Apple Q2 2014 Results

Finals will start soon, but I had to find some time to analyze Apple's Q2 2014 performance. Let's get right into it. 

by Larry Sukernik

• iPhone sales are steady. The iPhone is Apple's cash cow. Margin's are luscious, production has been perfected, and carrier subsidies keep consumers making repeat purchases. If you spin off the iPhone as a separate company, it would be nearing the top of the Fortune 500 list. It's big, but it's not the next big thing. That might be TV, wearables, or god knows what other new innovative product. Profits from the iPhone keeps the bills paid (and more), but it's clear from Tim Cook's statement's that they are working on something new. 
• iPad growth is slowing. Analysts predicted that iPad sales would fall, but not by as much as they did. Apple sold 16.35M iPad's in Q2 2014, compared to 26.035M the year before, a steep drop. Some reasons I can think of to explain the falling sales? The iPad is a hybrid product, one that fits in between a desktop computer and a smartphone, making it a nonessential product. Those who have it love it (myself included), but the value proposition is not clear for those who don't. Power users prefer keyboards, and while you can buy add-on keyboards for the iPad, they aren't as good as a laptop. Smartphones are also get bigger and nearer to an iPad's size, which makes the value of one even less clear. That said, 16.35M iPad's is still a huge number - nearly 4x the Mac sales, just for reference.
• Macs are like pancakes. Flat. Mac sales are the least volatile segment in Apple's repertoire, because the replacement cycle is predictable and demand is still strong. College students are heavy Mac users, as well as artists, designers, and other "creatives". I'm typing this post on a Mac, and made the graph above on one too, so business people make good use of them too. Not much to say here except that I don't see Mac growth growing much in the future, but nor will it shrink.
• Why is the iPod still around? Great question, and one that I ask myself every time we see iPod sales, which have been steadily plummeting since the iPhone came out. Apple only sold 2.76M units this quarter, likely to gym goers and children. iPod's are great devices to enter the Apple ecosystem with because they are so cheap, so perhaps that's what is at play here. Kid get's an iPod in middle school, asks for an iPhone in high school, and get's an iPad and a Mac for college. 

So what's coming next? Apple's developer conference (WWDC) is just around the corner, and we're all expecting an update to the Apple TV and perhaps mention of a new wearable. Neither of those products are as necessary as a smartphone, so I'm doubtful they will be the next big thing. It doesn't matter though, because Apple doesn't necessarily need the next big thing, but rather a nice, diversified portfolio of products. Time will tell. 

Google 2014 Q1 Results

I've been quite busy with schoolwork, "work" work, and learning to code, so forgive me for posting so sporadically. I may not be posting very often, but I've still been consuming all of the latest tech news as vigorously as ever, so all is dandy. Anyway, that's enough of my solipsism. This week we have a small treat from Google, with their 2014 Quarter 1 results. Below is a transcribed (and beautified) income statement. Percentages are mine.

Google Q1 2014 Income Statement. Q1 2013 included for comparison. 

- Items highlighted in red reduce net income. 

- Items highlighted in green increase net income.

- Items in black are totals. 

Some things of particular interest:

• Revenues grew healthily, despite what Wall Street skeptics will say. As many analysts have noted, Google revenues closely follow the amount of Google users (due to advertising). For revenues to continue growing, the user base has to expand. The U.S. is saturated already (pretty much everybody is a Google user), so revenue growth will either have to come from 1) international users, or 2) other ways of monetizing current users. It's also worth noting that international users are less profitable than U.S. ones.
• For every dollar earned, Google spends $0.14 on Research & Development. Google Glass, Google Maps, self driving cars, Android, Google TV, I can go on with other projects Google is involved in. The good part is that they are constantly innovating. The bad is that many, no - most products never leave the lab. Overall, it's great to see a large company spending so much on research and innovation. Looks like it's not stopping. Google spent 31.5% more on R&D this Q1 compared to last year. 
• Large increase in General & Administrative costs. Are they hiring up? Becoming larger and thus less efficient? Hard to say, but the increase is there and worth pointing out. 
• Net Income rose by 3.17%. Not bad, but not exactly stellar performance either. Considering revenues rose 19%, I would like to see net income follow revenue growth more closely. Trim down the fat (SG&A expenses). That said, technology companies are rarely efficient, so this is nothing to worry about, but again, worth pointing out. 

That's all for now. In the future, I would like to make some comparisons over a longer time period (10 years), but for now, this will do. As always, you can contact me here (I don't bite) or in the comment section below. 

