All posts in “Apple”

Secret microLED labs, Apple R&D, and the future of product margins

Over the weekend, Mark Gurman at Bloomberg reported that Apple has apparently built out a microLED display laboratory in California for testing and manufacturing small batches of the next-generation screen technology, presumably for its iPhone and other devices. Apple had previously acquired microLED startup LuxVue in 2014.

The news of a secret research lab fits into a larger narrative about Apple’s deeper and more expensive focus on research and development. Neil Cybart of Above Avalon, a subscription blog focused on Apple, noted that Apple “is on track to spend $14 billion on R&D in FY2018, nearly double the amount spent on R&D just four years ago” and also pointed out that “The $14 billion of R&D expense that Apple will spend in FY2018 will be more than the amount Apple spent on R&D from 1998 to 2011.”

Those are incredible numbers for any company, but the scale of the R&D output even for Apple is exceptional. Even more notably, Apple’s R&D expenses as a percentage of revenue have been steadily increasing over the past few years and are projected to reach a decade high of 5.3% this year despite higher revenues, according to Cybart.

That revenue percentage may be high for Apple, but it is remarkably low compared to peers in the technology industry. Other companies like Google and Facebook are spending more than double and sometimes triple Apple’s percentage of revenue on R&D. Part of that reason is Apple’s sheer revenues and scale, which allows Apple to amortize R&D over greater revenues than its competitors.

The more interesting observation though is that Apple has traditionally avoided having to do the sorts of expensive R&D work involved in areas like chip design and display manufacturing. Instead, the company’s focus has traditionally been on product development and integration, areas that certainly aren’t cheap, but are less expensive than bringing say a new LCD technology to market.

Apple doesn’t produce wireless modems or power management systems for its phones, instead using components from companies like Qualcomm, as in the iPhone X. Even highly-touted features like the iPhone X’s screen aren’t designed by Apple, but instead are designed and manufactured by others, which in the case of the screen was Samsung Display. Apple’s value-add was integrating the display into the phone (that edgeless screen) as well as writing the software that calibrated the color of the screen and ensured its exceptional quality.

For years, that integration-focused R&D model has been a win-win for Apple. The company can use the best technology available at low prices due to its negotiating leverage. Plus, the R&D costs of those components can be amortized not just against iPhones, but all other devices using the technology as well. That meant Apple put its resources behind high-value product development, and could maintain some of the best margins in the hardware industry by avoiding some of the costlier research areas required for its products.

That R&D model changed after Apple bought P.A. Semi almost exactly a decade ago for $278 million. Apple moved from an R&D strategy focused on product development to increasingly owning the key hardware components of its devices. No where is that more visible than in the processing cores at the center of the iPhone. The A11 Bionic processor in the iPhone X, for instance, is completely custom-designed by Apple, and manufactured by TSMC.

Indeed, the processor is an obvious place to start vertically integrating, since it provides so much of the other functionality of the device and also has a large influence on battery life. The FaceID feature, for instance, is powered by a “neural engine” component of the A11 chip.

There is a direct line between creating differentiated features that consumers recognize and are willing to shell out top dollar for, and building out the sorts of custom components that Apple has shied away from in the past. The display is obviously a critical point of differentiation, and so it shouldn’t be surprising that Apple increasingly wants to bring that technology in-house so it can compete better with Samsung .

Alright, so Apple is spending more on R&D to increase differentiation – sounds great. Indeed, one narrative of these expenses is that Apple is investing from a position of strength. Through its sheer force of will, it has become one of the most valuable companies in the world, and it dominates many of the markets in which it competes, most notably smartphones. It has incredible brand loyalty with a millions of customers, and it sees an opportunity to expand into new device categories like automotive in order to continue growing and owning more markets. In other words, it is expanding R&D to propel growth.

The more negative view is that Apple is struggling to maintain its hold on a shrinking smartphone industry, and the increasing R&D spend is really a defensive maneuver designed to protect its high sale prices (and thus margins) against significantly cheaper competitors who offer nearly equivalent functionality. Apple’s custom hardware powers its exclusive features, and that creates the differentiation needed to sustain revenues going forward.

There is truth in both narratives, but one thing is for certain, the margin pressure on Apple is increasing. While everyone is making educated guesses at iPhone X sales, many analysts believe that sales have been, and will continue to be weaker than expected, driven by the device’s high cost. If that is true, then higher prices will not be able to offset higher research and developments costs, and the combination will put more of a vice grip on Apple’s future smartphone innovation than the company has previously experienced.

