Apple’s CEO used Monday’s earnings call with analysts to rip into Android
Steve Jobs is usually content to let COO Tim Cook and CFO Peter Oppenheimer handle the hour-long Q&A with analysts at the end of each quarter. But he turned up on Monday afternoon for Apple’s (AAPL) Q4 2010 earnings call, and he clearly had a lot on his mind.
After briefly dismissing Research in Motion’s (RIMM) BlackBerry as a serious competitor (“We’ve now passed RIM, and I don’t see them catching up with us in the foreseeable future”) he lit into the company that bothers him most: Google (GOOG).
In a five-minute prepared statement that by the Q&A had turned into a rant, he ripped into Google and Android on multiple fronts. The full text is attached below the fold. The gist of his attack:
- Google’s numbers: “Unfortunately, there is no solid data on how many Android phones are shipped each quarter.”
- Google’s claim that iOS closed: “We find this a bit disingenuous and clouding the real difference between our two approaches.”
- The fragmentation of the Android OS: “Twitter Deck … recently reported that they had to contend with more than 100 different versions of Android software on 244 different handsets.”
- The competing Android app stores (Jobs counts at least four): “This is going to be a mess for both users and developers.”
- The virtues of Apple’s “integrated” approach: “When selling to users who want their devices to just work, we believe Integrated will triumph Fragmented every time.”
- The problem with 7-inch tablets: “It is meaningless, unless your tablet also includes sandpaper, so that the user can sand down their fingers to around one quarter of the present size.”
- The problem with Android as a tablet OS: “What does it mean when your software suppliers says not to use their software in your tablet? And what does it mean when you ignore them and use it anyway?”
- Bottom line: “We think the current crop of seven-inch tablets are going to be DOA, Dead on Arrival. Their manufacturers will learn the painful lesson that their tablets are too small and increase the size next year, thereby abandoning both customers and developers who jumped on the seven-inch bandwagon with an orphan product. Sounds like lots of fun ahead.”
The full text below, courtesy of Seeking Alpha:
As most of you know, I don’t usually participate in Apple’s earnings calls since you are all in such capable hands with Peter and Tim. But I just couldn’t help dropping by for our first $20 billion quarter. I would like to chat about a few things and then stay for the rest of the Q&A if that’s alright.
First, let me discuss iPhone. We sold 14.1 million iPhones in the quarter which represents a 91% unit growth over the year-ago quarter and was well ahead of IDC’s latest published estimate of 64% growth for the global smartphone market in the September quarter. And it handily beat RIM’s 12.1 million Blackberry’s sold in their most recent quarter ending in August. We’ve now passed RIM, and I don’t seem them catching up with us in the foreseeable future. They must move beyond their area of strength and comfort into the unfamiliar territory of trying to become a software platform company.
I think it’s going to be a challenge for them to create a competitive platform and to convince developers to create apps for yet a third software platform after iOS and Android. With 300,000 apps on Apple’s App Store, RIM has a high mountain ahead of them to climb.
Well, what about Google? Last week, Eric Schmidt reiterated that they are activating 200,000 Android devices per day. And have around 90,000 apps in their App Store. For comparison, Apple has activated around 275,000 iOS devices per day on average for the past 30 days with a peak of almost 300,000 iOS devices per day on a few of those days. And Apple has 300,000 apps on its App Store.
Unfortunately, there is no solid data on how many Android phones are shipped each quarter. We hope that manufacturers will soon start reporting the number of Android handsets they ship each quarter. But today that just isn’t the case. Gartner reported that around 10 million Android phones were shipped in the June quarter and we await to see if iPhone or Android was the winner in this most recent quarter.
Google loves to characterize Android as open, and iOS and iPhone as closed, we find this a bit disingenuous and clouding the real difference between our two approaches. The first thing most of us think about when we hear the word open is Windows which is available on a variety of devices. Unlike Windows, however, where most pc’s have the same user interface and run the same app, Android is very fragmented. Many Android OEMs, including the two largest, HTC and Motorola install proprietary user interfaces to differentiate themselves from the commodity Android experience. The users will have to figure it all out. Compare this with iPhone, where every handset works the same.
Twitter client, Twitter Deck, recently launched their app for Android. They reported that they had to contend with more than 100 different versions of Android software on 244 different handsets. The multiple hardware and software iterations present developers with a daunting challenge. Many Android apps work only on selected Android handsets running selected Android versions. And this is for handsets that have been shipped less than 12 months ago. Compare this with iPhone, where there are two versions of the software, the current and the most recent predecessor to test against.
