iTunes and Apple Hardware As Content Conduits

For the three-month period ended in September, Apple recognized $1.018 billion in revenue that, according to the financial statement "Consists of iTunes Store sales, iPod services, and Apple-branded and third-party iPod accessories." For the quarter this category represented 10.3% of GAAP revenue and a 22% gain in revenue over the prior-year period. Apple consolidates iPhone accessories revenue in a different category.

The increasing importance of iTunes Store revenue to Apple's revenue and earnings matrix is often overlooked. For example, while many of the media reports concerning the iPhone focus on AT&T's cell service issues, new competition from Android-based smartphones and the battle between Apple and Research In Motion for smartphone market share, the importance of the iPhone OS app economy is infrequently mentioned outside the context of more than 100,000 apps available as a competitive advantage in consumer hardware sales.

The iPod line (including the popular iPod touch) has reached a mature market position with the iPod touch materially responsible for the scant gains in unit sales, if any, and growth in sales revenue for the product line. 

Due to the success of the Apple iPhone, it's expected some iPod sales would be cannibalized by iPhone sales. The iPhone, in addition to being a handheld computing and communications device is also an iPod and at subsidy pricing is priced attractively compared to iPod models such as the iPod touch and iPod nano.

But look at the unit sales numbers another way. One Wall Street analysts predicts cumulative unit sales of the iPhone and iPod touch to reach 78 million units by the end of the December quarter. Both the iPhone and the iPod touch use the iPhone OS and thus have access to the apps available through the iTunes app store. App sales alone will provide for yet another year-over-year surge in iTunes store sales.

The much-rumored Apple tablet, which most of us expect to be announced in late January, will presumably have access to the iTunes app store as well, adding another app-enabled device to Apple's hardware product matrix.

The iPhone, iPod touch (and the pending Apple tablet device) function even more effectively as content conduits  and iTunes store revenue generation devices than the iPod line. Apple, in my view, is purposely designing hardware devices that generate as much constituent revenue as possible through iTunes Store sales.

Apple's revenue matrix, though highly dependent on hardware sales, is slowly migrating to a mixed revenue formula for recurring revenue from each device sold via of the iTunes Store. 

The importance of iTunes Store sales to Apple's future revenue and earnings growth can be hardly overstated. Content availability drivers hardware sales whether it be over 100,000 iPhone apps available as a competitive differentiator in choosing a handset or the resulting direct sales of apps, music, movies, etc. to owners of Apple's hardware devices. For the three-month period ending in December, I expect the revenue category referenced at the top of this post to rise at least 25% both sequentially and in year-over-year comparisons, reaching at least $1.25 billion in the December period alone.I expect similar or greater year-over-year percentage gains in revenue for this category for the next several quarters.

This recurring revenue source provides Apple with the opportunity to continue to moderate hardware device prices in favor of greater recurring revenue from iTunes Store sales as more hardware devices are sold.  

iPod Unit Shipments Revisited

I'm raising my estimate of iPod unit shipments in Apple's 1st fiscal quarter to 23 million units. The rationale for the estimate increase is strong sales of both the iPod touch and the iPod nano. The iPod nano's video capabilities and its attractive price starting at $149  are winners this holiday season. The iPod touch continues to be a popular product and sales this quarter should be robust.

The estimate of 23 million units sold is just slightly ahead of last year's results. But it's in an environment in which most analysts see a doubling (or more) of global iPhone sales versus the prior year period. 

Apple will report record revenue and earnings this quarter from strong Mac sales including the recently refreshed iMac, seasonal iPod sales and the continuing global rollout of the Apple iPhone. 

Apple and the iTunes Gift Card Economy

I'm amazed at the number of iTunes gift cards purchased and distributed as gifts during the holiday season. No matter the small commission paid to retailers for sales of the gift cards, they represent an interest-free loan to Apple for iTunes product purchases at a later date. The cards purchased at retail may also reduce Apple's distribution costs because merchant fees are not paid on purchases made from gift card redemptions.

I've searched Apple's financial statements for some inkling of the amounts carried in the company's cash balances and the offsetting liabilities for unused gift card balances and the financial value of the cards still to be redeemed. I can't find a conspicuous mention of the amounts anywhere. I'm surprised these amounts are not detailed because of the volume of and dollar value of gift cards purchased and redeemed each year.

iTunes gift cards can only be redeemed at one place - Apple's iTunes store. But these gift cards provide recipients with an array of product purchase options ranging from music and movies to iPhone apps. The cards have become their own form of currency for use at the iTunes store.

While debates rage about the iPhone versus Android 2.0-enabled smartphones on the merits of the hardware, there's no disputing the added value to a product franchise from iTunes store integration. There's no real competition currently for the iTunes app store and Apple has become the world's largest commercial distributor of recorded music via of this online store. 

Today content and accessibility of content (software, music, movies, iPhone apps, etc.) drives hardware device sales. iTunes gift cards lock-in the card recipient to the store similar to the way many other gift cards can only be redeemed at particular retail outlets. The popularity of iTunes gift cards and the value of the unused card balances can only be a draw for app developers and owners of commercial content seeking to expand sales and expand those sales through a relatively easy to use digital store front on attractive distribution fee terms.

Providing access to the growing iTunes economy is one way Apple will continue to entice interested parties to provide content for its products. Access to the iTunes store is a decided advantage for Apple and an advantage that can not be mitigated quickly nor inexpensively by competitors. It's also a reason the iPod touch is important to the iPhone's continuing success. The iPod touch provides a large pool of consumers (now measured in the tens of millions) that can use iPhone OS apps, building the market for developers and accessory makers much more rapidly than the iPhone could provide on its own during its nascent phase of sales growth. 

iTunes integration is providing an underpinning for Apple hardware device sales and a captive market of iTunes account owners with unused gift card balances can only sweeten the proverbial pot for app developers and commercial content owners seeking to increase product sales. 