It seems obvious that a company with hundreds of billions of dollars on the balance sheet should just be investing more of that into R&D initiatives like microLED. But analysts care not just about top-line revenue, but also the margins of that revenue. Apple’s increasing spend and declining unit sales portend tougher financial questions for the company going forward.

Qualcomm’s war may be over, but the casualties are just starting to be calculated

The epic battle between Qualcomm and Broadcom seems to have reached its armistice, with President Trump using the power of CFIUS to block the transaction this past week, ending what would have been the largest tech M&A transaction of all time.

It may be all quiet on the semiconductor front, but Qualcomm and Broadcom will now need to find a path forward to win the peace and secure access to the coming 5G wireless market. Qualcomm faces a daunting number of challenges, including a potential takeover battle waged by the spurned son of its founder. Broadcom will have to find a new path to use acquisitions to continue its growth.

As with any war though, the damage from this conflict isn’t exclusive to the two enemy combatants. The future of corporate governance and shareholder autonomy is now being reevaluated in light of the actions used by Qualcomm in its defense against Broadcom’s hostile takeover. In addition, America’s openness to foreign investment is increasingly under scrutiny.

Qualcomm picks up the pieces

Hostile takeovers are always going to be damaging affairs, no matter the outcome. The most important mandate for any board of directors — and particularly for the boards of technology companies — is to identify long-term threats and opportunities facing a company, and guide the executive team toward the best possible outcome for shareholders. Hostile takeovers are firefighting affairs — the discussions of the board are jolted from roadmaps, strategy, and vision to the minute-by-minute tactics of defending the company from marauding invaders.

Qualcomm should be directing its attention to strategy, but it faces additional wars on nearly every front. It’s fighting shareholders for its future, fighting Apple and Huawei over its revenues, fighting China over its acquisition of NXP, and now potentially fighting its founder’s son from a private takeover attempt.

Many of Qualcomm’s shareholders see the company’s performance as disappointing. While its stock has fluctuated over the past six years, today’s share price is essentially flat from where it stood in January of 2012. Compare that to Broadcom, which in the same timeframe has seen an increase of about 740%, and the PHLX Semiconductor Sector index, a basket index of the industry, which has seen its value increase by about 280%.

Unsurprisingly, shareholders were enticed by the opportunity to suddenly realize a 35% premium on their shares with Broadcom’s $82-a-share offer. Unlike Qualcomm’s board, shareholders were very interested in accepting Broadcom’s offer. In fact, we now know that Qualcomm’s board knew that it has lost the battle against Broadcom with its own shareholders during the acquisition process. As Bloomberg reported this week:

The votes started to come in on Friday, March 2. By Sunday it was clear that Qualcomm’s defense had failed.

Four of the six directors Broadcom had nominated were polling so far ahead of their Qualcomm peers that the race was effectively over, according to data viewed by Bloomberg. The remaining two were winning by less substantial margins. Making it worse, Mollenkopf and Jacobs, the architects of Qualcomm’s standalone plan, had received some of the fewest votes.

Inside the Qualcomm camp, the mood was bleak; assuming the trend continued, the board would lose control of the company at the shareholder meeting.

Broadcom’s message was one of quiet confidence. The company knew it had won, one person close to the discussions said. At that point, the person said, it was just a question of by how many votes, and who was going to leave the board.

Broadcom was winning the battle with shareholders, so Qualcomm’s board shifted to a terrain far more favorable to it: Washington bureaucrats. From the same Bloomberg report, “Federal lobbying disclosures for 2017 showing that Qualcomm spent $8.3 million, or roughly 100 times the $85,000 Broadcom spent…” These weren’t regulators; these were friends.

In late January, Qualcomm’s board submitted a preliminary, voluntary, and confidential notice to CFIUS asking for a review of Broadcom’s potential board coup. When Broadcom attempted to redomicile to the United States to avoid CFIUS purview (as it would no longer be a foreign company but a domestic one after it redomiciled), the government’s anger was palpable and sealed the company’s fate. The board’s original outreach to CFIUS precipitated the sequence of events that led to Trump’s block this past week.

Qualcomm’s board won the war, but it is still facing a rebellion from its own bosses. The board will be up for election unopposed this week at the company’s delayed shareholders meeting. Perhaps taking a page from tomorrow’s Russian presidential election, some shareholders are withholding their votes from the board slate to show their displeasure with the entire saga. From the Wall Street journal, “Institutional Shareholder Services Inc., an influential proxy-advisory firm, … in a note to investors late Wednesday, stood by its original recommendation that shareholders vote for four Broadcom nominees for Qualcomm’s 11-person board, even though the votes won’t count.”

