Wednesday, October 20, 2010

Size Does Matter

Steve Jobs stirred a hornet's nest with his comments about the 7" iPad competition that has been talked about for months now.

While Steve has a valid point about user interface usability, there is an even more important point to consider.

The iPad has a 9.7" diagonal screen, and the competing products have all picked a 7" screen. The trouble with a 7" screen is that you get only 45% of the screen area, so the interface has to be redesigned to fit that form factor. This redesigning is theoretically possible for some applications, while it will be impossible for some applications.

But there is another problem with having just 45% of screen real estate - you only have 45% space behind the screen to hold all the electronics and the battery. Presumably, the electronics in the iPad and the competing tablets are similar in size - so that means the space left over to hold the battery would be severely restricted for the competing pads. This only gets worse when you include bezel, because the larger screen of the iPad allows a wider bezel - on a smaller screen, the bezel has to be a lot smaller, otherwise it would be really weird.

Let us do some guesswork here.

Lets say the electronics take up 20% of the internal space in the iPad - the same electronics would take up almost half the space of the competing tablets. So while the iPad has 80% of its larger internal space left over for batteries, the competing tablets have only HALF of their SMALLER internal space left over for batteries.

This means that the competing tablets would be a lot lighter - because they have much lower battery capacity. And means that they will have a lot lesser battery life. With the math above, it is clear that the competing pads will have only about 25% of the battery capacity of the iPad.

A smaller screen will consume lesser battery - so a 45% smaller screen 7" would likely consume 45% of the power of a 9.7" screen. This is debatable, because most of the 7" screens would still have a resolution comparable to the iPad. When it comes to the power consumption of the other electronics, Apple has a massive edge with its A4 architecture - and an OS which is designed specifically for the A4.

I think most of these competing tablets will struggle to have a battery life of 3-4 hours compared to the iPad's 10 hour battery life. If Apple wants to lower the weight of the iPad, all they need to do, is lower the battery capacity by half - they will still have 5 hours battery capacity, in a much lighter device, with over twice the screen space of their competitors! Since the battery counts for significant part of the weight of the device anyway, lowering battery capacity by half should lower the weight of the device by about 25%, thus bringing it to a much more comfortable 1-lb weight.

Also with their recent acquisition of exlusive rights to LiquidMetal technology for electronic devices, Apple could lower the weight of the iPad even more by using LiquidMetal alloy for the case - without compromising the structural rigidity and durability of the iPad.

With this kind of change, Apple can sell a iPad Lite model that is 25% lighter, same flash capacity as today, at a 20% cheaper price, and still offer same screen size! Considering that most iPad use happens at homes, a 5 hour battery life is more than sufficient.

I also foresee Apple dropping the 16GB iPads, and moving to 32GB for the base model. This would be workable for Apple because of their lower costs for Flash, due to their humongous volumes, but it would be a tough act to follow for their competition.

Monday, October 18, 2010

5 things Apple can do with its cash hoard

Apple is likely to have ended the September quarter with a cash hoard of over $50 Billion. Steve Jobs has said that he wants the money to do something "big and bold". Here is my take on what they can do with this money. I think most of these things qualify as "big and bold", and also fit in with the grand plans of Apple.

- Apple should look at buying Time Warner. This gives Apple phenomenal presence in Content - including Movies, Music, Print Publications, News, online portal, Cable distribution, Internet Service Provider, etc. Costs $35B, Apple can likely buy them out for $40B. Time Warner's market cap is languishing because of a bad digital strategy, Apple would be the perfect fit to rectify their digital strategy. Considering the close ties Apple has with Disney, this takeover of Time Warner would effectively make Apple unbeatable in the media business.

- Apple is building a massive data center in North Carolina spending about $1B. They should look at creating 4-5 such data centers in different parts of the world - specifically, India, China, Europe, South America and possibly one more data center in North America. This will allow them to become the biggest player in the cloud services space. This will not just allow to offer services to each geographic location, it will also serve as a backup for other locations. Should cost about $5B, but if, as expected, Apple uses most of its own equipment, this will increase their revenues and profits massively.

- Enter the finance business. Apple already is the largest processor of small payments in the world - and they currently pay credit card companies as high as 15% in fees (15 cents minimum transaction fees for a 99 cents transaction on several cards). They should look to create a brand new network for small transactions. They can kickstart this network by adding RFID/NFC capability to the iPhone. They can come up with a global service and also be the biggest customer for this service, via iTunes! Should cost about $2B to create, but will result in massive savings on their current transaction processing costs. In 5 years, iTunes, iBooks and AppStore revenues could easily be $10B - and this payments network will save Apple a ton of money.

- Extend Apple into domains that have huge potential, but are currently not exploited effectively. An area like Home Automation could explode if Apple focusses on this domain. Instead of just taking over the living room, Apple can take over the entire house! Current offerings in this segment are way too complicated to use - Apple has the software and hardware skills to come up with a very easy to use implementation. This could be yet another component of Apple's grand ecosystem with iTunes, iPod, iPhone, iPad, etc. I expect this to take just $1B.

- Pay a dividend - Along with all these initiatives, it will be healthy for Apple to pay a dividend.

Tuesday, August 24, 2010

5 reasons why Android has peaked

TheStreet.com has an article on 5 reasons why Android has peaked. While I agree with their conclusion, I don't really agree with the reasons. The reasons are not so much because Nokia, HP/Palm, Microsoft, RIM get their act together, but more because of Apple.

Here are the reasons why Android has peaked according to me:

- Android has thrived in an environment where iPhone is available only on 1 carrier in the US. As AT&T loses its exclusivity, and the iPhone is available on more carriers in the US, Android will have to start competing with the iPhone. That is not going to be an easy battle.

- The recent announcement that Google and Verizon came up with is likely to be legalized. I think it is clear no one expects Wireless to have the same rules as the wired internet because the structure of the two businesses is entirely different. If Net Neutrality ends on Mobile Networks, Android's biggest edge will be wiped out. Right now, literally anything goes on Android - tethering, WiFi Hotspots, Google Voice, literally anything is possible on Android. Once Net Neutrality ends however, the playing field will get levelled - the ability of a handset to access these features will purely be determined by how much the subscriber is willing to pay. And in that scenario, Apple is likely to have the edge, because Apple customers tend to be higher spenders. The only difference between iPhone and Android would be that there would be no porn, and no malicious apps on the AppStore.

- As iAd takes off, and as iOS spreads into more and more devices, developers will realize that there is a lot more money to be made in the AppStore than in the Android Marketplace. Whether it is because of piracy, or the unwillingness of Android users to pay for software, or the customer irritation from regular ads, Android's revenue potential will be a lot lower than for iPhone. To add to this, Oracle's law suit against Google and Apple's law suit against HTC will only add to the confusion around Android. To add to this confusion, ChromeOS will muddy the waters even more. ChromeOS is a clear indication Google wants to move away from native apps to web apps - while Apple provides the best Native environment, as well as a great environment for web apps.

- The hardware innovation cycle that Android is enjoying currently will be counter-productive in the long run. Handset makers have absolutely no choice but to keep releasing newer and better handsets to stand out amongst the crowd of Android handsets. However, the upgrade cycle for customers will still be the same as the iPhone - every 2 years. Because of this, soon we will see a situation where even the best handsets have lukewarm reception in the market. Plus margins will be curbed even more as handsets will have to discounted or given away. Apple's release cycle on the other hand, is designed to encourage hysteric reactions in the market place, plus Apple's margins increase over the year from the introduction of one handset till the next one. Motorola, HTC, Samsung, etc. will soon be fighting a race to the bottom and will be struggling with losses. The need to distinguish one handset from the other will also mean that handset makers will have to resort to extensive software and interface changes. This will make it difficult to upgrade phones to the next version of Android, whereas, iPhone customers will enjoy a seamless upgrade experience.

- Finally, Apple is going to seriously up the innovation pace. The A4 chip and its low power consumption already make it clear what direction Apple is going to take. Apple is also investing heavily in battery technology, materials technology, innovative manufacturing techniques, etc. Apple is also not shy about using its massive cash pile to source materials like displays, flash memory, etc. No one is anywhere near close to replicating Apple's ecosystem, but Apple is already busy extending its ecosystem to even more areas, like books, TV content, games, etc. Android managed to catch up to Apple because it got Apple's innovation for free - like mobile enhanced Webkit, Multi-Touch technology, etc. But this time around, Apple is using techniques that won't be so easy to copy.

Saturday, August 21, 2010

The complete story behind Oracle vs Google

The blogosphere has been actively dissecting Oracle's lawsuit against Google. And for the most part, Google is coming across as a champion of Open Source, whereas Oracle is being painted as the villain. In fact some websites have even compared Oracle's lawsuit against Google to be similar to SCO's lawsuit against Linux.

However, there is a very very important point that has been lost in all the confusion. While today Google looks like the hurt party and Oracle looks like the aggressor in the eyes of the Open Source Community, I think over time, as the dust settles, Oracle will turn out to be the friend of the Open Source Community.

The real issue behind this suit, and something almost no one has looked at so far, is the legal enforceablity of the GPL. The GPL - or GNU public license, is the foundation of the entire Open Source movement. This is what ensures that coders at large can contribute to a project publicly, and still be assured that no private party can take advantage of the public nature of the project by extending it in a proprietary manner. For instance, if thousands of developers spend time and energy on improving Linux, and someone adds a few extra features to Linux and sells it (without contributing those features back to the open source community), then the entire Open Source movement would be destroyed. It would be easy for someone to add a few extra features to an Open Source project, and sell it as a proprietary project - taking advantage, without making any contributions. To protect against this, the GPL insists that any derivative work that is built upon a GPL project must also be contributed back to the public domain.

The GPL is only one of the licensing mechanisms available in the Open Source community. The other popular ones are LGPL or the Limited GNU Public License, and the Apache License. Apache license is the most flexible license, allowing proprietary extensions, with no requirement to contribute these extensions back to the Open Source community. LGPL is somewhere in between the Apache license and the GPL license.

It is upto each Open Source project to decide whether to go public under the GPL, the LGPL or the Apache License. Anyone who uses an Open Source project implicitly and explicitly agrees to abide by the terms of the license governing that project.

Linux has been released under the GPL license. This is the reason why RedHat is expected to release all their work done with Linux back to the OpenSource community. And this is the reason CentOS can quickly be compiled to offer binary level compatibility with RedHat Linux, for free. RedHat effectively can only charge money for Support and Services, because the exact same copy of the software is available as CentOS.

Because of these differences between the various licenses, there are also software projects, where different versions of the projects can be used with different licenses. For instance, Java offers a Free Open Source license under the GPL, together with a license SOLD by Sun to whoever does not wish to use the GPL. This is not a deviation from the concept of Open Source - it is one of the pillars of the concept of Open Source.

When it comes to regular JAVA, Sun released it under the GPL, with something called a CLASSPATH exception. That means, All changes to the Java Virtual Machine, the Java Programming language, etc would have to be contributed back to the Open Source community, whereas external modules that execute in the virtual machine by virtue of being available on the CLASSPATH can be retained as proprietary code. For mobile Java however, this CLASSPATH exception was not mentioned, so it was released under the full GPL. The objective was not to ask private app developers to contribute their code to the Open Source community, but to ensure that any changes to vital parts of the mobile device would have to be contributed back to the Open Source community. So any changes like a different dialer, or Messaging system, etc would have to be contributed back to the Open Source community.

For whatever reasons, Google chose not to go with the GPL verion - and because they were not making any money from Android, they could also not go ahead with a paid license from Sun. Also, Sun's implementation of the Virtual Machine was not ideal for a mobile environment. So Google came up with DALVIK - a new virtual machine specifically for Android. DALVIK would effectively run Java code, in a different virtual machine, with slight modifications. These modifications meant that SWING, and other Java libraries would not be available under Android. Any Java projects that did not use SWING, and the other non-supported libraries could easily be converted to the DEX format, but all Java classes that needed functionality from SWING that was not supported in DALVIK could not be executed. This issue per se was not a big issue, because even if SWING and other modules were not included in Android by default, they could have been added on later by the user. So this per se was not a deal breaker in terms of compliance with the Java licensing options.

In addition to this, the DALVIK VM was different from the JAVA VM in other ways. Under Java, multiple copies of the VM would be run as multiple processes - whereas, under DALVIK, multiple copies of the VM could be run as multiple threads (this is a simple explanation - the actual details are more complicated than just threads vs processes). Those who are familiar with processes and threads are aware that threads are a lot more efficient compared to processes. Under a regular desktop environment, this difference in efficiency would not have been required, but under the constraints of a mobile device, this difference in efficiency would make a massive difference. Under GPL, Google would have been required to contribute this change back to Java, but because they did not go with the GPL, they had no requirement to do so. If this was the only issue, Google can even now comply with the terms of the GPL, or even get a paid license from Sun/Oracle. However, there are other issues because of which the simple options are not available any more.

DALVIK had another important change compared to the Java VM - and that was that DALVIK allowed applications to use Registers. The Java VM on the other hand could not allow usage of the registers - because for Java, the Write-Once-Run-Anywhere paradigm was paramount. Since Register architecture and availability varies significantly from one platform to the other, the Java VM abstracted Registers - so that code written on one platform could execute exactly the same in any platform. It is this feature of DALVIK that is the deal breaker - there is no way Sun would have allowed Android to break the Write-Once-Run-Anywhere paradigm.