AT&T's U-verse

Last week I migrated from Time Warner Cable's residential services to AT&T's U-verse service. This was a change long in coming but transitioning the home's Internet, phone and TV services from one company to another is not a decision I made quickly considering week day installation logistics and the hassles involved in returning equipment and canceling the prior service bundle. 

Over the past couple of months I had received several mailers from AT&T promoting the U-verse service. There were at least a half-dozen mailed pieces extolling the features of   the service on my desk.  These were just enough reminders from AT&T that my discontent with Time Warner Cable merited a change in services.

On Monday last week I made the call and a Friday U-verse installation was scheduled. I received an order confirmation via of email and voice mail and text message reminders of the scheduled installation. On Friday morning the installer himself called to provide his ETA within the time range initially provided. I was impressed by the level of communication even before the installation began. 

In all the installation took about five hours. The AT&T representative not only installed the services bundle, he offered to rewire the phone lines from the box on the side of the house with cabling to provide better voice call quality. Beyond the installation, he remained on site and worked through turning off U-verse's wireless networking as I reset my Time Capsule to work in bridge mode with the U-verse modem. I was pleasantly surprised by the responsiveness of the representative and the quality of the work provided. In all I'm glad I made the switch.

Despite my increasing frustration with Time Warner Cable, it was my existing relationship with AT&T through my iPhone service contract that was a catalyst in making the switch. I figure if the company was smart enough to make the iPhone deal with Apple, it was smart enough to provide satisfactory home services as well. I consider my switch to U-verse AT&T's own iPhone halo effect.

Both Verizon and AT&T are losing traditional home phone customers by the minute. U-verse is one way AT&T is working aggressively to gain new revenue and establish new relationships with residential customers. In the September quarter AT&T had a net gain of 240,000 U-verse customers, bringing the installed base to 1.8 million customers. Obviously it's a relatively small segment of overall operations but it should grow at an impressive pace.

I'm long AT&T and see the company emerging as a much more aggressive provider of home, business and wireless services. Combining what I pay to AT&T for family plan wireless services and now for a multi-service bundle of residential services, I see AT&T as a company with strong growth potential and a 5.9% dividend at Friday's closing price as an investment incentive.

AAPL: Buy Now

Ordinarily on the Apple Finance Board I would post the above statement as a question. Tonight I'm posting it on Eventide as an emphatic point. The recent pullback in Apple's share price provides an excellent entry point for investors looking for long-term gains. 

Nothing about the company's fundamentals has changed and there's been no indications of a softening of demand for Apple's popular products. This quarter (Apple's 1st fiscal quarter) the company will report record revenue and earnings using both GAAP and non-GAAP measures. 

The recently refreshed iMac line should push Mac unit sales for the quarter to 3 million units and the iPod touch will buttress Apple's line of digital music players through this economically challenged holiday shopping season. The iPhone is continuing its global roll out and that product is still in an early stage of sales growth.

There may be a variety of reasons for the recent drop in the share price but none of those reasons reflect a change in the company's short-term or long-term prospects for revenue and earnings growth. At today's closing price of $189.27 I consider AAPL at a bargain price relative to this quarter's anticipated performance and ahead of positive changes in share price targets from analysts as we move closer to the end of the quarter and the release of revised revenue and earnings estimates. 

Acer: Apple's Unintended Ally

Acer Inc., the Taiwanese maker of popular netbooks and other computing products, recently surpassed Dell Inc. as the world's #2 maker of PCs. While Dell has seen continuing weakness in its consumer product sales, Acer has become the world's fastest-growing PC maker in part due to success in the PC market in which Dell is most challenged.

Acer sells PC products under four brand names: Acer, Gateway, Packard Bell and eMachines. The Gateway and eMachines brands up were picked-up when Acer purchased what remained of Gateway in 2007 and the company acquired Packard Bell in early 2008. Through these acquisitions Acer picked-up the remnants of failing PC makers and took possession of brand names with perceived value in various global markets.

Acer operates on razor-thin margins. Gross margins on products sold are around 10%, less than 1/3 the margin Apple commands on its products. To maintain success the company must grow unit volume. Acer may soon become the world's leader in laptop sales and eventually challenge HP for the global top spot in total PC shipments. At low margins unit shipments become all the more important.

How does Acer's success benefit Apple?

Acer has become the successor to three defunct computer makers: Gateway, eMachines and Packard Bell. These brands have become nameplates for Acer's inexpensive PC products. The different nameplates are used in the regions in which the respective brands maintain the greatest strength. By creating one central enterprise (including Acer's own branded product) the company continues to push PC prices lower and is essentially clearing the field of competitors in the PC market.  

In 2008 Acer recorded revenue of $16.65 billion and net income of $358 million. The company is targeting $30 billion in annual revenue as the company's goal. To achieve this ambitious goal the company is moving into smartphones in a more substantial way and is moving away from Windows Mobile in favor of Android-based phones. In the PC market the company will continue to drive down costs to protect its 10% margin while gaining as much unit volume as possible.

Acer's aggressive growth plans will make it challenging at best for Dell to remain in the consumer market. The company's successful focus on netbooks is also redefining the way people choose and use laptop PCs and is unwittingly eroding the market for more expensive portable Windows PCs. 

Acer has become Apple's unintended ally in furthering Apple's effort to undermine the PC-centric model. This is not good news for Microsoft but it is good news for Apple. Acer is clearing the way for the much-rumored Apple tablet which is expected to arrive in a small form factor with constant connectivity. It will also feature access to over 100,000 low-cost/no-cost iPhone OS apps. 

Acer will continue to devour competitors in the PC market with low-cost, low-margin netbooks and laptops leaving a gaping hole for an Apple-designed tablet with unique functionality to fill the middle ground between the limits of a netbook and Apple's higher priced laptop line. 

The Case For VZ

Verizon, via of its Verizon Wireless joint venture with Vodafone Group, is the nation's number one provider of cellular services when measured by subscribers. 

