A Crucial Call

Tomorrow's Apple earnings call is likely to be the most important of the tech earnings season. Apple shares have been battered due to the ongoing worries about the health of Jobs as well as fears about the extent of the impact of the economic downturn on Apple's upscale products. The guidance that Apple gave back in October was widely panned as being outrageously conservative but analysts consensus projections on revenues are now within the range given by Apple. While there is no doubt that the steep dropoff in consumer spending has hit Apple, I believe that the various data points from the quarter indicate that the analysts have become too bearish with regards to Apple's earnings.

I am using a combination of NPD and Gartner numbers for the Macs/iPod's and the Net Applications OS share data for the iPhone numbers.

Unit Numbers
2.57m Macs
20.4m iPods
iPhones Sell-in 5m
iPhones Sell-through 5.5m

Financial Numbers
Revenue $10.45 billion
GM 33%
GAAP Earnings $1.49

These numbers would likely be enough to provide a nice jump in shareprice, but guidance will be a huge factor. The odds are that Apple will provide extremely conservative guidance. There isnt much to provide a boost to shipments as MacWorld was a non-event, however I expect to see a product update on the desktop side in the next few weeks or so. Apple also needs to cut prices on the iPhone to reignite demand ahead of an expected update this summer. The timing of such an event will be a large determinant on the course of the current quarter.

Another Apps Store Milestone

This is just an incredible accomplishment. Apple has hit a half billion downloads in the space of six months. The Apps store has transformed the iPhone from a best of breed single handset to a best of breed mobile platform....with all of that means in terms of the development of a value chain and switching costs for consumers. I dont believe that even the most optimistic forecasts foresaw these kinds of numbers this quickly.

Snapdragon and Android Confirmed

I expected an announcement in six months but Qualcomm decided to deliver a nice CES surprise.

This is just a demo of Android running on the chip rather than a full scale netbook implementation but it definitely looks like they are heading in that direction. It looks like the x86/Windows combination is about to get some competition in their fastest growing market. I fully expect Apple to enter this market as well, though whether it will be based on an Intel chip or an internally developed ARM chip is an open question.

One thing is for sure, this is very good news for consumers. The one mortal lock in this is that Snapdragon/Android based devices should have a significant cost savings over x86/Windows.

Android + Snapdragon: A Perfect Match

The big gadget story of last week was the news that the guys over at VentureBeat had managed to port Android onto the Asus EEE. I believe that all signs point to the fact that this is precisely the direction that Google plans on taking Android. They have never been shy about their goal of dethroning Microsoft from the top of the tech hierarchy and netbooks provide an opportunity to do precisely that. They are exactly the type of always connected machines that can fulfil Google's visions of cloud computing. Google has also explicitly stated that they see Android eventually going far beyond its current home in smartphones and powering all sorts of new devices.

This is where Qualcomm and their ARM based Snapdragon chipset come into the story. Qualcomm has been quite public about their efforts to take on Intel's Atom chip directly in the netbook space. The problem for Qualcomm is simple, while the power consumption, size, and cost dynamics are all huge positives for Snapdragon, the fact that it will mostly be running obscure Linux variations means that consumers wont take a second look at Snapdragon enabled netbooks. The current sales numbers already show this with Windows netbooks far outselling Linux based versions.

This is why the pairing of Snapdragon and Android will work so well for both companies. Android on an Intel chip provides little in the way of positive differentiation versus the Softie/Intel combination. Similarly, Qualcomm needs an OS that is guaranteed to have a wide range of applications available and a brand that consumers will recognise. Google gets a hardware architecture that emphasizes substantially longer battery life than x86, lower cost, smaller form factors, and always on connectivity. That is exactly the recipe that is needed to give cloud computing a chance against Windows.

It also helps that these two companies have a bit of a history with Qualcomm being the first chipset manufacturer to support the handset version of Android. The T-Mobile G1 is running on a Qualcomm MSM7200a. I believe that we will see an announcement expanding this relationship into the netbook space within the next six months or so.

An interesting tidbit that might show that this effort is further along than most suspect....Net Applications has reported that a third of the visitors from Google.com had obscured the OS they were using. According to Net App, they would have had to go out of their way to make this kind of change. Perhaps an expanded version of the Android OS is being hidden?

An Apple Rumor That Makes Sense.

No, not the ever present commentary about Jobs's health, this is a new iPhone rumor that seems more plausible than the shrunken Nano's that has been bandied about. iPhone Alley is claiming that a new iPhone is being worked on that is in the form of the iPod Touch and may or may not include 3G. A cost reduced version of the current iPhone that still includes the current screen size would make sense. The key would be to reduce the cost of the data plan as well as the upfront price. If AT&T is willing to sell a $99 EDGE version of the handset that only requires a $25 a month data plan, that would significantly reduce the barriers of entry to owning the iPhone.

Doubts on the iPhone Nano

While the iPhone Nano rumors continue to swirl, I think it is worthwhile for investors and gadget freaks to go back to this quote from Steve Jobs during the October conference call about the likelihood of expanding the handset lineup.

http://seekingalpha.com/article/100980-apple-f4q08-qtr-end-9-27-08-earnings-call-transcript?page=-1&qa=true

Steven P. Jobs

Well, I wasn’t alive then but from everything I heard, Babe Ruth had only one homerun, he just kept hitting it over and over again. So I don’t think that -- I think the traditional game in the phone market has been to produce a voice phone in a hundred different varieties. But as software starts to become the differentiating technology of this product category, I think that people are going to find that a hundred variations presented to a software developer is not very enticing and most of the competitors in this phone business do not really have much experience in a software platform business. So we are extremely comfortable with our strategy, our product strategy going forward and we approach it as a software platform company, which is pretty different than most of our competitors.

This is about as straight forward a quote as you can get from Jobs. The iPhone Nano may have been a possibility prior to the gigantic popularity of the app store, but it would now represent a step backwards in Apple's quest to own the dominant platform within the smartphone space. Apple has seen first hand that applications define the winners and losers in computing and I don't see them taking the risks that fragmenting their handset lineup would entail.

Of course, this doesn't mean that Apple wont have a $99 iPhone fairly soon. A price cut in the first few months of the year shouldn't drastically impact margins and would spur sales ahead of the introduction of the iPhone 3.0. I actually believe that it would be in Apple's interest to keep producing this version of the iPhone and use it as their price driver in Christmas '09. A high-end 3.0 version of the iPhone and the current version given away for free with a contract would be a compelling combination covering the range of price points. It would suck the oxygen out of the smartphone space for the competition and deliver most of the benefits of the iPhone Nano without the drawbacks.

Nuvifone delayed

Not much of a surprise, the Nuvifone has been delayed into the first half of next year. This is going to be a real problem for Garmin as this Christmas is going to see an explosion of interest in GPS enabled functionality on handsets. The 2.1 version of the iPhone software looks set to support turn by turn directions and with Apple, you know that there will be a PR related blitz when it is introduced. While the capabilities have been available on handsets like the N95 for quite a while, the iPhone is likely to push it into the mainstream.

The complication for Garmin is that delays in handset introduction are an absolute killer. What looks like a well-spec'd handset for Christmas '08 may be an outdated dinosaur by June '09. Garmin has obviously seen the fact that stand-alone GPS units are going to become more and more of a niche as time goes on....unfortunately, the solution of attempting to compete in the mobile handset market is one that is easier said than done. Garmin is going to have a very tough road to travel in 2009.