Years ago, Microsoft got a license from Sun to create a JVM, and but they violated the terms of the license by creating the Java Native Interface - which was a mechanism for Java applications to get a performance boost by directly accessing Windows SDK underneath. However, JNI was a Windows-only implementation, and violated the Write-Once-Run-Anywhere paradigm. It is this violation that forced Sun to go after Microsoft, and which forced Microsoft to cough up a billion dollars in damages.

So there is absolutely no way Sun would allow Google/Android to compromise Java in such a manner. It is this violation that prevents Google from coming to a settlement with Oracle even today. And it is likely that it is this issue that could be the reason why Google ultimately loses this lawsuit. I think there is sufficient documentation at Google that would come out in the discovery process, which would make it abundantly clear that Google was well aware of all these issues, and still chose to do what it did, because that was the only way to get Android applications up to a level of performance where it would be viable.

Google had 2 choices - either not use Java at all, and come up with a totally new development environment, or to modify Java in a way that was not allowed under the existing Java licenses to make it a viable choice for the development environment. Google has absolutely no experience in platform creation - so the first option was not an easy one. They chose to go with the second option. This has now come back to hurt them.

The only real defence option that Google could have had, was that DALVIK was a clean room implementation, and did not use anything at all from Java. However, even this option is not really available, because there are far too many ex-Sun employees in the Android project who would definitely have had in depth knowledge of everything related to Java.

With the background now clear, there are some more things to be cleared up. Is Oracle the villain as the Open Source community paints them to be, or is Google the villain. I think the best way to understand this, is using a hypothetical analogy. Assume Red Hat violates the terms of the Linux GPL, and makes some proprietary changes to the Linux Kernel which are not contributed back to the Open Source community. Would the Open Source community be ok with this violation of the GPL? Or, lets take another example that would be even more realistic. Apple took an Open Source project called WebKit, and adopted it as the engine for Safari. Over time, Apple has contributed so much to the project that it has come to be seen almost as Apple's WebKit. 3 years back, when Mobile Safari was launched, it was dramatically different from all the other mobile browsers - what if Apple had decided back then that the changes in WebKit that made Mobile Safari possible gave Apple a tremendous headstart, and it would be advantageous to not contribute those changes back to the WebKit project. The entire OpenSource community would have cried that Apple took advantage of Open Source developers contributions without adhering to the licensing terms. Google has done something very similar with Java, and in addition, they have tremendously hurt Java as a platform.

Will Oracle be able to win this case in court? In my opinion, the answer is an emphatic yes. In fact, Google does not even have a leg to stand on, in this case. They cannot use a clean room defence, they cannot claim that DALVIK is sufficiently different from Java that the suit has no merit, they cannot claim that this was not intentional, they cannot claim that they did not know this would harm the Java platform.

If Google does lose, what are the implications. The monetary damages alone would be stunning. Back in the late 1990's, when Sun fought against Microsoft, they managed to get a billion dollar payout. However, we have to remember that Java not just survived but thrived after the Microsoft case got resolved. The situation now is completely the opposite - after the launch of Android, Java has been sidelined completely from the Mobile space. Effectively, Android was the death knell for Java. With this background, I am certain that Google will be looking at a figure way higher than what Microsoft faced. In fact, the facts of the case are so completely against Google that I would be surprised if this case even came up in court.

But despite however high the monetary damages are, it will be the non-monetary damages that would hurt Google even more. Android just cannot afford this kind of confusion at this point in its lifecycle. Already, Android is finding it difficult to compete with iOS for developer interest, because the Android user base is not ready to pay for apps and piracy is a big problem in the Android Marketplace, because it is not a curated store.

If Google does lose, it faces several nasty scenarios. They could be forced to remove DALVIK from Android and come up with a brand new development framework. Or they could be asked to pay a licensing fee for every installation of Android - which would be painful, especially considering they are giving away Android for free. Considering Windows Phone 7 is going to be launched soon, this sort of confusion is the last thing Google wanted. Microsoft could turn out to be a beneficiary of Oracle's attack on Google. Apple would also benefit because the iOS platform would look even more attractive to developers and consumers.

In more ways than one, it looks like Android is turning out to be a massive mistake for Google. Android ended up preventing Google from selling targeted ads for the iOS platform, and now this!

Tuesday, August 17, 2010

A quantum jump for India

After several articles on Apple and Google, finally, back to a subject I like - Markets and the economy.

Of late, I have heard several people question the logic behind the rally in Indian markets. Nifty is approaching 5500 levels, and Sensex is over 18000. We are not far from the peak reached in early 2008. Considering that the global economy is still weak, and considering that other markets are struggling to go higher, how justified is the rally in India?

This article looks at some significant events that have happened recently, or are likely to happen over next few months - events that will have a massive impact on India.

Everyone is aware of the bonanza that the government received from 3G auctions and BWA auctions. Over Rs 100,000 crores was raised from these auctions. That is 1 Trillion Rupees, or about $22 Billion. That is pretty massive by any standard, but for a country with a GDP of about $1.1 Trillion, 22 billion is a nice 2% of GDP. That is the kind of money that can make a solid dent in India's fiscal deficit.

One would have thought that getting such a big bonanza would have reduced the urgency for the privatisation programme - but thankfully, this has gone ahead as planned. In a masterstroke, the FM managed to get SEBI to pass guidelines for the minimum level of free float of listed companies. The 25% minimum impacts mostly government owned companies like ONGC, SAIL, NTPC, etc. The govt is able to raising money from secondary sales in several PSUs, using SEBI's guidelines as an excuse - employees, communist parties and even allies of the government can no longer protest these stake sales, because it is mandated by SEBI.

Not just this, the government has taken some major steps towards decontrol of retail petroleum prices. This should significantly reduce the subsidy burden from petroleum. On the petroleum front, the government has started seeing some money because of Oil and Gas production coming online in Rajasthan (Cairn), Andhra (Reliance), etc. This will only accelerate as production ramps up.

All of a sudden, the fiscal deficit that was at worrying levels just 6 months back, seems to be a lot more manageable. This enables the government to move ahead with reforming direct and indirect taxes.

Everyone has heard of the New Draft Tax Code, and how it radically alters the tax brackets for direct taxes. I am not sure how many people realized this - when the Draft Tax Code becomes law, 99% of Indians will be paying tax at rates that are LOWER than some of the lowest tax jurisdictions in the world - even lower than Hong Kong and Singapore! For income upto Rs 25 Lakhs, even if you claim absolutely no deductions, not even the statutory deductions, your effective tax rate works out to 14.8% - which is lower than HK's 15% rate. Once you factor in just the regular deductions (PPF, Insurance, Mortgage payments, and non-taxable allowances), you can get almost 35 Lakhs in income at an effective tax rate below 15%! Even for people earning significantly more than 35L, Indian tax rates work out much better than the rates seen in most countries (except HK, Singapore, Dubai, and the tax havens).

