<![CDATA[Perezonomics - Home]]>Mon, 21 Aug 2017 21:27:11 -0500Weebly<![CDATA[Is Apple “Diworseifying”?]]>Tue, 22 Aug 2017 01:54:49 GMThttp://perezonomics.com/home/is-apple-diworseifyingIs Original Content a Distraction?
​An excellent essay by Pantho Investments over at Seeking Alpha tackles head-on the issue of whether or not Apple (AAPL) is going through “diworseification”. The recent news that Apple is investing $1 billion dollars to create original content kicked off the discussion. Diworseification is a concept that Peter Lynch popularized in his 1989 book, One Up On Wall Street:
Instead of buying back shares or raising dividends, profitable companies often prefer to blow the money on foolish acquisitions. The dedicated diworseifier seeks out merchandise that is (1) overpriced, and (2) completely beyond his or her realm of understanding. This ensures that losses will be maximized.
 
Every second decade the corporations seem to alternate between rampant diworseification (when billions are spent on exciting acquisitions) and rampant restructuring (when those no-longer-exciting acquisitions are sold off for less than the original purchase price). —Peter Lynch, One Up On Wall Street, p. 148


It’s not uncommon for CEOs to be drawn to new markets or big flashy acquisitions that have nothing to do with their core business. But Apple getting into original content doesn’t fit that mold. For starters, Apple has maintained all along that their aim is for their devices to disappear so that all you see is the content that you’re after. Original content and iPhones go together like cars and roads or lamps and bulbs.
 
My problem with Apple’s billion-dollar investment is more along the lines of questioning whether it’s the most efficient way of getting quality content.
 
Netflix is churning out hit after hit in what has become a self-sustaining hit machine. The more eyeballs that they attract, the more that Netflix is able to predict what will become popular. Having good natural instincts on what your audience wants is invaluable. But combine that with analytical data that few of your competitors have, and you have a real advantage over the other geniuses in the industry.
 
The Netflix data warehouse and system is what I would have liked Apple to purchase. Not so much just the hit shows. Those shows are important, but the data and system are much more valuable.
 
Apple deciding to invest a billion dollars into original content is a big gamble. I’m not sure they truly respect how hard it is to create hit shows. Are they prepared to churn out ten shows to get 1 or 2 good ones? Nor do I think they fully respect how far behind they are.
 
This is why companies purchase other corporations. To gain a specific expertise that they don’t possess or to mitigate a lead that your competitors have. Of course, most management teams would rather build something from scratch. It’s cheaper and easier. But sometimes you don’t get that option.
 
An acquisition of an original content creator would help fulfill Apple’s purpose, not derail it.
 
Now available in iBooks —> The Tesla Bubble
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<![CDATA[Is the Amazon Echo a Russian Hacker’s Dream?]]>Sun, 13 Aug 2017 14:29:10 GMThttp://perezonomics.com/home/is-the-amazon-echo-a-russian-hackers-dream
​Writing for McClatchy, Tim Johnson laments that people seem to be too busy to care whether or not their Amazon Echo may be spying on them and how people could regret that one day.
In addition to how the personal data of consumers is used, a corollary is whether companies can keep the data safe, said James Scott, senior fellow at the Institute for Critical Infrastructure Technology, a Washington center that calls itself America’s cybersecurity think tank.

If U.S. adversaries hack databases containing consumer profiles collected and built up by data firms working with software companies, they could use the information to manipulate public opinion to stoke chaos, Scott said.

“What happens then is that nation states are able to fan the flame of alt right, alt left, Bernie Sanders supporters, Trump supporters, Hillary supporters,” Scott said, adding that a potential campaign could “fan the flame of distrust of the population against the government.” —Tim Johnson, McClatchy
 
I won’t buy any smart connected devices for my home unless they are Apple HomeKit certified. Why? Because Apple places a high value on security and forces their vendor partners to install special authentication chips on their devices. This is also one reason why HomeKit compatible products haven’t grown as fast as they have for the Echo. But to me, it’s worth it.
 
How secure are these Amazon Echos? Unlike Apple HomeKit devices which avoid the internet and use iCloud for sync, these Echos are sending data over the internet. How do we know that hackers couldn’t skim this data?
 
If you’re a politician, business leader, or a political journalist you should definitely not have an Amazon Echo in your house. The risk is too high. Even if Amazon had no intention of using that data, and that is debatable, how do you know that hackers aren’t going to break in?
 
Now available in iBooks —> The Tesla Bubble

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<![CDATA[A Venezuelan Bank Tops Apple in Terms of Market Cap]]>Sat, 12 Aug 2017 14:42:24 GMThttp://perezonomics.com/home/a-venezuelan-bank-tops-apple-in-terms-of-market-capDealing with Hyper-Inflation
​So for a brief period this week a Venezuelan bank was ranked above Apple (AAPL) in terms of market cap. That is just how far out of whack things in the socialist country of Venezuela have gotten. In a nutshell, oil revenues have collapsed and the nation is printing more money to avoid defaulting on their debt. The influx of new cash is causing massive inflation. 
I spent a lot of time in Venezuela in the late 90’s just before Hugo Chavez took over. Interest rates were low (under 20%), the economy was growing, and foreign companies like mine saw Venezuela as an attractive place to invest. Crime in Caracas was still rough though. I remember one morning one of our staff accountants was late for work because his wife had been car-jacked. He was following from behind and saw the whole thing happen.
 
My job was to help our Venezuelan subsidiary install their inventory cost system. It was an interesting assignment for me due to Venezuela’s hyper-inflationary history. This led us to not use a standard cost system as was the practice in the United States. Most people in American manufacturing have at least heard of the standard cost system, although, they may not fully understand what it means. Essentially, It means you put all raw materials purchased into your inventory at a preset standard cost regardless of what you actually paid for it.
 
So why would companies want to put material purchases into inventory at a cost other than what they paid? It’s a management tool that allows managers to gauge how good of a job they are doing with managing their purchasing function. If you negotiate a good price, this will show up in your variance to standard. Or conversely, if poor planning leads to purchasing smaller lots or alternate suppliers you could see higher prices than the standard. Managers also like these unfavorable issues quantified so that they have a target to chase for future improvements.
 
But a standard cost system only works if inflation is low. Otherwise the variance data as a management tool becomes meaningless and you start to undervalue your balance sheet.
 
When I installed a cost system in our Venezuelan subsidiary I use a FIFO system. Instead of putting purchases into inventory at a standard cost, we used the actual price paid. But when we sold that inventory, we used the oldest layer of inventory first. So it was a First-In-First-Out system. This kept our balance sheet accurate without having to resort to large inventory revaluation entries that can whip-saw the company. It also boosted profitability since it matched up older purchases that were at a lower cost with future sales when prices were higher.
 
I wouldn’t say that the FIFO system is better than a standard cost system. Different jobs require different tools and in a hyper-inflationary climate like Venezuela it works much better.
 
I remember while I was in Venezuela listening to our local staff talking about this brash new politician Hugo Chavez. He was a Bernie Sanders populist type who talked about trying to bring the wealth down to the people so that everyone could enjoy it. He demonized the rich corporations and the wealthy politicians who he accused of being the minions of business. Unfortunately, many of the citizens of Venezuela fell for his fiery rhetoric.
 
Twenty years later we can now judge the fruits of Chavez’s efforts. He failed at getting everyone in the country to share in the wealth. But he succeeded at income equality. Everyone is now poor.

​Now available in iBooks ---> The Tesla Bubble
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<![CDATA[What Happens to Samsung If North Korea Destroys Seoul?]]>Thu, 10 Aug 2017 03:07:55 GMThttp://perezonomics.com/home/what-happens-to-samsung-if-north-korea-destroys-seoul
​I’m not sure why, but it seems that there isn’t much being written about what would happen if Samsung’s headquarters is destroyed. Seoul sits only 35 miles from North Korea, and technically, the Korean War never really ended. North Korea has been steadily building their armaments so they can launch thousands of rockets at Seoul on a moments notice. They’ve been preparing for decades to wipe out as much of Seoul as possible in a thirty minute window. They know they’d lose any war fairly quickly so the threat of leveling Seoul in the first 30 minutes is their way of holding hostages. 
One thing is for certain, if war ever breaks out between the United States and North Korea. There will be death in South Korea unlike the world has seen since World War II. The shockwaves of this conflict could send the world economy into a tailspin from which it would take years to recover.
 