Trading at a p/e (ttm) of 16.22 at Friday's closing price of $31.63, the company is paying an annualized dividend of $1.90 or 5.90% cash yield on the share price. Valued at a slight premium based on p/e and dividend yield than its rival AT&T, both companies are components of the Dow Jones Industrial Average. Both telecoms are experiencing rapid change in their markets as US consumers unplug traditional landlines in favor of wireless communications.

Verizon may have committed one of the big technology blunders of the decade when it passed on the Apple iPhone. Either Verizon didn't see the potential for the iPhone or didn't like Apple's original revenue formula for the device. AT&T has been growing its wireless customer base and the much-desired data plan customer base in part at Verizon's expense due to AT&T's exclusive arrangement on the iPhone.

The good news for Verizon is the iPhone blunder can be put in the company's past through a deal with Apple for the highly popular iPhone when AT&T's exclusive on the device expires sometime in 2010. It's in Verizon's best interest to pursue a deal with Apple for the iPhone, the much-rumored Apple tablet device or both products in 2010.

Verizon's need for the iPhone to more effectively compete with AT&T and stop the defections of current and potential data plan customers makes a deal with Apple not only preferable, but a near necessity for the next year. 

For AT&T there's no escaping the public's perception Verizon offers a superior quality service to customers. AT&T is racing to add and expand infrastructure as quickly as possible to meet the growing needs of iPhone users and address what are believed to be glaring service issues.

In my opinion Apple will not end 2010 without a deal with Verizon for the iPhone and perhaps the forthcoming Apple tablet device. I see a likelihood of a deal by summer. For AT&T the end of exclusivity may not be welcome news, but the company can leverage its existing relationships with iPhone customers through enhancements to the services provided and use what the company has learned about Apple's customers to continue to grow its wireless business.

For investors with low risk thresholds or investors looking for a balanced return (dividend yield and share price appreciation potential) both Verizon and AT&T may be attractive plays. Both offer an opportunity to profit from Apple's iPhone success without the risk of a high beta investment in Apple. In my opinion AT&T will continue to benefit from its relationship with Apple whether the iPhone is exclusive or non-exclusive and Verizon may represent a future iPhone play that can be acquired now. 

The iPhone Unit Sales Forecast Conundrum

Forecasting iPhone units sales for Apple's 1st fiscal quarter is quite a challenge. Coming off a sensational September quarter performance, there are no historical data points that can be relied on to develop an earnest estimate for the December quarter.

I expect an expansion of global channel inventory from about 2 million units to about 3 million units as many more global points of purchase become available and product is provided to meet the demand of consumers. I also expect the chronically constrained supply that had hampered sales to have been resolved in October. 

Still, the pace of consumer sales and activations from the September quarter should have carried into this quarter even before holiday seasons sales become a factor.

For these reasons I'm currently estimating 8 million iPhone units sold in the December quarter, subject to revision as anecdotal information and sporadic published reports provide evidence to the pace of sales between now and the end of the year. 

FQ1 Mac Unit Estimate Revisited

I'm holding firm on my estimate of three million Mac units shipped in the December quarter (Apple's 1st fiscal quarter 2010). This estimate suggests a sequentially flat quarter for Mac unit shipments and a year-over-year gain in unit sales of almost twenty percent. My estimate is based on continuing strong demand for the MacBook Pro line beyond the September quarter and high demand for the recently refreshed iMac line of desktop computers

It was an unusual step for Apple to refresh the iMac at the beginning of the December quarter, departing from a past practice of updating the iMac line in January, in concert with the annual IDG Macworld Expo. Refreshing the line in time for Christmas will capture seasonal sales as well as sales normally postponed into January in anticipation of a product refresh. The December quarter refresh also allows Apple to fill out channel inventory to between four and five weeks of supply provided the company can keep pace with product demand for the iMac.

While air freight costs of moving iMacs quickly from manufacture to distribution is anticipated to pinch margins just a bit in the quarter, ASPs should remain attractive on the three million units to be sold. 

The Demise of Dell

I've been heralding the demise of Dell Inc. for a number of years now.  The company that began the vicious PC price war in the mid-90's is succumbing to its own failed strategy. 

Dell's quarterly results released today confirmed the company is on the fast track to oblivion, unable to maintain price and margin control and having destroyed whatever remained of the company's brand value.

Over the past several years Dell Inc. has spent almost as much money buying back shares (almost $28 billion) as the company is now worth (about $30 billion) in a desperate effort to increase earnings per share that could not be achieved organically from operations. The company is a shell of its former self.

Dell's slide is so pronounced it has now been replaced as the world's #2 PC maker by Acer which has experienced explosive sales growth in part at Dell's expense. Once an industry titan through production efficiencies and a sell-direct model, Dell now languishes due to a lack of innovation and a consequential lack of unique, distinguishing products. 

Dell's management is counting on a rebound in enterprise spending to shore up the company's moribund revenue and profit performance. The company may plug along selling technology products and services but it's now outclassed by major rivals such as HP and Apple that have chosen to invest in developing innovative products as a means to improve performance, maintain higher margins and enhance the perception of brand value to customers. 

Dell's shares traded down over six percent after hours following the release of the company's most recent quarterly results that reflected a fifteen percent drop in revenue and a more than fifty percent drop in earnings. 

The Droid (Part II)

I see the Droid as a competent product suffering from a disastrous marketing and advertising effort on the part of Verizon. More important than competing with the iPhone, Verizon needs to move existing customers from conventional cell plans to revenue rich voice and data plans. That's been lost in Verizon's marketing attack. Comparing the Droid to the iPhone is a loser. Positioning the product for existing customers as a step up from their current experience would have been a much more effective marketing plan.