These low tax rates operate at several levels - at the obvious level, they put a lot more disposable income in the hands of the consumer. They reduce the incentive to avoid paying taxes, thereby bringing in most of the black economy into the white economy. Also, with lower rates, people tend to make investment decisions based on the merits of the investment itself, rather than the tax implications - this will allow efficient deployment of capital.

There is a lot happening on the indirect taxes front as well - after years of discussions, it finally looks like GST will get off the blocks by April 2011. While a lot has been written and said about GST, there are some very interesting implications of GST that people have not focussed on. Remember, back when VAT introduction was being considered, there were several reasons thrown about - like VAT is more efficient, as it prevents cascading taxes, etc? Consider a producer buys inputs for Rs 100, paying a VAT of Rs 12.5, does some value addition and sells a product for Rs 200, collecting VAT of Rs 25. The producer needs to only pay Rs 12.5 to the government - which is the difference between the money he has collected and the money he has already paid.

GST has this exact same feature VAT, with one important difference. Under VAT, only VAT paid and received were offsettable. Whereas under GST, since it is a common tax for both Goods and Services, you can offset your Goods tax collected against your Service taxes paid. In the previous example, assume the same manufacturer had telephone and internet costs of Rs 10, on which he paid Rs 1.03 as Service tax - in the old system, this Rs 1.03 was lost to the government. Under the new GST system, the GST paid on the telephone bill can also be offset! So the producer only has to give Rs 11.47 to the government. Not just manufacturers - even service providers benefit - for instance, if Infosys gets a domestic IT contract, on which it charges Service Tax - it need not give this entire money to the government. They can offset this against the VAT they paid to buy computers to execute the project.

In a country where about 50% of the GDP is in Services, moving to a GST based regime will being in massive efficiency gains. Because pretty much everyone pays some service tax - if nothing else, at least on telephone bills, this service tax will now be offsettable and recoverable against GST payable on their product sales. This might seem like a very small amount, but remember this amount goes directly to the bottom line - so a company that has 10% margins could see 11% margins - effectively increasing earnings by 10%! A 10% increase in Earnings is not small at all.

So, on the one hand, there will be more money in the hands of consumers to buy products made by manufacturers, and on the other hand, the manufacturers will make more margins on their product sales. The combination of these 2 factors, is going to have a massive impact on corporate earnings, and therefore on the stock market.

As we get closer to April 2011, and as we see more clarity on the New Tax Code and the implementation of GST, I expect to see analysts upgrading the companies they cover.

It is anybody's guess as to whether the markets have already priced in these gains - but considering that none of these Direct and Indirect tax reforms are a done deal yet, I think it is safe to assume that markets have not priced this in.

Despite all the positive buzz from these reforms, can India still perform well if global markets tank? Back in 2008, everyone who was talking about decoupling got shit on their faces. Has anything changed? Is decoupling possible today, when it was not possible in 2008? I believe so, and will explain this in my next article.

Thursday, August 12, 2010

How to compete with Android

Over the last quarter, Android has had an average of 200K activations per day - this is an amazing pace, even higher than what Apple set with the iPhone 4. While there is nothing to be worried yet, Apple should be taking this seriously. They obviously do not want a repeat of what happened in the PC world in the 1980s and 90s to happen once again in Mobile.

Apple is already doing the things that it does best - constant innovation to keep raising the bar higher. However, there are some other things that Apple could do specifically to take on Android.

- Apple should change its release cycle, and release phones at least 3 times a year. The current annual release model is not good enough when you have a new Android Phone coming out literally every month. Releasing models every 3-4 months would ensure that Apple does not fall seriously behind in the spec game.

- Loosen restrictions on the AppStore. Quite a lot of restrictions that Apple imposes on the AppStore, are actually carrier restrictions, and not Apple restrictions. Carriers are the ones who are hurt by tethering options. Carriers are the ones who dont want VoIP calling over 3G. Now that Android is selling more than Apple, Apple can easily argue that if Android has these features, there is no reason iPhone also should not offer the same feature. The moment some of these restrictions are removed, iPhone can have pretty much any application Android can have. Apple should still have a curated store, but with lesser restrictions. Just this one thing would take away most of the attraction that Android has in the developer community.

- Open up iPhone to all carriers. We are already hearing noises that this is imminent. Just dont stop with one carrier, make sure iPhone is available with all carriers. The main thing, is that Apple should not allow a free ride to Android on Verizon and Sprint. Android is having a much tougher fight globally, where iPhones are available on multiple carriers. In the US, where AT&T is the sole carrier, Android is doing very well. To counter this, iPhones should be available on all networks.

- Apple should offer couple of models more - at the lower end of the market. These models should be available at extremely low cost, to cannibalize Android sales. The best part is that Apple has always seen better sales of its higher end models - so people invariably buy the higher end Apple models when they have a choice. Offering a real cheap phone for free with a contract would mostly serve to put pricing pressure on Android.

- Today, while Apple is still one of the largest sellers of smartphones, all Android phones put together outsell the iPhone. So Apple is way bigger than Motorola, Samsung, etc. In this sort of situation, a drop in margins will actually hurt Motorola, Samsung and others, a lot more than it will hurt Apple. Because of Apple's volumes, Apple can actually make decent money even at lower prices - whereas these other vendors will see a lot more margin erosion. This strategy will hurt the HTCs, and Motorola's of the world big time.

- Dont restrict the fight to Android, take the fight to the rest of Google as well - the moment Google realizes that Apple is stealing some of its ad revenues, and not making any money on Android, they will be in a lot of pain. In parallel, extend iAd to the Android platform - so that Apple can try to make some money off the success of Android as well - because the Android Marketplace is not a curated store, it will be very difficult for Google to stop Apple from monetizing Android. On the other hand, Apple runs a curated store, so they can easily stop Google.

- Push initiatives like Safari Reader, AdBlock for Safari, etc. These are initiatives that lower the value of ads on the internet - attacking Google where it hurts most. Implement the same functionality on the iPhone as well - to make any website optimized for the iPhone screen.

With these initiatives, Apple can compete much more effectively with Android, and avoid the Mac OS vs Windows scenario.

"Don't Be Evil" indeed!

Google's corporate motto must be a giant millstone around their necks - I mean, how can anyone have such a motto and still justify the lame way in which they sold out on Network Neutrality.

Just 3 years back, Google was the champion of an open internet - they were willing to bid $4.7B to force wireless spectrum to be truly open - so that Mobile operators would have to allow any devices and any applications on their networks. Back then, Google was the underdog, trying to pry open the wireless networks for their Android OS. However, now that Android is well and truly entrenched, they no longer care about Network Neutrality on wireless.

In addition, Google also realized that the iPhone has completely changed the way people use mobile internet - instead of browser based access, most of the access is through custom applications. These custom applications are that much harder for Google to monetize by way of ads - especially after Apple closed the doors to iOS, and no longer allow non-independent ad vendors from collecting data from iPhones to target ads. Without the ability to collect data, Google's Admob would be unable to display relevant ads on the iPhone, and would therefore would not be as attractive to advertisers.

On the other hand, despite Android sales picking up significantly, the iPhone still commands a significant percentage of mobile wireless access - this is because of the higher current installed base of iPhone, as well as because iPhone still is much better for mobile use because of seamless implementation of Multi-touch. Google could not use pinch-to-zoom and other intuitive gestures, as they were all restricted by Apple patents. So the browsing experience on Android is nowhere near as intuitive and pleasurable as it is on the iPhone.

There is also a lot of talk about iTunes moving into the cloud - and therefore offering a much greater user experience on the iPhone. Google has absolutely nothing to match iTunes, and it is unlikely that they can come up with something soon.

Considering all this, Google realized that its best bet lay in a crippled internet on the wireless side - because the iPhone would be impacted a lot more by the crippled internet than Android would be. iPhone is a lot more data intensive because of its rich media options on iTunes, wider variety of applications, better browsing experience, etc. So a crippled internet would actually work in favor of Google on the wireless front. On the wired internet however, Google is still easily the largest entity on the internet, so it makes sense for them to ensure that the wired internet stays with full Network Neutrality.

It is quite a shameless change of stance by Google - but I still think this is not going to hurt Apple much - if anything, Apple will be further incentivized to monetize iAd even more, so that they can actually pay for the network access needed by the iPhone. Google will realize that the end of Network Neutrality will hurt them even more. And it wont be long before Apple decides to extend iAd to the wired internet as well - on Macs, AppleTV, etc - and when this happens, they will be stepping on some sensitive toes at Google.

I have always felt that Android will be something Google will regret - because Android would end up costing Google its crown jewels. And the more Google plays dirty, the more Steve Jobs will hit back at them.

Sunday, July 18, 2010

iPhone4 sales could explode

The last 10 days are arguably some of the worst periods over the last 3 years when Apple has been selling the iPhone. The controversy over the iPhone4 Antenna has snowballed into a very major story throughout the blogosphere, and even in the mainstream media. Despite this, Apple announced that iPhone4 had sold 3 million units in just 3 weeks.

The iPhone4 is not even available all over the world yet. Even in the markets it is available in, the supply is way short of demand. And this sales record happened in some of the worst publicity periods for the iPhone4. I cannot imagine what the sales figure will be for the remaining 5.5 months of 2010 - but one thing is sure - I don't think ANY analyst will come even close to the final sales figure.

All the analysts looking for 8 million units a quarter to 11 million units a quarter are going to be blown away. I expect 12 million units in July-Sep quarter, and 15 million units in Oct-Dec quarter. And I think even these numbers are likely to be conservative - and only because Apple will find it difficult to make that many phones!

Remember just in Jan 2007, when the original iPhone was launched, Apple set a sales target of 10 million units for 2008 - and people thought that was an improbable target. They managed to reach that goal easily, and now they are doing over 10 million units a quarter!

And this is despite being available on just one carrier in the US, and not being present on the dominant carrier in China. With time the availability picture will definitely change. At that point, Apple could be doing 20M phones a quarter, and will be within kissing distance of 10% of global mobile phone marketshare!

Remember, 40% of Apple's revenues, and 50% of Apple's profits come from the iPhone already - and there is a clear path to potentially double both revenues and profits on the iPhone within just 2 years. So Apple's overall revenues and marketshare would go up by a third, even if other products just stay stationary. And considering the iPad still does not have any competition from other tablets, and considering the Mac is firing on all cylinders, the other product lines are also doing very well. Apple is also likely to convert AppleTV from hobby status to a full blown revenue line sometime soon.

We could easily be looking at $500 per share in 2 years time!

Wednesday, June 9, 2010

Beginning of the end for Google

AdMob CEO and Founder complains iAd is not in best interest of consumers and developers. I guess he means it is not in the best interest of AdMob!

Google got the FTC to approve the AdMob acquisition citing competition from iAd - and now when they see the competition from iAd, they are whining! Can't have it both ways, Google!

And this is just the first penalty for backstabbing Apple - in time you will see Apple stepping on Google's toes a whole lot more.

Here is how I see it playing out -

- Developer interest in iPhone, is already high and is likely to get even higher as iPhone4 and the iPad kick some ass. Considering that there is still no good way to make money on Android, except for Ads, and considering that Ads piss off the users, iPhone comes off as a much better option for developers.

- iAd is already pulling in almost 50% of mobile advertising revenues even before the launch - just imagine what will be the scenario as AT&T exclusivity ends, and Apple launches the iPhone on Verizon, Sprint and T-Mobile. All of a sudden, Apple despite being bigger in market share will be growing faster than Android as well - that should take the wind out of Android sails, and reduce their momentum significantly.

- Apple will soon extend the AppStore to other areas as well - AppleTV is the obvious first choice, but I would not be surprised if Apple creates a simulator of some sort to allow running Apps from the AppStore on desktops and notebooks running Mac OS. This is easy, as there is already a simulator for MacOS as part of XCode. And the rumored Magic Trackpad should help with Touchscreen functionality as well. In any case, significant majority of Apps do not use multi-touch, and single touch can easily be replicated with just the mouse. And to really crush things, they should come out with such a simulator for Windows as well. If they can manage a simulator for Android, that would be the final nail in the coffin. In such a scenario, the AppStore could become the premium market to get Apps for any platform on earth. While this is far-fetched, it is not beyond the realm of possibility. In fact, I would be surprised if Apple is not already working on something like this for Mac OS and Windows.

- Once the AppStore becomes universal, iAd will be raking in way more of the advertising pie. And with such a big foothold in advertising, there is nothing stopping Apple from extending iAds to web search and advertising as well. Apple can already bring back Sherlock, and make Web Search itself an app.

- In parallel, Apple will continue initiatives like Reader on Safari 5 - which removes all ads from a website, and just presents the text in a much more readable format. Over time, initiatives like Reader will diminish the value of web ads massively. It is quite possible that when Reader gets sophisticated enough, that will be the DEFAULT mode for Safari, with the regular website as an OPTION! You can bet your last penny, that is one feature of Safari that Chrome will not copy!

- I would not put it past Apple to come up with an agreement with Microsoft to allow iAd on Windows Mobile 7, in exchange for having Bing on the iPhone. Possibly even pay MS $100M every year (or even more) for the privilege! After all, they will just be giving MS the money they get from Google!

- Apple will use their massive data center in North Carolina to become much bigger on Cloud Services. Likely to see a basic MobileMe become free, and supported by iAd, and a premium version that is paid, without ads.

- Apple will use the same data center to extend iTunes to become the YouTube of the world - they will just open up iTunes to allow anyone and everyone to submit content, have a proper mechanism using technology like Shazam to take care of Copyright issues. The submitter will have the choice to allow the content to be viewed for free, or paid. If it is free, it will be supported by iAd. iTunes already has fabulous searching and tagging functionality, and with iTunes Genius, they can do a much better job than Google can. For users, there will a simple option to enable or disable the free content, so that the clutter is manageable.