Samsung is headquartered in Seoul. What would happen to Samsung if the majority of their executive management team was wiped out in one fell swoop?   Do they have any manufacturing facilities there? Would worldwide supplies of processor chips and displays be set back for years? What products wouldn’t exist if Samsung manufacturing goes down?
 
This is why Apple doesn’t like to stick all of its eggs in one basket when it comes to critical components. They split their chip orders between Taiwan Semiconductor and Samsung or split their displays between Samsung and LG, and so on. It’s kind of like not investing too heavily in one sector of the stock market. You try to diversify your risk. Even if you could save a bit more money by throwing all of your volume to one company, splitting your volume between two could prove to be immensely valuable in the event of some kind of disaster.
 
Hopefully, the latest round of UN sanctions will finally put the hurt on North Korea. Amazingly, both China and Russia voted for them. Kudos to Donald Trump for this major accomplishment.

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<![CDATA[Moving Data vs Moving People]]>Mon, 07 Aug 2017 00:16:05 GMThttp://perezonomics.com/home/moving-data-vs-moving-peopleHow Connecting People Can Reshape Society
CBS had an amazing story today illustrating how the future lies in the power of moving data. Connecting people in new ways that were impossible only a few years ago is what is changing society. Not physically moving people to be in the same room. 
Littera is one of the founders of a virtual currency called Sardex. It's a network of companies that exchange goods and services among each other in Sardinia without the need for cash. 

This stunning Italian island seems far from Wall Street. But the 2009 financial crisis rocked this picturesque place. Companies couldn't get credit and went out of business. Unemployment hit 18 percent. 

Littera and a group of friends hoped they might spur growth here by developing a system that would allow businesses to earn and spend without relying on the euro, or on banks that wouldn't lend. –Seth Doane, CBS Sunday Morning
 
Be sure to watch the video which is much more informative than the small sample of text on the web page. I watched it earlier today and it was amazing. The whole time I kept thinking about how NASA internally states that the power of moving data greatly outweighs moving people. 

Now available in iBooks ---> The Tesla Bubble

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<![CDATA[When Will the Tech Bubble Burst?]]>Sun, 06 Aug 2017 13:07:38 GMThttp://perezonomics.com/home/when-will-the-tech-bubble-burstThe Bubble's True Size Is Hidden
​An op-ed over at the New York Times by Ruchir Sharma yesterday is asking what is increasingly becoming a very real fear by tech stock watchers. It’s a very well written article that I’d recommend reading in its entirety.
It is true that prices today are not quite as widely overvalued as in 1999. Large technology stocks are up 350 percent this decade, the low end of the range for the hot stocks from earlier booms, which saw gains of 300 to 1,900 percent. Only a few select technology companies — mainly the internet giants — are trading close to the valuations of the dot-com era, when the average price-to-earnings ratio for tech companies hit 50. The average ratio for that sector today is 18.

However, the scale of today’s tech boom is not readily visible because much of the investment action has moved into the hands of big private players. In 1999, nearly 550 start-ups went public, and after many ended in disaster, the government tightened regulation of public companies. In part to avoid that red tape, this year only 11 tech companies have gone public. Many are raising money instead from venture capitalists or private equity funds. Venture capitalists have poured more than $60 billion into the technology sector every year for the past three years — the highest flows since the peak in 2000 — and private equity investors say there has never been a better time to raise money. -Ruchir Sharma, New York Times
 
Ruchir highlights the fact that since tech companies today have shifted their method of raising capital, that old metrics like PE Ratio are not an apples-to-apples comparison. The true scope of the bubble is hidden.
 
Companies like Apple (AAPL) and Google (GOOG) that are self-sustaining entities will be OK in the long term because they aren’t dependent on the equity markets. But unprofitable startups like Tesla (TSLA) will get washed away in the flood. New investor capital is the oxygen that they breathe and when new money stops flowing in, trouble ensues.
 
Now available in iBooks —> The Tesla Bubble
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<![CDATA[Putting Apple's Q3 2017 Earnings Release in Context]]>Sat, 05 Aug 2017 12:58:39 GMThttp://perezonomics.com/home/putting-apples-q3-2017-earnings-release-in-context
Every quarter when Apple releases their earnings, there is one thing I wish the tech or financial press would do: put the earnings in context. The fact that they don’t do this is especially egregious with the financial press which supposedly caters to investors.
​First, the press shouldn’t just show us the current quarter and parrot back Apple’s talking points. If they really want to help their audience understand the numbers, they should dig a little deeper. Any real analyst is going to juxtapose the income statement against the previous few quarters going to back to the same quarter last year. Second, they’re going to compare this quarter to the same quarter in the past few years.
 
If you do this with Apple, you see a few things that stand out. Their product mix is skewing more profitable. Apple is in a tough business where electronic hardware is perpetually in danger of being commoditized. Many analysts wonder if Apple can retain their premium design edge and avoid the “race to the bottom”. Not only are they retaining their famously fat margins, they’ve increased them. And it’s not all due to the iPhone either. 
If you look at Q1 vs Q2, the iPhone percentage of the mix went down from 69% to 63% and yet the gross margin went up. Mac and Services were a much larger share of the mix. I could see the expensive MacBook Pro as bringing in higher-than-average gross margins. I wonder about the services though. The App Store is probably not much over breakeven, but Apple Music could be quite profitable.
 
Now comparing the more recent Q3 to last year’s Q3 (25-Jun-16), you see gross margins are up a half point with the iOS duo of iPhone and iPad being down from 69% of the revenue to 67% of the revenue. Some of this could be due to the small price increase on the iPhone 7 Plus. Macs are also more expensive. But if you look at the biggest change in product mix, the addition of the services pops out. I combine services into “Other”, but it is the biggest gainer when compared to last year, $5,976 to $7,266.
 
So, Apple Music could be more lucrative than I have given it credit for. Although, in my defense, this is the kind of thing that becomes more profitable only after you cross a certain threshold. There are a lot of fixed costs up front that need to be covered, but after you get past a certain volume, it’s all gravy. This figures differently than hardware, where going up in volume always means more material, labor, or maybe even more capital.
 
Gross margins are up, but Apple’s overall profitability is not. Both R&D and SG&A are up, bringing operating income down when compared to last year. SG&A is mainly two things, the cost of the retail stores and the cost of the corporate headquarters. You can’t blame this uptick on the new Apple campus though, because those costs are being capitalized on the balance sheet and will be allocated back in the future after it is complete. 

Proper context also demands that you keep seasonality in mind, especially for a company like Apple that tends to have dramatic swings at different times of the year. I always find it funny at my own company how some people are surprised every year when profitability dips in the summer, which it does every summer due to the change in our product mix. That is why it is helpful to compare a quarter to the same quarter in previous years.
If you do this with Apple, as in my following chart, you can see how certain products have changed the picture. The wildly successful iPhone 6 with its larger screen had an outsized impact on margins in Q3 of 2015, which offset any margin loss due to the Apple Watch. I believe that the Apple Watch is a low-margin product for Apple and is the primary reason that margins are lower in 2016 and 2017. 

I know I have a lot of journalists that read this blog. So if one of you would pick up this format for reporting Apple’s quarterly results I’d appreciate it. I’d love to immediately see the full picture by reading one of your articles as opposed to having to first open up my spreadsheet and loading the numbers. 

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<![CDATA[Stop Advertising Apple’s Return Policy]]>Tue, 01 Aug 2017 02:25:31 GMThttp://perezonomics.com/home/stop-advertising-apples-return-policyLessons from the MacBook Pro Debacle
Apple was forced to change their customer service policy last week after MacRumors publicized a great thing that Apple Stores were doing for their customers. Some lucky MacBook owners who were taking in their older 2012 MacBook Pros for service were having them exchanged for brand new MacBook Pros. Understandably, a stampede followed which caused Apple to immediately amend their policy. Going forward, Apple Stores were instructed to no longer exchange for newer models but to wait for the parts to come back in stock.
The publicity killed the policy. I’ve done the financial analysis on return policies for multiple Fortune 500 companies, and I can tell you with assurance that they are molded by a cost/benefit ratio. Customer service reps, stores, and a corporate sales force are all allowed a certain level of discretion as long as the policy does not get out of hand. But once that policy starts to have a real negative impact on the bottom line, it will get changed.
 
Creating the financial model isn’t as easy as you think. Because the sales group always argues that there is a real sales uplift from the goodwill generated by a lenient return policy, the finance group will apply certain factors to take this into account. But if a policy gets abused to the point where there is a Reddit sub-group of people buying used laptops on eBay to exchange at their nearest Apple Store for new MacBook Pros, the goodwill factor will get outweighed by a sea of red. Like the Feds busting up an illegal operation, the finance group will storm in and assert control.
 