The Droid is not an iPhone competitor (at least not yet). Both AT&T and Verizon are suffering from an accelerated loss in revenue from traditional landline customers as consumers move to handheld wireless solutions. Positioning the Droid as an attractive option for Verizon's tens of millions of wired and wireless customers would be far more effective than for the company to be seen smarting over AT&T's iPhone success.

iPhone unit sales growth continues unbated. The Droid needs to be positioned not so much as an iPhone competitor, but as an attractive solution based on its own merits for consumers interested in migrating from a conventional cell phone handset to a smartphone solution. Verizon has a rich field to mine with its existing customers and far more to gain by selling the benefits of the Droid to existing customers independent of the iPhone's success.

The Droid

Accompanied by an expensive ad campaign, the Droid has hit the market. It's a step up in the continuing market migration to smartphones and products available for consumer purchase. But it's not an "iPhone killer" and any effort to position it that way will lead to disappointment and may actually be a disservice to the product and works against its consumer adoption.

In my view Verizon is miffed. The company's primary competitor, AT&T, is taking market share via of the iPhone. The problem Verizon has created for itself is positioning the Droid in its ads to compete directly with the iPhone. A better approach would be to release the Droid based on its merits as another smartphone option for consumers.

Verizon does not have a lock on the Android smartphone market and will be competing with other smartphone service providers offering similar fare. The loser in the market isn't Apple and the iPhone, it's first Microsoft and the Windows Mobile platform and to a lesser extent RIM and the BlackBerry line of products. Apple is gaining ground on RIM and Windows Mobile is losing share by the minute.

Android 2.0 offers a compelling list of features. For consumers choosing to remain tethered to Verizon as a primary determiner in choosing a new smartphone, the Droid with Android 2.0 may be an attractive choice. But I don't think it will materially slow defections from Verizon to AT&T this quarter by consumers interested in the iPhone.

I think Verizon has made a huge marketing mistake in choosing to position the Droid in direct competition to the iPhone. It would be more effective in my view to position the Droid for everything it is, not what it isn't. The direct comparison has done little more than alert consumers the iPhone isn't coming to Verizon anytime soon. The ad campaign is as apt to sell more iPhones for AT&T as it is to sell Droids to existing Verizon customers.

Android 2.0 will be available on a number of handsets offered by multiple service providers. Price competition is inevitable. Verizon at this point is doing nothing to position the Droid effectively in what will be a highly competitive environment between carriers offering similarly featured phones. There's less wrong with all of the coming Android-based phones than there is in the way Verizon is positioning the Droid.

AAPL In The DJIA: It's Inevitable

Apple's rising market cap and impressive continuing growth in revenue and earnings places the company in the thin air space among global enterprises. No matter the past few days of a falling share price (a pull back from the accelerated gains following the quarterly earnings report), the company is among the most highly valued companies when ranked by market cap and outranks all but a few of the current DJIA components.

It's not an issue of "if" Apple will be added as a component to the most closely watched stock market performance gauge in the world. It's a matter of "when" Apple will be added to the index of 30 select stocks. The only question is which current component it will replace.

AAPL 12-Month Price Target: $300 Per Share

I’ve mentioned several times in the Apple Finance Board my 12-month AAPL price target of $300 per share. In addition to the unit sales projections for Apple’s first fiscal quarter I’ve previously posted here at Eventide, I expect the Apple retail stores to report an impressive improvement over last year in both retail store traffic and sales per square foot during this holiday quarter.

At $200 per share (or less) I see AAPL as a bargain. The release of the new iMac, the popularity of Apple’s laptop line and the continuing global rollout of the iPhone 3GS suggest record GAAP sales and earnings for the quarter and a further buildup of the deferred revenue balances that will be extinguished by the end of the fiscal year through recognition of almost all iPhone revenue at time of sale and a restatement of prior fiscal periods to substantially eliminate the impact of deferred revenue accounting.

FQ1 '10 Early AAPL Unit Sales Estimates

My early FQ1 '10 Apple unit sales estimates include: Three million Macs, twenty million iPods (including the popular iPod touch) and over 6 million iPhone units. Although iPhones have been flooding into mainland China through Hong Kong and other gray market sources, the opening of the mainland through an authorized carrier will materially increase unit shipments for the quarter.

The newly refreshed iMac will be high demand and Apple may be challenged keeping the global channel stocked with adequate inventory. Apple's decision to refresh the iMac in October will positively impact unit sales in the December quarter due to elimination of concerns for a post-holiday January refresh of the company's desktop computer line. The annual anticipation of a January iMac refresh had skewed consumer buying patterns in years past.

The December quarter is traditionally the "iPod quarter" and although the product line may see a year-over-year unit sales decline as that product segment reaches a mature market phase, iPod touch sales will positively impact ASPs and extend the global penetration of iPhone OS-based devices.

I tend to ignore Apple's revenue and earning guidance. I view management guidance as Apple's estimates of virtually guaranteed results based on internal projections. But the conference call information that accompanies the guidance yields important information. Apple is anticipating a sequential drop in gross margins due to higher build costs on new products (the iMac) as well as in increase in transportation costs (specifically air freight expenses) in moving product from manufacturing to points of sale or in the case of Apple's Internet sales avenue from manufacturing to customer delivery. Again, I suspect much of the increase in shipping costs relates directly to the new iMac which will remain in high demand throughout the Christmas shopping season.

The consensus estimate for the quarter is currently $11.91 billion in GAAP revenue and $2.04 in GAAP earnings per share. I expect Apple to handily beat the current consensus estimates and expect the analyst estimates that comprise the consensus to rise on average during and immediately following the close of the December quarter.

The Case For T

I'm bullish on AT&T. It's one of the few mega caps that offers both a handsome dividend payment - currently over 6% at today's closing price - and the prospect of impressive equity value appreciation. Forget the relatively flat growth currently being experienced by this industrial giant. It's shedding wired customers at an astounding rate as households unplug their wired phone services in favor of cell phones as their primary voice communication device.