In addition to Google’s own app marketplace, Amazon, Verizon and Vodafone have all announced that they are creating their own app stores for Android. So there will be at least four app stores on Android, which customers must search among to find the app they want and developers will need to work with to distribute their apps and get paid. This is going to be a mess for both users and developers. Contrast this with Apple’s integrated App Store, which offers users the easiest-to-use largest app store in the world, preloaded on every iPhone. Apple’s App Store has over three times as many apps as Google’s marketplace and offers developers’ one-stop shopping to get their apps to market easily and to get paid swiftly.
Even if Google were right, and the real issue is closed versus open, it is worthwhile to remember that open systems don’t always win. Take Microsoft’s PlaysForSure music strategy, which use the PC model, which Android uses as well, of separating the software components from the hardware components. Even Microsoft finally abandoned this open strategy in favor of copying Apple’s integrated approach with their Zoom Player, unfortunately leaving their OEMs empty-handed in the process. Google flirted with this integrated approach with their Nexus One phone.
In reality, we think the open versus closed argument is just a smokescreen to try and hide the real issue, which is, what’s best for the customer, fragmented versus integrated. We think Android is very, very fragmented and becoming more fragmented by the day. And as you know, Apple’s provides with the integrated model so that the user isn’t forced to be the systems integrator.
We see tremendous value in having Apple rather than our users’ be the systems integrator. We think this is a huge strength of our approach compared to Google’s. When selling to users who want their devices to just work, we believe Integrated will triumph Fragmented every time. And we also think our developers can be more innovative if they can target a singular platform rather than a hundred variants. They can put their time into innovative new features rather than testing on hundreds of different handsets.
So we are very committed to the integrated approach, no matter how many times Google tries to characterize it as closed. And we are confident that it will triumph over Google’s fragmented approach, no matter how many times Google tries to characterize it as open.
Second, I’d like to comment on the avalanche of Tablets poised to enter the market in the coming months. First, it appears to be just a handful of credible entrants, not exactly an avalanche. Second, almost all of them use seven-inch screens as compared to iPad’s near 10-inch screen. Let’s start there. One naturally thinks that a seven-inch screen would offer 70% of the benefits of a 10-inch screen. Unfortunately, this is far from the truth. The screen measurements are diagonal, so that a seven-inch screen is only 45% as large as iPad’s 10-inch screen. You heard me right; just 45% as large
If you take an iPad and hold it upright in portrait view and draw an imaginary horizontal line halfway down the screen, the screens on the seven-inch tablets are a bit smaller than the bottom half of the iPad display. This size isn’t sufficient to create great tablet apps in our opinion.
Well, one could increase the resolution of the display to make up for some of the difference. It is meaningless, unless your tablet also includes sandpaper, so that the user can sand down their fingers to around one quarter of the present size. Apple’s done extensive user-testing on touch interfaces over many years, and we really understand this stuff. There are clear limits of how close you can physically place elements on a touch screen before users cannot reliably tap, flick or pinch them. This is one of the key reasons we think the 10-inch screen size is the minimum size required to create great tablet apps.
Third, every tablet user is also a smartphone user. No tablet can compete with the mobility of a smartphone, its ease of fitting into your pocket or purse, its unobtrusiveness when used in a crowd. Given that all tablet users will already have a smartphone in their pockets, giving up precious display area to fit a tablet in our pockets is clearly the wrong tradeoff. The seven-inch tablets are tweeners, too big to compete with a smartphone and too small to compete with an iPad.
Fourth, almost all of these new tablets use Android software, but even Google is telling the tablet manufacturers not to use their current release, Froyo, for tablets, and to wait for a special tablet release next year. What does it mean when your software suppliers says not to use their software in your tablet? And what does it mean when you ignore them and use it anyway?
Fifth, iPad now has over 35,000 apps on the App Store. This new crop of tablets will have near zero.
And sixth and last, our potential competitors are having a tough time coming close to iPad’s pricing, even with their far smaller, far less expensive screens. The iPad incorporates everything we have learnt about building high value products from iPhones, iPods and Macs. We create our own A4 chip, our own software, our own battery chemistry, our own enclosure, our own everything. And this results in an incredible product at a great price. The proof of this will be in the pricing of our competitor’s products which will likely offer less for more.
These are among the reasons we think the current crop of seven-inch tablets are going to be DOA, Dead on Arrival. Their manufacturers will learn the painful lesson that their tablets are too small and increase the size next year, thereby abandoning both customers and developers who jumped on the seven-inch bandwagon with an orphan product. Sounds like lots of fun ahead.
So thank you, and let me turn it back to Peter for the Q&A session.
In the Q&A, the exchange with Bernstein’s Toni Sacconaghi was the sharpest:
Toni Sacconaghi – Sanford Bernstein
I guess this is for both Steve and Tim. I wanted to just better understand your aspirations for iPhone and iPad. Tim, I think I’ve heard you say, “Look, we think about the Mac business as being one where we make the best products, but we’re competing against kind of strong income and power in Microsoft. And we don’t aspire to have high market share.”