Which brings me to my point. Apple’s lenient return policy is not necessarily always going to be as it is today. It is based on certain assumptions as to what percent of the market is going to use it. When it starts to deviate from those parameters, it will get reevaluated. The biggest danger to the return policy are evangelists who seem to relish in encouraging people to freely purchase Apple products and return what they don’t like.
 
Now these return policy evangelists would question why anyone would care if they encourage the world to use the Apple Return policy as their own little product sampling program to which I would respond, “Because I like it, and I don’t want it to change.”
 
Maybe I’m just old school, but I was raised to be careful with my money. My parents admonished me not to waste my money on something that I didn’t need because once you exchanged that cash for goods and services, that money was gone and you couldn’t get it back. From an ethical point of view, it is wrong to ask a vendor to return your money and take a loss on something that they can’t resell. If there was nothing wrong with the product, they don’t deserve to lose money because you are fickle.
 
For some reason, people seem to think it’s OK to abuse a policy if the vendor is a large profitable company. Perhaps it’s easier to understand if you think about it like a restaurant. Who would go to a small mom-and-pop restaurant, order a dish, and ask for their money back simply because they were trying out a new dish and discovered that they didn’t like it. Of course not. That wouldn’t be fair to the cook who spent time and money on that dish. They would be forced to take a loss through no fault of their own. Most people simply make a mental note to not order that dish next time. 
 
It’s the same principle with any product you buy. If there is nothing wrong with the product, it is unethical to return it. It is illegal for that store to sell a returned product as new, so they take a loss. So why do companies have no-questions-asked policies? Because they are banking that most people aren’t unethical. They are banking that once you buy it you’ll feel obligated to keep it.
 
Most serial return offenders like to bring up the fact that if a company keeps them happy that they will spend much more money with them in the future. But if you crunch the math, the company is always better off without these high-maintenance customers. Apple has to sell two more iPhones just to erase the loss on one returned iPhone. And few companies have margins as high as Apple, so for a toaster or chair it’s going to erase the profit on many more units. And return policy abusers are usually habitual. Corporations are much better off trying to identify and weeding out these problematic customers. They are income destroyers. These are the kind of customers that CEOs would love to see flocking to their competitors.
 
Having said all that, I think no-questions-asked policies are great, and I don’t want them to change. Periodically, I will take advantage of the option. But if people keep encouraging everyone to take advantage of it for frivolous reasons, like the MacBook upgrade program, these return policies will go away. So quit advertising it.
 
Now available in iBooks ---> The Tesla Bubble
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<![CDATA[The Future of Advertising?]]>Wed, 26 Jul 2017 02:11:19 GMThttp://perezonomics.com/home/the-future-of-advertisingApple Nails It
​Apple (AAPL) spent untold millions to make this short movie with Dwayne “The Rock” Johnson and it was great. Was it a commercial? Was it an instructional video? Was it a movie? All of the above and it was very well done. 
First and foremost, it was entertaining. I actually enjoyed watching it and couldn’t wait to throw it up on the big screen for my wife and kids who love the The Rock. There aren’t very many commercials that I can say that about. Second, while watching The Rock interact with Siri, I kept thinking “Hey, I should use that Siri feature more”. Apple did a wonderful job of portraying Siri in a positive light.
 
Normally, my wife and I would rather just purchase a TV series on iTunes specifically so that we don’t have to watch or fast forward through commercials. But if more manufacturers did something like this little feature, commercials wouldn’t be so bad.
 
Another reason that I liked it was because it wasn’t interrupting something else that I was watching. No matter how good an advertisement is, the very fact that it is standing in the way of something else that you’re trying to watch is irritating. That’s what is so horrible about YouTube commercials. Some of those advertisements may actually be pretty good, but if I made a selection to watch a video, the commercial becomes an impediment which annoys me because I have to wait for the video I picked. It’s kind of like your alarm clock. No matter what sound you use, you’re going to grow to hate it.
Whatever this short movie is considered, I hope advertising moves more in this direction. Make your product a part of an enjoyable little story with a plot and don’t interrupt my other entertainment.
 
Now available in iBooks à The Tesla Bubble
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<![CDATA[The State of Android Audio]]>Sun, 23 Jul 2017 15:14:26 GMThttp://perezonomics.com/home/the-state-of-android-audioIt's a Mess
One of the reasons I gravitated towards using an iPhone over an Android was a perception that Apple  sweats the details that others will miss. I haven’t been disappointed. These items will never make for an exciting commercial but small things like touch sensitivity, storage speed, and even audio lag are all better on Apple’s iPhone.
But I had no idea how bad the state of affairs is in The World of Android when it comes to audio. The iOS community has a vibrant and growing group of musicians and developers who are taking music and communications to a whole new level. But on Android? Not so much. Writing for TheNextWeb, Patrick Vlaskovits laments the problems and cites a potential opportunity to finally fix Android audio.
 
Android suffers from a persistent 10ms audio lag that affects every app that uses audio. Virtual instrument apps, VR apps, VOIP apps, voice assistants, and karaoke apps.
 
While iOS and iDevices are found on stage at music festivals and in recording studios in Hollywood, thanks to the thriving pro audio ecosystem replete with software and hardware add-ons such as audio effects to mics to guitar pedals to MIDI controllers and sound cards; high audio lag on Android prevents the very existence of an equivalent ecosystem on Android. It just doesn’t exist.
 
Historically, Apple’s Mac OSX has been the standard for pro audio, so Apple’s version of the USB Audio Class implementation has become the industry standard. Which is why USB audio hardware manufacturers produce chips and firmware to be fully compatible with Apple.
Apple has ported its USB Audio implementation to iOS as well, therefore iOS has good support for USB Audio. But Android’s native USB Audio support is poor, virtually non-existent. Meaning that USB audio is available on only a handful of Android devices. To get around this, OEMs connect to USB audio via Linux USB audio (as Android has Linux under the hood). But Linux USB functionality is not even close to Apple’s.
 
Without well-designed, universal USB support on Android, Android users will experience worse audio quality and greater fragmentation problems as Android OEMs switch from the 3.5mm headphone jack to USB-C. Does that pair of USB headphones work for Lenovo and Samsung too? Or just Xiaomi devices? How about on Sony’s Xperia line? 

Bluetooth? No, Virginia, Bluetooth is not going to save us either. 
The currently available Bluetooth enabled audio devices virtually guarantee high audio lag and mediocre audio quality, thanks to the commonly implemented Bluetooth standard versions (below 4.0). If you use a Bluetooth headset for Skype, then you’ve added around 0.2 seconds latency to the audio chain.--Patrick Vlaskovits

Now available in iBooks ---> The Tesla Bubble
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<![CDATA[Apple App Store Subscriptions Are Getting Over Used]]>Sat, 22 Jul 2017 12:19:47 GMThttp://perezonomics.com/home/apple-app-store-subscriptions-are-getting-over-usedThey Serve a Purpose, a Small One
​Apple (AAPL) made a great move recently when they changed their App Store to allow for app developers to offer their products at a subscription price if they choose too. There are some products that lend themselves perfectly to a subscription. But most software products do not fall into this category. 
I’m coming at this issue from a different angle than most people because I see it from the business viewpoint. Yeah, everyone knows that consumers hate subscriptions but why do businesses hate subscriptions? I can see the appeal that app developers would have for the subscription pricing model but for a couple of reasons it’s a bad idea.
 
Service and Support Is Not an Ongoing Product
For the most part, most products that you buy have a warranty period where it’s covered by the manufacturer if it stops working or is defective. Sometimes, like with BMW, this may even include regular maintenance. Do these companies make you pay a monthly subscription fee? Never. Your car payment is monthly but the purchase was an up front one-time purchase. Even any extended warranty is a one-time purchase up front.
 
Technically even leases are not a subscription. You’re negotiating with a dealer how much those three years are worth and you only finance it monthly.
 
A business will always account for service and support in the price of their product. It falls below gross margin on the income statement in selling costs. If you think you’re going to service a product for three years then you tally up what that is going to cost you and you divide it by the number of units you think you’ll sell. I’ve written about it before  so I won’t go into too much detail again.
 
