<![CDATA[Perezonomics - Home]]>Wed, 21 Feb 2018 22:25:51 -0600Weebly<![CDATA[The Hamilton Effect]]>Thu, 22 Feb 2018 04:13:54 GMThttp://perezonomics.com/home/the-hamilton-effectHistory Should be Understood, Not Distorted to Confirm Pre-Existing Beliefs
Senator Mike Lee from Utah wrote a great piece about how Lin-Manuel Miranda’s musical Hamilton has distorted history to confirm a big-government bias. It’s a shame really. Hamilton has done much to re-kindle an interest in America’s history. Now everyone has to explain all the inaccuracies contained therein.

I highly recommend reading this article which sets the record straight on Hamilton. And share it with your friends.

How the ‘Hamilton Effect’ Distorts the Founders
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<![CDATA[It's Time to Short Tesla]]>Fri, 16 Feb 2018 01:51:06 GMThttp://perezonomics.com/home/its-time-to-short-tesla
​I agree with Montana Skeptic that Tesla (TSLA) is quickly getting into juicy short territory. I highly recommend reading his great summary at Seeking Alpha.
Tesla is “structurally bankrupt”, meaning that they run out of money on the average of every 8 to 14 months. The people who keep predicting that Tesla is “going bankrupt”… are essentially correct. It happens quite regularly but the investors keep stepping in to provide a fresh cash infusion.
 
This is why you can't compare any of Tesla's products to the iPhone. The iPhone was never sold at a loss. There was sufficient market demand to allow Apple to charge prices to make it a profitable product from the very beginning. It was a self-sustaining product unlike anything that Tesla has ever sold except for maybe their Tesla branded iPhone cases. Apple's brand is so strong that even Tesla is able to make a buck off the iPhone.

The following two statements can't be said about the same company. They're contradictory.
Company X has a strong brand.
Company X has been selling their products at a loss for a decade.


As I explained in my book, you can't compare margins for the Model S to companies who use dealerships. Wholesalers vs retailer is an apples vs oranges comparison.
 
Now available in iBooks —> The Tesla Bubble
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<![CDATA[Tesla’s Journey to Oblivion]]>Fri, 09 Feb 2018 20:09:42 GMThttp://perezonomics.com/home/teslas-journey-to-oblivionThe Q4 2017 Results and Panic at Tesla Central
Tesla just released their Q4 2017 earnings and as many expected, it’s more bad news. Even the “good” news was hiding more bad news beneath the surface. Improved cash flow? Not really, Tesla hoarded ZEV credits and cashed them in all at once and they have deposits on the money-losing roadster and semi-truck.  For the non-accountants in my audience, deposits actually are liabilities on the balance sheet. 
What I found the most entertaining about all of this didn’t even have anything to do with Tesla per se. It was how Elon Musk timed the launch of his Falcon Heavy rocket right before Tesla reported all the bad news. The desperation at Tesla central must be getting thick. Thick enough for their Chief of Sales and Service to call it quits. How many high-ranking Tesla executives have quit in the last 12 months? I may have to go look that up and write a post about it. The insiders know the full picture of what’s going on and they’re voting with their feet.
 
I don’t blame Elon Musk for pulling such a blatant stunt at misdirection. With the tide of public opinion turning against Tesla, what else can he do? By now everyone pretty much expects Tesla to simply go bankrupt at some point. It’s an easier prediction than ever to make. The Tesla defenders seem to be fewer and fewer these days. We’re all just waiting to see who’s the most accurate at pegging the timeframe.
 
Tesla’s downfall isn’t without grace.  The rocket launch/earnings release reminds me of Buzz Lightyear falling in the original Toy Story kid’s movie. Yeah, Musk’s auto empire is falling, but at least it’s falling with style. And how fitting is the sight of a Tesla roadster getting jettisoned out into the cold vacuum of space to be destroyed by radiation? That about sums up Tesla’s situation back here on Earth.
 
Now available in iBooks —> The Tesla Bubble
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<![CDATA[Thoughts on Apple’s Q1 2018 Earnings Release]]>Sun, 04 Feb 2018 16:28:41 GMThttp://perezonomics.com/home/thoughts-on-apples-q1-2018-earnings-release
IPhone Sales Volume
 
There’s no other way to describe Apple’s (AAPL) iPhone sales volume in Q1 other than they were great. The first wave of articles written about Apple’s earnings release all dwelled on the fact that iPhone sales volume was down year-over-year. However, the major fact about there being one less week in 2018 (13 vs 14) was relegated to a quick footnote. 
​Here’s why I think iPhone unit volume was amazingly good. This is what Apple’s financial analysts would have done last summer when they were setting up their 2018 budget. First, they would have created a baseline target based on Q1 2017. So they would have taken last years iPhone unit volume of 78.29 million and divided by 14 for an average weekly volume. Then they would multiply the weekly volume by 13 to create an apples-to-apples comparison.
 
This brings you to a restated Q1 2018 target of 72.7 million iPhones sold based on 13 weeks. Any internal target negotiations would have began at this 72.7 million starting point. The iPhone beat this revised target by over 4.6 million units to achieve sales of 77.3 million units. That’s amazing considering that the average selling price was UP over the Q1 2017 quarter.
 
In all of my years of observing large manufacturing companies, I’ve developed one hard and fast rule. Which is this. All things remaining equal, as prices go up, volume comes down. If a company wants to defy this rule, it needs to create additional perceived value. Which Apple appears to have successfully accomplished.
 
IPhone X Profitability
There was some conjecture, which I rejected, that the iPhone X was going to be much less profitable for Apple despite the higher price tag. The theory was that the iPhone X was so expensive to manufacture that even with the price increase Apple wasn’t going to to recoup all their additional costs. Apple doesn’t release gross margins by product line so it’s kind of hard to definitively say what happened.
With a Q1 2018 gross margin average of 38.4% they are down from 38.5% in the previous year. However, I continue to believe that the Apple Watch is a low-margin product for Apple. And the Series 3 Apple Watch made huge sales gains this Christmas quarter which would bring down Apple’s average gross margin.
 
It looks to me like the iPhone X is just as profitable as any previous iPhone model if not more so. With a big increase in Apple Watch unit sales, any degradation in iPhone gross margins would have resulted in a much larger drop in gross margins. The iPhone made up 70% of Apple’s revenue mix this quarter so any hiccup would have been impossible to hide. Even if high margin services were up, it wouldn’t be enough to offset any downturn in iPhone margins. In fact, Services and the Apple Watch seem to cancel each other out. They’re both growing but impact the average margin in opposite ways.
 
Q2 Outlook
Even at Apple’s “reduced” Q2 guidance of $60-62 billion Apple is still looking at double digit growth year-over-year. Considering that is up from $52.9 billion in the same quarter in 2017 this actually a pretty healthy increase. Even if you take the lower end of Apple’s guidance of $60 billion that is still over a 14% increase YoY.
 
If you look at Apple’s previous Q2s to see what previous increases or decreases were like it puts the guidance into a much better light. Last year, Apple had only a 4.4% YoY revenue gain. The year before, it was actually a YoY decrease of -14.7% when compared to the iPhone 6 Super Cycle. 
If Apple hits the upper end of their guidance to achieve $62 billion, they would have nearly an 18% revenue jump. That is very close to the 2015 iPhone 6 “Super Cycle” level of a 21.3% jump. It looks to me like reports of the death of Apple’s 2018 Super Cycle are premature.
 
Now available in iBooks —> The Tesla Bubble
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<![CDATA[Remember All Those Dire Predictions of iPhone X Scarcity?]]>Thu, 01 Feb 2018 02:14:20 GMThttp://perezonomics.com/home/remember-all-those-dire-predictions-of-iphone-x-scarcityThere's a Connection
​Mikey Campbell had a great report on how Apple's iPhone X is successfully beating back Samsung in the US. 
"During Q4 2017, all the three new iPhones were strong sellers — the three were the top three selling phones in the U.S. market," Shah said. "However, since its launch on Nov. 3, the iPhone X outsold the iPhone 8 and iPhone 8 Plus by a 2:1 margin. What this means is the super-premium segment (above $800) has grown from almost 0 percent in previous years to 25 percent share of the total smartphones sold in USA during Q4 2017, which speaks volumes for the potential of USA market and the U.S. consumers' buying power."
 
Adding color to the hard data, Research Director Jeff Fieldhack noted Apple grew its sell through by 20 percent in a U.S. market that grew only 2 percent over the same period.
 
"This means Apple has been successful to take share away from Samsung in the premium," he said.— Mikey Campbell, AppleInsider
 
Does anyone else remember all the doom and gloom predictions regarding how difficult it would be to find the iPhone X? The fact that things didn’t turn out that way is directly related to the rumored “production cut backs.”
 
Both the Nikkei Asian Review and the Wall Street Journal wrote stories within the last week about how Apple is slashing production orders due to weaker than expected demand. Something seems off. They’re interpreting their data based on an out-of-date manufacturing model.
 