In your iPod business it was kind of the opposite. You had very high volume, you drove price points down to entry points in the marketplace. And you have more than 50% market share globally. I think when we’ve talked about it in the past, you’ve actually said that you view the iPhone business as being more akin to the iPod business in terms of your aspiration.
Steve, it sounded like that wasn’t really consistent with what you said. You said very clearly, we don’t want to be Nokia, we just to want to make a phone. So perhaps, you can help me better understand how we should think about your aspiration for both the iPhone and the iPad. Steve, you also made a comment about seven inch screens aren’t going to cut it, and implying that you’re not going to go down to those lower price points.
Is your aspiration for iPhone and iPad to be volume players and market leaders? Or is it simply to make good products? And if you have smaller share like you do in Mac, that’s fine. Can you help me with that, please?
Sure, and I’ll let Tim say what he’s going to say to. First of all, Nokia makes $50 handsets, and we don’t know how to make a great smartphone for $50. We’re not smart enough to figure that one out yet, but believe me I’ll let you know, when we do. So our goal is to make a really breakthrough great product. Make the best product in every industry that we compete in And to drive the cost down, while constantly making the products better at the same time. That’s what we did with iPod.
We updated our products many times every year, with better functionality often times at the same price, and sometimes at a lower price. And it was the relentless improvement, and in some cases a lower price that was able to be our competition. And yield the market share that it did. And as you know, we have a very low market share in the phone market in the single digits, in terms of all the handsets. And we have a very high market share now in Tablets, because we’re the first mover.
But we don’t think about it that way. The reason we wouldn’t make a seven inch Tablet isn’t because we don’t want to hit a price point, it’s because we don’t think you can make a great tablet with a seven inch screen. We think it’s too small to express the software that people want to put on these things. And we think as a software driven company, we think about the software strategies first.
And we know that software developers they’re not going to deal real well with all these different size products, when they have to redo their software, every time a screen size changes. And they’re not going to deal well with products where they can’t put enough elements on the screen to build the kind of apps they want to build.
So when we make decisions on seven inch tablets, it’s not about cost, it’s about the value of the product when you factor in the software. You see what I’m getting at? So we’re all about making the best products at aggressive prices. And that’s what we will do and that’s what we’ve done with the iPod, and that’s what we will do with the iPad as well.
Toni Sacconaghi – Sanford Bernstein
Tim, maybe you want to comment, if I could push you on that Steve. So if the market starts to move towards somewhat lower functionality smartphones in that migration of non-smartphones to smartphones that you talked about. If the market starts to move to dramatically lower price points, you feel you can’t make an appropriate product that is good at those price points. You will see share under those circumstances. Do I hear you correctly?
You’re looking at it wrong. You’re looking at it as a hardware person in a fragmented world. You’re looking at it as a hardware manufacturer that doesn’t really know much about software, who doesn’t think about an integrated product, but assumes the software will somehow take care of itself. And you’re sitting around saying, “Well, how can we make this cheaper? Well, we can put on a smaller screen on it and a slower processor, and less memory.” And you assume that the software will somehow just come alive on this product that you’re dreaming of, but it won’t. Because these app developers have taken advantage of the products that came before with faster processors, with larger screens, with more capabilities that they can take advantage of to make better apps for customers.
And it’s a hard one because it throws you right back into the beginning of that chicken and egg problem again to change all the assumptions on those developers. Most of them will not follow you, most of them will say, “I’m sorry, but I’m not going to go back and write a watered down version of my app just because you’ve got this phone that you can sell for $50 less and you’re begging me to write software for it.”
Toni Sacconaghi – Sanford Bernstein
One more if I may, please, Steve? You now have more than $50 billion in cash. You’re generating more than $20 billion a year in cash; it rests very comfortably on your balance sheet, earning less than 1% interest. What is your aspiration for that cash? And why are you not more open to returning some of that cash to shareholders in the form of buybacks or dividend?
Of course that’s been suggested to us. We strongly believe that one or more very strategic opportunities may come along that we’re in a unique position to take advantage of because of our strong cash position. And I think we’ve demonstrated a really strong track record of being very disciplined with the use of our cash. We don’t let it burn a hole in our pocket, we don’t allow it to motivate us to do stupid acquisitions.
And so I think that we’d like to continue to keep our powder dry because we do feel that there are one or more strategic opportunities in the future. That’s the biggest reason. And there are other reasons as well that we could go into. But that’s the biggest one.
[Follow Philip Elmer-DeWitt on Twitter @philiped]