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Tag Archives: apple

Falsehoods Apple believes about professional mac users

In the spirit of great posts pointing out the difference between programmers’ assumptions and the real world (like namesaddresses and time), here’s a more satirical, but sadly true, take on Apple’s new Macbook Pro.

16GB of RAM should be enough for anybody. After all, nobody has more than a handful of browser tabs open. And hardly anybody uses virtual machines. All browsers for testing run on macOS. Application’s memory footprints are not growing.

When you ask professional mac users what their biggest problem with their mac is, they all tell you “I wish my machine was 2 millimetres thinner”.

Shaving off half a pound of weight really makes a huge difference once you have put the computer in a bag, together with its charger and a bunch of accessories.

Every computer user wants a thin-and-light laptop. We should never, for any reason, compromise on thin and light.

Battery life is more important than power, memory or ports. But not more important than a second screen and an extra ARM chip to drive it.

Customers do not care if the brand new computer they paid premium prices for contains outdated chips. I mean, come on, it’s like so uncool to know what a processor is.

Nobody ever forgets to bring along an adapter. And all conference rooms are equipped with mac-specific inputs to brand-new projectors anyway, so you never have to be afraid to be stuck without a way to connect your computer to an ancient VGA port.

Everybody uses Wifi everywhere, even conservative, security-conscious large organisations (i.e. the kind of organisation paying top dollar for custom software development)

Nobody needs Ethernet, since WiFi is always as fast and as reliable as a cable.

When you order a computer, you always know exactly what you will need in the next 2 years, so there’s no need to upgrade. And computers are so cheap you buy a new one every year or so anyway. Especially since setting up a new computer with your applications and configuration is so quick and fun we don’t even provide Firewire transfer any more. All your data lives in the cloud anyway.

A touch surface is just as good as a button. I mean, who touch-types in this day and age?

The cursor keys are hardly ever used, so we can make them any size or shape that makes the keyboard look nice and symmetrical. Symmetrical is, like, super important.

When we switch to all-new ports, within a year or so people will get all-new devices anyway, so that problem goes away really fast. I’ve never seen a peripheral older than a year or two in the wild.

Since everybody has a smartphone, nobody uses cameras any more.

What else would you need ports for besides charging and displays? All data is easily transferred via internet, and a laptop is super ergonomic to use all day without an external keyboard or mouse. Speaking of mice, it’s all about touchpads these days, everybody prefers those over a mouse.

Still complaints about ports? Fine, get a Thunderbolt 3 docking station. Lots of choices for those, and super cheap.

Magsafe was a nice idea, but it turns out it has no practical use, since people tripping over a laptop’s power cable is only a theoretical problem. In practice, you only plug in to charge overnight anyway. Batteries last a long time used that way, no need to ever replace them.

If you’re an apple user, you won’t care if we charge a couple hundred bucks more.

We DO give people choices. You can choose between “no power and no ports”, “3 year old hardware” or “more than 2000 bucks”.

All this is coming from from a position of love, not hate. I’ve been using Macs since before it was cool, and I’m still hoping to again see a “Pro” Mac where Pro means “for Professionals” rather than expensive and fashionable.

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Why Apple bought Beats? Beats me.

So the long-rumored acquisition of Beats by Apple has been confirmed, with press release and all. Which tells us precious little, except “Beats is awesome” and “Music is really important to us”.

So why did Apple buy Beats?

Let’s look at possible reasons why companies buy other companies, and see if the beats deal makes sense if looked at it this way, and makes sense specifically for Apple

 

Growth

Ben Thompson at Stratechery  thinks that Apple’s share price can only be justified by growth, and they need to buy a cool line of high-margin accessories. Which is interesting, but in my not-so-humble opinion wrong:

Apple’s stock has a P/E ratio of 15 – i.e. the company is valued at 15 times their current annual profit. Which is not terribly low, but definitely not a level where you need crazy growth to justify it. For comparison: Google’s P/E is 30, Facebook is at 80, and Amazon is at a whopping 500. In other words: nobody would buy Facebook’s or Amazon’s stock if it promised to make as much profit as it’s making now forever. But Apple? They return a solid 6.7% of profit on the invested capital – that’s more than e.g. super-high-risk (that country that just went broke and stiffed it’s lenders, remember?) long-term greek government bonds . And Apple’s valuation is more in line with some steadily profitable, but not exactly growing, companies like IBM (P/E of 12.5 ) or Microsoft (P/E of 15). In other words, in order to justify its stock price, Apple has to grow as much as Microsoft. No need to buy a headphone maker for that.

 

Price

If a company is up for sale at a good price, it can be worth buying it just to take advantage of the low price, and possibly sell or IPO it later.

Since beats was not a public company, i.e. not traded on a stock exchange, we don’t know how much other companies would have paid for it. Luckily there were some publicly announced financial transactions around Beats: HTC bought a significant stake in beats  in August 2011 at a valuation of 600m, then sold half of that stake again  in Jul 2013 at roughly same valuation, and sold the other half in September 2013 at a valuation about $1 billion. There’s also some quasi-official information about an investment by Vivendi in 2013 Vivendi which valued the beats company at $1.6 billion.

Which would point to a reasonable valuation somewhere around $2 billion – which means the beats aquisition was definitely not a bargain.

 

Profit

Gruber at daringfireball thinks it’s a straightforward combination of profits, assets and people. Let’s start with profits.

In 2011, beats had about  $50 million of revenues. They “tripled revenue” in 2012, but while switching to manufacturing the headphones themselves (before that, beats was a pure brand – they did not actually make anything, just promoted the beats brand. The beats headphones were made and sold by Monster cable (yup, that company behind ridiculously overpriced cables), and Monster cable paid beats a percentage of sales for the right to put the beats logo on their headphones).

According to privco.com, in 2012 beats made a$67 million profit on $1.1 billion of revenue, which would point to a fair value somewhere around $1 billion. Fastcompany thinks they might have had $ 1.5 billion revenues in 2013 – good growth, but not the kind of exponential growth possible with software companies. Manufacturing means that growing revenues also require more capital, and lead to higher risks, so privco.com thinks beats was overvalued.

And the streaming service? It’sreally young – beats only bought it as “Mog” in 2012 for a price somewhere around $10 million, and apparently has only about 100,000 registered users, so it’s not a significant source of revenues or profits. Even if every single one of those subscribers was paying 10 bucks a month, and continue to do so for 10 years in the future, the total lifetime value would be less than 5% of the purchase price of beats.

Overall, the beats aquisition would have been expensive for anybody – and Apple definitely does not need the cash flow. Neither are they desperate to invest – they have shown to be quite happy sitting on a huge pile of cash.

 

Assets

Another possible reason to buy a company is to get into a new line of business, to buy instead of building your own.

Now Apple certainly does not need to enter the headphone business, and headphones make little sense as an adjacent business. In fact, with the ipod hi-fi, Apple has shown in the past that they are perfectly capable of making audio gear, but at the same time that it’s not a good business for them. And while Apple has frequently bought companies for their technology, skills or as add-ons to their existing business lines, they have never bought a company for their brand, or to get into a new business.

How about the streaming service?

Music streaming is booming, and the larger players like Spotify would probably be crazy expensive to take over at current tech valuations. On the high side, Beats is thought to have only 200.000 subscribers  (compared to, say, Spotify’s 10 million), and most of those come from a marketing deal with a major provider. Which might still be a good base for another company wanting to get into the music streaming business.

But of all the world’s companies that might want to get into streaming, Apple is probably the least in need of buying an existing streaming service – they already have the tech tech experience, the distribution and the record label deals. Now a successful streaming service would probably have to support Android, and using the beats brand might be a convenient way to not have to support Android with anything Apple-branded – but Apple has shown in the past (think iTunes on windows) that they are perfectly willing to be on rival platforms if it makes business sense.