The part that none of the financial journalists seem to be taking into account is the extra manufacturing capacity that Apple would had to have put into place this year to deal with two major iPhone models.
 
Creating new product lines to target new customers is great, but there are significant additional costs to doing that. You need more inventory, more manufacturing capital, more employees, etc. If the volume isn’t there, it could end up being a losing proposition. That’s why the operations guys are usually pushing aback against the sales and marketing guys about how they need to consolidate their product lines.
 
So, what am I getting at? Apple was probably forced to fire up many more manufacturing lines than they have in previous years. This would directly lead to a larger than usual drop off after Q1 was over. It’s possible that both Apple’s production cut backs are bigger than usual and that sales are higher than ever.
 
Apple had no way of predicting what the breakout between the iPhone 8 and X was going to be. Therefore, the safe option was to pad the ramp-up capital for each model since it would be better to have too much capital than too little. If Apple has too much inventory, they can sell it in Q2. If they have too little, they could lose the sale forever. My guess is that the “production cut backs” were in relation to both the 8 and the X. Possibly even mostly the 8. However, headlines about iPhone 8 production cut backs are a lot less juicy.
 
A bigger than usual production cut back doesn’t necessarily mean that sales were disappointing, it just means that they built more inventory up front. When both the iPhone 8 and the X were launched, I was surprised how readily available both models were. Within 3 weeks the iPhone X was available for pickup at just about every Apple Store around me. The iPhone 8 didn’t even have lines. This further supports the thesis that Apple simply built more inventory up front than usual.
 
I had written a while back about how Apple could lose over 10% of their unit volume and still make just as much money due to the more profitable iPhone X. The fact that they’re actually selling more iPhones than ever means they’ve hit the jackpot.
 
Now available in iBooks —> The Tesla Bubble
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<![CDATA[Why the HomePod Isn’t Too Late]]>Sat, 27 Jan 2018 14:45:53 GMThttp://perezonomics.com/home/why-the-homepod-isnt-too-lateNo One Makes a Good Personal Assistant Yet
​The Amazon Echo is not a personal assistant. It is a community assistant. There’s a big difference between the two. And as of yet, no one in the world is making a good countertop personal assistant.
Calling the Amazon Echo a personal assistant is a misnomer. It’s a community assistant. Anyone in a household, whether they actually live there or not, can trigger Alexa to accomplish various tasks. Setting timers, turning off lights, or reading you the news. The Amazon Echo is no more your personal assistant than your living room light switch is your personal device.
 
One of the reason that HomePod skeptics are down on the HomePod is because they perceive Apple as being late to the intelligent assistance game. I disagree. Apple has been steadily positioning its pieces on the battlefield for the last three years. Further, Apple may have more physical assets in place than anyone except maybe Amazon. Apple has sold far more Apple Watches than Amazon has sold Echos. But Amazon has been licensing Alexa for use on many other devices such as thermostats and cigarette lighter adapters. So it’s hard to say how many distribution points Amazon actually has.
 
But intelligent assistance is less about a specific hardware factor and more about convenience. It is also  more about software and microphones. Amazon itself has proved that point. That’s why Alexa is now in car stereos and refrigerators. The physical base station appeals in certain use cases, but otherwise the base station has a lot of drawbacks. It can’t follow you through your day the way that your Apple Watch can. It can also get confused if you have two base stations in your house and you’re in the middle. And who wants to upgrade all of their base stations when a better unit is released?
 
But Amazon has convinced Apple that there are some households for whom a base station makes a lot of sense. Some people hate wearing watches, and if there is one place in the world where you’re likely to leave your phone laying in another room on the counter, it’s at your home. So Apple finally relented and is now selling their own countertop music device. But this is not Apple’s answer to the personal assistant that everyone is asking for. This is Apple’s latest Trojan Horse in their future personal assistant push.
 
Amazon proved that there is a time and a place for the home base station. But they’ve also proven that this is only a subsegment of the greater movement. In the near future, most people who use Alexa may not even own an Echo. This may even be why Amazon gave Alexa a name that was separate from the device (Echo). The two don’t necessarily go together. And Amazon still hasn’t figured out a way to migrate from community assistant to be everyone’s personal assistant.
 
Apple has believed all along that the Apple Watch is a superior solution to Amazon’s Echo from a hardware perspective. It’s both mobile and personal. That’s why the Apple Watch has received much more attention that the HomePod. The HomePod coming out three years after the Apple Watch shows where Apple believes it ranks in importance. And I don’t disagree with them. Intelligent assistance is more about software than hardware, and Siri isn’t ready for a device whose whole reason to be is to know what you want or do what you need.
 
Even Apple will concede that Siri has a long way to go to match Alexa’s growing skill set. But the software part is something that Apple has always been good about keeping a secret. The tech world was shocked when Apple unveiled that they had invented the Swift open source programming language. No one saw it coming. Likewise with Apple’s big Augmented Reality addition at WWDC last summer. We heard Tim Cook drop little tidbits about how augmented reality would one day be a really big thing. But no one expected the depth of Apple’s commitment when iOS 11 was unveiled.
 
Apple is missing two pieces from really beginning their assault on intelligent assistance. First, to migrate from a community assistant to a personal assistant, Siri needs reliable voice recognition. Second, Siri needs to expand greatly as a platform.
 
Apple recognizes that a community assistant is better than nothing but still a sub-optimal solution. I think Apple is unwilling to offer an Echo-like device with Echo-like flaws. They want a superior solution that makes everyone say that someone finally got it right.  Unlike Google, Apple wasn’t willing to offer FaceID until they had a reliable solution. I predict that Apple will follow the same pattern with intelligent assistance and stun the world with VoiceID. This will allow mom, dad, or the kids to ask Siri to read their most recent iMessages without confusion. Siri at that point could become the personal assistant to everyone in the house.
 
So, is the HomePod too little too late? Absolutely not. It’s not too little because the main job of fighting the Amazon Echo will fall to the Apple Watch. The HomePod is more like a supporting cast member. And it’s not too late because Apple is still working on making Siri more powerful. 
 
In fact, the HomePod is either right on time or early. Siri isn’t ready for prime time yet, and Apple is already prepositioning their countertop devices all across America. At some point in the future, Apple will release a new and improved Siri that won’t have a ramp up period. There will already be millions of Apple Watches and HomePods out there ready for an infusion of new intelligence. My guess is that if Apple is now willing to sell their HomePod that the more powerful Siri isn’t going to be too far behind.
 
Now available in iBooks —> The Tesla Bubble
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<![CDATA[When a Large Acquisition Makes Sense for Apple]]>Thu, 25 Jan 2018 02:40:34 GMThttp://perezonomics.com/home/when-a-large-acquisition-makes-sense-for-appleWhat Horace Dediu Gets Right...and Wrong
​Horace Dediu of Asymco had a great FAQ regarding Apple’s (AAPL) $268 billion cash horde. I highly recommend reading it if your wondering why Apple takes out loans when they have so much cash or why they buy back stock.
 
I especially liked this part from his article.
Question:   Why does Apple need to pay shareholders?
Answer:      
Because it’s their money.


Simple and to the point. If there’s one thing that bugs me about tech writers, it’s how many of them speak about Apple’s shareholders as if they are some kind of parasitic drag on the company. To the contrary, they own the company. Tim Cook is no more the owner of Apple than the guy who takes your order at McDonald’s owns the restaurant. Okay, I’m exaggerating a bit here, because Tim does own stock in Apple. But his percentage of the total is so small that the shareholders could still fire him and shut down the company if they chose.
 
Apple exists for the shareholders. Just like the corner dry cleaners store exists for its owner or your eBay business exists for you.
 
The only part of Dediu’s article that I have a disagreement with him on is the question and answer section on acquisitions.
 
Question: What about acquisitions?

Answer:  Why not buy other companies?It buys companies but usually small ones which are essentially acquisitions of teams and their intellectual property. Apple does not buy “business models” or customers or cash flows which is what large companies are valued for. Operationally, it’s also because Apple has a strong culture and it wishes to preserve it. Acquisitions dilute culture which is why integrations often fail. Statistically, large acquisitions are value destructive and the larger they are, the more likely they are to fail. Incidentally, when a company is acquired with cash that hole in the balance sheet is filled with something called “goodwill” which reflects some intangible value of the new asset. If and when the acquisition is deemed to have failed the goodwill is written off and so is shareholder equity. That’s how shareholders are robbed.

 
There are two different reasons for an acquisition of another company that is as big or bigger than your own. One is to boost profitability, the other is to solve a problem.
 
Dediu is making the assumption that Apple doesn’t need to do a large acquisition because they don’t need to boost profitability. That is because large acquisitions are often about boosting synergies and lowering costs. For example, two small auto companies merging would be able to get a better price on steel and would be able to lay off redundant head count. A good example of this would be the spectacularly successful merger of HP and Compaq. Contrary to what many of the naysayers said during Carly Fiorina’s unsuccessful run for the Republican nomination, the merger was a home run.
 
