Quick Thoughts: Is Apple’s Head in the Clouds? It Probably Should Be.

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–          The center of gravity for the smartphone user experience is shifting from the device into the cloud, integrating platforms across multiple devices and tapping the resources of web-based data centers.

–          Maps are a critical element of this, with user location central to many emerging applications and with computational complexity and data requirements far, far beyond the limits of the device itself.

–          Needing user feedback to debug its maps, Apple had little choice but to launch and faces months before its database is adequate, and is unlikely to catch up to Google in quality and functionality.

–          Sales of the exceptional iPhone5 should easily outstrip its predecessor, but the aura of invincibility is gone.  Apple may need to broaden its line, shorten its product cycles and accelerate cloud investment to remain ahead of its smartphone competition.

 

By now, everyone knows about Apple’s map problem.  Ultimately, the company had little choice – maps are central to Google’s own ambitions in the portable device market, and if Apple expected to continue to use them in its iOS platform, it would have to give its rival a lot more control of the application and a lot more opportunity to generate revenues for itself.  Given that the circumstances were only going to get worse with time, Tim Cook decided to rip the band-aid off now.

Waiting wouldn’t have helped.  Google’s maps data base has more than 20 petabytes of information – equivalent to 21 million gigabytes, or the total storage capacity of 330,000 64Gb iPhone 5s.  While, Apple has collected a much smaller information set from its new mapping partners, it is, nonetheless, far too big to rely on human debugging in a lab and far too messy to use algorithmic methods.  The only way to fix it is to send millions of users with millions of iPhones out into the wild to help debuggers find problems and to help algorithms understand anomalies.  Think of the next 6-12 months as a giant Alpha test – Apple will learn, millions of bugs will be corrected, and the service will get better.  Still, the enormity of the task suggests that the near term expectation should be adequacy rather than excellence.

Indeed, Google has spent many billions of dollars building its maps prowess over the past 8 years, investing in a fleet of specially equipped cars to drive every mile of every road taking pictures and collecting data.  It has also been collecting data from the many millions of Google Maps equipped smartphones and tablets, including iPhones and iPads, automatically flagging trouble spots where users diverge from recommended directions.  Google employs a small army of dedicated map analysts to resolve anomalies on an ongoing basis.  Over the years, it has added public transit maps, walking maps, indoor maps, and hiking maps to its database, which now covers the vast majority of the world’s land mass.  Moreover, the Google Maps application runs on the biggest, fastest and cheapest distributed data processing system on earth, comprising millions of servers spread over 35 data center locations and hundreds of caching locations worldwide, employing proprietary, state of the art hardware and software designs that are years ahead of the next best cloud operators.  In increasing competition with Amazon and Facebook, Google has spent more than a decade chasing and hiring the best data processing talent in the business, aided by the luster of its widely acknowledged best-in-class design and performance.

In comparison, Apple is a neophyte.  Not just in maps, where it is now obvious that a handful of startup acquisitions and a partnership with Tom Tom does not buy you an acceptable alternative, but across the spectrum of cloud-based applications.  In its core DNA, Apple is a device company.  The first iPhone was intended to be tethered to a Mac for synchs, downloads and upgrades, like the iPods that had come before it.  Over-the-air data transfers came later, after Android devices had blazed the trail.  iTunes still operates as on the file download model only, years after Rhapsody, Spotify, Pandora, and others showed the value of streaming music.  iCloud, launched to great fanfare at the June 2011 WWDC has been a quiet disappointment, reminding us that confusing, slow and expensive are unappealing adjectives applied to a consumer technology service.  Behind Apple’s cloud initiatives are just two major data centers, with one more under construction, and a reliance on commercial CDNs to cache content and accelerate responsiveness to customers.

Of course, Apple has advantages of its own.  The iPhone5 is a stunning piece of engineering and design.  Extraordinarily thin and light, yet possessing solidness and precision of a luxury automobile, it delivered surprise and delight even though its technical specs had been widely leaked well before the announcement.  iOS still offers the most intuitive and well integrated user experience amongst smartphones, running on a internally designed bespoke processor that offers leading edge performance.  The Apple user base is large, well-heeled and loyal, supported by world-class distribution and an innovative and widely envied retail operation.  The Apple brand is considered the world’s most valuable, unequivocally standing for innovation, quality and cool.  All of this allows Apple to demand the world’s largest subsidies from wireless operators and to command the highest retail prices in the industry.  In contrast, Android is famously fragmented with incompatibilities across licensees that give app developers fits and make software updates a nightmare.  While the technical prowess of Apple’s hardware competitors seems to narrow the gap with each product cycle, the majority of reviewers see the iPhone5 still setting a new bar for its rivals.  Of course, Apple’s single model strategy and year-long design cycles may maximize profitability, but they also leave the door open for rivals with handfuls of models and 4-6 month product introduction cycles to leapfrog iPhone product iterations as it gets further and further from launch.  The weak iPhone sales in the June quarter were a testament to this, and perhaps, a spur to Apple to pick up the pace or expand the line.

The iPad is further ahead of its competition, in a product category that is even faster growing – a position that may be enhanced by the expected announcement of an 8” iPad Mini in coming weeks.  With the iPhone5 shattering its predecessor’s sales records, and with domination of the red hot tablet market, it seems a good bet that the Holidays will be happy indeed in Cupertino this year.    But then again, you knew all of that.

Longer term, more and more of the user experience will involve coordinating web-based resources across multiple devices.  The magic that will allow users to seamlessly transition their activity from smartphone to tablet to living room television derives from data processing infrastructure that stores all of your information and keeps track of what you are doing, perhaps melding a single application simultaneously across multiple screens.  In this, huge opportunities await – advertising, e-tail, streaming media, transactions and consumer services could add trillions to the addressable market, all enabled by the cloud.  Apple’s decision to drop Google Maps and get on with it appears to be steeped in that reality.  The skills and infrastructure needed for maps will be a start on investment needed to chase myriad other opportunities – that iTV rumor that won’t die can’t live without an appropriate infrastructure to manage massive volumes of streaming video.  Those 450 million credit card numbers on file with iTunes?  World class distributed data processing capabilities would be more than helpful in making use of those.  Siri hints at an avenue to cutting out Google search, but as long as Apple must choose Google or Microsoft as the underlying engine value will leach out of the iOS ecosystem toward one or the other of Apple’s two most hated rivals.

The upshot?  Apple knows that its lack of cloud prowess will hurt it a few years down the line, particularly given Google and Microsoft’s leadership.  In that context, kicking out Google Maps is not only sensible, but vital, and we can expect Apple to be aggressive in future products to co-opt other cloud driven opportunities for itself as it invests to build its internal capabilities.  Rumor has it that Apple is developing a Pandora-like streaming music service of its own.  The Passport functionality included in iOS6 suggests future integration with an Apple-driven payments capability.  iCloud can, and will, be rehabilitated.  Apple will, eventually, launch a streaming TV product and fulfill the Analyst’s prophesy.  Someday, it will probably launch its own search engine and rid iOS of the Google taint forever. All of these would be potentially lucrative ways for Apple to further monetize its extraordinary market position.  This direction would also likely require a substantial jump in capital spending, and could prompt an acquisition or two.  Just don’t expect any of it to work perfectly right out of the box.

For our full research notes, please visit our published research site.

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