Liberty

Hopefully. That seems to be what Mr. Market believes. Salix is down 3% today.

http://dealbook.nytimes.com/2014/09/29/bank-of-america-settles-s-e-c-case-on-4-billion-accounting-error/

Speculation about what might happen: http://blogs.wsj.com/moneybeat/2014/09/29/dealpolitik-shareholders-may-have-little-influence-on-allergan-decision/ http://blogs.wsj.com/moneybeat/2014/09/29/where-the-allergan-valeant-salix-actavis-teva-fights-stand-now/

http://9to5google.com/2014/09/29/samsung-note-4-screen-gap-screengate/ I wonder if this will be all over every single media outlet for days. Oh wait, of course not. Not because there's a conspiracy, but mostly because people don't care about Samsung phones the way they care about iPhones, so the coverage wouldn't draw much attention...

A "highly lucrative way"? Isn't the real problem with Amazon that they haven't yet demonstrated that they can deliver real profits? Bezos is a great retailer and I think that if he wasn't reinvesting so much in growth, he could show GAAP profits. But Amazon is far from a product company. Its best products are mediocre at best, if not terrible. How's the premium-priced-at-launch Fire Phone doing? The Kindle is selling mostly because of Amazon's near monopoly in ebooks. If ebooks were all sold on open DRM free standards, almost anyone else could make a better e-ink reader than Amazon and kill the Kindle.

Online services is a weak spot of the company (though some parts are very strong -- people underestimate just how gigantic iTunes, iMessage, and the App Store are). But software? What do you think iOS and OSX are? Two best-of-breed OSes which are being updated rapidly. And now they just came out with Swift, a huge deal that lays a foundation for the coming decades, along with tons of great new API platforms that their best-in-the-world developer ecosystem can build on (XPC, TouchID, Homekit, Healthkit, Cloudkit, CarPlay, soon Apple TV apps I'm sure, Metal for graphics, etc). Almost everybody adopted Webkit, the HTML rendering engine that Apple built (on top of KDE's KTHML, but they made huge contributions even before Google adopted it, to then fork it again). That's another huge, very complex software project that they built up from almost zero market share when IE and Mozilla dominated.

I "insist" because that's the actual real-world dynamic. But only at the premium, differentiated end of the market where people want the best (a relative positional thing), which is the only space Apple plays. This is what the facts show in other industries, and the consumer computing industry has much stronger network/ecosystem effects so there will be a lot fewer players left at the premium end of the market, so the winner(s) will have a much higher market share than, say, with cars or shoes or watches where there can be many more entrants and brand loyalty is about intangibles alone rather than lock in too. And because phones are relatively affordable to most people, the premium segment can be a lot bigger than for cars. And margins can be a lot higher in an industry where IP is your raw material rather than in a cyclical industry with high fixed costs, high capex, labor issues, etc, like with cars. The low-end is already pretty commoditized (by any definition of that word), so that's clearly not the part I'm talking about. Anyway, time will show who is right and who is wrong. This argument against Apple has been around for many years and so far it has proven completely wrong. In fact, the more personal electronics become, the better Apple has been doing because that plays to its strengths. They did better with laptops than desktops, better with iPods than latops, better with phones and tablets than iPods, and watches are a very interesting new space that is a lot more personal (always visible wearable). It'll be interesting to see the competition try to successfully go into this high-end fashion/design heavy space and sell thousand dollar watches with multi-hundred dollar bands... The more I think about it, the more I think this could be a hugely profitable new segment for Apple.

Innerscorecard, thanks for the Shanghai perspective. I'm curious, what would you say are the top phone brands that are considered status symbols there? What is the brand hierarchy for most people, if there's a clear pecking order there? Thanks in advance.

The two things that interest me most right now, apart from iPhone 6 sales, are: 1) Apple Watch: They said the S1 wasn't just a SOC, it's an entire computer on a module, all encapsulated in resin and completely separate from the rest. What if a couple years later you bring your watch to Apple for service and for a few hundred bucks you get a new (better) battery and a S3 chip that is much faster and has new sensors, cell capability, etc (maybe they can even replace the health sensors in the back with new ones if that round part is modular too)? The whole thing could've been designed with this in mind; they're really not telling us much about the watch so far because they don't want to be copied before it launches, but I think there's a good chance this'll be the case. The solid gold sapphire covered Edition watch will certainly cost many thousands of dollars, but that'll make sense to high end watch buyers if they can just keep upgrading it and keep it a long time rather than see it become obsolete like an old iPod after a few years. And with all the bands and designs that will come out over the year, it can actually be desirable to have a first edition Apple Watch, or a 2016 model because you prefer that design (by Marc Newsom?) over the previous year, or whatever. This happens in the mid to high end watch market, and Apple obviously wants to go in that industry, not in the "smartwatch" industry (they've never used that word for the Apple Watch). 2) Still looking forward to Apple TV turning into a much more powerful living room computer. So far they've mostly just seen Apple TV as a hobby and as a neat little thing that strenghtens the ecosystem and gives you some functionality, but Apple's real mission is to build general computing platforms. I expect the new Apple TV to have a much faster SOC (A7? A8? the shift to 64 bits probably means that within a few years it could have more than 4 gigs of RAM), gaming controlers, an app store, better integration with cable companies/content companies, maybe the ability to be controled from your Watch (a remote you always have with you), etc. The new Metal API which is so much faster than OpenGL is basically asking for big screen gaming capabilities. What if they did a custom SOC with 4 cores and a beefier GPU? That would be more than enough for all but the most hardcore gamers.

