Apple and IBM, a view from the peanut gallery

Apple and IBM are both companies I hold in great esteem – in the top 5 of all companies I care about. I worked at IBM for a long time, and I own a lot of Apple devices. I have small investments in the stocks of both companies . My day job is to make partners successful for my employer MongoDB – so any enterprise alliance news is something I look at as a learning opportunity  Naturally it picked my interest significantly when I heard the announcement . My instinct was to say “Wow Ginnie scored big”. So, here are my thoughts on the alliance – strictly my personal views and not that of current or past employers.

There is very little in common between IBM and Apple to begin with.

1. Apple is a much more prosperous company than IBM – be it Market cap, revenue or margins. And its no secret that Apple is the senior partner in the relationship. IBM’s CEO flew to CA to do the announcement with Apple’s CEO, and not the other way around. If this happened in IBM’s prime years, Tim Cook would have landed in JFK and taken a limo to Armonk 🙂

2. Apple is more prosperous than IBM with MUCH less employees than IBM has. On top of that the IBM internal organization is heavily matrix oriented to take care of its complex business. It would take some Eisenhower-esque leadership to get all the right teams focused on this initiative. (But honestly, I am not all that worried since I know first hand that when it comes to leadership, IBM has some of the best in the corporate world in their ranks.)

3. Apple is extremely focused – it has a much smaller portfolio around which this massive empire has been built. IBM portfolio is like encyclopedia Brittanica in comparison 🙂 . When I looked at the joint announcement first – I smiled thinking “wow you could not have expressed in a more cover-all-bases generic way”. 

4. Apple makes money from hardware and IBM has been steadily divesting hardware business

5. Apple provides a workplace that is cutting edge and has an awesome cafeteria – IBM to my knowledge does not even provide free coffee to its employees . Apple prefers jeans and IBM prefers suits. The impedance mismatch in culture is palpable.

6. Although several employees at IBM use Apple devices in a BYOD mode, the company standard issue has always been a thinkpad laptop, and not a Mac.

Why does this alliance make sense ?

Just like with the law of magnetism in physics – opposite poles attract !

1. Apple is a company that thrives on innovation. But they need something to keep the market happy during the time taken between innovations. IBM opens the doors to the top enterprises – voila, a whole new addressable market delivered on a platter.

2. IBM services is pretty good at production support and maintenance. Many large companies have outsourced support to IBM – and combine Apple care with what they do today, there is a clean new upsell package for IBM GBS and GTS. 

3. People don’t give enough credit for IBM’s design investments. IBM has a solid design team that does an amazing job – the most famous being the public facing sporting events like US Open. So when it comes to creating the 100 apps – design is something that IBM can rely on being a differentiator. Same goes for advertising – IBM makes some pretty impressive ads. I am thoroughly enjoying the ones I am seeing during US Open, although I don’t see any mention of the Apple collaboration in any of them. 

4. IBM has an asset that they don’t seem to be able to use effectively so far – that is IBM Watson. It frustrates me to no end seeing IBM take incremental steps in pushing Watson. I think this partnership is the most fantastic way for Watson team to push its case before the biggest corporations on the planet. A Watson on every iPad ! . In fact I think rather than do the generic announcement they did – I would have preferred to see 100% of the focus on just Watson and Applecare for the enterprise. The rest seem like noise to me

5. IBM has strong alliances with many ISV partners like SAP, Oracle, MongoDB etc. And most enterprises already use solutions from these ISVs. IBM has a great opportunity to further the value of Apple alliance by building apps around what enterprises already have. 

6. IBM has sheer size in its favor . A massive overhaul of enterprise tech landscapes need armies of consultants. Apple does not have that army, and can’t recruit fast enough even if god forbid they want to do it. That is a huge advantage for this alliance. 

And finally, what is the big risk factor ?

This is largely a Global Business Services (GBS) led effort if I understood it correctly from the announcements. GBS is a well managed machine with extremely low bench at any given point. So if a massive investment is needed in headcount , time and budget – it will need to be taken away from billable engagements. That is a really hard thing to do unless another part of IBM can pick up the slack to bring in the money to keep investors happy. The only viable division that can pick up slack is the software group. Since Ginnie did not reset Sam’s 2015 EPS roadmap – IBM cannot take a lot of risk on losing focus on existing revenue and bottom line. That in my mind is what the risk is – there is a significant upside in the long term if everything works out well , but it needs making big bets in rejiggering the existing business for IBM. 

If IBM won’t take that risk ( and I REALLY hope that they will take the risk, and convince investors to cut them some slack) – then it will be business as usual for both companies, and this will be yet another partnership announcement that did not pan out. 



Apple Vs Samsung – Never Mind The Customer, Eh?

So I just heard the news that Apple got richer by a billion dollars , and Samsung has to pay up that money for patent infringements. Well, Apple did not get the whole amount it was seeking, but $1B is not too shabby. Since the Jurors only took under 3 days to decide on the case – I think Apple’s lawyers probably did an incredible job convincing them. Maybe they and other lawyers with similar expertise will see a bull market now for their skills and experience .

More than the $1B they got from the ruling – there are many benefits AAPL would get from this ruling.

Good press is not something AAPL is short on . The cult following they have will make sure that this will be hailed as a huge win for innovation, honesty, higher standards and so on. If Oracle or someone similar sued a competitor and won, they will probably never get the same opportunity to milk mileage out of it in internet and press. Such is life 🙂

AAPL would have also successfully scared several “innovative” competitors in their markets. Some version of this trial is bound to play in most countries . Patent laws apparently differ across the world, so who knows how this will net out after lawyers on both sides play several innings each. And of course there is the appeals process too. It will be a while before dust settles. I am not sure if this win for AAPL also gets them an ongoing royalty revenue stream from Samsung.

What about customers though? $1B will not kill the Samsung company – but they will directly or indirectly pass the cost to customers going forward. I am a customer who prefers my samsung galaxy tab over an iPad, although I use an iPhone. Many friends and family members use samsung devices – and I wonder how many carriers will be now scared to keep a contract going with Samsung.

Well, Samsung also sued AAPL. That might get them back something – if not in money, then at least in good will. But I am not going to hold my breath on Samsung having a good chance to beat AAPL in US market in near future . That will be such a shame , if that is how it plays out.

For innovation to thrive, irrespective of final results of these battles in court – the patent system should be revamped and simplified. Legal innovation does not have the same effect as product innovation for us customers.




Not Even Apple Can Keep The Market Happy

So AAPL announced its Q3 results – and next thing we know its shares took a beating – almost down 5% in after hours trading when I looked. Did anything change fundamentally for AAPL to deserve this brutal treatment from investors? I doubt it – they are just paying the price for being a very successful public company for the most part. It is not as if they did bad in absolute terms – they made a lot of money in the quarter, but not enough to keep up with the market’s instiable appetite for more.

Their product cycle did not do AAPL a lot of favors – despite the excellent iPad sales, and a new mac model. Everyone I know – and me – are waiting for the new iPhone. Till next model comes out, large numbers of  existing customers will not pay for an existing model . It is not as if the analysts did not know it – they just did not cut AAPL any slack for it.

There is an interesting question here – how much of iPad sales is killing the traditional mac revenue? I know many who barely use a PC or Mac any more, and just use iPads. I have seen this more with ex-PC users. But this might be affecting mac buying behavior quite a bit too. I am sure some smart analyst has figured it out. I need to find out more. While AAPL is a clear leader with iPads,  the tablet market is getting brutally competitive. So they cannot slacken one bit on iPads .

AAPL has always been very conservative when it comes to guidance to market. It is now at a stage where Apple’s guidance and  analyst consensus is a few billion dollars apart for revenue each quarter. That is a lot of money to make up every time. Apple and Analysts need to reach some middle ground to avoid wide swings. It is hard to pull off though given AAPL’s success.

Some small investors will probably panic as always and sell now. My feeling is that some smart fund managers will just buy at the low price given the company has strong fundamentals and tonnes of cash.

AAPL might not be totally immune to economic issues in Europe – and that could be a long term issue. I would be keen to see how 4Q turns out for them. Guidance for 4Q is 34B USD – which is probably way too low for keeping analysts happy. I am pretty curious to see if they will revise it soon after seeing the stock take a hit.



Shelf life of innovaton

To begin with – I wonder if someone will argue with me if I just say “there are only so many original ideas in this world”.  I am sure someone would – I can think of a few people I know on social media who hold a different view. In any case – I firmly believe original ideas are limited.

But is innovation a term to define an original idea? I am not sure – partly because I am not a scholar in English language.  I cannot draw a firm difference between invention and innovation when it comes to an original idea. The idea of invention and innovation is to improve something in general.