But unless you’re paying for something new, like new magazines or shirts in the mail, it’s hard for the customer to consider software a subscription service. The software equivalent of a magazine subscription would be something like getting a new game every month. Or maybe something like Netflix where you pay monthly but have access to a smorgasboard of programs. But as far as software customers are concerned, 1Password is the same product in a month or two. If they want to upgrade to a new version later on, they’re ok with that. So why the subscription?
 
The only scenario where it seems to make sense to offer a subscription is when your product costs significantly more than the median price of software. Adobe’s media editing software is the prime example. Paying every month for what seems like essentially the same product seems wrong. Service and support is included with almost everything else we buy but not for software? Why not?
 
Businesses Want to Lock in the Full Sale
Every company wants to make a product and exchange it for a certain price. Once. They don’t want to give you their product in exchange for 24 monthly payments where you can stop paying at any time. Every payment could potentially trigger your customer to reevaluate what your product is worth to them. It’s like you’re asking them to re-purchase your product every month. You only want your customer to make that decision once, not 24 or 36 times. Because there’s always the chance that after they’re tired of it they may decide to stop paying.
 
Also, a business doesn’t want to wait two or three years to realize the full revenue stream from sale of their product. You want that revenue immediately so that you can fund your new product stream. In theory, you launch a new product and the up front revenue funds your service and support and R&D on your next product. If your product doesn’t do this, you either priced it too low or made a bad decision on entering this market.
 
Whether you’re talking about a vacuum cleaner or a software application it doesn’t make a difference. You’ve already sunk all your time and effort into the finished product. If you sell up front, you get reimbursed. If you offer a subscription and your customer cancels, you lost out.
 
Customers Don’t Like Subscriptions
Not only do customers not like feeling like they’re being nickel-and-dimed, but even more so, they don’t like entering into long term commitments. Yes, you may pick up some customers low on cash who wouldn’t be able to afford your product without breaking up the price. However, you’ll never know how many customers skipped your product because they simply don’t like entering into long term agreements.
 
Long-term agreements, even the kind you can cancel at any time, cross the threshold for most people where they start to think more rationally and ask more questions. It’s going to be harder to make the sale. I’m speaking in general here but all savvy customers avoid leases or subscriptions if there is an option to buy. Why? Because they all know that inherently you pay more in the long run.
 
It’s much easier to get customers to make impulse decisions for single purchase items then it is to get them to sign a multi-year deal. If they paid up front for your product and later get bored with it, too bad for them, you get to keep the money. But if they cancel their subscription? Too bad for you, you lose out on all the revenue you would have had otherwise.
 
So What Should App Store Developers Do?
It may be too late to ever get back to this scenario but I’d like to see apps priced with service and support built into the up front price. I just want to buy an app like 1Password one time and not see it on my bank statement every month. Developers need to be up front with their service period just like any other business and state clearly that they will service your product for X number of years or months.
 
If developers are determined to offer subscriptions, fine. Offer both. Why does it have to be all one way or the other? The trick is to maximize the number of people who buy up front and aim the subscription at those who wouldn’t buy from you otherwise.
 
A good pricing model does two things. It prices the “buy it now” price low enough to hit the sweet spot where you will catch the majority of people who want to buy your product and still offer you a good margin. Second, it makes the lease or subscription price high enough that you don’t lose any of up front buyers but it still captures people who can’t afford to purchase all at once. You don’t want to maximize subscribers at the expense of your customers willing to pay up front. Subscribers need to be incremental sales.
 
Now I know that this is all easier said than done when it comes to Apple’s App Store where there is a flood of cheap apps. But subscriptions won’t be the panacea that everyone thinks. They will bring their own problems too. And when subscription sellers find that out, they’ll be right back to square one. 

​Now available in iBooks ---> The Tesla Bubble
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<![CDATA[I Wish the iPad Had 3D Touch]]>Fri, 21 Jul 2017 02:15:00 GMThttp://perezonomics.com/home/i-wish-the-ipad-had-3d-touch
Evan Selleck at phonedog.com writes about how he wishes Apple would add 3D Touch to the iPad and I completely agree with him.
So that means all that great interactivity with apps that I get on the iPhone, which includes quickly jumping into music playlists both with Apple Music and Spotify, I just can't do on the iPad. And as I mentioned above, I've been trying to use 3D Touch more on my iPhone, and I've enjoyed doing so, but switching to the iPad now feels like I'm losing a specific piece of functionality -- and it's from the same company. –Evan Selleck
 
More and more I’m getting annoyed that I can’t do the same shortcuts on my iPad that I do on my iPhone. It happens every day that I try to initiate a 3D Touch action and I remember that it doesn’t work.
 
I’m not buying the argument that Apple doesn’t want to add 3D Touch to the iPad because it’s too large. The fact is that most iPad usage is while your sitting down and using both hands. In this setting, 3D Touch is easy. I know because I’m already doing it. I keep forgetting that it doesn’t work yet.

​Now on iBooks ---> The Tesla Bubble

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<![CDATA[Why Is Elon Musk Really So Wary of Artificial Intelligence?]]>Wed, 19 Jul 2017 01:51:40 GMThttp://perezonomics.com/home/why-is-elon-musk-really-so-wary-of-artificial-intelligenceIs This About Money?
Is anyone else wondering why Tesla’s Elon Musk harps on artificial intelligence so much? He’s literally advocating that governments step in and start regulating it. That’s a pretty drastic move that could permanently cripple AI’s future. Nothing slows down progress in an exciting new field more than government bureaucrats getting involved. Here is a guy consumed with his primary purpose in life, raising money from investors, who regularly takes time out of his agenda in order to throw shade at AI.
I think I know why. And it’s actually not a detour from his main mission in life. It still involves his primary directive of raising money.
 
How would AI be a problem for Musk? Because Musk’s business ventures and every other company are competing for the same investor dollars. Tesla isn’t only competing against Ford or GM for investor dollars. They are up against everyone from Coca Cola to Google. Money flows in the direction of the highest yield, whether that’s electric automated cars, sugared water, or world-changing devices that employ artificial intelligence.
 
The real great advances in tech are going to be made in artificial intelligence. Devices that can predict what you want, how you feel, what you might say. Robots that can do the jobs that no one wants. As we get closer to real AI that doesn’t feel like a dumb children’s toy, there is going to be a surge of investor capital flowing in that direction. It’ll come at the expense of yesterday’s Wall Street darlings. Companies that move pounds and not bits.
 
So, what does this have to do with Elon Musk? All of Musk’s business ventures are all about moving people. Tesla, SpaceX, Hyperloop, even The Boring Company. It’s grunt work compared to the companies that are doing new things with gathering and delivering data. There’s a real risk that many of Tesla’s backers will eventually get disillusioned with its progress, pull their investments, and throw it into the latest hot AI companies.
 
Investors bullish on Tesla are fond of saying that if you value Tesla as a car company, it is overvalued. But if you value them as a tech company, it is cheap. However, considering that all of Musk’s business ventures are refining how we move people, it’s a stretch to classify them as a tech company. They move pounds, not bits.  They may use the latest technology, but this tech becomes just a component in creating a faster railroad or a better wagon.
 
My theory is that, deep down, Elon Musk recognizes the deep divide between all of his business ventures and the true tech pioneers of our day. Companies that are delivering, organizing, and interpreting data, not people.
 
As I’ve mentioned before, my views on tech are influenced greatly from my days at NASA where I was able to observe their internal debate. On one side were those who wanted to transport people and on the other side were those who believed that transporting data was more important. Moving people was exponentially more expensive and yielded a fraction of the data. Needless to say, the camp that advocated for high-tech probes and satellites won. It was much cheaper and yielded way more data.
 
Moving people or satellites was considered lower-level grunt work best left for the private sector. To NASA, SpaceX and Blue Origin are the equivalent of hiring a long-haul trucking company. In the long run, NASA kept the higher-level important projects that delivered the treasure it was after, the data.

​Now available in iBooks ---> The Tesla Bubble
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<![CDATA[Hardware Is King]]>Mon, 17 Jul 2017 02:49:24 GMThttp://perezonomics.com/home/hardware-is-kingWhere Benedict Evans Gets Apple & Netflix Wrong
Benedict Evans had an interesting piece on content but he makes the same mistake many others do when assessing the value of an Apple acquisition of Netflix.
Conversely, one can certainly argue that selling smartphones is a subscription business, and though Google does not itself sell phones (to any significant degree), Apple certainly does. You pay an average of $700 or so every two years (i.e. $30/month) and Apple gives you a phone. Buy an Android instead and you lose access to the (hypothetical) great Apple television service. This is why people argue that Apple should buy Netflix. From a pure M&A perspective, buying Netflix and immediately limiting its business to Apple devices would halve its value - why buy a business and fire half the customers? Buying it without such a restriction would have no strategic value - Apple would just be buying marketing and revenue. But as Amazon has shown, you don’t have to buy Netflix - they’re not the only people who can buy and commission great TV shows. –Benedict Evans
 
Benedict’s mistake is that he looks at Netflix as someone would evaluate investing in bonds. Comparing the present value of the investment to the future cash stream. He’s only quantifying one side of the equation.
 