I agree with Horace that Apple doesn’t need to spend its money on a large acquisition in order to cut costs or boost profitability. But that’s not the only reason to do an acquisition. Often, these large acquisitions are more about solving a problem or shoring up a weakness. For instance, Bass Pro Shops recently purchased Cabela’s. Why? Because Bass Pro Shops didn’t invest in a vibrant online internet store like Cabela’s, and they don’t have anywhere near the catalog business that Cabela's has. This merger/acquisition helps to fill a hole that Bass Pro has because they don’t have time to build their own solution while Amazon happily poaches more of their customers.
 
Further, if a large acquisition is not about boosting synergies and cutting costs, integration doesn’t have to happen. To say that Apple’s culture would be diluted is not a given. In fact, the opposite could happen. If Apple’s executive management team starts to get distracted by launching a new media business, their current hardware business could suffer. Tim Cook, Eddie Cue, Phil Schiller, et al, only have so many hours in the day.
 
Apple could potentially acquire a large company with media experience and let them handle getting this new media business off the ground. This would free up Apple’s executive team to do what they’ve always done, design great hardware. Apple could leave the acquired company a wholly owned subsidiary and not integrate the two. But they could still take what they need from their subsidiary since they own it.
 
Apple seems to be gearing up for some kind of foray into video streaming. So now they have a need for media. Both original new media and perhaps a back catalog of movies and shows. Looking at a Disney acquisition would give them access to a lot of media. The Pixar team has a proven record of cranking out hit after hit and the Star Wars franchise would be wholly owned by Apple. This would solve a big problem for Apple.
 
Now available in iBooks —> The Tesla Bubble
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<![CDATA[Jordan Golson On Tesla’s Amazing Decade]]>Sun, 21 Jan 2018 18:33:27 GMThttp://perezonomics.com/home/jordan-golson-on-teslas-amazing-decadeIt’s the Investors Who Are in the Spotlight
​Jordan Golson of Ars Technica began his review of the Model X by unintentionally calling attention to something that actually isn’t very flattering for Tesla (TSLA). Of course, he’s trying to put Tesla’s progress in as favorable a light as possible but there’s one big problem with what he said, which I’ll cover after his quote.
It’s been quite an unexpected decade at Tesla. In 2007, if you said that the EV company would release an all-electric sedan that became one of the fastest accelerating vehicles of all time and sold tens of thousands of units with numerous hardware and software improvements along the way, you’d have been sent to the loony bin. And if you then predicted the company would release an all-electric SUV that would do the same and develop and release (sort of) an affordable, stylish, and long-range EV... well, maybe you’d have been mistaken for a member of the Musk family.—Jordan Golson, Ars Technica
 
Here’s the problem. The reason that no one would have predicted that Tesla could ever crank out all these cars is because everyone would assume that Tesla would have to find a way to turn a profit at some point. In the real world, all investments demand a return. Preferably within about two years.  It never occurred to anyone that Elon Musk would be able to sell a vision that is ever on the horizon and never getting much closer.
 
GM and BMW have been stuck in EV limbo for years because their shareholders expect a decent return on their investment. So they invest what they can without endangering their company’s respective financial health. If GM and BMW were free from the pressure to build EVs profitably, they could create some amazing pieces of machinery. And they would be much higher quality than what Tesla is churning out.
 
Ultimately, Tesla is losing money because the demand for their vehicles isn’t strong enough. But wait! At this point the Tesla apologist brings up the fact that there are plenty of rabid Tesla fans out there. Yes, but Tesla is discounting their inventory to get even these fans to buy their inventory.
 
Capitalism works like this. If market demand for a product exists, a company will fill that demand and their customers will compensate them for their costs plus some profit. That’s why 42” plasma TVs used to cost $5,000. There was enough market demand for these amazing new pieces of technology that people were willing to pay whatever it took to get one. No one planned to sell them at a loss. Gateway did sell their plasma TVs at a loss but it was by accident. They didn’t realize the extent of the service and support costs involved and it eventually killed the company.
 
If there is not enough demand, companies have to lower their prices to move inventory. This is why Tesla is perennially losing money. There is some demand for their EVs, but not enough to pay for their costs. So Tesla sells at a loss to move their inventory. Tesla’s average selling price needs to go up by at least 30%, but Tesla won’t raise prices out of fear that their sales will implode. If customers won’t cover your costs plus profit, there really isn’t “demand” in the capitalistic sense of the word.
 
Tesla apologists cling to the hope that as volume goes up, costs will go down, and in the future Tesla will be self-sustaining. However, the opposite has been happening over the last few years. Tesla’s losses have been widening and they’re now burning through cash at a faster clip than ever before. The Tesla pessimists have been proven right at every turn so far.
 
At their current clip, it’s estimated that Tesla will be completely out of cash by this August. If investors don’t hand over billions more, that’s the end of the show folks. I do think that investors at this point are still willing to fund operations but in the future it will come to an end. The million dollar question is when?
 
So back to Jordan’s point. Yes, it is amazing that Tesla has manufactured and sold all of these cars over the past ten years. But what makes it amazing is that Tesla’s investors still have hope in the face of a consistently deteriorating financial position.
 
Now available in iBooks —> The Tesla Bubble
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<![CDATA[Apple Is Preparing for War]]>Sun, 21 Jan 2018 14:32:00 GMThttp://perezonomics.com/home/apple-is-preparing-for-warThis Is Starting to Look Bigger Than Apple Music
​Anyone paying attention to what Apple (AAPL) has been doing behind the scenes with media has been astounded over the last 6 months. Between hiring heavy hitters and purchasing video with impeccable pedigrees, Apple has been making some great moves. The most recent announcement is the purchase of an epic drama “See” by the director of the Hunger Games and the Oscar-nominated screenwriter of Peaky Blinders. If the whole video streaming industry is a battle right now it looks like Apple is amassing a huge army on the border and about to go to war. 
But the question on everyone’s mind is “What is Apple’s plan?”. Are they wanting to augment Apple Music which is available to both iOS and Android? Are they after more service revenue? Or do they want to bypass Apple Music and make their media exclusive to iOS?
 
I had written only a few weeks ago that Apple was making slow methodical moves which indicated that perhaps they were more interested in diversifying their risk and going after more service revenue. But with more purchases and hires in only the last 3 weeks I’m coming around to the view that maybe Apple is wanting to make a big splash.
 
Looking at the money they’re spending on new employees and content thus far I’m now leaning towards the idea that Apple is more interested in the higher profit option of boosting their hardware sales and making all of this content exclusive to iOS. Why? Because they’re investing so much money so quickly.
 
Corporations typically like to see at least a two-year payback on investment. With the amount of money that Apple is spending on media it seems doubtful to me that Apple could ever get to a two-year payback or less by only growing streaming revenue. The investment payback period on going only after additional streaming revenue is much longer than if they were also modeling a boost in high margin hardware. But the hardware boost only comes if they make the content exclusive to iOS.
 
Even if gross margins on Apple Music was in the 80% range (which I doubt it’s that high) it would take over 18 new music subscribers in a quarter to equal the sale of just one additional iPhone X. If Apple was truly interested in only boosting service revenue and trying to make the company less reliant on hardware sales, I wouldn’t expect them to be spending this much.
 
But I could be wrong. Perhaps Apple is more patient than the typical company and willing to wait longer for payback on their investment. If there is one thing that Apple doesn’t have to worry about it, it is how to finance their projects. There are very few companies in a cash-rich position anywhere near Apple’s so it’s interesting to watch how they handle their investment decisions. I suppose we’ll just have to stay tuned and see.
 
Now available in iBooks —> The Tesla Bubbl
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<![CDATA[Could Apple Learn from BMW’s Naming Woes?]]>Sat, 20 Jan 2018 15:42:09 GMThttp://perezonomics.com/home/could-apple-learn-from-bmws-naming-woesThe Oldest, Clearest, Most Logical Model Designation in the Auto Industry
​Apple (AAPL) seems to find itself in an increasingly difficult position when it comes to naming their iPhone models. This is a situation that will only get more sticky if Apple continues to expand the iPhone line as rumored. Ben Lovejoy wrote a piece that I mostly agree with on how Apple needs to segment the iPhone into distinct models to make things a little clearer.
I actually think it’s time for Apple to leave behind the numbering of iPhones – once you hit double-digits, it just feels too untidy. Let’s just stick to the product names, and prefix with a year if necessary, exactly as the company does for its Macs.
 
So, I’d suggest something like this:
iPhone mini (for SE 2)
iPhone (for LCD model)
iPhone Pro (for X successor)
iPhone Plus (for larger model of X successor)
 
We’d then have a logical range in terms of size and price, a single design – and a meaningful set of names. —Ben Lovejouy, 9To5Mac
 
I read Ben’s article while in the middle of reading Bob Lutz’s excellent book on leadership Icons and Idiots. It struck me how similar Apple’s iPhone name problem of today resembles BMW’s name problem of the 1970s. Bob Lutz was BMW’s Executive Vice President of Sales and Marketing when this issue came to a head and here’s an excerpt from his book where he discusses it.  
 