 

People(“Aqui-hire”)

Another reason to buy a company is to get the founders on board, for their unique talent or connections. Now Dre and Jimmy Iovine certainly are industry insiders. But again, Apple does not need an in with the music industry. And an aqui-hire is usually something along the lines of “really large signing bonus”, not several billions. The deal is simply way too expensive to make sense this way.

 

Synergies

Another common justification for a merger is “synergies” – i.e the combination of two companies being worth more together than separately. Which is usually about fixed cost overheads (needing e.g. only a single accounting department) or market power – not something that’s applicable to beats.

Are beats and Apples as a combined company worth more than separately? Maybe a little bit – there are opportunities for joit marketing, distribution integrated into apple stores, hardware bundles, and the like – but nothing you couldn’t do as a limited-area partnership without having to buy the company outright.

German site neumusik.com thinks it’s about industry contacts, the streaming service, and “wearables”.  Again, those are nice things to have (except headphones as a prototype for wearable computer thingies? come on.), but nowhere close to being worth that much money.

 

Financial shenanigans
Sometimes a deal seems to not make sense, until you notice some completely unrelated financial fundamentals. E.g. for a while Yahoo’s stake in Alibaba was worth more than the whole of Yahoo, or Pfizer wanting to buy AstraZeneca simply in order to invest money outside the US for tax reasons.
So maybe beats has better licensing deals with the music labels? That would certainly move the needle for Apple, seeing how they pay more than $3 billion a year to the record labels. If beats has a licensing deal that is only 10% cheaper, that would nicely amortize the purchase price.  Well, it’s possible, but unlikely. It’s unlikely that the much smaller beats would get a better deal than Apple with its huge, market-dominating iTunes store. Plus, record labels have non-stupid lawyers – most likely any licensing deal beats has would have a takeover clause that voids exactly the advantages mentioned in the event of a sale.

 

Desperation

It happens that a company is bought because it has something another company desperately needs at any price. Think e.g. Google having to buy the whole of Motorola just to get some ammunition for the mobile phone patent wars. Or Instagram threatening Facebook’s hold on its target demographic to the point where it safer to bascially throw money at them to make the threat go away.

The only thing like that beats has I can think of is “coolness with young people”. Apple is old, mainstream and established by now, and in danger of losing it’s counter-culture underdog coolness. Whereas beats has massive brand presence with teenagers.

That might be a factor, but I sorely hope it’s not. For me, beats represents everything negative Apple is frequently falsely accused of. Beats is a  lifestyle fashion fad instead of offering premium products, is using distribution and advertising instead of making a better product. The beats brand is built on glamour and celebrities, rather than standing for something.

Now there are some signs that Apple is starting to think about the lifestyle, luxury and fashion aspects of its brand – things like hiring people from the fashion and luxury industry. But I’m hoping that that’s about some specific aspects, like the retail experience. Overall, if Apple should have bought beats in order to become more like beats, it would be a quite radical departure for them.

 

Stupidity

Sometimes mergers happen for the simple need to do something, and the inability to find any other good way to invest profits. But Apple management is simply too smart to throw money away just to do anything. And if they wanted to get rid of  excess cash, all they’d have to do is increase dividens, or put more money into the already existing huge share buyback program (essentially distributing profits to the shareholders).

They do need a new product line – but compared to, say, reinventing the cell phone industry, headphones are boring, and not a big enough market to move the needle. And streaming? Well, it’s 2014 – it would be pretty crayz to want to get into the content distribution industry at a price tag of §3Billion

 

Summary

Usually there is one big reason for buying a company. In the case of Apple buying beats, I simply don’t see it. Forced to come up with a reason, I’d have to go with “for the cool brand” – but as previously mentioned, I would hate for that to be right. Or maybe there is some financial result that is worth more than 3 billion – I can’t see that, and if that should be the case, quite possible nobody outside Apple knows.