However, an Apple purchase of Netflix is more like a capital investment. What Benedict describes as “halving its value” is only the investment side. The return on that investment are the Android switchers. If Apple were to purchase Netflix and make it exclusive to iOS and immediately lose half of all the subscribers that would be offset by former Android Netflix subscribers switching to iOS. If 2% of all Android users switch to iOS that would be equivalent to an additional $55 billion in gross margin over the next ten years. If 4% of Android users switched to iOS the resulting new gross margin would be about double what Netflix is worth today.

​Now available in iBooks ---> The Tesla Bubble
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<![CDATA[Net Neutrality Is the Reemergence of Government Price Controls]]>Sun, 16 Jul 2017 14:14:40 GMThttp://perezonomics.com/home/net-neutrality-is-the-reemergence-of-government-price-controlsWelcome to a Slower Internet for All
​A lot of people get confused by the subject of net neutrality because they think that they’d have to study arcane telecommunications law to come to their own conclusions. As a consequence, most people simply believe what the media tells them, that net neutrality is essential to a free and vibrant internet. But nothing could be further from the truth. Net neutrality guarantees that the internet will be less free and less available for everyone. 
There are some basic principles involved that don’t change. Mainly, cost controls always result in an inferior experience for everyone involved. Net neutrality is a new term for an old concept. Government regulation of private industry via cost controls.
 
Take electricity for example. The American electrical grid is woefully inadequate and underdeveloped for the size of our population. It’s the reason that relatively minor events can cause huge blackouts which may affect multiple states at once. Why? Due to price controls and regulations, no one is willing to invest in new power plants because the return on investment is poor or negative.
 
Look at the vaccination industry for another example. In 1993 there were 25 vaccine makers in the United States. That year Hillary Clinton pushed congress to pass the Vaccines for Children Act. According to the Wall Street Journal, with the government purchasing 55% of childhood vaccines at forced discount prices, there have been "declining financial incentives to develop and produce vaccines." Never mind that programs like Medicaid were already providing them for the truly needy. The result? The vaccination rate for children “barely budged,” and twenty of the companies abandoned the vaccine business, leading to appalling shortages. Foreign companies have since stepped in to fill the void who are exempt from the Vaccines for Children Act.
 
Since the Open Internet Act of 2015, everyone agrees that broadband investment by service providers is down $3.6 billion from the previous period already. This is what happens when you limit profits through price fixing. And it’s going to get worse. That means more users will be sharing less capacity. Slower speeds for all. Repealing the Open Internet Act will lead to more investment and faster speeds for all.
 
This week I was listening to a local businessman expound on the dangers of net neutrality and how it was adversely affecting rural communities. However, he was preaching to the choir, since he was speaking to other business leaders and financial professionals. It struck me how there is such a dichotomy of thought on this subject. Most people in business, with the major exception of content providers, are universally against net neutrality. Anyone who has experience in business or evaluating capital investments instinctively knows it won’t work. If you asked this crowd if they knew anyone who supported net neutrality, they’d be hard pressed to think of anyone. None of these people are on Twitter or do much public writing. It’s one of the reasons I started my blog.
 
So why would anyone favor the Open Internet Act? Basically, there are only two groups who favor the Open Internet Act. Though if you’re on Twitter, you would think everyone does. Essentially, the large media providers support it along with all the people that they’ve brainwashed. As providers of content, they have an outsized impact on how people think.
Content providers like net neutrality because they are subsidized by all the little users and not on the hook to lay out capital for the network they use. And the majority of all broadband usage goes to a disproportionate few companies. The free market has historically dealt with supply and demand issues via pricing. But the Open Internet Act short-circuits this built-in safeguard.

The Open Internet Act allows a few big players unlimited access to a limited pool of resources. We’ve run into problems with this model before. For example, California suffered terrible drought issues because many farming companies had a grandfather clause in the law which allowed them to pump unlimited water from the ground. The government was unable to place a certain charge per gallon on this group so everyone else suffered water rationing while these farms watered their almond fields or filled their plastic water bottles. If California had the power to raise the price on these farmers or water bottling companies, they could have more easily dealt with the outsized demand. But they couldn’t and everyone suffered. The perfect picture of what will happen if the Open Internet Act isn’t overturned.

A Net Neutrality Primer

Net Neutrality Leads to Higher Prices and Less Innovation

Now available ---> The Tesla Bubble
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<![CDATA[The Problem with Touch ID]]>Sat, 15 Jul 2017 15:27:14 GMThttp://perezonomics.com/home/the-problem-with-touchidFacial Recognition Would Be the Perfect Complement
I’ve been listening to the tech blogosphere go crazy for two weeks now at the thought of Apple adding facial recognition. The underlying assumption by everyone is that Apple is going to abandon the tried-and-true system of Touch ID. But I’m not so sure that it’s an either-or situation.
I’ve been waiting for someone, anyone, to bring up the big problem with Touch ID. Sweat. Ask any runner who’s finished a hard workout what it’s like to grab their iPhone and try to get in. TouchID almost never works. Version 2 of Touch ID is slightly better than version 1, but it’s still a low probability that you’ll get in with sweaty fingers.
 
God forbid that you have some kind of emergency while running on a hot summer day. Touch ID doesn't work and if you drip sweat on your screen the touch points can even lock up. You can eventually get it to work but you need to stay calm and take your time.
 
Adding facial recognition sounds like the perfect complement to an existing Touch ID system. Each can mitigate the weakness of the other.
 
On the touch side, sweat will mess up your finger print but not your image. So facial recognition compensates for the lack of identification points due to the sweat.
 
On the facial side, you can fool a facial recognition system with a picture, but Touch ID ensures that it’s the real you. Touch ID prevents interlopers from using a picture of you.
 
I’m hoping that Apple has incorporated Touch ID into the screen. If I can get a screen as large as the one in the 7 Plus in a smaller case I’d happily ditch the home button. It’s logical to think that Apple may have run into problems putting Touch ID under the screen and was forced to augment security via facial recognition. It’s all a mathematical problem. If moving Touch ID to under the screen caused ID certainty to fall from 99.9% down to 82%, how can they bump that up? Facial recognition alone may yield 25% certainty. But adding in the finger touch points could bump overall security to 100%
 
What I mean is that there are lots of people who may resemble you. But the chances that someone in the world who has your hair style, nose, eyes, and over 82% of your fingerprint pattern is almost nil. Genius.
 
Like everyone else, I don’t like the idea of giving up Touch ID entirely in return for Face ID. But I do really like the idea of a system that allows me to get into my phone even faster after a sweaty run.

Now available ---> The Tesla Bubble

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<![CDATA[Apple Could Sell Less iPhones Next Year and Make More Profit]]>Fri, 14 Jul 2017 02:37:50 GMThttp://perezonomics.com/home/apple-could-sell-less-iphones-next-year-and-make-more-profitWhat Is Plan B’s Breakeven Point?
There’s been a lot of speculation lately regarding Apple making an unprecedented move with their iPhone. That would be if they offered a sort of “Pro” model that costs upwards of $1,100. It’s unprecedented for the iPhone, but not for Apple. They’ve already offered Apple Watches and iPads that cost north of $1,000 so they probably have some feel for the kind of demand that they can expect. 
But I was listening to the Upgrade podcast while out on a run today and Jason Snell and Myke Hurley brought up a very interesting theory that I hadn’t thought of. What happens to buyer psychology if all of a sudden the top iPhone is out of reach? Would potential iPhone buyers forego upgrading at all since they can’t have the best iPhone?
 
That’s an interesting question from a financial modeling perspective. Some people like to play Candy Crush while chilling on the couch, I enjoy hauling out my iPad (my new 10.5” iPad Pro is amazing) and playing with Excel. So I decided to estimate how many iPhones Apple could afford to lose and still make more money than if they had never offered the iPhone Pro.
 