Business School Curriculum Must Get Updated

Lately I've been fascinated by the characteristics that make a company succeed or fail. I'm not the first, and certainly not the last student of business strategies. As a business school student, I'm forced to read about many traditional business strategies used in the last century. You know what I'm talking about. Product Differentiation, Cost Leadership, Michael Porter's Generic Strategies, Lean Supply Chains...I can go on and on. The books they make us read then go on to give examples of successful companies that implemented, and continue to implement such strategies. Hewlett-Packard, Dell, and Motorola are just some of the companies that most often get mentioned. And every damn time I read these textbooks, I think to myself: "These companies lost. They are caricatures of their former self". Why are we learning this again?

Very few people buy HP computers anymore, and the few that do are probably enterprise customers stuck in a contract. Dell, after years of faltering revenues, struck a leveraged buyout in order to go private. And Motorola, oh the beloved Motorola, the company that supplied the U.S. Military, NASA, competed with AT&T during the cellular revolution, and brought to the world a mobile phone that actually had some semblance of design (remember the RAZR?) was recently sold off to Lenovo for a paltry $2.91 billion. The theme here is that none of these textbook business strategies kept these companies alive when faced with modern competitors.

Which makes me raise the question: are these strategies worth teaching anymore? Yes, they are, but only as a historical record. Business school graduates should know what worked in the past in order for them to avoid repeating the same mistakes in the future. 

More importantly though, business schools should embrace new business strategies that work for successful companies today. But before we do anything else, let me try to predict what you might say. You'll counter my idea by saying that these new strategies aren't tried and tested, that they aren't guaranteed to work, that they may be simple, dumb luck. My answer to all of those questions is maybe, but that doesn't mean they shouldn't be taught at universities. If there is one thing I learned about business strategies, it's that they are constantly disrupted by new strategies. The truth is that there is no single, true strategy that will eternally propel a business into success. The times change, the environment changes, the people change, and the strategies change with them. Business strategy isn't like math, it's malleable and constantly adjusts. Therefore, you must be on top of the latest ideas in order to compete successfully. 

With that out of the way, let me list out a few modern business strategies that work (note the word work, not worked) today (not yesterday) for successful companies. I will list one influential book (just one, or else this post would quickly turn into a business encyclopedia) that outlines some of these strategies, and then I will give two examples of companies that use them successfully. 

The Innovator's Dilemma
This is probably the most popular business book in the modern age because it reads very simply and states exactly what you need to know. It's also laced with examples, which always makes ideas more relatable. There are many strategies presented in it, but here is a tease of my personal favorites (paraphrased in my own words).

- Companies must disrupt and cannibalize themselves. Don't let a competitor get there first.
- The customer is NOT always right. The problem they want fixed, however, is.
- Research and Development will lead to innovation. Innovation keeps you successful.

The Innovator's Dilemma is not a perfect book. No book is. But it's a great reading for business school students since many companies today use similar strategies successfully.

Case-Study: Apple
- The iPod was an extremely successful product for Apple. It sold millions of units every quarter, and analysts predicted sales would only go up. What did Apple do? It released an iPhone that cannibalized its iPod sales, which today make up only a small portion of Apple's revenue. That couldn't have been an easy decision, especially since it was so risky, but nonetheless it worked, making Apple one of the most profitable companies in the world. In other words, Apple disrupted its existing, and very successful product, in favor of a product that would be profitable in the future. 
- Apple is almost notorious for refusing to budge to customer demands. It's not because Apple is stubborn (although sometimes, it certainly is), but because the company truly believes it knows what the customer wants better than the customer thinks he wants. This keeps their products simple and easy for people to understand. 

Case-Study: Google
- There has never been a company that lives and breathes R&D as much as Google. Nearly every product and service Google offers is a test to see if it sticks. You may not realize it, but Google has been testing hundreds of different products throughout the years, discontinuing many, and further improving those that work. Remember Google Buzz? Gone. Discontinued in 2011. Picnik? Shuttered in 2012. May you rest in peace iGoogle (2013). You get my point. Google has been pouring money into the development of new products throughout the years. It's like rollling a die, eventually you'll land on a six and win. But most of the time, expect failure. 

The Times Change, And The Education Should Follow
Computer Science students often complain that they are learning programming languages from the 1970's, and would rather learn something modern. The thing about Computer Science is that although the syntax changes, the fundamentals of programming haven't changed at all. Once you learn to think like a programmer, you can learn any other programming language. The same applies to Mathematics. Both subjects remain essentially the same from the time you learned them to the present. Business is nothing like that. Sure, a profit is always a profit, and revenues must always exceed expenses, but the strategy for earning revenues constantly changes. It would be foolish to use old business tactics when new, innovative ones exist, especially considering that traditional tactics are likely to fail. There is very little logic in business strategy. After all, who would think that disrupting your own product is the right business move?

A Smartphone in Every Pocket

"Our slogan from the very beginning was ‘A computer on every desk and in every home,'" said Bill Gates during the height of Microsoft's dominance. As many have noted, that goal has been achieved. It's been achieved years ago, in fact. Whether you were an early adopter, a late one, or even a Mac user, you've undoubtedly had to use a PC at least a few times a month, or more likely, every day. Windows has won, even Steve Jobs admitted to it. If the CEO of your key competitor says so, you know you've won. 

