Wednesday, May 7, 2014

High Tech "State of the Union", By the Numbers: Part 4 - "Area 51"

The eight companies we've seen in the first three parts of this series are all leaders in their fields who develop cutting edge technology for their markets. They comprise chip, software and systems companies that collectively serve the Computing, Consumer and Communications markets, as well as Mobile Computing, Industrial/Scientific/Medical, Military/Aerospace and Automotive.

However, none of the companies are 'silo' technology developers. Stated differently: whether analysts typically fit any one of these firms into hardware, software, chip, subsystem or system categories, the truth of the matter is that every single one of them crosses these boundaries as a matter of course. For instance: Microsoft doesn't just develop PC software, but chip and system hardware as well, such as game consoles and the applications processors within them, as well as smartphones and tablets. Another example is Xilinx, a reprogrammable chip designer that also develops EDA tools, applications software, system level embedded IP and circuit boards for system design evaluation and prototyping. Thus, all of these firms not only possess great depth in their individual specialties, but also substantial breadth in the technology they deploy and support.

The people at these companies work like fiends to attain a plethora of deeply impressive technical accomplishments. The things they craft embody all of their aggregate creativity, talent, training and experience, applied with tremendous effort over a period of months and years. It is no exaggeration to affirm that the people at these companies produce more than just products, but works of art. 

All men dream: but not equally. Those who dream by night in the dusty recesses of their minds wake in the day to find that it was vanity: but the dreamers of the day are dangerous men, for they may act their dream with open eyes, to make it possible. This I did. - T.E. Lawrence, "Seven Pillars of Wisdom"

Nevertheless, the two companies that are the focus of this chapter leap beyond even the already remarkable efforts of the previous eight - they dedicate themselves to building dreams. In this installment, we'll be looking at Apple and Google.

Their dreams are no ordinary ones, but visions of the future - ideas that appear to be beyond even some of the most fanciful notions of science fiction. Both Google and Apple seem to have a Pygmalion-like gift for imagining ever more incredible things and breathing life into them.

What this gift has done for their quarterly revenues since Q1 2008 can be seen below. As usual, revenues are in $B.

Google - This company has had more influence on the internet than any firm except for, perhaps, Netscape. One could say the same for mobile computing - after all, the development and release of the free Android OS opened up the smartphone market in much the same way that IBM galvanized personal computing with its open hardware architecture for the PC.

Google is no stranger to hardware development either. For years, the company has developed blades and boards for its vast server farms. Google is also recruiting chip development teams - perhaps to create its own family of custom network processors, though it is quite possible that they have other plans for these groups that have not been publicly revealed. 

One possible area of interest for applying these chip design resources would be in the development of applications processors for wearable computing. A current major complaint about wearables is their near complete dependence on internet connectivity to perform useful functions. By upgrading their embedded hardware, wearables could be transformed from 'dumb' devices that burden network resources to 'smart' ones that can support significant levels of independent processing, concurrently liberating network resources for higher level traffic.

It is apparent that Google wants to be a major participant and driving force behind the Internet of Things, as evidenced by Google Glass, which is still considered a 'work in progress' by the company. The Android Wear initiative, whereby the Android OS and an SDK will be made available for wearable computing developers, reinforces the company's long term commitment to wearables while basically tipping Google's hand regarding its ultimate intentions with its new chip hardware development resources.

Then there is Project Ara. Using MIPI for its protocol stack and PHY, Google intends to create a modularized smartphone hardware platform and make it available license-free and at nominal cost by Q1 2015. The choice of MIPI and the goal of making the platform widely and easily available is shrewd, as it follows the pattern set by Android: driving growth thru independent innovation and creativity in an industry sector while eschewing the arrogantly covetous and monopolistic practices of Wintel - practices which proved self-defeating in their bids to implement self-serving industry standards and which ultimately generated so much fervent hostility against them.

The intent of Ara, of course, is to stimulate smartphone innovation by independent hardware developers. Besides the myriad hardware configurations that will wind up being tested by the market, there will undoubtedly be cascading side effects in software. For instance: any given combination of modules will need some sort of software stack that can run on it, which suggests that the smartphone stack itself will have to become modularized. There will need to be an API framework that facilitates the development and integration of customized applications, middleware and perhaps even firmware. There will likely be consequent demand for software development toolsets offering simulation and testing support. One can say with reasonable confidence that the repercussions of Ara are likely to echo thru the electronics industry at the chip, system and software levels in a fractal manner.