First, I’m estimating that Apple could produce 30 million iPhone Pros in their fiscal 2018. I’m guessing that they can make a significant number of the iPhone Pro but not nearly enough to satisfy worldwide demand. That’s compared to a normal volume of about 220 million iPhones shipped in a year or 13.6% of the mix. By my calculations, Apple’s breakeven point is that they could afford a 10.5% unit sales decline or 23 million iPhones. If they lose more than 10.5% of their sales it’s a bad move for Apple. If they lose less than 10.5% it’s a smart financial move even with lower volume.  
                                                                       
That’s assuming the iPhone Pro can garner an average price of $1,150 with similar 38.6% gross margins. Though I could envision a scenario where the margins on the iPhone Pro could be much higher. It’s very possible that the iPhone Pro selling price is not set by component cost but is more of an effort to quell demand which will greatly outstrip supply.
 
If the gross margins on the iPhone Pro are higher than on the 7S, Apple can afford to lose more than a 1:1 ratio of unit sales and still make more money than if they had never offered the Pro.
 
So Apple’s iPhone sales could drop from 220 million to 197 million units and they’d make roughly the same amount of money if 30 million of those sales are the iPhone Pro. The big question is how many Pro models can they make? If it is less than 30 million, the breakeven point moves up. Or if gross margins are better than 38.6% it goes down. You could play with the numbers endlessly.
 
My feeling is that Apple would like every iPhone to be the Pro model but for whatever reason they can’t do that. So this is plan B. When the realization set in to Apple’s top management that they probably couldn’t produce enough of the new iPhone to meet demand they had a hard choice to make. Do they suffer countless accusations that they’ve lost their design chops and trot out the iPhone 7S? Or do they risk the bad optics of an iPhone unit sales decline if they offer an iPhone Pro that not everyone can get?
 
True to form, it sounds like Apple chose the option which yields the highest profit. They’re going to get criticized either way, they may as well enjoy some profits in the meantime. And as I always say, if you're wondering what direction Apple will go, just quantify the ROI on their various options.

​Now available in iBooks ---> The Tesla Bubble
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<![CDATA[Excel Tip: Make Your VLOOKUP Double Variable]]>Sun, 09 Jul 2017 14:34:33 GMThttp://perezonomics.com/home/excel-tip-make-your-vlookup-double-variableTwice the Power!
​Anybody in business is probably pretty well acquainted with Microsoft Excel. It’s like a lump of clay just waiting to be molded and shaped into whatever you need it to be. If you work in finance, you work with Excel about as much as a truck driver grips a steering wheel. And yet, most people seem to stop exploring and learning new tools in Excel that could make them more efficient after a while. 
To the non-finance types, once they’ve learned how to do pivot tables and VLOOKUP formula’s they think that they’ve arrived. But that’s really just scratching the surface to how powerful Excel really is. So I decided to write a post on the one thing that people could add to their repertoire that would make the biggest difference. That would be doubling the power of VLOOKUP.
 
Most people who use VLOOKUPs stick to using it with only one variable. The vertical part is variable but the horizontal movement is fixed at a set number of columns.They might create a VLOOKUP to scan down a component parts list to grab the standard cost. The only variable is the item number. So the formula will look for that specific item number in a list and move over the designated number of columns to where the standard cost is.
 
But a lot of times, you may need to enter two variables. When I was working with the Cabela’s Corporation I created some complex Excel models to predict our delivery costs based on zip codes. But cost is linked to both zip code and weight. Therefore I needed two variables, distance and weight. My VLOOKUP needed to be able flex up and down based on zip code and left or right based on weight.
 
I used one VLOOKUP formula to look for the zip code and I had another VLookup formula nested within to look for the weight. This allowed the number of columns that Excel had to move to the right to be variable.
​In my example, the price is dependent on the weight. So the purple section is where the number of columns to move to the right would normally be. I created a table in Excel that had a UPS or Fedex pricing matrix based on zip codes and weight. So the VLOOKUP didn’t use a value for the number of times to move to the right. Instead it became variable.  Based on the weight it would look up the cost in my table of weights. The greater the weight, the more times it moves to the right, the more it would cost.
 
You can’t use the FALSE command if you are searching within a range so I left if off. Because if a package is between 11-15 pounds it will be the same price. So omitting the FALSE allows you to grab results by a range.
For comparisons sake, here is how that same formula would look if I only had to flex up and down for zip code but not left and right. Like if every package weighed exactly eleven pounds I could hard code the move to the fifth column.
 
=VLookup(A3,E3:J30,5,FALSE)
 
I’m oversimplifying for brevity’s sake, so you’ll need to play around with it a bit to fit your needs. When Cabela’s was evaluating cities to place distribution centers, I was able to take historical package delivery costs and price that history out of other cities and come up with a delta to actual. This allowed me to quantify how much more or less we’d spend if we shifted volume to a different city. But this can be applied to any scenario where you need to pick a value from a table.
 
Bonus Tip
Don’t you hate it when you can’t sum a column because you have errors in there caused by divide by zero errors? Use IFERROR so that you don’t end up with lots of #DIV/0! type errors. Placing IFERROR in your formula’s will rid you of the dreaded #DIV/0! forever. You just need to do the following:
 
=IFERROR(your formula,0)
 
This formula sets a default action if it encounters any kind of error. That default action is defined after the comma. In this case, I want Excel to enter a 0. But you could also type a message by using quotes or enter a cell reference.
 
So there you go. That should keep you busy for a little while and before you know it you may be vying for a spot at the World Excel Championships

Now available in iBooks ---> The Tesla Bubble
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<![CDATA[Does Samsung Make More Money from the iPhone?]]>Sat, 08 Jul 2017 14:05:32 GMThttp://perezonomics.com/home/does-samsung-make-more-money-from-the-iphoneThe iPhone Was the Best Thing to Happen to Android
Business Insider yesterday published a piece mentioning that the components division at Samsung Electronics which sells to Apple (AAPL) is the most profitable section.
 
Samsung is best known as a brand that sells phones like the Galaxy S8. But its most profitable division sells parts, like screens and memory chips, to companies including Apple.
 
In fact, Samsung is reported to be the only supplier of the new next-generation OLED screen expected to be a key selling point of the iPhone 8.–Kif Leswing
So the iPhone continues to be the little engine that could. Google gets most of their ad revenue from iOS users and Samsung’s most profitable division most certainly owes that crown to Apple. iPhone ad revenue subsidizes Android development and iPhone component sales lower overhead costs for everyone that buys from those manufacturing plants. The iPhone was the best thing to ever happen to Android.
 
This could just be coincidence, but it seems that Samsung’s marketing has been getting less and less confrontational with the iPhone. In the early days, their ads were openly mocking the iPhone or its purchasers with in-your-face ridicule. Lately it’s shifted to more of a subtle jab. It’s almost as if Samsung came to the realization that the iPhone was good for Samsung and they’re happy with a bipolar mobile world. Samsung wins either way.
 
In fact, with competition coming at Samsung from all sides, the iPhone may be more important than ever. If they lose Galaxy sales to low-priced Chinese phones, this could hurt them in a couple of ways. First, low-priced phones are going to use lower margin components. The iPhone is famous for having customers willing to pay high prices for the best experience. Second, Chinese handsets may utilize more homegrown components, cutting Samsung out entirely.
 
This also highlights the importance of companies having some kind of subsidizing cash cow. Companies like Samsung with their components or HP with their printers can afford to take risks in other areas. Companies without an underlying base of revenue that attack an intensely competitive market find themselves in a high-risk proposition. Gateway Computers, HTC, and Tesla have all done this and have either died, are dying, or going to die. 

Now available in iBooks ---> The Tesla Bubble
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<![CDATA[Corporations Don’t Need Laptops]]>Thu, 06 Jul 2017 03:12:20 GMThttp://perezonomics.com/home/corporations-dont-need-laptopsWindows Tablets Make More Sense
​When it comes to corporate purchasing of computing devices, there are two things that don’t make sense. One, everyone is issued a laptop. And two, no one ever uses most of the hardware features on them. And this is almost universal at companies of all sizes and in all industries. 
Now I’m talking about all the worker bees outside of the creative classes. Managers, accountants, analysts, assistants, warehouse clerks, etc. When you get into the class of creatives who create art, code programs, or design things, the mix of those who actually use their device is probably much higher. But the truth about this creative class that people often gloss over is that there aren’t really that many of them.
 