“Another set of turbulent discussions took place over the proper badging of BMW cars. Back in the 1960s, it was simple: the various body sizes were each equipped with one engine size. Thus, the smallest BMW (abandoned in the ’60s) was the 700, its engine size in cubic centimeters. The high-volume sedan was the 1600, and the largest car was the four-door BMW 2000, so named for its two-liter, four-cylinder engine. But the complexity generated by offering larger engines in the smaller cars soon reared its head. What to do when you put the two-liter engine in the 1600? Call it the 1600-2000? The 1600 Two-Liter? That conundrum was resolved by the designation 2002, which became a wildly popular car and perhaps the most iconic BMW ever. Although that fix worked, we could see that the designation system was doomed. With the new midsize BMW sedan (now called 5 Series), we had a real problem, for it was later to be offered with the six-cylinder engine of the large (now 7) series. These were named by their engine size, 2500, 2800, and a slight departure, 3.0. So, what to call “a midsize BMW with the 2800 cc six? The 2000-2.8? 2.0-2.8? The organization was churning, trying to find a solution, and the decision deadline for tooling the badges was fast approaching. I was wracking my brain for a logical answer as well, to no avail.”
 
“The solution presented itself quietly and unexpectedly in the form of Oskar Kolk, my quietly professional, self-effacing domestic sales manager. He had asked to see me after hours and now sat facing me across the desk. He apologized for the intrusion and explained that all of this really wasn’t any of his business, he knew he wasn’t in Marketing, that his suggestion probably was worthless, etc. He then unfolded a carefully handwritten sheet upon which, in 100 percent detail, was contained BMW’s brilliant model designation, the oldest, clearest, most logical in the industry.”
 
“My thought,” Kolk said, “was to call the smaller cars the 3 Series, the midsize ones 5 Series, and the big ones the 7 Series. That would always be the first, identifying digit. The second two digits would connote engine size, so you could have a 316, 318, 320, 325, even a 330 with the big six. The upcoming midsize car would start with the 2-liter four, so it would be the 520. Later, when it gets the 2.5-liter six, it “becomes the 525, and nobody would confuse it with the big, current 2500, because that one becomes the 725!”—Bob Lutz, Icons and Idiots
 
The brilliant part of BMW’s segmentation is that it doesn’t preclude the lower series from getting premium options if the customer is willing to pay for it. Just because a car is a 3 series doesn’t mean it will cost less than a 5 series. Likewise, I think Apple could use this same flexibility. An iPhone Mini with dual camera’s and 3D Touch would be awesome for some people.
 

Now available in iBooks —> The Tesla Bubble
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<![CDATA[Thoughts on BirchTree's watchOS 5 Wish List]]>Thu, 18 Jan 2018 14:53:10 GMThttp://perezonomics.com/home/thoughts-on-birchtrees-watchos-5-wish-list
​The Apple Watch is the most exciting device made by Apple over the last 3 years. The performance jumps are huge, and it’s constantly gaining new abilities. But everything can be improved, and I appreciated Matt Birchler’s great write-up on suggestions for watchOS 5 at his BirchTree blog. I’m linking to it here and expounding on the suggestions that I liked the best. His suggestions are below in bold.
Siri should always be listening for “Hey Siri,” thereby removing the need for me to raise my wrist to ask a question or make a request. Since Siri can now talk to you (at least on the Series 3) then it should be able to answer me without the need to ever look at the watch face.
 
This may be the most important suggestion of all. One of the biggest drivers behind Amazon’s Echo sales success is that Alexa is always standing by waiting for your orders. Siri isn’t quite there yet on the watch. You don’t have to touch your watch to call Siri, but you do have to turn your wrist so as to trigger your watch screen. Having an LTE-capable Apple Watch strapped to your wrist with an always-listening Siri would finally turn Siri into the omnipresent assistant we’ve always wanted.
 
The Apple News app is nice, and I love its integration into the Siri watch face, but it does not let me read entire articles on the watch itself. I know it’s a bit odd, but it would be nice to be able to read more than just the first line of some articles without having to get my phone.
 
In contrast, the news app Flipboard will put articles in their Apple Watch app, at least the first 4 paragraphs, and I actually like using it. It used to be that using the app was far too slow on my Series 0 or 2, but on the Series 3 it’s fairly quick. I’ll read articles on my watch any time I don’t have my iPhone or iPad with me and I feel like scanning the latest headlines. This is where the genius of the Apple Watch crown really shines. You can scroll through the text without blocking the screen. I don’t see why Apple News feels that they can’t add text to their articles. Flipboard already does, and it works just fine.
 
My final want is a crazy one, but I’d like the ability to watch YouTube videos on my watch. yes, this is stupid, and yes this is definitely not happening, but every once in a while I would actually like a video to play on my wrist and I can’t do it today. This would require Apple to make it possible and for Google to make it actually happen, and neither of those are likely, but hey, what are wishlists for?
 
This actually makes a lot of sense. I often like to listen to YouTube videos when I’m doing chores. I’m listening much more than I’m watching. Especially if it’s a daily vlog from someone who’s basically just talking into the camera. I don’t really need to see every second of the video. I’d like to play the video on my watch and listen to it on my AirPods. I’d love to have my YouTube Watch Later playlist on my watch ready to go at any time.  
 
Now available in iBooks —> The Tesla Bubbl
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<![CDATA[Crunching the Math on Electric vs Gas Forklifts]]>Sun, 14 Jan 2018 14:52:42 GMThttp://perezonomics.com/home/crunching-the-math-on-electric-vs-gas-forkliftsWhere Business Insider Gets EVs Wrong
​Business Insider’s Matthew DeBord made the amazing claim that there is currently no debate over how electric vehicle’s are more cost-effective than gas vehicles.
On average, running a vehicle on electricity is over 50% more cost-effective that running a car on gas. There's really no debate about this, and the simple fact was recently backed up in a University of Michigan study by Michael Sivak and Brandon Schoettle. —Matthew DeBord
 
Corporate America seems to disagree with his assessment. The problem with the study that Matthew tries to hold up as his evidence is that it primarily is measuring the difference between electric and gas as fuel and doesn’t take into account the long term fixed costs.
 
For instance, most corporations have been crunching the math on using electric versus gas forklifts for many years now. Unlike most consumers, corporations DO make their decisions based on the most cost-effective solution. And for the most part, gas usually wins. Even when you take into account the lower maintenance and fuel costs for EVs it is still cheaper to own gas forklifts.
 
Last summer I had to go through the financial analysis on whether to convert our forklift fleet in Louisiana over to electric. The appeal of electric forklifts was plain to the warehouse manager because he hated dealing with the hassle of downtime and scheduling maintenance and repairs.
 
However, when we quantified the cost of electric forklifts over the next ten years it wasn’t even close. EVs were 30-40% more expensive than gas forklifts. The problem was higher initial vehicle cost, battery pack replacement costs, and charging station replacement cost.
 
Most people are aware that electric vehicles cost more up front. But not everyone is aware of how expensive battery replacements can be. Further, even less are aware that the charging stations you pay a lot of money for also have a limited life. For electric forklifts the charging stations need to be replaced every 6 years.
 
When faced with the total cost of conversion over to electric vehicles, my warehouse manager balked at the cost and chose gas forklifts. How could he justify a nearly 40% increase in costs? Yes, maintenance and fuel are cheaper, but battery and charging station replacements kills that advantage.
 
There are some companies that have already started using electric forklifts but it’s not because they’re cheaper. Let me explain why.  In those cases, the 40% premium on EVs is weighed against the cost of downtime. For instance, if it’s Friday afternoon and you don’t get every truck loaded because one of your forklifts blew a transmission, that may cost you in other ways.
 
If you are a company that doesn’t compete on price and is willing to charge a higher price for superior service, you may be willing to pay more for forklifts that won’t go down for repairs. This is the same rationale being used by companies who are signing up for electric semi-trucks. It’s not that they think they will be cheaper to operate, it’s that superior service trumps low-cost.
 
The study from the University of Michigan that Matthew DeBord holds up as evidence that no one quibbles with the fact that EVs are cheaper is flawed. If it was true, corporate America wouldn’t overwhelmingly still be using gas forklifts. If it was truly cheaper to use electric, American business would have already converted their forklift fleets.
 
