25 January 2013

Rotten to the Core

(This was originally posted on Dr. Keynes, since it's mostly macro oriented. But, the mainstream punditry has seen the light, and dealing with the substance in similar terms. So, I guess it's appropriate subject matter for Dr. Codd.)

The entirety of the pundit class, both mainstream and fringe, have been weighing in on the meaning of Apple's disappointing quarterly yesterday. This is old news, from the perspective of this endeavor: I've been asserting for some time that Jobs/Apple has been pursuing a suicidal path. Where once there was a somewhat iconoclastic computer company, is now a garden variety up-scale appliance maker. The ElectroLux or Jenn-Air of the 21st century. Just because there's a cpu running the widget, doesn't make it a computer. Your Ford has as much compute power.

Up-scale anything is a low volume, low growth proposition; always has been and always will be. Ferrari sells about 6,500 units a year. And no growth. Apple's problem is that the middle class is being hollowed out. Obama's call for progressivism is also the clarion call to save Apple. Not that Jobs did or Cook does, understand this. Certainly not the proto-Jobs day trading plungers who don't have a clue. Apple has transformed itself by invading existing market sectors with novel designs, nothing more. None of the devices that have worked (remember Newton?) were original to Apple.

Rumors continue that there is an iTV in the offing. If so, and carried out as a novel design exercise, could it work? The iPhone really sped Apple away from being a computer maker, to being an appliance maker. iTV is pure appliance, but can physical design do for iTV over other set-top boxes what the iPhone did to RIM? Not likely. Physical design provides an avenue for advantage for objects which live either in the eye or in the hand; they're pretty to look at, or they're pretty to manipulate. Set-top boxes have no appreciable use case in either vector (love mixing metaphors, how about you?). How many of you bought your stereo receiver (assuming anyone still has a stereo) because of its looks? Thought so. The long time exception in that sphere is B&O, which markets its facade not its performance; a tiny niche company and the products aren't very good. That's Apple's future.

The Apple story of significant growth, through market invasion, requires that there be markets which already exist and which can be wrapped in a novel physical design. They've clearly worn out the iPhone meme. The last few versions haven't been meaningfully differentiated either from previous versions or competitive phones. The novelty is wearing thin, if not gone completely.

Apple may have slipped into Microsoft land, playing out the game as a worthy journeyman, collecting a fat salary but not playing any meaningful minutes. The days of Kobe are in the mirror. But, and here's the macro problem, could we have reached a technological plateau? Could it be that the innovators don't have a clue what more to do with cpus? With a concentrating upper class, a shrinking middle class, and an exploding lower class, what's a high-end digitizer to do? With smaller feature sizes still occurring (although that may soon end, too), thus greater compute power available, into what new device, smartly designed for the well heeled, should all this power be packaged? Consider that the basic inventions at play here all came to be in the first half (and for some quite early) of the 20th century. The smartphone makers and the carriers are cut from the same cloth as Wintel before them: in both cases the relationship is symbiosis, with each side supplying the needed demand for the other. In the case of Wintel, MS let "the hardware fix performance" while Intel needed Windoze bloat to justify the tick or tock (although tick-tock jargon happened later). Now, carriers need bloated data streams to claim higher fees, while smartphone vendors need bigger data pipes in order to support non-telephone functions.

The entire industry has to figure that out. The "emerging markets" are valuable only so long as the First World countries control the exchange rate regime. But, there's a problem with that, too. In the past, even the recent past, the regime was essentially mercantilist: the First World kept third world currencies undervalued, so that raw materials (and more recently, finished goods) could be imported cheaply. The third world, to First World capitalists, was never intended to be a consumer market. Now, having siphoned off a considerable amount of purchasing power from the First World middle class (by shipping employment to those cheaper currencies), looking to a third world middle class presents a problem: either third world wages/currencies (for First World menial tasks) have to rise enough to replace what's been lost from the First World, or the wheel stops spinning. It can't be both ways: cheap wages/currencies in the third world and middle class in the third world.

Yes, there are reports that Apple does do a decent iPhone business in China. But the value of the renminbi exists at the whim of Beijing.

Here is what largely happened in the West post WWII: unions and corporations conspired to create a blue-collar (low skill) middle class, which had sufficient incomes to absorb the burgeoning output of industrialization. This was a symbiotic relationship; capital needed consumers, but the rest of the world was either wild (most of South America and Africa) or devastated from the war, so domestic consumption of output required domestic incomes to buy. Having Bretton-Woods control of exchange rates, and thus raw materials from the third world (petroleum in particular), played a large part in that. Cheap energy makes for a higher use of energy, what is commonly called "standard of living". This was a period of leveling of income distribution, which powered economic growth. It ended when the Arabs got sick and tired of Israel, and took control of petroleum in retaliation. We still don't know how that will end, although there have been reports that horizontal drilling will yield mammoth amounts of, to date, unrecoverable deposits in North America. We'll see.

No comments: