From across the Tasman Sea comes word that that Apple is ramping up its targeted advertising platform.  This will be the great battleground for the next decade, as the likes of Google, Apple and even supermarkets and airlines with loyalty schemes battle it out for supremacy in the customer profile market.  Think what happens every time you use a fuel docket, every time you pay for groceries and leave a footprint with your loyalty card.  Make no doubt, Big Brother is watching you.

Apple uses customer profiles to target mobile phone adverts – Business – NZ Herald News.

But is this necessarily a bad thing?  I am not convinced it is.  For years we have been giving up our most sensitive information to anonymous government and private entities who then decide if we should have security clearances, credit cards, welfare, tax refunds or be pursued for an unpaid parking fine.  Citizen tracking has long been an integral part of civilisation, and at times used for bad.  However, if used wisely, and if citizens retain control and remain informed of how their data is being used, it could be a tool for enormous good.

And by good I refer to realisation of the dreams of capitalism – the most efficient allocation of limited resources for the good of humanity – driven by needs and wants to provide resources to provide the greatest value.  No longer will we be harangued with irrelevant advertising, no longer will companies produce mountains of products to be pushed on to the market often with colossal waste when those products prove to be failure.

Sophisticated customer profiling will democratise capitalism by putting the consumer firmly in control.  Companies will move from slow cumbersome push driven to dynamic rapidly responding pull driven production.  Businesses that fail to embrace the new consumer driven world will ultimately fail as they will be unable to compete with dynamic responsive businesses.  Smaller entrepreneurial companies will be empowered to identify small profitable market niches previously regarded as unprofitable by traditional large push driven businesses.  This will lead to a flourishing of diverse markets and a more colourful society to live in contrast to push driven conformity.

Companies will be forced to bow down and serve the consumer and adapt to their ever changing whims and needs to survive.  Those that do will be amply rewarded.  The consumer will be the winner.

This is a far cry from the bleak dystopian warnings repeated almost daily in the media and films such as Minority Report where the consumer is portrayed in an omniscient automated society intent on entrapping innocent victims in its web of seduction, lies and corruption.  This world is technologically possible, George Orwell warned of this.  Aldus Huxley, inspired by bold 19th century industrial progress, even espoused it before Hitler popularised industrialised eugenics and Aldus Huxley turned away in horror.

Radio National recently ran an excellent podcast analysing both sides of the story, even interviewing some of those involved in the very act of tracking how we feel.

The dystopian vison would only eventuate if we consciously sought this world and allowed it to be created.  I do not believe this is possible.  It is possible that the very act of having this discussion averts this possibility just as the penning of George Orwell’s 1984 in 1948 raised awareness sufficiently to prevent his nightmarish vision.

I am more optimistic and foresee a natural evolution toward a consumer centric demand driven capitalist society where consumers, and even the environment, benefit from a more responsive and resource efficient productive society.

As long as our democratic institutions remain strong, and we remain intolerant of corruption in all collective endeavours, the future will remain bright.

2010 is indeed heating up to be a battle of battles between Google and Apple.  Several years ago it would have been incomprehensible to imagine Google and Apple going head to head in an all out war, or at least Apple declaring all out war on Google.  The interesting thing is their entirely different business models.  Google’s is founded on advertising, subsidised with a small amount of paid applications.  Apple’s is the other way around – with high margin products and software, subsidised with a small amount of advertising in the (predictably named) iAd platform.  Google has a vested in interest in driving down margins and costs to broaden their market appeal.  Apple has a vested interest in maintaining profit margins through ecosystem lock in and clever marketing.

It is not the first time Google’s apparently charitable business model has come in conflict with a margin dependent business model, and it won’t be the last time.  On the surface, Google like to appear as the good guys who give everything away for free and eschew system lock-in, however this is only because they can afford to do it and in fact need to so they can drive ‘traffic’ through their ecosystem and sell ads.  Google also gathers a level of freely given market  intelligence that would have made George Orwell quiver.

Other companies like Apple rely on attracting and retaining high margin consumers to their ecosystem and providing a high quality level of service and product, in return for being tied to the platform.

So now Apple is launching a new assault on Google with the concept of a paid cloud offering, which essentially means less stuff to carry around and more stuff that is carried for you and available when you need it through the network.

Apple’s War With Google Takes To The Skies With iTunes In The Cloud.