- iWork.com and App versions of iWork will easily supplant Google Docs - Once again, Apple could offer versions of these products for free, supported by iAd.

- As iAd gets big enough, it will pave the way for Apple to finally move AppleTV out of hobby status, and into a significant revenue stream. Customers can get an iTunes season pass for all the content on iTunes, either paying $49.99 per month, or $29.99 with iAd.

Google created Android as a way to get control over mobile web access. However, they will soon see that Android will turn out to be the reason why Google will lose - not just in Mobile advertising but probably in search advertising and desktop web access advertising as well!

Google might be a very big pony - but at the end of the day, it is a one-trick pony. And Apple can and should take away that one trick from them. To continue with the pony metaphor, with Google, Advertising was the cart, and Services were the horse - the services existed only to pull more advertising - whereas with Apple, Advertising will get its deserved role of being the horse, to move great services (the Apple cart). This is a major difference - Google was all about exploiting its services to get private information about the user, to help it target ads. Apple on the other hand is unlikely to try to make a profit from ads - they exist only to subsidize the content. They dont have to resort to being BigBrother, since they only want to break even on content.

Tuesday, June 8, 2010

When function is form, and form is function

Apple announced the new iPhone yesterday - an event that was without its usual suspense because of the Gizmodo revelations. However, there were still some aspects of the announcement that were quite interesting.

To me, one of the most interesting changes in the new iPhone, is in the choice of materials used to make the case. Apple chose to use Glass panels on either side, banded together with a stainless steel side.

To most people, glass is a dicey material - when Apple launched the first iPhone with a glass touchscreen, there were several questions about whether the screen would survive a drop to the floor. However, we have seen that the glass used in the iPhone was quite durable. In fact, the aluminium backing on my phone got dented badly in some falls, but the glass stayed intact. Even now, my old iPhone still has no scratches on the glass. Same is the case with the 3GS - while the plastic got scratched a bit, the glass is good as new.

Considering this, it is not surprising that Apple decided to go with glass on both sides - the new phone looks absolutely stunning. So in a way, the glass not just avoided the scratches and dents, but also gave the phone a classy makeover.

Moving to glass also opens up some other options for Apple. Some time back we saw Apple filing for a patent for Solar Panels integrated into Touchscreens. See http://www.iphonefaq.org/archives/97797 for details. The glass back of the new phone gives apple a much better option to integrate Solar Panels - without impacting the touchscreen in any way. Quite obviously, Solar Panel in the touchscreen would have affected the display - putting it on the back of the phone should solve that problem.

Also, this opens up tremendous personalisation opportunities - when you order a phone from the Apple Store, what if you can upload a picture that Apple will print and insert behind the glass panel? Would be a lot more sophisticated than the inscribing options currently offered.

Let us not forget the stainless steel band - while it looks cool, it also doubles up as the antenna for the phone, while also strengthening the phone significantly.

Apple has once again shown that form and function go hand in hand.

Saturday, May 29, 2010

AppleTV Reinvented

Some things Apple could do to dramatically redefine TV.

- Buy EchoStar - current market cap $1.8B - Apple could possibly buy it for $2.5B + debt. With EchoStar, they get nationwide Satellite Network, as well as IP to Sling Media. Convert Apple TV to be the Set-Top box for Dish Network. This is likely to be the easiest option for Apple, rather than negotiate with cable networks.

- Change to iPhone OS4 - opens up entire App Store.

- iPodTouch with IR Transceiver as Universal Remote. Should be usable as Remote, Keyboard, Microphone (for Video Conference) etc. EPG should be displayed on the iPodTouch.

- Multi-player gaming - AppleTV should be capable of creating an ad-hoc network with multiple iPodTouch units, for multi-player gaming.

- Offer an optional iControl unit for $99 - basically, iPodTouch with minimal flash, minimal RAM, lower end processor, 480x320 multi-touch OLED display.

- Open up USB port, with support for Web Cam and external storage. Video Conferencing would be a great application. External storage only for Personal Media - cannot be used for DVR.

- Offer an optional motor-panning 1080P iSight camera for $199 (panning and zoom controllable using the iControl remote).

- Instead of using low power A4, use full power chips, or even dual A4 chips, to support 1080P seamlessly, including 1080P videoconferencing (if customer has adequate bandwidth).

- Local DVR Functionality. DVR to be controlled from EPG on iPodTouch. DVR requests, etc to be stored on MobileMe - so user can setup recording remotely. User can also delete shows from MobileMe remotely, to clear up space on the local disk.

- Cloud DVR Functionality - customer can pay $10 extra per month to have access to ANY SHOW he wants, available at anytime streamed from the cloud. Cloud DVR shows would be available only for 1 week. If user wants longer term recording, he can copy content from Cloud DVR to local DVR. If the user does not want Cable TV, he can just pay $30 per month and get all his programs from the Cloud DVR, along with targeted rich interactive ads using iAd. But he won't get any live content - like Sports, news, etc.

- Integrated support for PlaceShifting (SlingBox functionality) - using MobileMe. Moment user logs into MobileMe and wants to watch either Live or recorded content, the local stream is turned off. Any content that is also available on the cloud would be streamed from the cloud rather than the source AppleTV, for bandwidth efficiency.

- Sell 3rd party licenses for Game Controllers - Steering wheels, Joysticks, Tennis Rackets, etc.

- Sell 3rd party licenses to integrate AppleTV directly into consumer electronics.

- YouTube competitor - Create a free videos section within iTunes, where users can upload their own videos for sharing with others. Customers can optionally also charge for their uploaded videos, with the usual 70:30 revenue sharing. Apple already has massive library of copyright content, it would be easy to use technology like Shazam to see if any user uploaded content violates copyright of any other content. With such a check, studios would prefer iTunes over YouTube. Can be integrated with rich interactive iAds, for revenue.

- Package AppleTV with 2 iControl units and one iSight HD camera for $599 - or for $199 with 2 year Cable TV contract at $49 per month or $399 with 2 year Cloud DVR only contract.

The main idea is to make full use of the ecosystem that already exists - and create cross-selling opportunities for other parts of the ecosystem. For instance, if the user wants remote DVR functionality or place shifting functionality, he/she has to get MobileMe. For the remote, s/he has to get iPodTouch. Since the unit supports multi-player gaming, there is an incentive to get multiple iPodTouches for the entire family. Cloud DVR would use iTunes. Interactive targeted advertising using iAd would dramatically change the way people look at advertisements. Could even support features like instant feedback on ads - so that the marketer knows how the ad is being received, by which demographic.

Friday, May 21, 2010

In other news, pot calls kettle black...