Now available in iBooks —> The Tesla Bubble
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<![CDATA[Google Agrees That Apple’s Chip Advantage Is a Threat to Android]]>Sat, 13 Jan 2018 20:44:06 GMThttp://perezonomics.com/home/google-agrees-that-apples-chip-advantage-is-a-threat-to-androidThat’s Why They’re Poaching Apple’s Chip Engineers
​Chance Miller writes for 9to5Mac on how Google is poaching Apple (AAPL) chip engineers and recently scored a huge win with hiring away John Bruno. 
At Apple, Bruno was responsible for the silicon competitive analysis group. This group is Apple’s way of ensuring it stays ahead of other chip makers in terms of performance. Bruno also served at AMD and was one of the lead developers of the Fusion processors for PCs. –Chance Miller, 9to5Mac
 
Back in April of 2017, I had written about how Apple’s huge advantage in processor power could translate into real trouble for Android if they don’t pick up the pace soon. Judging by the moves that Google is making with stealing Apple’s chip designers, it appears that Google agrees with my thesis. Here’s an excerpt from what I wrote last year:
 
If iOS devices continue to pull away in terms of processing power, I could see a scenario where software made for iOS and Android are no longer equivalents. Right now, even though the iPhone 7 is significantly faster than the fastest Android phones, there is still a lot of overlap between the two platforms. If you’re wanting to include the iPhone 5C and up, there are a lot of Android phones that fit into that spectrum of capability. But what happens if the oldest iPhone that developers are targeting is more powerful than 80% of the Android installed base?

We’ll end up with software made for iPhones and iPads that is significantly more powerful than the Android equivalent. Not just better designed, but more features and more capable. Gaming is already so much better on iOS than Android that many Android gamers are either switching to iPhone or tempted to take the plunge. – Perezonomics, April 22, 2017
 
Apple is currently over two years ahead of Android when it comes to processor performance. That’s due largely to the fact that they have what could arguably be the most talented chip design team in the world. It makes sense that Google would go after Apple’s chip designers because there is a very limited pool of experienced engineers in this area.
 
Perhaps soon we’ll start to see Android phones get a little more competitive to iPhones when it comes to power, configurability, and energy management. Because thus far, they’re falling further behind every year.
 
 
Now available in iBooks —> The Tesla Bubble
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<![CDATA[Android Performance Is Two Years Behind the iPhone]]>Tue, 09 Jan 2018 02:16:38 GMThttp://perezonomics.com/home/android-performance-is-two-years-behind-the-iphoneThe Real Reason Android Doesn’t Need to Throttle
In the face of Apple’s criticism for throttling old iPhones with worn out batteries, Samsung came out and stated that they didn’t do that with older Samsung phones. Which I found to be quite hilarious.
First, Samsung is admitting that they don’t have deep hardware and software integration the way that Apple does. Apple controls both sides which is one of the reasons that iOS is much more power and memory efficient than Android.
 
Second, Samsung’s mobile phone chips are so much less powerful than Apple’s custom designed chips that there is no need for throttling. Look at the table below of single core benchmarks from the Geekbench website and what jumps out at you? Single core performance on iPhones blows away any Samsung or Google phone. In fact, the Galaxy Note 8 still isn’t even to the level of the iPhone 6s which came out in 2015.
And make no mistake, single core performance is what makes a phone feel fast or slow. It dictates how quickly your phone can get through the myriad of mundane things it has to do. It’s analogous to torque in a car motor which is what makes your car feel fast or slow. Multi-core performance is like high-rpm horsepower, it’s there to provide power when you really need it but it doesn’t affect how your device feels in day-to-day use.
 
Comparing iPhone processors to Samsung’s processors is like comparing a supercharged Corvette Z06 to a Toyota Corolla. If GM said that after a few years when the rings started to develop blow-by that your top-speed would be reduced from 180mph to 150mph via the computer to prevent further damage. There might be an outcry. But if Toyota said that they would never limit their Corolla’s top speed to 150mph everyone would just laugh. That’s because everyone knows those weak motors would never come close to 150mph.
 
Same with Android phones. The iPhone 8 has over twice the single core power of the Galaxy Note 8. Android phones don’t ask nearly as much from the battery as iPhones do. In fact, Apple could throttle the iPhone 8 by 40% and it would still be faster than the Galaxy Note 8. So when Samsung says that they don’t throttle their Galaxy phones all we can do is smile. Because Android single core performance is so weak it’s like they come from the factory permanently throttled.
 
And the thought that Apple is somehow deliberately sabotaging their products to make people upgrade is absolutely ludicrous. I’ve worked in many Fortune 500 companies and that’s just not how anyone operates.
 
Now available in iBooks —> The Tesla Bubble
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<![CDATA[Where Brooke Crothers Gets Tesla Wrong]]>Mon, 08 Jan 2018 17:44:10 GMThttp://perezonomics.com/home/where-brooke-crothers-gets-tesla-wrong
​Writing for Forbes, Brooke Crothers closes his eyes and puts his fingers in his ears when it comes to all the financial forecasters who warn that Tesla (TSLA) has arrived at the beginning of the end.
The daggers are out after Tesla reported Q4 vehicle production and delivery numbers.
But the long, tortured analyses are getting stale. All of the Model 3-centric stories say pretty much the same thing: Tesla is toast and here's the math to prove it. And every story insists: "This time it's really serious."
The problem is, people have been saying the same thing about Tesla for years. And financial blogs rehash the same the-end-is-nigh drivel every day.—Brooke Crothers, Forbes
 
Brooke’s thesis reminds me of an old joke about a man who jumped off a high rise building with a parachute strapped to his back. On his way down, people in the windows asked him when he was going to pull the strap. He responded “Well, I’ve fallen over 50 floors and so far so good”. In fact, Brooke’s piece is a good summation of where the bull case for Tesla is nowadays. It’s been reduced to the fact that they haven’t gone bankrupt yet. Well, the skeptics were right about Saturn, Suzuki America, and every other EV maker to date. So their batting average is pretty good.
 
Here’s what Brooke doesn’t get. The financial guys are worried because Tesla is pivoting away from higher priced cars with higher margins to lower priced cars with lower margins. This is very different. Making matters worse, the capital requirements of the lower margin Model 3 are much higher than what are needed for the S or X. Things have changed greatly, by Elon’s doing. And so far, the financial doomsday sayers are proven right every 3 months when exactly what they predicted happens.
 
Were it not for the Model 3, Tesla could have limped along for a while making the Model S and X at little to no profit. But now that they’re dumping money into the Model 3 they’re going to hemorrhage cash like a deer with an arrow in its neck. Tesla is investing enough money into the Model 3 to produce 5,000 vehicles per week. At that pace, the Model 3 would outsell the Ford Fusion in the US.
 
Tesla isn’t going to make up the Model 3s lower margin in volume. For starters, the Model 3 price is too low, no amount of volume is going to help them ever turn a profit. Second, unlike other automakers, their selling costs are huge and they’re variable. That means the more cars that they sell, the more that they lose on battery charging infrastructure costs, warranty repairs, and customer service and support. Other automakers don’t deal with these costs because independent business owners (dealers) invest a lot of their own money to deal with these. But not Tesla, as their sales grow, so do their expenses in lockstep. This alone makes Tesla’s business model unsustainable.
 
But Tesla has 350,000 reservations cry the Tesla bulls. That’s true, but what happens if Tesla invests the capital required to sell this level of Model 3s, and the demand turns out to be a one-time spike by the curious? It’s going to be big trouble for Tesla. Or if a good amount of those fully refundable deposits turn out to be speculators who cancel their deposits when resell value isn’t where they thought it was going to be?
 
I’ve watched the hype surrounding the Model 3 and Tesla in general and noticed something curious. By and large, the Tesla fans are not what you would call “car people”. Tesla fans are not the automotive tastemakers. That is part of the reason why Tesla customer satisfaction surveys come back with glowing reviews when their cars are much more shoddily constructed than cars made by GM or Toyota. Real car people have high standards and know what to look for in automotive quality.
 
When it comes to the traditional automotive tastemakers, the “car guys” among us, the reaction to Tesla ranges from non-plussed to overtly hostile. Tesla investors are hoping that the 350,000 Model 3 reservations are a sign that the public is ready to accept electric cars for their daily transportation. However, if these 350,000 are simply a new addition of non-traditional car people who are willing to buy the Model 3, Tesla is in big trouble.
 
Tesla can’t gear up for this level of sales only for a one-time blip at the beginning. Tesla needs a sustained shift in national attitudes towards EVs. And that’s not happening within the next 5 years.
 
But just for the sake of argument. Let’s say that demand for the Model 3 is exactly where Tesla hopes into the forseeable future. What happens then? Well, Tesla will continue to lose money as they sell their cars at a loss. Tesla investors will eventually get disillusioned after two or three years.  They’ll lose faith that they'll ever see a huge bump in stock price and stop handing over cash a billion dollars at a time. At which point, Tesla will begin their downward spiral of bankruptcy.
 
And that’s the best-case scenario.
 