However with all this gold rush toward the ‘cloud’, one question remains.

If access to the cloud is interrupted, what do you do?

Nokia, having invested a great sum of money in to buying out all the owners of Symbian to open source the once leading mobile operating system have quietly dropped Symbian on their high end devices.  It seems the Nokia strategy has failed to yield results, with profit margins and smart phone market share plummeting since 2007.

For the high margin smartphone market, Nokia instead are banking their future on the Intel backed Meego mobile operations system, another Linux variant like Android.  It seems like a match made in heaven – the world’s greatest chip manufacturer looking for a way in to the mobile market, and the worlds biggest mobile manufacturer looking for a way to stay in the mobile market.

It is unclear what they Nokia and Intel hope to achieve from this, as it would seem strategically valid to back the Android mobile operating system, already enjoying significant market share rising faster than the iPhone globally (and here) with reports of already surpassing the iPhone in US markets at 28% and 21% respectively.

However, Symbian still leads although is in decline in mobile phones worldwide, with Android now enjoying the number four spot and rising fast.

Where will Meego will fit in to crowded space, with Samsung also releasing Bada, HP buying out Palm to get hold of WebOS (reportedly very good but lacking market critical momentum) and probably more on the way?

I put odds on 3 to 1 that Nokia will capitulate on Meego within two years and also release an Android based phone.

What an exciting ride in economics this week!  And what an interesting time to see so much contrasting and conflicting reports come out.  The Australia property sector is an ongoing focus of mine, because apparently, property can never fall if you believe the Retail Institute of Australia, and we just need to release more land to solve the housing affordability problem.

However, information now emerging shows that this view  is not shared by international investors, and that even with all the full force of a federal election putting pressure on banks, it is unlikely that bank interest rates will remain as constrained as official RBA interest rates.  As sentiment moves toward regarding Australian residential property as a riskier investment, expected rates of return (interest rates) demanded of Australian banks will rise.  If banks are to remain viable, and this is in everyone’s interest despite what some popular media outlets tell us, they will have to pass on the increased cost of borrowing to mortgagees.

With Australian property now the least affordable in the world, it is not unreasonable to expect a correction.

The question I will continue to ask and look out for signs for, is will the coming bushfire be a healthy one that clears out the forest to make may for newer healthier growth in housing and the economy overall, or will it be something more serious?  Despite all the reports coming out, I am optimistic that the coming economic bushfire about to erupt in the Australian property market, will be a healthy correction and nothing to fear although spooked investors will make it look like something to fear.

Here are a few interesting articles floating around that you may not have seen, as this sort of information rarely receives broad attention.

Early June (almost one month ago)

“AUSTRALIA’S biggest banks have become the victims of aggressive international hedge funds, which are shorting the banks’ stocks after growing concern about the strength of the domestic property market .. A New York hedge fund manager, who did not want to be named, said sentiment towards the Australian banks had soured because of doubts that the strength in the national property market would be sustained“

via US hedge funds dump Australian bank shares | The Australian.

(Well, at least something’s growing)

Yet despite this coming out a month ago, reports in the Australian media are still reporting contrasting and at times conflicting information.  However, that any conflicting reports are emerging, is a sign that a few measures are becoming more widely known.  Eventually, a cunning journalist will connect the dots and see there is something worth investigating here.

Tuesday (June 29)

Reports are emerging that the cost of lending to Australian banks is rising, regardless of any level of ‘political pressure’, because well, the foreign markets where our banks source their funds don’t answer to our politicians.  So while bank bashing will become a popular sport in the coming federal election, it is unlikely this will achieve very much outside of the polls.  Banks may ‘reconsider’ their discount rates, however a bank is not a charity, they still need to make money, and we need to them to make money.  Love them or hate them, events in the USA in 2008 showed us very clearly how struggling and failing banks are in no ones interest.

“The ‘big four’ banks are struggling to maintain their home loan status quo as higher wholesale funding costs increase the pressure on banks to raise their home loan rates. But faced with the potential political backlash for increasing interest rates out of sync with the RBA’s cash rate changes has lead to banks reconsidering their discount rates for new home loans, The Australian reports.”

via Banks to slash loan discount rates due to politcal pressure | Dynamic Business.

“Borrowers are unlikely to get any relief through lower costs in the forseeable future as the big banks face replacing tens of billions of dollars of cheaper-priced debt at much higher rates.  That was the message underlined by ANZ yesterday when it disclosed that its long-term debt was now costing 20 per cent more across its $90 billion portfolio of borrowings, extending to the 2014 financial year.”

via More pain as banks prepare to pass on costs.

Wednesday (June 30)

A report suggesting the housing market is very strong.  Except it’s largely attributed to being artificially created by taxing the future to boost the present (aka ‘stimulus’).

Building permits soar – ABC News (Victoria)

“The value of approved housing permits has climbed to almost $12 billion, up almost a third on the same period a year ago”

“The Building Commission .. Deputy Building Commissioner Sarah McCann-Bartlett says .. it is a combination of very strong growth in the domestic sector, particularly driven by the first home owners grants, and public housing programs, and then the school stimulus package as well as growth in other public buildings,” she said.”

So not much actual real private sector growth there.

New home sales slump, prices stagnate – ABC News

“The widely watched RP Data – Rismark Home Value Index showed a rise in city home prices of just 0.5 per cent (seasonally adjusted) in May .. new home sales slumping by 6.4 per cent in May”

So outside of the publicly supported property market, prices growth is slowing.

Today (Thursday, July 1)

Building approvals slide, retail sales edge higher

“building approvals slipped 6.6 per cent in May (seasonally adjusted), following on from a steep fall in April .. The bureau says all states except South Australia (up 30.6 per cent) reported a fall in building approvals in May, with falls of 24.8 per cent in Tasmania and 13.9 per cent in Western Australia the worst results. However, the total value of building approved rose 2.7 per cent in May driven by a strong rise in non-residential approvals.”

So the property market is strong, where public funds have been diverted to support it.  Elsewhere, it’s sliding.

Interesting times are ahead..

Android is currently riding on a wave of euphoria having blasted in the global and Australian smartphone market this year.  However, is this  just a honeymoon period, or is Android here to stay?  Android is based on a radically different business model to the established players of the declining Symbian and the mature Apple iOS (hardly breaking new ground with a naming convention there).

The Android business model is based on the open source Linux operating system – founded on a passionate merging of socialist ideals and advanced technology where software is poured in to a creative commons to be shared by all of humanity, free of charge.

Android is no exception, however Google is no charity either.  Google have chosen Android because it suits their business model of supply chain integration to drive down costs, and broaden their market for their core business of search and advertising.

This business model, by driving down costs, will commoditise everything it touches, the process by which consumers come to expect products and services to be low cost, undifferentiated and possibly even free.  This suits Google just fine, but offends established players such as Apple who rely on healthy gross device profit margins, while Google’s business model relies on broadening their market reach to more consumers with free or cheap services and products.  Apple and Google could not be any more different, and Apple are not happy about it having launched a proxy lawsuit against Google via HTC.

A comparison of relative profit margins in mobile device manufacturers reveals that on company operations, Apple enjoys EBIT(1)  profit margins of 40%, compared to Microsoft at 38%, Nokia at 4.9% and Dell at 4.1% (Forbes Magazine 2010).

In terms of gross margin on products, on the iPad alone, Apple enjoys gross margins of up to 55%, with concerns raised when the gross profit margin falls to ‘only’ 40% (Forbes Magazine 2010), with up to 60% gross profit for the iPhone (Elmer-DeWitt 2010)

Conversely, Nokia and HTC fall to almost half of this figure at just over 30% gross product profit margin.

So there is a lot to lose, as Nokia have shown with their declining profit margins and their CEO coming under increasing pressure to do something about it.  Meanwhile Android, based entirely on ‘free’ is becoming very popular with device manufacturers, who don’t have to pay royalties to use Android, and consumers, who enjoy cheaper devices and a more ‘open’ platform, in contrast to the Apple ecosystem ruled over by the benevolent dictator Steve Jobs.

2010 will be a very interesting year in the smartphone market, and only one true winner will emerge: the consumer.

Definitions

(1) Earnings Before Interest And Tax, otherwise known as Operating Profit is a measure of profitability that takes in to account the operating structure and expenses of the organisation such as marketing and R&D.  EBIT does not include potentially anomalous measures such as depreciation and asset write-downs structured to minimise taxable company income.

References

Forbes Magazine. “Apple Suffers Mildly From Slimmer iPad Margins.” Forbes.com. 14 April 2010. http://blogs.forbes.com/greatspeculations/2010/04/14/apple-suffers-mildly-from-slimmer-ipad-margins/ (accessed June 07, 2010).

Elmer-DeWitt, Philip. iPhone gross profit margin nears 60%. 02 March 2010. http://tech.fortune.cnn.com/2010/03/02/what-doth-it-profit-an-iphone/ (accessed June 07, 2010).

Apple just won’t give up.  Having entered the ‘mobile space’ and declared sovereignty against any other newcomers such as Google (likely due to their joint chairman Eric Schmidt ‘defecting’ to Google a year or so ago), Apple has declared all out war against many mobile companies and is now embroiled in a fight with Nokia, HTC and Google

This is likely to be a long and very dull drawn out lawsuit that Apple hopes will stall the development of Android, perceived as being its main competitor.

What is curious though, is that until Apple decided to sue everyone else, Nokia had quietly accepted Apple violating Nokia’s mobile patents.

Is there a slight scent of hypocrisy in the air?

via Apple Filing Another Case Against HTC « Moby1 blog.

Following my earlier thoughts on Australia’s unsustainable export composition

The ABC has reported that yet another deal has opened up for Australian coal exports, this time for brown coal which is low grade coal.

This concerns me for two reasons:

1) Australia is continuing its reliance on coal exports to prop up our enviable lifestyles and this leaves the Australian economy dangerously exposed to a volatile global economy – and in case you need a reminder (graph taken from the Department for Foreign Affairs and Trade)

2) It further increases Australia’s responsibility for global greenhouse emissions. In the rush to move Australia toward a ‘low emission’ economy, we are conveniently pushing our responsibility further out of our awareness by ignoring where our imports come from – name China – who may not yet share our growing enthusiasm for low emission economics – while we happily base over one quarter of all our national exports on the most polluting export we can dig up and ship out as fast as the ships can take it.

So we sit in our solar powered homes, with our low emission cars, and wear many proud badges declaring our achievement, while the bulk of our consumer goods are produced in high emission economies.

The net result of this is to create a bubble of blissful ignorance around Australian consumers while through our exports and overseas consumption, may in fact be the most polluting people per capita on Earth, regardless of all the wind farms and solar panels on our roofs.

Coal is an incredibly important commodity to the Australian economy, one which we must, eventually, move away from. It should be seen as a stop gap measure while Australia builds up more economically and environmentally sustainable exports for the long term, not something to be celebrated.

Otherwise, considering where our imports come from, and what we export, we may as well be honest with ourselves and stop pretending we are an environmentally sustainable nation, however low our domestic emissions fall.

For those who are interested in what happened to Nokia (Remember them?  Apparently they still make phones), Symbian 3 is starting to make an appearance although it has not yet appeared on any devices, and Nokia is reported to be moving to the Mego platform (a Linux derived OS like Android, except backed by Intel rather than Google).

http://www.mobile-review.com/review/symbian-3-en.shtml

I am really not sure what all these manufacturers hope to achieve by dazzling developers with a bewildering array of mobile platforms to choose from, and I don’t think it bodes well.  Some platforms may find niche markets such as in the developing world or for certain market segments, however I don’t see a mainstream future beyond Android and iPhone for the foreseeable future.

The CEO of Nokia has recently come under some criticism for this and has stated that Nokia needs to improve their execution.  Well, no significant platform improvement since the Nokia N95 in 2007, 3 years ago, would suggest that yes, there appears to be a problem with execution.

Lets hope Nokia regain their strength however, as the mobile market has benefited greatly from their innovation and contribution to technologies that they have generously allowed other companies to use.

It seems the open architecture of Android is both a strength and a weakness.  Here’s hoping that Android does not suffer the same problems that have maligned Microsoft operating systems for many years – from the ongoing security issues inherant to the open development models that allowed the very platform to succeed in the first place.

Android apps ‘open to snoopers’ – Technology – News – iTnews.com.au.

The Wall Street Journal is speculating that Google is planning a music download service.

Google is renowned for shaking up established business models, sending game changing earthquakes through established markets.  It is too early to determine if this will be a good or a bad thing, but it will surely up the ante in Apple’s fight against Google.

Google Plans Music Service Tied to Search Engine – WSJ.com.