If someone comes up with a cure for cancer – we will probably call it an invention. And when the next person comes up with an even better way to cure cancer – it gets called an innovation, or less charitably – an improvement. And the judgement passed on this is not done by the cancer patient who got cured or the doctor who treated the patient. It will be done by authors, analysts, scientific community etc – all of whom are a degree or two or more separated from what actually happened. Whether we call it invention, miracle, innovation, minor improvement or a waste of time and money all depends on the eye/tongue/keyboard of the beholder.

What is innovation then?  It is a comparison to status-quo, isn’t it? If I do something better today than yesterday, I have done some innovation. But will anyone other than me agree that it is innovation? Should I wait to call it innovation till I find a few more people to agree with me? If making money is key – then yeah, I suppose a few people should agree with me. These should be buyers, people who influence buyers etc.  This also explains why vendors shout out about innovation before any customers benefit from their wares. Good for them.

What is forgotten in this dialogue (err..monologue since I am the only one “talking” here now) is the time dimension of innovation – or more accurately, the shelf life of innovation.  So I and a few others get to agree that what I just produced can be called innovation.  And someone is willing to pay money to get it. As time progresses, I keep tweaking my product (to keep getting some money to earn a profit, to fund new projects, to go to Australia to watch a boxing day test match and so on) . Will each tweak be called innovative? Or because I did innovation once, will I continue to be known as an innovator?

From the money point – there are two ways I can make money. I can charge money for tweaks by charging a maintenance fee (the type SW companies do) or I can bring a new version every now and then and convince customers to (optionally) pass down old ones and buy new ones (like car companies, Apple etc do).  As a customer, I prefer the former model where I get everything I need for a smaller price tag every year, as opposed to spending money (equal to or more than original investment)  again to buy the next version.  Companies who charge a maintenance revenue are tagged with “improvements” and companies that make you buy the new version all over again are tagged “innovators” or even “inventors”.  Am I the only one who thinks this is strange?

For me as a vendor – if making money is my prime objective, the latter model is probably better.  Of course I cannot do this one product – I will need a portfolio of products so that no one product can sink the ship if it fails to sell. I also need a brand that holds significant value and loyalty. Car companies and Apple have proven that this is a workable model. I have several friends who have bought iPads every time Apple had a new model. I also know many friends who for generations have bought Chevy, Ford or BMW.   I don’t have any friend who buys cars from Chevy, Ford or BMW every time there is a new model though 🙂

This model is rarely seen in software side. The successful companies like IBM, SAP, MS all have made excellent software – used by millions of users for their daily jobs. Their solutions have long shelf life. And they charge a maintenance fee to provide improvements and support over time.  They also come up with new solutions that fetch more upfront money than the annual maintenance.  But since they don’t make people buy new models every few months – they almost never get any credit for innovation like Apple from the analyst/blogger community.

The criticism on”incremental-ism” is not without merit – customers are not always given sufficient “big enough” changes all the time. Vendors need to address that. However – it is not as if customers use what is available already all the time either. If I take SAP as an example – very few customers take time to find out what is available to them in Enhancement packages that they can use to improve their business process.  And only a few go on all the way to implement it unless forced by laws and regulations etc.  Vendors know this – so they strike a balance on how much they will improve existing products vs invest in new ones. Of course when they come up with new ones – there are people (like me) who will question its maturity.  There is no easy answer here.

One last thing – adding “disruptive” to innovation. I believe this idea of “disruptive innovation” came from Clay Christensen.  I do agree it is a neat idea. Where I differ from some other people is the frequency at which disruption can be done without losing efficiency of doing business.  I cannot get my head around the notion of a business surviving technology disruptions every year in the name of innovation. But listening to some experts on the topic – and resisting the temptation to name names – I constantly get this feeling that they expect customers to be friendly to this idea of constant change.  I know a CIO who had to fight more than a year to convince his company to let go of on-premises MS office and go to a cloud based office 360 solution. I doubt he can fight 5 such battles a year.

Just when I was all tired about the innovation – I spoke to an ex-colleague on phone. He says that the need to be innovative is so yesterday. His company is now moving on to be inventive.  That is the new cool kid now it seems. At least can we go back and talk about “Synergy” or something again , or is retro not cool anymore either?



What does Apple’s outsourcing have to do with farming and manufacturing in Kerala ?