In the September quarter the company activated 3.2 million iPhones while adding 6.7 new wireless customers in the past year. Wireless services accounted for 44% of the September quarter's revenue. AT&T is quickly transitioning itself from dependence on wired revenue sources while it invests heavily in its wireless infrastructure for both voice and data services.

Depressing near-term earnings are the big subsidies being paid to Apple on subsidized iPhone purchases. But that investment has already provided some attractive results - the churn rate on post-paid cellular service accounts dropped to 1.17% in the September quarter.

While this isn't a stock that would excite anyone to watch its daily trading gyrations, for the long-term this company is positioning itself to deliver consistent results and continues to pay an attractive dividend. There's a total return value in AT&T that shouldn't be overlooked.

The Apple Success Continuum

Many of us live in a world of numbers, financial forecasts and results. Apple's quarterly results released this week are simply staggering from a financial perspective. There's a common thread weaved in each quarter of Apple's continuing success. The company's success is dependent far more on the company's relationship with its growing universe of product users than it is on the performance of any individual product or product model in the company's portfolio. There's an important lesson to be learned here: Each new product release is simply a "snapshot" in time of a product development continuum and is little more than an aside in an ongoing "conversation" between the company and its product users.

This week Apple reported September quarter results. The company's quarterly performance included the sales of 3.05 million Mac units and 7.4 million iPhones. The iPod, which just a few years ago was the revenue engine for the resurgent computer and electronic device maker, saw a year-over-year drop in unit sales to 10.2 million units.

For years the Mac was the mainstay of Apple's revenue and earnings performance. The return of Steve Jobs in 1997 and the release of the Bondi blue iMac in 1998 began new chapters in Apple's history. With the development of OS X, brilliant engineering of Mac hardware and a focus on customer satisfaction, Apple entered a renaissance era. Lucrative Mac margins financed the development of the iPod and its eco-system. The iPod returned the favor during the first several months of the awkward Intel transition and now the Mac and the iPhone are providing the financial fuel for the next major Apple product release, expected in early 2010 and the build out of the data delivery infrastructure needed to support the company's expanding portfolio of products and services.

While most analysts and AAPL watchers are fixated on quarterly unit sales numbers, the intricacies of deferred revenue accounting, gross margins and the prospects for iPhone sales in China and other new territories, there's a story here that being overlooked.

Apple's consumer products score impressively high marks in customer satisfaction surveys and the Apple retail stores serve not only as points of product purchases but also as locations for continuing Apple's "conversation" with the company's customers.

The focus on the customer satisfaction and a development of an on-going rapport between Apple and its customers is what drives sales. The purchase of a Mac or an iPhone by a consumer isn't the end of a transaction, it's the beginning of a new relationship that transcends the products being purchased.

It's why, for example, the Palm Pre can't compete with the iPhone and why AT&T is willing to pay high subsidies and invest billions of dollars in technology upgrades to support its Apple customer base.

It's why Microsoft will announce all kinds or superlative upgrade numbers about Windows 7 soon after launch but may resort to double-speak when journalists look under the proverbial hood and ask the hard questions about actual upgrade activations and the depth of the Windows 7 eco-system as the market continues its migration to handheld computing devices and decidedly away from Windows-based desktop systems costing $500 or more.

Apple's focus on customer satisfaction and the company's preoccupation with design excellence paves the way for new opportunities and new product releases. Apple isn't about the sale of an iMac or an iPhone. It's about enhancing the company's rapport with its product users. That relationship and continuing "conversation" between the company and its product users is what creates the Apple success continuum. The 90-day fiscal report cards are little more than snapshots in time.

My iPhone 3GS Defense Force

I've been using an Apple iPhone 3GS for almost two months now. Each day this handheld device grows in importance to my daily digital life and my personal productivity. It's a big step up from the original iPhone I had been using for almost two years.

It's become such an important resource I've quickly established what I'll call "My iPhone 3GS Defense Force." It's not like I need or want an army to stand around and protect the device from nefarious miscreants desiring the device for themselves, but I do want to the 3GS iPhone to last and I want to keep it in fine working order.

My defense force consists of three key items: AppleCare for the iPhone, an iPod shuffle and my original iPhone sans AT&T's voice and data services. For those of us who purchased an iPhone under a subsidized contract from AT&T, it's easy to forget a $199 or $299 iPhone 3GS actually costs much more. AT&T happily hands over the balance due Apple for the pleasure of providing me with data services at an attractive margin.

I want the iPhone 3GS to remain in good working order at no additional cost beyond the dollars I forked over to Apple for the two-year AppleCare warranty. The AppleCare contract is tied to the start of the iPhone's purchase and synchs with my two-year AT&T contract obligation. AppleCare covers any issues with the iPhone's battery, adding to the allure of the extended warranty's purchase.

The second item in my 3GS defense force is a lowly iPod shuffle. I've enjoyed the 3GS iPhone so much I had been using it as my digital music player on my long daily commutes. I've chosen to purchase an iPod shuffle to handle my music player needs while traversing the congested highways and byways of Los Angeles County often at a slow, glacial pace due to the mass of humanity residing in this expanding megalopolis. Using an iPod shuffle as my primary digital music player saves the iPhone's battery and extends the time between needed recharges of the phone.

The third item in my iPhone 3GS defense force is my original Apple iPhone. Even without AT&T's voice and data services it connects to my home WiFi network and is now used the same way people might use an Apple iPod touch - for music, Web surfing and spending small bits of time occupying oneself at home with fun and amusing games available from the iTunes App Store. It's also a handy device for checking weekend sports scores while watching my favorite teams on TV.

The only nemesis for my 3Gs iPhone that remains is me. I need to find some good exercises that assist me keeping a firm grip on this handy digital device. My original iPhone evidences the outcome of my sometimes slippery grip.