Just read an unintentionally hilarious article on AppleInsider - http://www.appleinsider.com/articles/10/05/21/google_compares_apple_to_big_brother_from_iconic_1984_ad.html
Some executive at Google reportedly called Apple "Big Brother" in a reference to the famous 1984 commercial that announced the Mac.

Hilarious, because I don't think he could have put his foot in his mouth more effectively, and more publicly. Considering all the news around Google's privacy violations, and all the attempts by Google to ingrain itself in pretty much every single aspect of our lives, it is quite obvious who Big Brother is. In fact, the surveillance society referred to in the 1984 book eerily resembles Google.

I guess he refers to Big Brother not in a surveillance kind of way, but more about the fact that Apple does not give any choice to the developer or to the user. Steve Jobs decides how things should be, and that is the way things will be. Like as if Google gives its users all the flexibility they want. I remember years back when I signed up for GMail, I did not like the conversational style of GMail - and wanted to revert to the regular email style that you see in Yahoo, Hotmail, etc. Guess what - Google decided for me that GMail would stay conversational - no option to use regular mails. I haven't checked lately, but I wouldn't be surprised if that is still the case!

At least, the choices Steve Jobs makes are acceptable to the vast majority of end-users. It is usually only the tech geeks who feel crippled by Apple's restrictions. There are things that I have wished were different with Apple, but for the most part, things just work. Of all the people complaining about a non-replaceable battery, I wonder how many of them ACTUALLY carry a spare battery? The dramatic success of the iPhone has showed that the "restrictions" in the iPhone haven't really affected demand for the product.

Google acts and operates as if they are champions of Open Source, and everything they do is open. However, even a cursory look at Google reveals that the only things that are Open at Google are things they don't expect to make money on - and all their crown jewels are safely locked inside a proprietary safe.

There is another interesting comment this guy made - "If Google did not act, we faced a Draconian future where one man, one company, one device, one carrier would be our only choice. That's a future we did not want." The thing is, Google bought Android in 2005, well before the public launch of the iPhone. Quite obviously, they knew about the iPhone by 2005, and *specifically* bought Android to combat the launch of the device. If this is not an act of corporate espionage by Eric Schmidt, I don't know what is.

In fact, I firmly believe that Apple is very close to launching a major change in plans for AppleTV - launching a subscription model for iTunes content, together with tie-ups for live News and Sports broadcasts. This would finally offer users a viable alternative to CableTV. Google, by virtue of Eric Schmidt's board seat, obviously knew this was coming, and this is the motivation behind yesterday's announcement of GoogleTV. We will see more such vaporware announcements from Google, over the next few months - but thankfully, will end soon, because Apple realized the folly of having Eric Schmidt on the board last year.

Point 6 of Google's charter says - it is possible to make money without doing evil - and their motto is "Do no evil". I think Google needs to look at the mirror and see if they are living up to their ideals. They have clearly shown that they are OK with evil if it serves their interests - see their actions in China, and how they changed their minds only when they got bitten. Their track record of IP/copyright violations, is also indicative of the same malaise.

Wednesday, May 12, 2010

For a few dollars more...

Right in the middle of the 3G auction, the government announced that 2G operators having more than 6.2MHz of spectrum will have to pay spectrum fees decided based on 3G auction prices. This announcement makes absolutely no sense - it will spell the end of the mobile revolution in India - because 2G operators would be forced to jack up prices. And if prices are jacked up, then we wont see 20M mobile users per month being added.

The reason why Indian operators are able to succeed at such low costs, is because they dont care about ARPU - they just care for overall revenues to be high, which they acheive by increasing penetration. In the current scheme of things, license costs are a percentage of revenue - 10%, 8% and 6% of revenues depending on the circle. So as long as the fixed costs are covered by the revenue, operators are profitable. But the moment they are forced to pay massive costs for spectrum, this model will not be viable - the amount of revenue they have to make to get profitable would go up dramatically. This means they can no longer be ambivalent about falling ARPU - they would be forced to increase ARPU. At higher ARPUs, significant number of customers would be priced out of the market.

Quite obviously, this is a bad policy for the government to adopt - so the only reason they are doing this, is because this will make 3G spectrum more valuable. If 2G operators ANYWAY have to pay for the spectrum at the same rates as the 3G spectrum, they might as well bid for 3G spectrum - so operators who chickened out of bidding at the higher levels would now consider bidding for 3G.

I expect that soon after the auction concludes, we will see a rethink by the government, and they will leave 2G spectrum pricing untouched. But the winners of the 3G spectrum would be in trouble, because they would have already bid extremely high for 3G spectrum, and cant back out just because 2G spectrum is not being charged for!

At these high prices, the 3G winners would find that they have to price 3G data access prohibitively high - and will not be able to attract large number of customers for 3G, and so they are stuck in a very unprofitable situation. If they price it low, they can attract a lot of customers, but they might still find it difficult to service the debt that they took on to bid for the 3G spectrum.

In a lot of ways, this is similar to killing the goose that lays the golden eggs.

Tuesday, May 11, 2010

Barking up the wrong tree!

Last week, the Indian government announced a ban on Chinese Telecom equipment. While this has been discussed for quite some time now, the news of the ban still came as a surprise, because it takes a lot of guts by the government to come up with such a confrontational move.

The rationale for this ban is that Chinese Telecom imports could jeopardize India's security - while no one bothered to explain how security could be jeopardized, I guess the main worry is about things like sabotaging equipment, using a timebomb that is already present in the software, or sending instructions to disrupt functioning of the equipment as part of a regular software update. In the event of a war between India and China, it will be extremely foolish for India to rely on Chinese telecom equipment - even for civilian use.

However, what is the guarantee that American equipment has no security issues? Or for that matter Swedish equipment? Or Israeli equipment? While it is unlikely that India will fight a war with the US, Sweden or Israel, security considerations are not just about wars. What about spying, corporate espionage, etc?

Indian telecom market has grown to be one of the most significant markets in the industry. We add over 20 Million mobile users each "month" - this is the population of Australia! We spend tens of billions of dollars every year on telecom equipment. In fact the amount of money India pays for telecom equipment each year to foreigners dwarfs how much we pay foreigners for defence equipment. When it comes to defence, we have technology transfer clauses, we have requirements for domestic manufacturing, etc - because we realize that we have to be in control of the equipment eventually, and cannot afford to depend on outside help forever. When it comes to telecom equipment, why are we not insisting on such clauses? Telecom equipment is as important for our national security as defence equipment is.

Most telecom equipment is purchased by private sector telecom companies - but the government can atleast set the agenda when it comes to purchases by BSNL. What if BSNL insists that 10% of any contract has to be locally fulfilled by Indian partners. Or gives incentives for local procurement of the equipment? In fact if TRAI can step in and ban Chinese Telecom equipment purchases even by private telecom operators, why not mandate that private telecom operators have to procure 10% of their requirements locally? And mandate that this 10% should not be passive equipment like cables, towers, etc - but active equipment like Switches, base stations, etc. Because this industry does not even exist in India, they can start small, and slowly scale up the local content over time.

If we really care about security, it is in our long term interest to set up a thriving domestic telecom infrastructure industry. Initiatives like banning the Chinese will not work in long term - India is a big enough market, and Chinese equipment has a big enough price advantage, that it becomes attractive to setup dummy entities in some other jurisdictions to bypass these artificial restrictions. Do you expect Indian customs officials to pore through base station components and firmware to determine the origin of the product?

There is another important reason for India to encourage a domestic telecom industry. The Nano project by Tatas has shown that Indian engineering is second to none, and is best suited to create products specifically targetting Indian markets. Indian requirements are dramatically different from requirements in Sweden, US, etc. Nokia has done a great job customizing their product for the Indian market when it comes to handsets, but when it comes to infrastructure equipment, India uses pretty much same equipment as the rest of the world. One problem caused by this one-size fits all approach is the power situation. Power is not reliable in India - so towers need to have power backup solutions, generators, etc. Also because of extreme heat and dust in India, airconditioning requirements are also higher. The power backup needs to be capable of handling airconditioning requirements as well - so it adds very significantly to the cost of the deployment.

Maybe a solution engineering specifically for Indian conditions would do away with the requirement for Air-Conditioning. Maybe someone can create a solution that uses much lesser power. These solutions would be much better suited for Indian conditions, and would reduce the cost of deployment. The best part of this example, is that it is not a hypothetical example. Sloka Telecom - an Indian startup has created WiMAX base stations that do not require any air-conditioning, and use very little power, so that power backup requirements are lowered quite significantly. This makes the cost of deployment lower, and allows the operator to recover his investment at much lower ARPU.

Whether the ban on Chinese equipment stays or goes, it is high time India put policies in place to promote domestic companies to create telecom infrastructure. We should ensure that at least some of the billions of dollars that we spend on telecom each year comes back to us.

Sunday, April 11, 2010

The knives are out - Apple goes after Google!

My last post dealt with the differences between Apple and Google, and how a major war was likely between the two. Over the last 4 months, a lot of this has played out in ways similar to what I predicted.

Apple has gone after HTC, in what many believe is a proxy fight against Google and Android. Going after HTC gives Apple several advantages - HTC does not have the financial clout that Google has. Any judgement against HTC will dissuade others from stepping on Apple's technology patents. At the least, this will be a long drawn out legal battle, and will muddy the waters for Android quite significantly. In that period, Apple can increase its technological and marketplace lead over Android.

Apple has announced iAd - this is a much more serious threat to Google, because it attacks the very core of Google. Like everything else Apple touches, they came in late to the advertising game, but they have come in with a really well thought out implementation which make it extremely difficult for Google to counter. The nature of mobile devices today, is such that people dont spend much time on the browser per se, and instead use applications that are specifically designed to do one task well. Because these applications dont connect to Google at all - Google has no effective way of targetting ads.

Apple's current iPhone development guidelines charge $99 from developers who want to sell paid apps in the App Store, but dont charge anything from developers selling free apps. I expect that this policy will be changed within the next year - anyone using iAd in their free apps would continue to get free placement in the AppStore, but anyone relying on other advertising services would have to pay $99 to offer even their free apps in the store. This single move, combined with the fact that iAd offers very generous 60:40 revenue sharing with the developers is likely to move developers towards iAd very quickly.

iAd ads are served up by the OS - which has a very good idea of your current location based on WiFi, GSM triangulation, or GPS, depending on your device. The OS also knows your iTunes user id, and hence details of your credit card and your billing address. It has details of your past purchases on iTunes, as well as on the AppStore. All this information can be used to efficiently target ads at the user. Also, iAd offers much more compelling ads, with video, built in games, etc. And the ads are relatively unobtrusive, because when the ad is closed you are taken back to the application. iPhone, iPod Touch and iPad also represent the cream of the user community - the people with high disposable incomes and spending power. All these are likely to create impetus for a quick shift to iAd from the advertising community.

How can Google compete against iAd - I think Google will soon realize that it is pointless and likely impossible to compete against iAd on Apple's platform. Their $750 million investment in AdMob might be worth a lot less now. Their best bet would be to implement something similar in Android - but even here, Apple already has a patent on embedded advertising controlled from the OS.

Google belatedly realized the implications of this patent and has filed for a Location Based Advertising patent. This could take some of the sting from Apple's patent if successful - but unfortunately for Google, Location Based Advertising has several examples of prior implementations in Japan and other markets. It is unlikely that Google can get this patent - and even if they do, it is unlikely that they can successfully defend it. Apple's OS based advertising however has absolutely no prior implementation as a threat.

But all this is moot - Apple is not in this game to make money selling advertisements. They want to make sure that they remain in full control of the ecosystem, and they can sell more devices that become even more valuable because they can access content that is subsidized by ads in a verifiable way. This is very similar to the Hulu model where TV episodes are offered free in return for the user agreeing to see ads. In Apple's case, they can offer much wider variety of content for free - and because the ads are played by the OS itself, they can enforce that the user actually sees the ads. If Apple makes money from showing these ads, it is just gravy for Apple - but for Google the money from Ads is their biggest source of revenue. Apple is really going for Google's throat with iAd.

There are other subtle ways in which Apple is targetting Google. For the last 2-3 months, there has been speculation that Apple will replace Google as the default search provider on the iPhone - and possibly cut a deal with Microsoft to position Bing as the default search provider. However, this was seen as a move that would piss off Apple's user base, as Bing is clearly nowhere near as good as Google in web search. Such a move by Apple would have been seen as ineffective, because most users would have immediately switched their default provider back to Google. Apple however took a completely different path. Instead of picking a default search provider, they just removed Google's branding from the Search functionality, and just called in "Search Web". When the user searches, results are displayed from Google, Yahoo, and possibly even Bing. This kind of collating of results creates an advantages for the user - because you can get the best results from all search providers at one shot. From Google's perspective however, while their search results are available on the iPhone, they cant make money off it - because Apple strips off the ads and other things in the results.

Several years back, there was a major fight between web publishers and Google - with the web publishers complaining that Google News was displaying articles from websites, without showing the ads that were present on the websites. Only when users clicked on the "Read more" link would they be taken to the original website. In an age of information overload, it is natural that most people never bothered to click the "Read more" link, and instead got all their news from just the main Google News page. The clock has come full circle now - with Apple displaying the search results from Google's website, without displaying the Ads and other links in the website! It will be interesting to see how Google counters this move of Apple, without weakening its position on Google News, Google Reader, Google Books, etc. It will be brilliant if Apple just offers links like "More results from Google", "More results from Bing", etc - and place these alphabetically, so that Bing would come before Google.

This is just the beginning - expect to see more such initiatives over the next few months. Google is going to regret the day it decided to compete with Apple.