Now available in iBooks —> The Tesla Bubble
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<![CDATA[Excel Tip: Automate with the SUMIF Function]]>Sat, 06 Jan 2018 15:53:15 GMThttp://perezonomics.com/home/excel-tip-automate-with-the-sumif-functionAnother Overlooked Function More People Should Take a Look at
​One Excel function that I’m surprised more people don’t use more often is the SUMIF. It’s a fairly simple function that even people working on uncomplicated spreadsheets may often have an occasion to use.
​The purpose of the SUMIF is to allow you to create totals without sorting your main data table. I used to work with data tables at the retail giant Cabela’s that ran well over a hundred thousand rows.  Every time I ran a fresh data dump, I wanted some quick diagnostic totals by category to quickly gauge how things had changed.
 
Sure, I could create a pivot table or use the SUBTOTAL function, but there can be problems with both of those solutions. First, the rows in a pivot table may move up or down depending on what data is present. This can ruin formulas elsewhere in the spreadsheet. As for the SUBTOTAL function you might use to sort your data in the Data menu option, that will work, but it has to be done fresh every time. A fresh data dump will erase all of your previous subtotals.
 
Using the SUMIF function allows you to anchor values that won’t move up or down like in a pivot table. It will also update itself automatically whenever you import fresh data.
 
For instance, let’s say that your manufacturing plant had a list of inventory on hand in one big table. If you wanted the total inventory by product line, you don’t want to have to sort the table by product line and manually add SUM formulas for each section. Besides being time consuming, the sum ranges would change every time the list was updated, forcing you to redo all your formulas.
 
Setting up SUMIF formulas would be a one-time job that you wouldn’t have to update every time the main table was refreshed. It’s not a complicated formula as far as Excel goes. There are three main parts and the graphic below describes each one. 
​To show you how this would look in a simple example. I created a scenario where there are twenty-eight inventory item numbers in a table but only three product lines. If I want to see the total inventory by product line, I would do the following:
Each week or month I could copy fresh data into my green table and the product line totals up above would automatically update themselves. Notice that even though I have only 28 item numbers, my range goes down to row 939. This allows for future growth. If I set my range only down to row 43 and we add 10 new item numbers, those new items would get left off of my totals if I didn’t remember to update the range. So it’s always good to leave some room for growth.
 
In my summary table, I have three product lines. These totals can be linked as source data in other spreadsheets if need be. What would happen if I was using a pivot table and there was no Enerflex inventory in a week? The pivot table would move the Primo product line up one row, where Enerflex used to be. This could be a potential problem if the product line totals feed into other formulas.
 
This is just one specific example of how SUMIF can allow you to automate some recurring reporting that you might do. However, anyone who works with large data tables on a regular basis would find many uses in the course of their daily work. If there’s one thing that data workers do a lot of, it is summarizing totals by some kind of criteria.
 
Related: Make Your Vlookup DOUBLE Variable
 
Now available in iBooks —> The Tesla Bubble
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<![CDATA[Would It Make Sense for Amazon to Purchase Target?]]>Fri, 05 Jan 2018 02:13:24 GMThttp://perezonomics.com/home/would-it-make-sense-for-amazon-to-purchase-targetThe Math Says “Yes”…Eventually
​Wade Hicks of Fox Business reports on Gene Munster’s theory that Amazon may acquire retail giant Target.
Consumers have continued to shift more toward online shopping, leaving brick-and-Mortar retailers struggling to compete in the online space against e-commerce giant Amazon (AMZN). 
Walmart (WMT) stepped up its game by acquiring Jet.com for $3.3 billion in 2016,  in effort to expand its e-commerce operations.
Yet, Amazon seemed to buck the trend with its $13.7 billion purchase of Whole Foods.  The deal has since led to speculation over which brick-and-mortar might be purchased next.  Loup Ventures Managing Partner Gene Munster recently predicted that Target (TGT) would be Amazon’s next acquisition target.
 
I wouldn’t be surprised one bit if Amazon actually does purchase Target. I had written last fall that the future may see Amazon get pulled into bricks-n-mortar retail as opposed to trying to make it go away. It’s simple economics. Here’s an excerpt from my October 7th post.
 
But could Amazon someday take over the retail world? Judging by the sensationalist coverage in the tech and financial press that is the impression you get. I really hate those clickbait titles. Amazon is not going to destroy brick-and-mortar retail stores. Far from it. If Amazon continues on the road that they are on, they will be forced to join the brick-and-mortar retail world, not destroy it.
 
Here is Amazon’s situation from someone who’s quantified various network price tags. Distribution costs per unit are higher for online/catalog retailers than they are for old fashioned retailers. It’s much more expensive on a per unit basis to deliver an individual box to your front door than it is to fill a trailer with forty pallets of that same item to a store and have everyone come pick it up on their own dime. This part everyone knows.
 
What makes catalog/online retailers cheaper than traditional brick-and-mortar stores is that they don’t have to pay the high fixed costs for all those retail buildings, inventory, and employees. The savings of not having the retail footprint outweighs the variable higher delivery costs. Delivery costs are variable and stay low with low volume. However, this model only works in a certain sweet spot. Retail stores are like automated factory equipment. The fixed costs are high but after you cross a certain volume threshold it makes more financial sense than paying the variable costs of expensive individual delivery.

 
Now available in iBooks —> The Tesla Bubble
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<![CDATA[Should Apple Still Purchase Netflix?]]>Tue, 02 Jan 2018 05:04:09 GMThttp://perezonomics.com/home/should-apple-still-purchase-netflixDisney Just Got a Lot More Intriguing
​It’s been reported today that an analyst with Citi is pegging the likelihood that Apple (AAPL) would purchase Netflix at about 40%.
Citi analysts say that there is a 40% likelihood of Apple acquiring Netflix.
Apple will be able to repatriate about $220 billion in cash to the US under the Trump tax cut. The company would need only one-third of that to snap up Netflix. – USA Today News
 
As I had stated earlier this week, there are two different roads that Apple can go down when it comes to media. They can either pursue diversifying their risk and grow their cross-platform revenue or they can double-down on profit and use media to support their hardware sales.
 
I had made the case that Apple should buy Netflix because it’s hard to see what other business outside of the iPhone can provide iPhone-like volume and margins. But if Apple were to follow this road, they’d need to make a big splash that would entail buying entire companies and not just individual shows.
 
But the game board has changed a lot with the recent purchase of 20st Century Fox by Disney. Disney has seriously upset the status quo in Hollywood, and we could see some rapid change coming. Corporate mergers can be like mini-world-wars. Once the first shot gets fired, everyone races to grab their turf.
 
Now I would think that Disney would make a nicer purchase for Apple than Netflix. Yes, it would cost a lot more than Netflix, but Apple may be the only company in the world who could afford to contemplate a purchase of this magnitude. I’m sure if AT&T or Amazon could afford it, they would have purchased Disney already.  
 
Now available in iBooks —> The Tesla Bubble
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<![CDATA[The Free Movement of Currency and Ideas vs Government Control]]>Sun, 31 Dec 2017 15:35:14 GMThttp://perezonomics.com/home/the-free-movement-of-currency-and-ideas-vs-government-controlCrypto Currency and Social Media
​Starting in the 19th century, transportation technology emerged which changed the world. Railroads, automobiles, and airplanes all brought freedom of travel never before imagined in history. Revolutionary changes are still happening in the 21st century, but they’re now in the form of moving data. 
I saw on the news this morning that the government of Iran is cracking down on protesters by shutting down the popular social media apps Instagram and Telegram. This follows rumors earlier in the week that the government of South Korea is rumored to be outlawing Bitcoin at some point in the future. This is after China has already severely clamped down on Bitcoin exchanges by its citizens.
 
The common thread between these two seemingly separate issues is that there is a tension between governments and the free movement of data. Both ideas and currency can be moved around the internet in the form of data. However, ideas and currency have also been traditionally controlled by governments to various degrees when they were in paper form. When you control the spread of ideas and currency, you control the people.
 
After the Bitcoin bubble bursts, will crypto currencies continue to grow? If you believe that social media will continue to grow, then you gotta believe that crypto currencies will continue to grow. Because data will always find a way.
 

Now available in iBooks —> The Tesla Bubble
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<![CDATA[Would Apple Studios Be Chasing Hardware or Service Revenue?]]>Sat, 30 Dec 2017 17:17:28 GMThttp://perezonomics.com/home/would-apple-studios-be-chasing-hardware-or-service-revenueIncreasing Profitability vs Diversifying Risk
​It seems that every hardware, media, and telecom company is chasing media content these days. And with good reason. Competing solely on the basis of price is a brutal business. Original content is one of the few things proven to engender customer loyalty and cause people to switch to your service. 
Apple (AAPL) is no exception. Judging by the hires that they’ve been making, they are definitely on the road towards Apple original content. I think it’s great that Apple is starting to get into the media fray. Anything that can pull customers away from other services and keep them in your ecosystem is worth the investment.  
 