Snow Leopard On The Prowl

It's an interesting thing about Snow Leopards. They're rarely seen but their territorial markings are more frequently found. Apple's recent Mac OS X commercial upgrade named after the elusive cat exhibits some of the same traits. For $29 (or $49 for the Family Pack) Mac OS X, 10.6 makes its presence known but often in subtle and non-conspicuous ways.

I've finished my five Family Pack upgrades (yes, we have five Intel Macs in the house) and each Mac, no matter the model or vintage, exhibits snappier performance running Apple's latest Mac OS. Screen images are more crisp and on my primary Mac (a Core 2 Duo iMac), Snow Leopard has enhanced what was already an elegant user experience.

Mac OS X, 10.6 eliminated my most frustrating computing issue: Time Machine's slow performance. Now backups are completed much more quickly and without a noticeable drag on the Mac's performance while Time Machine goes about its work.

In developing Snow Leopard Apple rewrote much of the OS in 64-bit code. That of course means I had to boot my iMac in 64-bit mode just because I can. I wasn't expecting to see a huge performance boost but I'd say there is a pickup in performance in the routine tasks I regularly perform. But that's beside the point. By positioning Mac OS X as a true 64-bit OS, Apple is positioning the product for the next several years of development.

The low-price and noticeable performance gains makes Snow Leopard an attractive purchase for Mac users running Intel-based machines. I recommend the upgrade and I'm confident Apple's refinements in Mac OS X today are setting the stage for more conspicuous enhancements tomorrow.

The iPhone and Google Voice app

In reading Apple's response to the FCC's questions concerning the apparent denial of the Google Voice app for the iPhone, one thing is clear. The Google Voice app (in its current or modified form) will eventually be approved by Apple for use on the iPhone.

Why: It would be a competitive misstep to deny iPhone users access to this service. The iPhone makes calls. But the iPhone is also conduit to sell iPhone apps. Thanks in part to the exclusive arrangement with AT&T, Apple charges an attractive fee for each iPhone sold. The fee (or price paid) by both the buyer and AT&T (via of the rich subsidy) is recognized by Apple over the two-year anticipated economic life of the phone. Beyond the issues of dollars and the intricacies of the deferred revenue accounting method used for each iPhone sold is the issue of the customer relationship or ongoing "conversation" between Apple and users of the popular device.

Apple provides two years of software upgrades on each iPhone sold at no charge (hence the deferred revenue of accounting as required by law). The iPhone is as much about the relationship between Apple and the iPhone owner as it is about the phone.

The iPhone is also about selling apps and building out a product eco-system. Apple keeps 30% of an apps selling price (inclusive of transaction fees and distribution costs). If one starts doing the simply math with reasonable projections for app sales growth the financial numbers become quite astounding. In the years ahead the iTunes app store will be a material contributor to Apple's revenue and earnings and provide a substantial aggregate investment by developers in the iPhone eco-system.

Google is also about the customer relationship, if even in an eerie, automated, detached and weird kind of way. Both Apple and Google are building technology empires on understanding the needs and desires of users and meeting those needs and desires in efficient and profitable ways. Apple isn't about to deny iPhone users use of Google Voice. it would eventually hamper sales of iPhone handsets and the corresponding sales of apps.

Google is a competitor of Apple in the device market via of the Android OS for smartphones. It's a principal reason Google's CEO was under heavy pressure from regulators to resign from Apple's Board of Directors. The two companies will increasingly become competitors as each expands their global portfolio of products and services.

But the competition between Google and Apple pales in comparison to the antithetical market approach of Google's biggest competitor and Apple's traditional rival - Microsoft. Google isn't about to let go of the potential for tens of millions of iPhone OS users to take advantage of its Google Voice service. The competition between Google and Microsoft to provide users with productivity solutions, search services and now communications tools will only get more intense with each passing day.

Google and Apple are inherently allied by business philosophy and market approach. Though competitors on an increasing number of fronts, both companies (in vastly different ways) are about the customer relationship, not the sale of individual products and services. They are naturally aligned and will increasingly become competitors without even trying, the natural alliance of the two enterprises and flash points of competition are inherent in the approaches each company uses to pursue growth in the global market.

Apple and Google will find a way to resolve the issues - both real and perhaps eloquently imagined by Apple - surrounding the Google Voice app for the iPhone. I suspect a resolution will be found within weeks. It's in the vested interest of both companies to make it work.

The 3GS iPhone Has Made Me A Believer (Again!)

I remember the fateful day 25 years ago when I saw in person the wonders of the Mac. It changed the way I viewed personal computers. Back In 1984 everything about the Mac screamed for the user to come closer to the device and put it through its paces. Roughly 13 years later the Bondi blue iMac created a similar appeal.

I had been using an original iPhone and thought digital life was good. That was until a brief vacation in June when my iPhone became my primary communications device. My fellow vacationers were zipping around the Internet with 3G iPhones while I was waiting for the EDGE network to (maybe) load pages.

Last month I bit the bullet, signed a two-year contract with AT&T and plunked down $200 plus tax for a 3GS iPhone. Similar to the excitement of using a Mac for the first time, the 3GS iPhone has changed the way I see iPhones. The big step in development from the original iPhone to the 3GS is remarkable. Pages load quite quickly on the 3GS and the variety of apps written to take advantage of the iPhone's compass and GPS abilities are also noteworthy. This products makes me an Apple believer (again!).

I'll get into the iPhone's sales numbers in future posts and the importance of the app store in Apple's effort to build out the iPhone's eco-system, but this product is a clear winner that not only differentiates this Apple product form competing products in the marketplace, it may very well be the first in a series of products that will destroy the underpinnings of the PC market Apple helped to create.

Google v. Microsoft: Battle of the Behemoths

In one corner we have the global leader in operating systems and in the other the undisputed champion of Internet search. Both companies dominate their respective markets with sketchy outcomes in forays into other markets.

Google and Microsoft are companies with deep pockets for research and product development and eye each other constantly from across the economic boxing ring. The areas of potential competition between the companies makes the Apple-Microsoft rivalry look like nothing more than an entertaining carnival sideshow.