But for the rest of us, we don’t use laptop keyboards. We generally dock our laptops and use a full-sized wired keyboard with a number pad. We don’t use internal hard drives. In fact, right from day one we’re admonished not to use the hard drive and to save everything to our network drive because it’s backed up nightly. We don’t use USB ports unless it’s to plug in a mouse. USB sticks today are kind of like floppy disks in 2005. They’re rare but still around. When you see one it’s almost quaint. At some companies, they’re even strictly forbidden.
 
The only reason that Windows laptops are still the de facto standard in corporate America is because until recently they’ve been cheaper than the relatively expensive Windows tablets. Compared to Apple, the world of Windows is an opposite bizarro world where tablets cost more than laptops. No wonder they aren’t selling all that great.
 
The way to a corporate IT buyer’s heart is through their wallet. They don’t care about large SSDs or built-in Pico projectors. They want to see a low price. They want to see a reliable piece of hardware that jettisons unnecessary items. Corporate analysts don’t need HDMI, SD card slots, or even many USB ports. Most corporate workers would find the tablet more convenient for meetings anyway. As soon as Windows tablet makers and corporate IT buyers get on the same wavelength there will be a sea change.
 
Windows tablet makers need to stop trying to mimic or outdo the Surface Pro and start offering quality tablets that undercut laptops by $2-300. At that point, corporate IT will start migrating people away from laptops and towards tablets. We don’t need integrated keyboards, lots of ports, or Pico projectors.
 
Because for most buyers, price is one of the most important factors. And much simpler tablets should always have a cost advantage over laptops. They’ll always still have to buy some laptops. But the time will come when you’ll have to plead your case to get a more expensive laptop versus the standard issue tablet. The opposite of today.
 
Corporations are driven to find a way to do the same amount of work or more at a lower cost. It’s only a matter of time before tablets begin to take over their offices. 

Now available in iBooks ---> The Tesla Bubble
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<![CDATA[Thoughts on Chris Lattner’s Departure from Tesla]]>Tue, 04 Jul 2017 04:46:37 GMThttp://perezonomics.com/home/thoughts-on-chris-lattners-departure-from-teslaTesla's Stock Options Are Worthless
After only six months on the job, one of the most brilliant programmers in the world, former Apple (AAPL) Director of Development Tools and the Godfather of the Swift programming language,  announced that he was leaving Tesla (TSLA). Both Chris Lattner and Tesla have used the phrase “not a good fit”. If you’ve spent a lot of years observing Fortune 500 executives come and go this phrase, generally means one thing. A new person clashed with the indigenous culture of his new company. That leads to stark disagreements on how to proceed forward. 
Apple Compared to Tesla
As to what this specifically means with Lattner and Tesla one can only guess. However, looking at Lattner‘s alma mater so to speak, Apple, it’s not too hard to see why there might be a culture clash.
 
Apple is a company that is willing to push back product launches until they can offer a high-quality product. Tesla is impatient and, when faced with numerous delays, will launch a product before it’s ready.
 
Apple likes to underpromise and overdeliver. Tesla is famous for overpromising and underdelivering.
 
Apple has a hard time saying “yes” to new business ideas. Tesla has a hard time saying “no” to new business ideas.
 
Apple will bend over backwards in the name of customer satisfaction even if it means lower profits. Tesla is willing to damage customer satisfaction if it means their first profitable quarter in years.
 
These are just a few of the differences that outsiders can easily point out. I’m sure it didn’t take long for Chris to feel like he’d landed on another planet.
 
Tesla’s Stock Options Are Worthless
But what I find really interesting is that both he and ex-Tesla CFO, Jason Wheeler, left Tesla on the eve of what Elon Musk thinks is their greatest accomplishment. Tesla is about to go mainstream with the launch of the Model 3 and disrupt the automotive world. Or so Musk thinks.
 
Both Lattner and Wheeler left abruptly. Former Google VP of Finance, Jason Wheeler left in February only days before Tesla’s earnings release. A highly unusual move for a CFO. And Chris Lattner left in the midst of Musk’s big push to make autonomous cars a reality. Lattner had stated when he left Apple that he relished big impossible tasks.
 
Yet both Wheeler and Lattner essentially voted with their feet that they have no confidence in Tesla. From their insider’s view, their stock options were worthless because the company is going to fail. They also didn’t want their names associated with Tesla any longer. Wheeler didn’t want his name associated with the financial statements and Lattner didn’t want his name associated with the debacle that will be self-driving cars.
 
This point is especially poignant right now as another product which really did change the world comes up on its tenth anniversary, the iPhone. It seems anyone connected to the iPhone in any way is trying to get their name associated with it. You’d think that perhaps Wheeler and Lattner would want to be able to say in ten years that they were at Tesla in the beginning. But no, they’ve done the opposite. They’ve jumped ship before it sinks.
 
In Wheeler’s case, perhaps he thought investors are going to get hurt and he didn’t want that on his conscience. That means pensions and 401Ks taking a big hit. But for Chris Lattner, the stakes are much higher. People could potentially get killed. How do you live with that?
 
Elon Musk appears to be disconnected from reality. He had two guys who were highly successful professionals with proven track records that disagreed with him and now for whatever reason they’re gone. Something is critically wrong in Teslaland. 

Now available in iBooks ---> The Tesla Bubble
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<![CDATA[Tim Cook, the Would-Be Robot Overlord?]]>Sun, 02 Jul 2017 12:33:37 GMThttp://perezonomics.com/home/tim-cook-the-would-be-robot-overlordTech Should Serve Humanity, but for How Long?
Earlier this month in an interview with the MIT Technology Review's Nanette Byrnes, Apple’s CEO Tim Cook made the statement that technology “should serve humanity, not the other way around.”
 
While he calls AI “profound” and increasingly capable of doing unbelievable things, on matters that require judgment he’s not comfortable with automating the human entirely out of the equation. “When technological advancement can go up so exponentially I do think there’s a risk of losing sight of the fact that tech should serve humanity, not the other way around.” 
​While I do agree with Tim that, in general, tech exists to serve humanity. There’s a long-term issue much larger than Apple which needs to be discussed. Something about Tim’s statement has been bothering me for weeks now. I can’t shake the notion that if we are on the road to creating sentient intelligence that we are headed towards failing a test of some sort.
 
Everyone who becomes a parent inevitably makes the statement that having children has helped them to understand and empathize with their own parents. Becoming a parent helps you to understand how your own mother or father sacrificed and dealt with problems the way that they did. As mankind’s ability to create artificial intelligence grows, we face the same dilemma as our own creator. How to deal with the free will of created objects?
 
Christians believe that God created the first “artificial intelligence” when he placed mankind on the earth. God created all forms of life but he gave mankind a special gift. We were created separate and apart from all other life in that we were made “in his image”. Not that we look like God, but we are self-aware, intelligent, and it is in our nature to reason and to create.
 
But God didn’t allow his new intelligent life to run rampant in his own world. There are dimensions which exist that we don’t have access too. He sandboxed us off where he could observe how his newly created intelligent life grew and evolved without wreaking havoc in the larger universe.
 
I still think it’s likely that mankind could never create any form of sentient artificial intelligence. There may be a supernatural origin to the spark of life which we don’t have access to replicate. But I’m not dogmatic about that. I’m open to the possibility that given enough time, perhaps it could be achieved. I’m also open to the possibility that perhaps our creator intends for us to accomplish this feat. We were created in his image and we were given the same desire to create.
 
But why would God want mankind to create a true artificial intelligence? I can only guess it would be a form of his defense for judgement day. You can’t talk to atheists for very long about why they reject the creator before they start hurling out accusations. Why does God allow bad things to happen? Why are evil people allowed to do what they do? And on and on the accusations go.
 
It’s logical to think that perhaps God wants mankind to be in his shoes so to speak. To create life so that we can better understand him and the choices that he made. It would also allow him to respond to mankind’s accusations with examples of how we ourselves handled the situation. Will we create robotic slaves? Will we be capricious with who lives or dies?
 
If mankind ever creates a real form of artificial intelligence, that puts God in a sort of grandparent position. He gets to watch and record how his own children deal with all the issues that arise from bringing forth life. For the portion of humanity that is drawn to God, this will forge a closer bond as we come to understand him more fully. For the part of humanity that rejects God, this will convict them as they are held guilty against the standard which they’ve used to condemn God. 