The big question now regarding Apple’s media aspirations is what part of their business are they trying to grow? Apple Music is a cross-platform service available to both iOS and Android users for a monthly fee. Is Apple simply trying to increase service revenue? Or are they trying to support their hardware ecosystem, reduce churn, and get people to switch from Android to iOS?
 
If increasing service revenue is the goal, their media budget would be much lower. There would be much less profit in stealing Spotify or Google Music users than there would be in increasing hardware sales. And it’s unlikely that anyone would drop Netflix or HBO for Apple. Video services are fast getting to the point where people are having to drop one service to add another.
 
There would both be more risk and reward to utilize media to augment their hardware ecosystem. Worldwide, Android controls over 80% of all smartphone usage. Even garnering 1% of Android users who switch to iOS would yield exponentially more profit than what they would get from increasing the Android version of Apple Music. It doesn’t take long for Apple’s famously fat margins on their iPhones and iPads to really add up to a mountain of money.
 
It’s hard to say which path Apple is taking at this point. They seem to be moving slowly and methodically as opposed to making a blitzkrieg assault. So I lean towards thinking that Apple is more interested in diversifying their risk and using media to augment their services revenue. This would give them a hedge should their iPhone revenue ever stall or decrease.
 
Using media to supercharge their hardware sales would be much more profitable. This would entail making all their original content available only to iOS users. However, they would stay in the same situation as they’re in today where “as the iPhone goes, so goes the business.”
 
This is a very interesting situation to contemplate because there is no clear-cut, obvious way that Apple should go. The answer to this question goes beyond spreadsheets. It relies on how good a handle Apple has on predicting the market’s reaction to different variables.
 
Now available in iBooks —> The Tesla Bubble
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<![CDATA[Tesla Owner Satisfaction Illustrates Why Apple and Tesla Are So Different]]>Wed, 27 Dec 2017 04:29:51 GMThttp://perezonomics.com/home/tesla-owner-satisfaction-illustrates-why-apple-and-tesla-are-so-differentApple Is Pushed to be Better, Tesla…Not So Much
​The latest owner satisfaction survey by Consumer Reports magazine actually had Tesla ranked above any other car company in the world. And yet, this is despite recent insider information which revealed that  as many as 90% of Tesla’s vehicles roll off the assembly line defective. If these are both true, what does that say about Tesla and their customers?
This story illustrates one of the biggest reasons why Tesla (TSLA) is such a different company than Apple (APPL). Apple is by no means perfect when it comes to quality, however, their customers and the tech press push them towards it by highlighting any defects in their products. They provide a valuable service in that Apple is forced to deal with quality problems quickly and learns from those problems.
 
When it comes to the tech press and Tesla’s customers the situation is the opposite. They lead Tesla to mediocrity by accepting the defects and giving Tesla glowing reviews anyway. By grading Tesla on a curve, Tesla is lured into thinking that they are ready for the big time when they’re really not. This allows them into thinking that they can deal with quality later and go for scale now. But for a company, overhauling your quality policies later, is like you waiting until after you’re married with kids to get your doctorate degree. The longer you wait, the more difficult it’s going to be.
 
Tesla’s hard core fans are in such denial regarding the low quality cars that they drive that they actually take umbrage at Americans for “putting down American made cars”. Where have they been for the past forty years? GM, Ford, and Chrysler have been steadily losing market share to Asian and German automakers. Why? Because of perceived shortcomings in quality. Especially in the area of fit and finish.
 
Boy, is the Tesla fan club in for a rude awakening when the Model 3 starts to land in driveways beyond just the faithful fans.
 
The difference between Tesla and Apple is so deep that it goes much further than one makes cars and the other makes computers. All technology companies can be divided into two camps. Those that are in the business of moving data and those in the business of moving physical objects. Moving DATA is shaping the future and moving OBJECTS is refining the past. Apple is focused on the future and Tesla is focused on the past.
 
Now available in iBooks —> The Tesla Bubble
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<![CDATA[My Apple Watch Wish List]]>Sun, 24 Dec 2017 14:21:09 GMThttp://perezonomics.com/home/my-apple-watch-wish-listAn EKG Might Be Nice, but I Want Fast Wireless Transfers
Even though Apple’s iPhone X now has the best screen of any smartphone in the world and the new iMac Pro has enough power to impress even jaded computer enthusiasts, I find the Apple Watch to be Apple’s most exciting product. Both because of what it means to the future and because of the large performance gains that it gets every year. But there is one aspect of the watch that Apple is still improving quite slowly: Podcasts.
Just because Apple doesn’t offer an official podcast app doesn’t mean that you can’t enjoy podcasts on your watch today. Apps like WatchPlayer or Workouts++ are already out there allowing you to transfer files directly on to your watch. But due to limitations on the part of watchOS, you have to be real diehard podcast listener to put up with all the hoops you have to jump through to enjoy podcasts on your watch.
 
Come on Apple. Why is it still so difficult to move files on and off the watch? Specifically podcasts, but this applies to music and photos as well. I want to be able to get podcast files onto my watch as easily as you can to an iPod Touch. That means automatic downloads and fast transfer speeds. Here is my Christmas wish list for the Apple Watch.
 
Faster Transfer Speeds
The Series 3 Apple Watch did get a notable bump in speed with the upgrade to Bluetooth 4.2. For an 80mb file transfer speeds went from an hour on a Series 2 with Bluetooth 4.0 down to 15 minutes on the new Series 3. But that is still way too long in a world where transfer speeds are measured in seconds. We need to get 80mb podcast files to transfer in about 10 seconds. I’ve heard that Bluetooth 5.0 will greatly increase data transfer speeds so maybe the next generation of the Apple Watch will finally get there.
 
Untethered Background File Transfers
If I want to transfer 5 or 6 100mb files to my watch, I don’t want to have to keep that app active on my watch to get the files transferred. I need to be able to queue up my files and go back to what I was doing. Even if every file took about 10 seconds, I dislike not being able to use my watch for anything else for fear of breaking the download.
 
3rd Party App Volume Control
Currently, 3rd party podcast apps don’t have the ability to adjust the volume to your headphones. So if I’m listening to a podcast on my watch, I have to switch to the Now Playing or Music app to turn the sound up or down. That’s crazy. We never would have accepted this on an iPod Nano. And yet, the Apple Watch is really the spiritual successor to the iPod Nano in many ways.
 
First Things First
I keep hearing rumors about Apple investigating adding blood sugar monitoring or an EKG to the Apple Watch. That’s all fine and I have nothing against these worthy features that could perhaps even save lives one day. But I just want my Apple Watch to get to parity with my old 3rd generation iPod Touch from 2009. I want to easily download music or podcast files without having to connect to any other device. My stainless steel Apple Watch even costs twice what an iPod Touch does. When it comes to music and podcasts, an Apple Watch should surpass anything that an iPod Touch or Nano can do. I wish Apple would prioritize the basics first, and then branch out into the other features later.
 
Now available in iBooks —> The Tesla Bubble
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<![CDATA[Why Corporate Tax Cuts Are Good for the Average American]]>Thu, 21 Dec 2017 02:02:44 GMThttp://perezonomics.com/home/why-corporate-tax-cuts-are-good-for-the-average-americanThank You President Trump
​On Sunday morning, I heard liberal economist Paul Krugman attempt to downplay the impact of the Republican corporate tax cuts. He argued that the impact on jobs would be minimal, but he didn’t explain why. I thought it might be helpful to explain where he must be coming from. Because even if he’s right, everyone should be happy.
I’m not some policy wonk in a think tank or some professor sitting far away from business. I’m working in the trenches and have spent a huge chunk of my corporate life on one major task, forecasting. All corporations need to have a good handle on what their cash needs are.  Anyone working in finance for a large manufacturing company spends a lot of time trying to forecast revenue and expenses for the future. There are two big reasons why we spend so much time on this activity.

  1. They may not have enough money. If they will need more money than they have readily available, they will need to start working on the lowest-cost financing that they can get. And just like buying an airline ticket before Christmas, the longer you wait, the harder it is to get a good deal.
  2. They may have too much money. If they will have more money than they need, they need to wisely invest it somewhere so that they make more than paltry bank interest.
 
Point #2 is the salient one today. That’s because corporations don’t like to let money accumulate in the bank for no good reason. Why would anyone accept a 2% return on their money when they could get 30 or 40% elsewhere? Liberal Democrats are all making the convenient assumption that corporations and rich individuals like to let banks use their money for almost free. Nothing could be further from the truth. They didn’t get to their successful position by doing nothing. They took risks and invested their time and money into worthy projects.
 
Most corporations are full of production managers and engineers who have all manner of ideas on how they could cut costs if they only had the money to do it. New production equipment, more forklifts, building enhancements like better lighting, etc. The ideas go on and on. And it’s not just the manufacturing side. The sales group would often like to expand their product lines. But that also takes lots of money.
 
Not every good idea can be invested in. So, it’s always incumbent on the finance group to vet the ideas and rank them in descending order with the highest-return ideas at the top. Many good investment proposals go unfunded for lack of capital.
 