What's noteworthy about this battle of the tech titans isn't so much the two companies are natural adversaries but the points of engagement are quickly moving beyond a well-defined or contained area of conflict. As both companies come out swinging at each other, the field of battle is not only expanding, it may take on the look of trench warfare with Google and Microsoft lobbing economic grenades and mortar fire at each other from both near and distant points of skirmish.

The recent Microsoft-Yahoo! deal is aimed squarely at battling Google in its core market (search) while Google's plan to release the Chrome OS is a shot across the bow of the flagship in Microsoft's revenue armada.

Apple, for its part, is drawn into this spreading conflict as an ally or antagonist to both companies as the combat between Google and Microsoft becomes a global conflagration between the two digital superpowers. Microsoft remains one of biggest Mac developers on the planet with products such as Office while Google moves the battle of productivity solutions from shrink-wrapped boxes to the cloud. For now Apple needs cooperation from Microsoft to continue Mac versions of Office and Apple product compatibility with Exchange. At the same time Apple remains a natural ally of Google in its efforts to diminish the influence of Microsoft at every point on the planet.

The recent flaps over scrutiny of close ties between Apple and Google and Apple's decision to remove certain Google products from the iTunes app store illustrate Apple's quirky involvement on both sides of the fight.

Microsoft needs the volume of Windows sales that netbooks provide. It's needed to protect Microsoft's overwhelming leverage in the global OS market. Microsoft also needs to provide Windows OEMs with higher margins on netbooks sales to make Windows licensing fees more economically acceptable to the hardware makers. Google sees the netbook market as a prime target for the release an OS to further entrench users in the use of the company's expanding array of solutions. The Chrome OS will be an attractive OS alternative to netbook makers seeking to raise margins on their own by eliminating the Windows licensing fee.

My personal view: Advantage Google.

Moving the analogy back to the boxing ring, Google has the corporate strength and depth of resources to deploy a Rope-A-Dope strategy in battling Microsoft's swings at the search and Internet advertising markets and the body blows that will come as Google moves into the OS market.

Like a fighter rather than a boxer, Microsoft has the strength to take on all comers and land blows that would fell all but the fittest of competitors. But in defending its "command and control" OS paradigm, the company is tethered to an outdated market model, reducing its reach to many areas of the economic ring. Microsoft is big and strong, but deftness is necessarily lacking as the company seeks to protect its revenue fortress from attack by the search and Internet advertising heavyweight.

Google will jab, poke and counter with right hooks, damaging the opponent while maintaining movement around the ring. Neither competitor will land an early knockout punch and the outcome will be determined by the scorecard following each round of the bout.

Apple's best position during this bout is a ringside seat watching Google fight what might have been some of Apple's biggest battles. Any crack in the foundation of Microsoft's overwhelming OS advantage is a win for Apple and provides an opening for Apple to further fracture Microsoft's control of the PC market. While Google prepares for its ring bout with Microsoft, Apple will continue its development of the iPhone eco-system unabated no matter claims Google's Android-based solutions pose a competitive threat.

Google's Chrome OS

While some see Google's Chrome OS as a competitive overlap for Apple and Google, I see it as a product specifically designed to compete with Windows in the high-volume, low-margin netbook market. It's a potentially disruptive force in the Windows PC market aimed at fracturing Microsoft's command and control of this product tier.

One would be hard pressed to think of a more effective target than the release of a no-cost OS into a product tier in which margins per unit are practically nil and provides the specific functionality desired by consumers shopping in this tier of the PC market. People shopping for netbooks aren't planning to do graphic design or scientific analysis on the devices. They are shopping for a low-cost PC that provides Internet access and productivity suite functionality. Google provides Internet-based solutions including cloud-based productivity products.

Apple is quickly moving to expand the presence of iPhone OS products in the marketplace and Google is following what might be seen as a similar but actually different path. This is not a market in which Apple and Google will be competing for the same customers. The much-anticipated Apple tablet is not a netbook nor do I believe will it be intended to compete in the familiar laptop product tiers. Rather, I expect a product that will further the monetization of hardware, the commoditization of software and deliver iPhone OS apps to the end-user as efficiently and profitably as possible. I suspect we will see a product that serves as an always connected Internet device for the delivery of movies, music, books and information and provides a productivity space for the user larger in size than the iPhone and iPod touch.

Google and Apple are on different paths and the Chrome OS will be much more of a competitor to Microsoft's presence in the netbook market than it will present a challenge to Apple in the emerging digital device product segment Apple is desiring to create and exploit for the delivery of iTunes store products to the consumer.

Apple v. Microsoft: A Clash of Cultures

During a recent conference with analysts, Microsoft CEO Steve Ballmer referred to Apple's recent gains in market share as a rounding error. In fact, he goes on to say Apple's worldwide Macintosh market share costs Microsoft nothing. This, while acknowledging the number of Macs in use by those in attendance. Mr. Ballmer moves on to tackle Linux and what he sees as a more formidable global threat to Microsoft's control of the OS market.

I'm not creating this blog post to lambast Mr. Ballmer. He's CEO of one of the most successful technology companies in the world and by some accounts that company's most vocal cheerleader and public booster. He went on to tell those in the audience it was OK to use Macs as long as they were using Office as their productivity suite.

It's a clash of cultures between Apple and Microsoft, not a battle for control of the OS market. Apple doesn't seek control of the OS market, Apple, to the point of obsession, seeks to control the quality of the company's products from development to design to the end user experience.

What Microsoft can't control is the quality of the hardware sold with its OS nor can the company control the consumer desire for ever-lower PC prices. To maintain control, the company must address all price points in the PC industry. In Mr. Ballmer's discussion with analysts, he suggests Linux, lacking a fixed design point, is chaotic and doesn't deliver a value proposition when desiring to build an eco-system to support it as a product.