But now look what has happened. Windows computers are on the inevitable decline, year by year. The Surface tablet was an extremely costly public failure. To top it all off, Windows Phone never took off like it was planned to. Despite revenues still reaching record highs, it is clear that Microsoft is in an uncertain position, and management kerfuffles don't alleviate that worry. Microsoft needs the next big thing, a profit center that will lead it for the next decade. Given that smartphones have a market reach far greater than PC's, that should be Microsoft's core focus. Fortunately, they have all of the elements to succeed; it just amazes me that they don't see them.

Here's what I would do to revive the company if I were Satya Nadella.

• Make a Windows Phone. Nothing bad was ever said about the quality of the Surface. In fact, reviewers said that it had fantastic build quality. Now that Microsoft owns Nokia, who rivals Apple in hardware design, making a beautiful Windows Phone should not be a problem. 
• Bundle Free Services. Microsoft has Outlook, OneDrive, Skype, Office, a music store, a video store, and an app store. That's an ecosystem that is far more comprehensive than Apple's. Microsoft's core competition in services is actually Google. Here's how I would tackle this. Google has the reputation for being open and public, which rubs many users the wrong way. Microsoft should take the Apple approach and preach data privacy and the highest level of integrity. Moreover, make all those services free for Windows Phone users. Free calling and texting with Skype, free email with Outlook, free cloud storage with OneDrive, free Office apps. Hell, even make music streaming free for a certain number of hours per month. Right now, the main thing stopping consumers from purchasing Windows Phone devices is the lack of apps. Offering all of these services for free would compensate for that app shortage and would undoubtedly bring many new users to the platform. And developers follow the users. Note that making all of these services totally free for Windows Phone users will be an extremely expensive short term decision, but in the long term it will pay off. 
• Platform Lock In. Apps don't lock in users, but ecosystem services do. I can switch easily from an iPhone to an Android phone and back, because apps like Twitter, Facebook, and WhatsApp are platform agnostic. They offer essentially the same content on all devices. Photo storage, playlist preferences, and documents in the cloud, however, are all things that keep users locked in to your platform. Give iPhone and Android users a compelling reason to switch to Windows Phone with the bundled services above, and keep them glued to it. For example, offer a service that automatically backs up all user photo's in the cloud, give them unlimited storage (unlike Apple, which provides a limited amount for backups), and let them access those photo's online and share them with friends and family. When people are given a compelling free service, they use it. When they use it, they are locked in to the platform. Who would want to switch platforms when they have thousands of photo's saved in OneDrive? That's right...nobody. 

There's one last thing I would do as CEO, that's that marketing the Microsoft ecosystem. Show people why they should switch, and how many free services they get from doing so. Users love free stuff, and Microsoft needs users. Give them what they want, and you will receive them. 

Will Accountants Be Replaced By Computers?

I'm sure you've read by now many articles predicting the demise of various occupations such as doctors, waiters, taxi drivers, and accountants, among hundreds of other "ancient" professions. Now, I'm not a doctor or a waiter (at least in this lifetime), but I am an accountant who knows his field well and feel very comfortable writing about the future of this profession. Obviously my being an accountant makes me inherently biased, but it also makes me especially well informed. With that said, let me get back to what I mentioned in the beginning of this paragraph, and that is, will the jobs of accountants be replaced by software and/or computers? Or more elegantly: will accounting be a dead profession?

The short answer is no. If that's the answer you came here for then feel free to stop reading after you finish this sentence, and resume whatever it is you were doing before this. Otherwise, read on to see why I believe accounting will still be done by humans.

Computers (I will lump software into computers as a whole for this post) nowadays are extremely powerful, intelligent, and complex. Evidence of this is Google Search, which we can all agree is almost impossible to live without in our data driven world.  Processors are fast, RAM is abundant, and storage is almost free. All of these things, however, are missing one crucial trait that only a human can add, and that's subjectivity. Here's the thing about accounting; it is at many times extremely subjective. Many numbers are crunched using estimates - estimates that were made by accountants. Sure, a computer can give you the output of a long, complex formula, but it first needs instructions on what it's solving for. Computers are great at math, which by the way, accounting isn't. There is no formula that always guarantees the right answer. Each country, state, and industry has different rules that need to be applied, which a computer will have no way of knowing. An even better example of the need for subjectivity in the accounting field is auditing. Are these internal controls appropriate? Are they compliant with standard X and regulation Y? Lots of these questions require judgement only an accountant can give. I can't predict the future, but unless computers will be programmed with subjectivity in mind, we will always need human reasoning. A computer is an accountant's best friend, but it's nothing without the accountant.