Now available on iBooks ---> The Tesla Bubble
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<![CDATA[How Apple Could Win the Media War]]>Sat, 01 Jul 2017 16:17:18 GMThttp://perezonomics.com/home/how-apple-could-win-the-media-warOriginal Content Isn't the Only Way
​About two weeks ago, Apple announced that they had hired two prominent TV executives from Sony Television. Any doubt as to whether or not Apple still has grander plans for the future of video content were immediately dispelled. They do, and poaching the executives who helped bring the world “Breaking Bad” is a pretty good start.
I still think that Apple’s best shot at making inroads into media without getting distracted would be purchasing other successful companies. People are set in their ways, and once they’ve developed habits it can be very difficult for them to change. That’s why manufacturing companies or retailers buy other companies. You could expend blood, sweat, and tears into growing your own niche with no guarantee of success, or you could buy another company and advance directly to GO.
 
The CleanFilms Angle
But if Apple is intent on starting small and trying to grow a competitive media advantage slowly, there is one thing that no one else in the world is doing that perhaps only they can accomplish. This feature could help differentiate Apple and attract service switchers: offering family-friendly versions of feature-length movies. Not family-friendly movies per se, but current popular movies that have been sanitized to remove offensive material.
 
About ten years ago there was a company called CleanFilms that had a successful Netflix-style business doing this. You could rent or purchase movies from them that were the airline versions without the sex scenes, graphic violence, or cuss words. It was helpful for parents with young children who wanted to watch a movie geared towards adults but didn’t want to worry about their kids getting an eye- or ear-full. Parents can only watch so many movies about dogs. Most of the time, the cut material was inconsequential to the movie, and the movie was no less enjoyable.
 
But the company ran into legal problems with the movies studios. They were barraged with lawsuits from studios who objected to anyone editing their movies without their permission. CleanFilms tried to get around this by purchasing a new copy of the movie for every copy they edited. But after losing their initial court battle, and CleanFilms didn’t have the the financial clout to go on and was forced to close down.
 
Original Content Isn’t the Only Way to Stand Out
If you are a new company trying to break into a crowded market, you have to do one of two things. You either have to offer something new or offer currently available products in a more convenient way. Streaming movies is a good example of offering what is currently available elsewhere in a more convenient way. Netflix didn’t steal business from Blockbuster by offering original content. They did it by repackaging the same movies in a more appealing manner. People didn’t like getting off the couch to visit Blockbuster, and they hated paying late fees.
 
Apple is a relative latecomer to the video business. It sounds like they are going to try to stake their foothold by offering something new. They want to create quality content that is unavailable anywhere else. But there is also the option of offering currently available content in a more convenient or attractive way.
 
No one in the industry is offering family-friendly versions of popular movies. Doing so would require a gargantuan effort in time and money negotiating the proper terms with the studios. Few companies have either the means or the will to take on this task. It’s an open question whether or not even Apple could accomplish this feat. But if they could, the payoff would be well worth it.
 
Getting people to switch to a new service is incredibly difficult. As I mentioned before, that is why companies buy other companies.  So if Apple doesn’t want to invest in other media companies, they should consider investing in ways that are significantly appealing enough to cause customers to switch streaming services. Offering family-friendly versions of popular movies or TV shows would be a great way to accomplish that.
 
Movie makers already know that if you are going to have a successful blockbuster movie that you need to stay away from an R rating. That is the kiss of death to achieving high-volume success in theatres. Why? Because at the end of the day, a lot of ticket sales are to parents who want to go with their kids. In a movie theatre setting, a PG-13 rating has become the best compromise between balancing artistic expression and parents bringing their kids. But in the privacy of your own home, there is no need to balance the wants of your audience. Why not allow those who want the full experience and those who want a family night get what they want?
 
No one else in the industry is offering this service, so it would be a great way for Apple to help carve out their niche in addition to new quality content.

Now available in iBooks ---> The Tesla Bubble
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<![CDATA[Why Apple Has Leapt Ahead of Google on Augmented Reality]]>Wed, 28 Jun 2017 00:37:15 GMThttp://perezonomics.com/home/why-apple-has-leapt-ahead-of-google-on-augmented-reality
Christopher Baugh writes about Apple’s advantages over Google, even when Google has the initial advantage.
Apple’s control over both its operating system and the hardware on which that software runs came up throughout the keynote. That highlights what Google really needs to worry about when competing with Apple: The fragmentation of Android, and how it performs across multiple different devices. This matters even when Google has a technical advantage.

Additionally, millions upon millions of iPhones are already eligible to run AR apps, and presumably, every new iPhone and iPad from here on out. One cannot say the same about Google’s AR platform, which not only requires each Android hardware partner to put a Tango sensor module in the back of their phone, but also sell consumers on these specialized handsets instead of sleeker ones without.--iPhone in Canada 06/27/17

 
Apple can coordinate the hardware and software roadmap and with in fell swoop ensure that every iPhone from now on will be AR compatible. Google can only dream of this kind of power. This is why Apple can bring things to market like 3D Touch, the AirPods W1 Chip, and now AR. 

​Now available on iBooks ---> The Tesla Bubble
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<![CDATA[Former Apple Product Design Engineer Discusses Manufacturing at Scale]]>Sun, 25 Jun 2017 12:40:30 GMThttp://perezonomics.com/home/former-apple-product-design-engineer-discusses-manufacturing-at-scaleAnd Why Tesla's Model 3 Will Be a Disaster
If you’re either a manufacturing or Apple wonk you should check out Leander Kahney’s interview with former Apple product design engineer, Anna Katrina Shedletsky.  The latest podcast of Apple Chat spends time with the now co-founder of Instrumental discussing all manner of hardcore manufacturing science. Her views were formed from spending a lot of time in China getting the iPod and Apple Watch manufacturing lines validated. Anna could easily be a professional podcaster. She's a great communicator without getting too dry.
Regarding Factory Automation
I particularly appreciated some of her comments towards the end where, like me, she hopes that the public doesn’t grow to fear factory automation. One of the reasons that I like to write about manufacturing robots in my blog is because it is such an overwhelming positive trend for both business and society in general.
 
Large Fortune 500 companies that can afford to invest in factory automation are, by far, the minority of job providers. As these large companies automate they will focus on an ever more narrow product band. That leaves more opportunity for the smaller non-automated companies to scoop up the lower volume product lines. Meaning that they have to hire more people.
 
Are people at large companies going to lose their jobs? Yes. Are smaller companies going to have to hire more people? Yes. This is why it is so important for governments to remove barriers to starting new companies or lowering the tax and regulatory burdens on medium-sized companies. We need them to pick up the slack.
 
The net result is that everyone pays less for those products which have been automated.
 
I also enjoyed her clarification regarding the controlled environment that engineers crave. Having spent my entire career in manufacturing I can attest that this controlled environment is always at odds with the freewheeling wild west that actually occurs out on the plant floor. Watching these two groups is like observing a married couple where one is a slob and the other an OCD neat freak.
 
Why Tesla Is a Risky Bet
Anna also spoke some about the science of building quality products at scale.  This is not an Apple-specific process and is one that I’ve observed at the various companies I’ve worked at. It involves “soft tooling” or fine tuning your one “golden line”. Once the process engineers sign off that your master line can produce X number of units per hour without quality problems, the manufacturing group is off to the races with the ramp up. This is how world class manufacturers do business. You take the time to get things right before you fire up countless lines that start churning out junk.
 
Even I, with my low expectations of Tesla, was surprised recently to see the headlines that Tesla (TSLA) had decided to skip the step of fine tuning their Model 3 production master line. Why? Because they are behind schedule. So Elon Musk has decided to skimp on quality to make up the difference. This is why Tesla will eventually run into quality problems en masse with their Model 3. Tesla’s problems ultimately flow down from the top.
 
Tesla has weakly pointed out that Audi has skipped the golden line step and had some success with it. But Audi is a world class manufacturer and Tesla is not. And no one else in the auto industry has dared to follow Audi’s example. Further, Tesla's claim that they didn't get much from their previous master line can't be taken seriously. That's like saying that we don't need a Department of Homeland Defense because terrorist attacks happened anyway. It is hard to quantify all the issues that you did prevent by doing the master line and Tesla should have spent more time in validation, not less. Elon Musk is simply trying to placate investor fears by making that statement.
 
Tesla will forge ahead with setting up all their lines before ironing out all their manufacturing issues. If the lines need to be re-configured or various pieces of machinery need to be swapped out, it’ll have to be done at a large scale. This will mean longer delays and much higher costs than if they had just done things right from the beginning.
 
This is part of the reason why I wrote The Tesla Bubble. The stock has been going up and up all year because investment firms and pension funds are trying to ride the momentum. But anyone who takes a closer look at this company can see it’s riddled with problems. Some of which haven’t fully emerged yet.
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