Some people have a hard time understanding that despite the facts actually showing that it's the case in many industries (though not all). I wish I didn't have to repeat myself, but when others do repeat themselves, sometimes I have a hard time not jumping in... The facts seem to show that the market is gigantic, and most of China is still on 2G and China Mobile is still ramping up. iPhone 6 isn't for sale in China yet and already we have record sales.. What will be interesting is how Samsung sales do, because big screen were a differentiator for them. Now they lost that. Cars are expensive compared to most people's average income, so the premium segment will always be relatively small. Smartphones are the most affordable luxury out there if you account for how useful and addictive they are. If I ever see Android being better than Apple, I'll sell my Apple stock. But right now I see Apple just pulling ahead when it comes to differentiation of the ecosystem and quality of the products in what actually matters to customers. It's not preordained that Apple has to win, though. Google isn't a consumer product company. It's not in their DNA. It's an uphill battle for them. It's a nice side benefit of the mobile technology moving so fast right now. The current iPhone is something like 86x faster CPU-wise than the original one. Of course the modern OSes will feel slow on a device that is a few years old. It's actually a "damned if you do, damned if you don't" thing for Apple; if you support old devices, people complain things get slow. If you don't give a crap about older devices like Android OEMs, then people will complain about not getting updates and being forced to buy new hardware... At some point the hardware improvement cycle will slow down and we'll have to closely monitor what effect this has on sales. But mobile devices are carried around and get beat up a lot more than a stationary computer, so I doubt the upgrade cycle will ever be as long as for computers. Plus, they are kind of a fashion accessory, so having an 'outdated' device will bug people a lot more than having an old beige box under their desk...

It depends on what you mean by not giving a crap about something. Refrigerators and air conditioners are very important consumer products, if not "personal." They are appliances that most people either have or want. Yet the margins on these products are low despite the immense value they provide to people because, while most people really need/want them, they are appliances and not as "personal." Of course everybody wants one. But most people don't care what it is as long as it works well and doesn't look terrible. These are commodities. The number of people who care about what brand and model of car they have compared to what brand and model of dishwasher they have are very different despite as many people having cars as have dishwashers. You don't see people buying dishwasher magazines, put dishwasher posters on their walls, follow discussion forums about dishwashers where people argue about which design looks better, which has the best engineering, feel when you use it, etc.. It's not because Apple makes its money by monetizing the hardware that it's their main differentiator. If Apple's hardware ran Android, they wouldn't make nearly as much money. But people will keep caring about the hardware too, just like they care about the design and engineering of cars. Android phones are becoming like TVs, because regardless of what model you buy, you get pretty much the same thing. But if you want what Apple offers, which is a differentiated experience, you can only buy an iPhone. Cars are commoditized? What planet do you live on? Some segments are more commoditized than others, but at the higher-end a very large number of people care very much about the difference between an Audi and a BMW and a Porsche and a Jaguar and a Tesla, etc. Do I have to bring up the Nike example again? If there's something that should be commoditized, it's shoes, right? As for the margins, of course the economics of the car industry are different from the consumer electronics and software industry. I don't think it's too relevant what margins they get.

There's a big difference between products that people don't give much of a crap about and products that are more personal. DVD players, microwaves, dishwashers... Sure some people care, there's a high end, but most people couldn't be bothered. But almost everybody cares about cars and they'll never commoditize the way you speak of. And people care even more about smartphones because their whole life is on them and it's a very personal thing that everybody sees.

That's a very good question. The main difference I'm seeing between what Apple does and cars, shoes, watches, etc, is that with those there's not really a strong network effect that acts as a barrier to new entrants (just one example: nowadays the price just to sit at the mobile computing table is an app store with thousands and thousands of apps -- it's unlikely there's ever going to be a third successful app store out there), and making top notch computing devices (hardware + software + services) is much much harder than almost anything else. Add a strong fashion/industrial design element, and almost nobody is even qualified to compete.