All these undertakings in which Google is engaged make one almost forgive its avid complicity in the NSA's espionage abuses. However, as demonstrated by the company's revenue history, these applied R&D efforts have yet to have any significant impact to the bottom line. Revenue growth these past six years has been remarkably tepid, especially considering the firm's stock valuation (more on that below.)

If any of Google's internal research projects turns into a significant revenue generator, the problem for the company will evolve into one of sustaining a competitive edge in a new market. Until then, though, we will have to wait for one of these technology seeds to germinate. On the other hand, if this never happens, then Google's efforts will come to resemble those of Xerox PARC and AT&T's Bell Labs, where the engineers and scientists created marvel after marvel from which the parent company accrued little or no benefit.

Apple - The first thing to notice in Apple's revenue results is the consistent fourth quarter holiday bounce - mild from 2008-2010 and fantastically more pronounced afterwards. The overall revenue trend appears at first glance to be on a happily upward slope.

However, examining the holiday bounces more closely reveals an interesting phenomenon. If you connect each Q4 revenue number, the curve grows impressively from 2008 to 2011 and then slackens. One can see the same result by connecting the Q2 numbers - excellent growth with a plateau effect revealing itself in the later years.

This loss of momentum mirrors the deteriorating growth rates of the tablet and smartphone markets. Though there is still some final room for growth left in those segments, it would be unreasonable to expect Apple to continue its energetically upward revenue trend in the face of rising price competition and reduced demand for markets that are clearly approaching saturation. 

This means, of course, that Apple will need to find new growth drivers for 2015 and beyond. The first possibility that comes to mind is the IoT. Apple's inherent time-proven skill and experience in crafting technology to enhance the lives of its users should theoretically provide it with a huge advantage over competitors in discovering wearable architectures and applications that have widespread appeal.

What casts a shadow over this potentially bright future is CEO Tim Cook. After fulfilling his promise of leaving the organization untouched for the first year of his tenure, Cook began to make sweeping changes in late 2012. The resulting disruptions in organizational hierarchies, duties and direction triggered a brain drain of unhappy employees jumping ship to search for greener pastures, derailed many product development schedules and reduced the supported feature sets of some of those products.

Cook has also decided on some interesting executives hires recently. These include Burberry CEO Angela Ahrendts and Yves Saint Laurent CEO Paul Deneve, as well as a number of biomedical professionals. Ahrendts is expected to focus on the retail and online store business, while Deneve and the biomedical crew are likely to be working on wearables.

Will Tim Cook's Apple continue inventing the future as well or better than Steve Jobs? I haven't the vaguest idea. It's evident that as mobile computing growth winds down, 2014 will be a defining year for both Cook and Apple.

Expectation whirls me round.
The imaginary relish is so sweet
That it enchants my sense. - William Shakespeare, "Troilus and Cressida"

The final comment on these two companies considers their status in the industry, both in terms of perception and reality. The perception is that both are visionary enterprises dedicated to creating and using technology to build a better tomorrow. Their influence and prestige in High Tech is reflected in a tongue-in-cheek rumor about the root of their success - that their chief technical wizards actually stepped off a flying saucer which landed in Area 51 north of Las Vegas several decades ago and its crew members integrated themselves into daily life by finding jobs at these firms when they were both still in their startup phase.

The reality of things, though, is that there is a stark difference between the two: one of them makes vastly more money than the other. Yet their stock prices are nearly identical. The contradiction is glaring, especially when the equity data is examined in detail as it is in the table below.

The revenue difference between the companies is enormous, yet in all other factors - most glaringly in stock price - the companies aren't all that far apart. Furthermore, Apple has a track record proven over three decades of defining and releasing products that revolutionize High Technology and which make the company huge amounts of money, whereas Google has yet to demonstrate that it has mastered that last bit.

Why Wall Street treats these companies as near equivalents from an investment perspective is a paradox that I am unable to fathom. If anyone reading this editorial has any insight into this conundrum, please share it in the comments. I would love to hear a rational explanation for this.

The final installment next week will offer a final summation and analysis for the High Tech sector. To guide the discussion, we will travel back to a time in remote antiquity, to a place where wisdom and insight was sought for the weighty issues of the day.

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