That shareholder meeting will no doubt be eventful. While the board and the company’s execs will argue that they have a strategy moving forward, they confront two other ongoing firefighting challenges and one new one that could be another round of bruising internecine warfare.

Qualcomm is still in the midst of its $44 billion NXP acquisition, which continues to wait on Chinese regulatory approval. The timeline for that approval is still unclear, but even when Qualcomm does receive it, the company will still have to close the deal and actually implement the transaction. That will take significant time and energy.

Even more complicated is the continuing fight with Apple and Huawei over Qualcomm’s IP licensing revenue. Licensing revenue is crucial for Qualcomm, and the litigation around the fight will force the board to continue monitoring the day-to-day legal tactics of the company rather than focus on a longer-term vision of how to work with the largest smartphone producer in the world to generate profits.

On top of those two challenges, another takeover attempt could potentially exhaust the board further. Yesterday, Qualcomm’s board voted to remove board member Paul Jacobs, who is the son of Qualcomm’s founder and the company’s former chief executive from 2005 to 2014. He had been demoted from executive chairman to director just last week. As the New York Times noted, “The split, which means no member of the Jacobs family will be involved at the top echelons of Qualcomm for the first time in 33 years, was not friendly.”

According to reports, Jacobs is attempting to raise more than $100 billion to buy the company, potentially leveraging SoftBank’s Vision Fund in the process. SoftBank, of course, is a Japanese company, and the Vision Fund has significant capital from foreign countries including Saudi Arabia and the United Arab Emirates. Even more ironically, Qualcomm is an investor in the Vision Fund.

Jacobs is following in the footsteps of Michael Dell who bought the eponymous tech company back in 2013 in a take-private transaction worth $24 billion. Can Jacobs even raise the required amount of capital, four times more than Dell? Will Qualcomm be forced to run back to the Trump administration in order to avoid a “foreign” takeover of the firm yet again, this time by the son of the company’s founder?

My guess — fairly weakly held — is that the answers are yes and no. Jacobs will find the money, and the board won’t fight a distinguished former executive — even if Jacobs was running seriously behind in shareholder approval in the Broadcom fight. We will learn more in the coming weeks, but expect more strategic actions here (maybe from Intel) as well.

Broadcom regroups

Despite its very public failure, Broadcom is in a much stronger position coming out of this battle. It beat analyst estimates this week for its Q1 earnings, and has seen impressive growth in its wireless communications segment, which were up 88% year-over-year. It also managed to lower expenses, which helped drive an increase in gross margin to 64.8% (aren’t fabless and patents awesome?)

Broadcom continues to deliver strong results, but the big question post-Qualcomm is really what’s next? Qualcomm was the single most important chip company that might have been available for purchase (Intel is out of Broadcom’s league). While it plans to continue to redomicile to the U.S., which should allow it to get back into the acquisition game in America, Broadcom may struggle in the coming years to find the kinds of accretive acquisitions that can keep its growth on the trajectory it has been on over the past few years.

Shareholder power wanes?

The biggest questions coming out of the Qualcomm / Broadcom spat is not related to the companies themselves, but the entire intellectual edifice of shareholder rights and the framework used by American companies to conduct corporate governance.

Qualcomm’s board of directors took extraordinary steps to block the Broadcom acquisition. They unilaterally went to Washington to get an injunction not on a deal — which had never been consummated between the two companies — but to block Broadcom from replacing its board of directors in a standard shareholder vote. This is a very important distinction: Qualcomm’s board saw the direction shareholders wanted to go, and essentially decided to just ignore the election process entirely.

From Dealpolitik columnist Ronald Barusch:

This change threatens over three decades of a carefully balanced governance system. Since the Delaware Supreme Court approved the use of the poison-pill takeover defense in 1985, the courts have basically blessed the following tradeoff: On the one hand, corporate directors can fight tooth and nail to stop a deal and the courts will give only limited scrutiny to defensive tactics.

However, the board is strictly limited in any moves to interfere with shareholders’ ability to replace directors and force a company to change course that way. In the vernacular of a leading Delaware case, a “just say no” defense doesn’t mean “just say never.” A bidder with enough patience who can convince a target’s shareholders to change directors has a path at least toward cooperation on resolving regulatory impediments to a deal.

This is a unique case as Barusch notes, but at what point can boards use every method at their disposal to prevent their own shareholders — the people they have a fiduciary duty to represent — from taking charge of the company? This past week presents one of the most complex examples to date, and it wouldn’t surprise me if a shareholder decides to attempt a legal attack on Qualcomm.