Both Apple and Microsoft are fixated on control but come at those efforts from vastly different vantage points and practices. It's a clash of cultures.

In the Mac camp are many people with long memories. They remember Microsoft ripping off Apple's designs even the "look and feel" of the Mac for Windows. Microsoft proved in court the company did this legally, based on clauses in the contracts between the two companies. Microsoft has always been one of the largest Mac developers on the planet. It wasn't that Windows was as good as the Mac, but it was "good enough" to satisfy the taste of most consumers and Microsoft's zeal for control of the OS market.

In the Windows camp are people who have a vehement distaste for the Mac. It's seen as a disruptive force and one for which the Intel transition has taken away most of the arguments. Macs no longer run on some kind of obscure chip architecture, but share the same innards as many Windows PCs. The iPod and now the iPhone are products those in the Windows camp don't see as a threat to Windows OS hegemony and they have provided an opportunity for detente. Windows zealots now only had to hate half of Apple and could safely admit some of the products from the folks in Cupertino are pretty darned cool. The fact is, iTunes has made Apple one of the largest Windows developers on the planet based on installs even if the software is provided free.

Back in the Mac camp, enthusiasts determined it's OK for Apple to play nice with Microsoft because to make Apple products available in the enterprise market the company has to deal with Exchange and other dreaded elements of the Microsoft OS command and control structure. Besides, Apple won the digital music player market by such a margin the resentment over Microsoft's success in the past could at least be partially put to rest. Similar to the way Red Sox fans responded after an 86-year drought as World Series Champions.

Where does it all go from here?

I remember the release of Windows 95. From an end-user standpoint it didn't go nearly as well as history might remember. It created a boon for the Microsoft eco-system: OEMs, peripheral makers, upgrade component makers and developers. I suspect Windows 7 will create its own set of issues but nothing that will threaten Microsoft's control of the OS market in the maturing and declining PC market. It may, however, create more of a blip on the sales radar screen for Macs that might just be more than a "rounding error" for the folks in Redmond. By comparison Snow Leopard will be received without nearly the same issues and will be a competitive contrast for the Mac in the inevitable comparisons between the two products.

For Apple, the company chose to finally build out an eco-system first with accessory makers for the iPod and now with developers for the iPhone and iPod touch. It's a page from Microsoft's path to success.

Microsoft will keep its monopoly standing in the OS market to satisfy the needs of the company's eco-system. Apple will continue to gain high-end market share to satisfy the needs of it shareholders. The iPhone will continue its global assault and roll-over what remains of the Windows Mobile market.

The clash of cultures will reignite when Microsoft makes a run at the iPhone with a revamped Windows Mobile solution and the coming Mac tablet hits at the PC laptop market with a resounding blast, threatening the volume numbers Microsoft needs to support its OEMs and developers.

Add the Google folks to the fun with a Chrome OS for netbooks, an OS for smartphones and we can all take sides in the coming clash of cultures played out on new battlefields with strange alliances the likes of which we have never seen before.

Windows 7: So What?

Get ready for the endless hype. Windows 7 is being readied for release. No matter the release of the latest iteration of the Windows franchise presents Apple with an excellent Mac sales opportunity (the hype of Windows 7 won't match the reality), Windows 7 may represent the last major release of a failing product paradigm.

Many of us began our computing life with MS-DOS. The company first lost my interest with the release of Windows. It was no match for the Mac. Windows 95 was exploited by PC OEMS, peripheral makers and developers to drive sales of both hardware and software products. Its release coalesced an odd alliance throughout the industry to make Win 95 a success. The same conditions have not been seen since and may not be seen again.

Personally, I liked Windows NT. It was the most intuitive Windows product I had ever seen. Somehow its successors only succeeded in junking up the works. XP, for all of its issues, has remained in service for eight long years. Vista was a debacle and Windows 7 is being billed as Windows "done right." Even if it is, the PC market itself has passed the point of no return on Windows.

With handheld devices such as the iPhone and iPod touch taking Web share from PCs and netbooks as the only growing segment of the Windows PC industry at this time, there's little room for another version of the Windows OS that isn't developed with the small device market in mind. Google now sees an opportunity for a netbook OS in Windows 7's wake.

The overriding challenge faced by Microsoft with Windows 7 is a challenge of the company's own making. The Windows hardware market has been commoditized in favor of Microsoft and its rich margins on operating systems and the Office productivity suite. As hardware costs have been driven ever lower, the cost of a Windows 7 upgrade is a high percentage of the cost of a new cheap box or netbook. Upgrade sales will not power revenue. The hassles involved in upgrading a box or laptop from XP to Windows 7 also works against a robust OS upgrade market.

Hardware margins for OEMs are razor-thin. Without pricing control in the hardware market, it will be challenging at best for Microsoft to command rich margins for the more powerful versions of Windows 7 from OEMs. In short, unless hardware prices rise, there's little room for Microsoft to sell its higher-priced versions of the new OS.

Expect an effort to push PC prices higher with the release of Windows 7. OEMs will be hawking the virtues of new PCs equipped with Microsoft's latest Windows release and will be looking for ways to increase prices to raise margins. However, competition remains high and Windows PC makers are already challenged differentiating brands in a market that shares one operating system between the makers.

To make Windows 7 more than a modest success Microsoft has to carry the baggage of commodity-priced PCs on its shoulders. It may be the modern-day version of the mythical Sisyphus who was destined to push a rock up a hill only to have it roll down again as he neared the apex. Reworking the orientation of consumers in the Windows PC market from a focus on price to a focus on Windows 7 as a value proposition to justify higher PC prices won't come cheap and won't be easy.

Meanwhile consumers continue the migration from desktops and even laptops to handheld computing devices unabated. We'll see lots of hype. But Windows 7 looks more and more like the answer to yesterday's Windows problems, not the solution that will drive consumers into the personal computing world of tomorrow.