If you chop a tree for firewood, you should plant a tree to compensate. And you should do it even if you are not into the whole green thing. Or else you will be turning in your grave constantly when your children and grand children swear ad-nauseum about the trouble you put them in . But I digress.

So Apple outsourced a LOT of manufacturing to China. You should read this excellent NYT article , and feeling depressed after reading it should be expected.

Does that make them evil – probably not. They are a profit seeking entity, and they sell all over the world. They can do whatever works for them. Did China win that work because of cheap labor? yeah – they probably did. But the manufacturing did not flourish there solely because of cheap labor. It flourished because China has plenty of engineers, built an ecosystem around Apple’s manufacturing needs and then started offering that service to other companies. And then other innovative companies started investing in China to build manufacturing. The story repeats in concentric circles – and it seems to fuel itself.

Did America lose out big because Apple outsourced manufacturing? yeah – I guess it did. But Apple was not the first to do so. And neither is manufacturing the only thing that got outsourced. But did America get anything in return? yes of course. We can now walk into mega marts and buy things a lot more cheaper. We can walk to an Apple store and buy an Apple product much cheaper than if it was manufactured locally.And so on and so on.

So is this a fair trade off? hardly, in my opinion – if what is happening to farmers in Kerala is an indication.

Kerala, my home state in the southern tip of India, literally means “land of coconut palms”. And Kerala is a place where people eat rice in some form 2 or 3 times a day. When I was young – the state had a large number of vast rice fields and coconut plantations. Around the time I was in high school, this was not the case any more. Many farmers moved from growing rice and coconut to growing rubber. Rubber was a “cash crop” which fetched handsome prices from tire manufacturers etc. Fast forward to today. Keralites still eat rice and coconut based food 3 times a day, but they have to buy these (and most vegetables) from neighboring states for a huge price. And rubber values fluctuate so much that not many farmers got rich that way. As agriculture declined, the problem was compounded by lack of supply chain efficiencies in buying and storing food grains and vegetables. End result – farmer suicides started happening in an accelerated manner. Many of them lost their land and fortune and their loved ones. And prices still go up significantly most years.

While Keralites are extremely enterprising and capitalistic when they live and work outside their state, they are mostly left leaning when they live in Kerala. Manufacturing has steadily declined in the state, and it has become a consumer economy for the most part. The state has 100% literacy, and has extremely high standards for health, higher education etc compared to many other Indian states. But despite all of this – manufacturing won’t flourish there. Both parties (well, alliances of convenience is a better phrase) that typically rule Kerala are left leaning to various degrees, and both have strong trade unions which actively discourage manufacturing. Except for IT, I think everything else in Kerala that generates money has a union presence that threatens its existence. This environment is the prime reason why lots of Keralites get out of the state after their education, and live and work outside. I am one such guy too – who finished college and could not wait to get out of there. Due to many people leaving the state, there is a positive side too – these people send a lot of money back to their families that live in Kerala. So the consumer economy generally has always been excellent.

When I read the article on Apple’s outsourcing to China, the situation of Kerala is what rushed to my mind immediately. The long term implications are stark – once you let go of something you do well, you have to be prepared to pay the price. And you should be able to invest in something else to compensate for the long term repercussions. It is the price to pay when economy takes a global flavor. You cannot pick up your toys and go home arbitrarily when you don’t like the game after some time – you need to stay in the game and invest wisely for future. Globalization is not exactly a bed of roses – it is a mixed bag.

IT outsourcing is something I am very familiar with. If a company outsources some IT functions and uses the savings to invest elsewhere, it works great. If it just eats up the savings, and don’t invest elsewhere – it just won’t survive in the long term. Outsourcing might create other kinds of jobs too – like Apple being responsible for increased demand for AT&T etc and creating jobs there. Or the outsourcing companies in India creating jobs in the US when they want to get into high end consulting etc. Apple has a large consumer base in China – and makes money in that market. One day when tax laws make it attractive to bring that money to US, Apple might do that – and it will help US economy. It is pretty hard to judge – at least for me – on how much these indirect benefits will offset the long term costs. But at a minimum, it does offer some relief.

Outsourcing of manufacturing and IT and other things won’t go away – although in an election year, many might say it will. The question is how will we compensate for the long term impact ? There is no one magic bullet – it needs a lot of things to fall in to place – on both public and private sector. And sadly, it might not get much traction in US till the presidential elections are over.