The other side of the potential waning of power for shareholders is CFIUS itself. The Trump administration ended a potential deal for a company that shareholders were widely in favor of. Where do the rights of shareholders to realize a return on their equity end and the right of America as a nation to control national security technology start?

We are on new terrain, and there are no clear answers here. In many ways, it depends on what happens over the next few years of the Trump administration. If there are more blocks like what we saw this week, we could see a radical change in the corporate calculus that would have a long-term negative effect on the value of some American companies.

Hostile takeovers may be incredible drama for writers like yours truly, but they have enormous consequences for companies and the employees who work at them. Qualcomm is going to have to shore up its support with a whole host of stakeholders in the coming months (while dealing with a potential take-private fight), while Broadcom needs to find its next strategy for further growth. All of us are going to have to deal with new uncertainty around the power of shareholders to shape the destiny of their companies. The war is over, but the aftermath and its consequences have just begun.

Now we know why Siri was so dumb for so long

Seven years after Siri launched on the iPhone 4S and it's still not as smart as it should be.
Seven years after Siri launched on the iPhone 4S and it’s still not as smart as it should be.

Image: jhila farzaneh/mashable

It’s no secret that Siri is way behind other voice assistants like the Google Assistant and Amazon’s Alexa when it comes to comprehension and total number of skills. 

Apple has drastically improved Siri over the years, adding new features and upgrading its voice to sound more human-like, but its ongoing shortcomings really revealed themselves in the recent launch of the HomePod, the company’s first product that’s almost entirely controlled by the voice assistant.

So how did Apple screw up Siri so badly when it was released so far in advance of the competition? A new report from The Information reveals how years of missteps left Siri eating dust.

According to the report, after acquiring the original Siri app in 2010 for $200 million, Apple proceeded to quickly integrate the digital assistant into the iPhone 4S in 2011. There was so much potential for Siri, and Apple promised to bring voice controls to the masses just as it did multi-touch on the original iPhone.

Except the voice-controlled computing revolution never quite happened the way Apple predicted. iPhones users quickly realized that Siri couldn’t do a lot of things. And even after Apple opened Siri up with SiriKit in 2016, it still isn’t as intelligent as the Google Assistant or Alexa.

So what the heck happened?

According The Information, it all went downhill after Steve Jobs died in 2011. Jobs’ death marked the beginning of Siri’s downfall.

Instead of continuously updating Siri so that it would get smarter faster, Richard Williamson, one of the former iOS chief Scott Forstall’s deputies, reportedly only wanted to update the assistant annually to coincide with new iOS releases.

Frustrated by all the patching they were doing to Siri, engineers reportedly batted around the idea of starting over.

This is, of course, not how a digital assistant should be treated. As Google and Amazon have demonstrated, digital assistants need to constantly be updated in the background in order to keep up with the ever-changing demands of its users.

Williamson denies the accusations that he slowed Siri development down and instead cast blame on Siri’s creators. 

“It was slow, when it worked at all,” Williamson said. “The software was riddled with serious bugs. Those problems lie entirely with the original Siri team, certainly not me.”

Other problems over the years included layering new elements on top of Siri using technologies culled from new acquisitions. For example, the Siri team had issues integrating new search features from Apple’s acquisition of Topsy in 2013 and natural language features from the VocalIQ acquisition in 2015.

“Members of the Topsy team expressed a reluctance to work with a Siri team they viewed as slow and bogged down by the initial infrastructure that had been patched up but never completely replaced since it launched.”

Frustrated by all the patching they were doing to Siri, engineers reportedly considered starting over from scratch. Instead of building on top of Siri’s reportedly bad infrastructure, they would rebuild Siri from the ground up — correctly on the second time around. Of course, when you’re serving hundreds of millions of users across all of Apple’s devices, that’s a tall task.

The most revealing part of the report exposes how Apple didn’t even have plans to integrate Siri into HomePod until after the Amazon Echo launched:

In a sign of how unprepared Apple was to deal with a rivalry, two Siri team members told The Information that their team didn’t even learn about Apple’s HomePod project until 2015—after Amazon unveiled the Echo in late 2014. One of Apple’s original plans was to launch its speaker without Siri included, according to a source.

Right now, it looks like Siri won’t be blown up and a rebuilt. And if Apple wants to transform its assistant into a true competitor to the Google Assistant and Alexa, it’ll need to sort out its internal management issues and decide what it really wants Siri to be. For all users, we hope it’s more intelligence and deeper integration with third-party apps and services.