Any spike in cash above what is needed to run the business will generally go more towards funding these investment ideas. It’s much better for the corporation to earn 20%+ on their money as opposed to letting the bank sit on their money for free. A climate where many companies are simultaneously increasing their spending on machinery and equipment will lead to those suppliers having to hire more people. This is good news for the common man.
 
Economists who try to make the argument that corporate tax cuts in the past haven’t led to job gains are only being half truthful. That’s because we haven’t had a corporate tax cut of this magnitude in many decades. For Paul Krugman to say that this tax cut won’t make a difference because it didn’t work in the past would be like saying your 50% salary increase this year won’t make a difference because your 3% raise last year didn’t change your lifestyle. Size matters and this tax bill is a big deal. Tax cuts in recent history were heavier on the individual side and lighter on the corporate side. I don’t think it’s overkill to say that this bill is revolutionizing our corporate tax structure.
 
There’s another odd argument posed by liberal economists to knock this tax bill. They say that this bill will have little impact on jobs because corporations already have an effective tax rate of close to 21%.  This is a dangerous argument for liberals to make because it undercuts Chuck Schumer and Nancy Pelosi’s argument that Donald Trump is trying to give a huge cash windfall to corporations. Either Republicans are giving corporations a big fat tax cut or they’re simply codifying the effective tax rate where it should be. It can’t be both so one of them is obviously wrong.
 
But even if the tax cut was only smoke and mirrors and not a net tax cut, it would still be a great help to corporations because it reduces uncertainty and levels the playing field. When I’m doing a financial model for return on investment, I have to use a conservative estimate for tax rates that is higher than what we’ll probably pay. Why? Because I can’t assume we’ll be getting big deductions every year. Also, not every corporation can bank on big deductions. Reducing reliance on tax loop holes is good for competition, resulting in lower prices.
 
Also, everyone mocking these corporate tax cuts forgets one major point. Corporations don’t really pay taxes. Their customers do. Corporate tax cuts or hikes flow directly to average Americans. If taxes go up, prices go up. If taxes go down, prices can go down. If all corporations in an industry all of a sudden have a few more points in margin, there will always be one entity which will try to steal market share by lowering price. This sets off a chain reaction of other companies following suit to protect their turf. The customer gets the benefit.
 
What will happen after the Trump tax cuts will be a combination of price cuts and investment in machinery and equipment. No one is really sure which of these two will be the bigger piece or if they’ll happen equally. Economists who say that there will be a huge upswing in hiring are modeling a bigger piece going to investment in equipment. Economists like Paul Krugman, who say that there won’t be a big impact on jobs, are constructing a model where the excess cash goes more towards price cuts. It’s a win-win scenario for the average American.
 
Whether companies invest in machinery or lower prices, both outcomes are beneficial to consumers and not a “corporate giveaway”. As much as Paul Krugman tries to minimize any credit to President Trump, these are both outcomes that everyone will love.
 
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<![CDATA[The Wearables War Is Over and Apple Won]]>Sun, 17 Dec 2017 14:43:26 GMThttp://perezonomics.com/home/the-wearables-war-is-over-and-apple-wonBalancing Quality and Speed for New Product Launches
Brett Williams had an interesting piece in Mashable last week detailing how the Apple Watch has taken over the wearables market.
The iPhone maker flexed its muscles to take over the young wearable space in a relatively short period. Apple only released its first smartwatch in April 2015, and its latest, the Series 3, is just the third iteration of the device. 
"Apple has shipped 34.4 million smartwatches worldwide since it entered the category in 2015," said Canalys analyst Vincent Thielke in an email to Mashable."In other words, Apple accounts for 51.6 percent of all smartwatches ever shipped." Brett Williams, Mashable
 
What I find particularly interesting about how this all turned out is that Apple (AAPL) was a late-comer to the wearables market. By the time Apple had finally launched their first generation Apple Watch in April of 2015 Samsung was already on their second or third iteration of their Android Wear watch.
 
Apple took a great amount of criticism for being late to market with their Apple Watch. And then when it was finally launched they took a great amount of criticism for it not being perfect. But back in early 2015 everyone was so busy comparing the Apple Watch to their vision of what a wearable should be that they didn’t bother comparing it to the actual competition. And regardless of what you thought about the first generation Apple Watch, it was the best wearable on the market by a wide margin. I was a Pebble Watch user at the time and almost all of my gripes were answered by Apple.
 
Samsung and Google valued being first to market over all else. They had the first-mover advantage and still never managed to make much headway in wearables. Things got so bad that Samsung even bailed on Android wear and started loading their own Tizen on their watches.
 
All corporations must try and strike a balance between getting new products to market quickly and taking their time to get things right. Apple was roundly criticized for erring on the side of being too slow. However, now in hindsight, it appears that Apple took a sensible course and Samsung/Google erred on the side of overvaluing first-mover advantage.
 
Now available in iBooks —> The Tesla Bubble
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<![CDATA[The Financial Problem with Offering iTunes to Android Users]]>Thu, 14 Dec 2017 02:50:35 GMThttp://perezonomics.com/home/the-financial-problem-with-offering-itunes-to-android-users
​I was listening to the MacWorld podcast recently when an interesting question popped up. Would Apple (AAPL) ever make iTunes purchases available to Android users? The consensus on the show was that, no, Apple would never do that because it’s not the type of thing that they would do. 
I don’t disagree with their consensus but I think it goes a little deeper than that. There’s a very clear cut financial rationale underneath Apple’s whole walled garden. I don’t think Apple follows their walled garden paradigm only because the economics make sense. There’s a lot to be said for Apple being able to enhance the customer experience by developing both hardware and software in tandem. This is the true driving force behind why Apple hasn’t traditionally made their products cross-platform. But they still take into account the financial feasibility of any of their overarching principles.
 
When it was announced that Apple Music would be available on Android it surprised a lot of people. So why would Apple appear to be inconsistent with their doctrine?
 
I'm not so sure that Apple is being inconsistent. Apple generally goes where the money is. When the walled garden doctrine and quest for increased revenue are in support of one another, there is no controversy.
 
But Apple has demonstrated a willingness reevaluate their stance on a principle if it begins to conflict with their financial modelling. Case in point, Apple believed that having one-handed usability on the iPhone was more important than increasing the screen size. However, when the financial analysts detailed how much revenue they could be missing out on, they changed course and now we have screen sizes of up to 5.8”.
 
In the case of enlarging iPhone screens, it would be a fairly simple problem to figure out how much revenue they might gain. When you evaluate a proposal financially, you create two models. One model is the control group and will quantify your sales and gross margin if you don’t change anything for the next five years. The other model will quantify the changes and compare to your control. The amount of additional revenue is your return on investment (ROI). The Apple sales forecasters would estimate how many more iPhones they could sell if they had a large screen model. They could then multiply these additional units by the average sales price and gross margin to see the incremental impact.
 
Offering iTunes on Android is a much more complex question. It’s not just a straight forward addition of media revenue. There is also the potential loss of units in the iPhone side of the business. Apple’s walled garden makes iOS a very sticky ecosystem. The iPhone retention rate compared to Android is significantly better. According to Tim Cook, Apple gains more Android users than they lose. So, when Apple financial analysts evaluate the impact of offering services on Android, they need to take into account a possible reduction in the iPhone retention rate.
 
Just for the sake of argument, let’s say that Apple has a retention rate of 92%. Meaning that every year Apple loses 8% of their customers who switch to some other brand. If Apple started making their services cross-platform and their retention rate were to fall down to 90%, what do you think would happen? In my financial model, a 2-point reduction in retention rate equates to a loss of $2.8 Billion in revenue per year. If the retention rate were to drop 5 points that would mean a loss of $7.1 Billion.
 
At a 5-point erosion in retention rate, $7.1 Billion becomes the break-even point that the iTunes side needs to make up.  That’s a whole lot of additional iTunes purchases that needs to come in just get to zero, let alone make a return. Especially when you consider that all Apple services totaled to around $30 billion in the last fiscal year. And that includes iCloud and App Store revenue that wouldn’t go up.
 
So what does this all mean? It means that Apple is very unlikely to ever offer an iTunes media app for Android. The risk to their retention rate is too great in relation to the potential benefit. This is an oversimplified example just to make a point. In reality, a reduction in the iPhone retention rate would have other ramifications besides just lost iPhone revenue. There would be a corresponding loss of iCloud, iTunes, Apple Watch, and perhaps other business.
 
 
So why did they offer Apple Music on Android? Because this was something new. They weren’t giving up any legacy advantages. Data stored in iCloud or movies stored in iTunes are legacy systems which keep you in iOS. Streaming music is not. By its nature, it’s ephemeral. The risk that Apple would hurt their iPhone retention rate is much smaller and all the Apple Music revenue would be incremental. There was probably more risk in not having a music streaming service. The risk-to-reward ratio swings in the opposite way as offering iTunes on Android.
 
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