Absolutely. That's why Apple is so successful despite Samsung massively outspending them for years in marketing and sales incentives. That's why Apple could enter new markets where they had no presence, against entrenched incumbents, and win; because people saw the quality of their products and designs. How do you win against RIM, Nokia, Motorola, etc, when you've never made a phone before? How do you beat all the other digital music players when you're so late to the game? Tablets have been around for 15 years, how do you get people to buy yours when others have failed? Certainly not just marketing... I don't understand why you think there's such a thing as "good enough" in consumer products. Did BMW, Porsche and Mercedes get killed by "good enough" Honda Accords? (a modern Accord is no doubt better than a Mercedes from the 80s, if not the 90s). Why didn't Nike get killed by cheap Walmart shoes? Why are high-end watchmakers still around when you can buy a cheap watch that does the job just fine? Why are premium headphone makers still around when you can get a fine pair pretty cheap nowadays? How about that high-end furniture? Viking appliances?

Which came first, the egg or the chicken?

The real hubris is for those with no taste to think that because it doesn't matter to them, that it can't possibly matter to others despite facts clearly showing that it matters a lot, especially in the premium end of the market.

http://blogs.barrons.com/focusonfunds/2014/09/26/t-rowe-also-calls-for-shareholder-vote-on-allergans-plans/

We do have a fundamental disagreement. I totally disagree with your view of how this consumer product industry works.

If there is no moat, why do they make more money than the rest of the industry combined, with a minority market share (all up-market)? Why should one commodity player have huge margins and very sticky users and other commodity players struggle to break even and create user loyalty? Why do millions of people wake up in the middle of the night to preorder commodity products that they've never seen in person, paying more than the competition? Everybody else seems to be saying that the innovation gap is closing or has closed. Are you saying there's still a huge innovation gap and that it explains those superior profits?

You're like my most reliable contrary indicator about Apple. I now expect even better results for the next few years.

Ok, have it your way, let's not talk about products even if that's the single most important thing that will determine success or failure for all companies involved. But even if that's what you want to talk about, I don't see what the "innovation gap" - narrative or not - has to do with Bendgate, an iOS point update bug, and the hacking scandal. These are certainly not good for perception of Apple, they are clearly screwups, though I'd say they'll soon be forgotten, but what have they got to do with innovation? The only reason why these things are even notable is because Apple is held to such an incredibly higher standard than its competition, mostly because the tiniest thing the media jumps on generates more pageviews than anything else. Android is full of malware, phones that can't be updated, carrier supplied crapware, horrible OEM interfaces like Samsung's Magazine, tablet apps that are still stretched phone apps, etc. Can you imagine the shitstorm if Apple's ecosystem started having these problems all of a sudden? Aren't these things a lot more fundamental to the experience than waiting a day for iOS 8.0.2?

Could you please tell us what are Android's superior features? Oh, lord. Okay, this is getting into the typical design/features debate that happens every several months on this thread, so I think I'm just gonna stop now. You're the one who brought it up. "if you ignore the competitor's superior features, that indicates a biased, partisan view." Let's not ignore them, then...?

I was saying that the Mac has been around for 30 years and it's still not commoditized. You were talking about commoditization. Over that 30 year period they've had ups and downs, and have made products that weren't competitive for various reasons (the Windows monopoly pretty much choked off all competition for a long time before the internet became the platform that mattered, etc). For a long period the company was very different from what it is today and kind of lost its way. Since Jobs came back, we can pretty much talk about a New Apple. But it doesn't change that the Mac was never commoditized, unlike your thesis that it's inevitable.. Differentiation is necessary but not sufficient for superior profits in this market. Ask Android hardware makers or PC makers how their margins are doing... Someone PM'ed me this interesting question: "at the current trend rates, how long does it take Apple to eclipse Cummulative 30 year pc profits?" Good question. Volume was so much lower for the first 15-20 years, I wouldn't be surprised if it happened pretty quickly... And of course if you count mobile devices, which are computers, on both sides, well...

Someone helpful PM'ed me this: http://www.slate.com/blogs/moneybox/2013/04/16/mac_profits_are_high_too_high.html http://www.slate.com/content/dam/slate/blogs/moneybox/2013/04/16/mac_profits_are_high_too_high/mac%20profits.png.CROP.article568-large.png That's from a couple years ago, but I think the lead has increased since then since the PC industry has been hit hard in the meantime while Macs have kept growing and popular new models have been introduced...

Could you please tell us what are Android's superior features?