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Apple Maps shows you the nearest bike-sharing stations

Apple has signed a partnership with Ito World to add bike-sharing data in Apple Maps in over 175 cities across 36 countries. The feature is now live and helps you find the nearest station by typing “bike sharing” in the search bar or the name of the service.

Once again, Apple chose to integrate an existing data set instead of putting together this data in-house. Ito World has worked with dozens of companies to license and normalize bike-sharing data. This way, Apple only has to integrate one data model to support hundreds of bike-sharing services.

Apple isn’t starting from zero as the company had already integrated some bike-sharing data in a handful of cities. But this is a big improvement over existing data.

Apple Maps doesn’t tell you the number of available bikes or empty docks. I hope the company is going to add this in an upcoming update. It just gives you the address, name and contact information for the service. So this feature won’t replace more sophisticated apps for local users.

But it can be quite useful if you’re traveling to another city and you want to ride a bike. As the name of the service is different in each city, you often end up on Google looking for local bike-sharing services.

With this update, you can type “bike sharing” in any city and find the name of the service and the location of the closest station. It doesn’t tell you if a startup is operating a dock-less bike-sharing service in that city, so you’ll have to open the Mobike, Ofo or oBike app yourself.

Apple Maps supports Citi Bike in NYC, Ford GoBike in San Francisco, BIKETOWN in Portland, Santander Cycles in London, bicing in Barcelona, BIXI in Montreal, CityCycle in Brisbane, nextbike in Germany, Austria, Croatia, Switzerland, the U.K., and dozens of others. I tried looking for stations in smaller cities and it also works in European cities with hundreds of thousands of people.

Apple has been slowly adding more data to Apple Maps to stay relevant against Google Maps. The app now supports airport and mall maps, lane guidance, public transit, EV charging stations and more. Your mileage may vary, but Apple Maps could now be a good option for your local area.

  1. Barcelona

  2. Hamburg

  3. London

  4. Portland

Update: Here’s the full list of supported services. It represents 176 services in 179 cities in total.

Android beats iOS in smartphone loyalty, study finds

Samsung’s new Galaxy S9 may not quite live up to the iPhone X when it comes to Samsung’s implementation of a Face ID-style system or its odd take on AR emoji. But that’s not going to matter much to Samsung device owners — not only because the S9 is a good smartphone overall, but because Android users just aren’t switching to iPhone anymore. In fact, Android users have higher loyalty than iOS users do, according to a new report today from Consumer Intelligence Research Partners (CIRP).

The research firm found that Android brand loyalty has been remaining steadily high since early 2016, and remains at the highest levels ever seen.

Today, Android has a 91 percent loyalty rate, compared with 86 percent for iOS, measured as the percentage of U.S. customers who stayed with their operating system when they upgraded their phone in 2017.

From January 2016 through December 2017, Android loyalty ranged from 89 to 91 percent (ending at 91 percent), while iOS loyalty was several percentage points lower, ranging from 85 to 88 percent.

Explains Mike Levin, partner and co-founder of CIRP, users have pretty much settled on their brand of choice at this point.

“With only two mobile operating systems at this point, it appears users now pick one, learn it, invest in apps and storage, and stick with it. Now, Apple and Google need to figure out how to
sell products and services to these loyal customer bases,” he said.

That’s also why both companies have increasingly become focused on services, as they try to extract larger revenues from their respective user bases. For Apple, that’s been a win, financially speaking — it saw record revenue from services in November, suggesting growth in things like Apple Music, Apple Pay, iCloud, AppleCare and App Store.

For Android users, the higher brand loyalty could be chalked up to their ability to switch to different styles of new phones, without having to leave Android — thanks to its distribution across a variety of handsets. That gives users the freedom to try out new experiences, without giving up their investments in purchased apps, or the time they’ve spent learning their way around Android, for that matter.

It’s worth noting that Android hasn’t always led in user loyalty as it does now. CIRP has been tracking these metrics for years, and things used to be the other way around.

In 2013, for example, iPhone owners were found to be more loyal than Android users. But that shifted the following year, and Android has risen ever since. (By the way, if you click through to read the comments on that linked AllThingsD article from 2013, it’s a quite a trip. Remember when people cared so much about their choice of smartphone it led to commenting wars? Ah, the good ol’ days.)

All that being said, the rate of switching is different from the total number of people switching, the firm also pointed out. And looking at the numbers from that perspective changes things.

“We know Android has a larger base of users than iOS, and because of that larger base, the
absolute number of users that switch to iOS from Android is as large or larger than the
absolute number of users that switch to Android from iOS,” said Levin.”Looking at absolute number of users in this way tends to support claims that iOS gains more former Android users,
than Android does former iOS users.”