What Apple Gains By Not Offering 32GB iPhone6? $4 Billion?

If you are reading this you already know about Apple’s iPhone 6 launch. One thing you may not have noticed is there was a price increase. Even professional Apple product reviewers did not notice the product versioning change first. Usually Apple releases three versions of the product that are separated by the storage dimension. In the past it was 16GB, 32GB and 64GB. And the versions increase in price by the standard $100.

That changed with iPhone 6. A careful review of the versions will show you this

iPhone 6 versions

After looking at this you may wonder where is the said price increase. Read on.

There is no 32GB version. For $100 more instead of getting just 16GB more or 32GB for another $100 you now get lot more. Instead of 100% more for $100 more and 300% more for $200 (more than base version) you now get 300% more for $100 and a whopping 700% more $200 more than the base version.

However the fact that the base $199 version has stuck in 16GB has caused considerable heartburn to many. Many argue Apple should have offered the base version at 32GB instead of 16GB. Sure they could have and could have done so with no impact on profit. After all their flash costs are so low at the volumes they get.

Wouldn’t customers be delighted to get 32GB at $199 (contract price)? Yes. That is not the point. What Apple would say to these naysayers is, “we are offer far more value than before for $100 and $200 more than we did before”.

What Apple is doing is a simple case of price discrimination done right. It is an effective lever for them to get customers to self select themselves to the version that is most profitable to Apple.

Think of it this way. Let us say the 16GB, 32GB and 64GB versions of iPhone 5 are like 3rd class, 2nd class and 1st class service in a train car. In the early days of American railroads the operators did offer three classes, with the 3rd class at really affordable prices. But the operators wanted those who can pay higher prices to willingly do so. So they removed the roofs in 3rd class cars. People who can afford second class were no more tempted by cheap prices of 3rd class tickets.

In case of iPhone 6 Apple didn’t remove any roofs or cripple it. They decided to add free extras to 2nd and 1st class car passengers for the same money. You can choose to remain in 3rd class but you are not getting free drinks or umbrella.

A customer looking at the base version and the middle version will see lot more value for $100 than if they bought the 16GB version. Many who otherwise would not have chosen the middle 32GB version (had it been there) or chosen base 32GB version (if Apple heeded the advice of tech bloggers and offered it as base version) will pay $100 more.

That is the price increase I referred to before. That is customers will willingly give pay more and still get to keep more of their consumer surplus. So Apple will see an increase in its Average Selling Price (ASP).

What does this do to Apple’s bottom line?

Look at past four quarters of iPhone sales and ASPs.

iphone5-sales

Let us say the unit numbers stayed the same (likely will be higher given the unprecedented demand we are seeing). Let us assume a conservative rate of 25% to 30% of people will willingly choose the 64GB version. Let us give a high end cost of $16 for the additional 48GB storage. Just for this limited and conservative scenario the new Apple profit for the next four quarters look like this

iphone6-sales-forecast

That is close to $4B in new profit just by keeping the base version at 16GB.

Any questions?

Seven Deadly #PowerPoint Sins

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And if you are wondering why this isn’t a article

How to build the future in 224 pages?

0-1-peter-thiel-best-seller-startupWeekend Journal ran an excerpt from  PayPal Founder and Venture Capitalist Peter Thiel’s upcoming book,  Zero to One: Notes on Startups, or How to Build the Future. The book is not released yet but is already number one bestseller in Amazon in at least two categories.

Startups is one category and there should be no surprise about that. I have no doubt this book will be extremely popular among those who religiously follow tech blogs, want to run startups or call themselves founders.

The second category is Economic Policy which should come as surprise.

0-1-peter-thiel-best-seller-econ-policy

Standing at 224 pages with no footnotes or references (you can check the content page in Amazon) one cannot help but wonder how this can be a definitive work on both startups and economic policy let alone a bestseller in both those categories.  Its startup credentials come easy, the author founder PayPal and funded many. The economic policy credentials likely come from a provocative chapter that calls for monopoly market power over competition and avers its take on capitalism.

And it does all that with no references to previous works on capitalism, competitive markets or the unavoidable market market move toward market concentration with few powerful players. Not only it ignores any previous works (which there are many, just see the length of references listed here) it goes on to paint a picture that entire branch of economics as antiquated and stuck in 19th century.

Economists copied their mathematics from the work of 19th-century physicists:

Economists use two simplified models to explain the difference: perfect competition and monopoly

 

There is no mention of who those economists are. They are all labeled and addressed as one group – economists.

After several such putdowns of all economists as single class of people, attributing to them what is only taught in introductory coursework the author claims superiority by dismissing these simple ideas easily. It is a time tested ploy to take an already refuted claim, make it sound like widely accepted truth, attribute it as commonly held belief of a vast majority of people and then offer author’s own antidote that causes that belief to come crashing down. For good measure present author’s position as the only possible option with no room for another possibility.

A curious reader with iota of skepticism left in them will find this treatment disconcerting. But there are not that many and the book will continue to remain a bestseller for a very long time. Whether people read this or not they will continue to rave about it, quote from it and will claim this changed everything.

Here we must ask how anyone can opine on such broad and complicated topics of capitalism, competition and monopoly without as much quoting single supporting work or alternative viewpoint. For this we have an answer from my favorite economist, John Kenneth Galbraith,

affluent-society

Now let me end this with a look at what other powerful and popular people are saying about this book. Since these are the blurbs you can get they say nothing but the best. Here are the blurbs from Amazon.com and my annotations.

This book delivers completely new and refreshing ideas on how to create value in the world.”
– Mark Zuckerberg, CEO of Facebook

Careful choice of words by Mark. He does not say these are correct or relevant, he just says “new and refreshing”. Of course if we look at the econ lit even those are highly questionable descriptions.

“Peter Thiel has built multiple breakthrough companies, and Zero to One shows how.”
– Elon Musk, CEO of SpaceX and Tesla

The statement is ambiguous at best. Musk ends with, “shows how”. How what? How Thiel built his multiple breakthrough companies? How to build one such company? How to write a book?

” Zero to One is the first book any working or aspiring entrepreneur must read—period.”
– Marc Andreessen, co-creator of the world’s first web browser, co-founder of Netscape, and venture capitalist at Andreessen Horowitz

The first book? What if we have already many books? Really?

“Zero to One is an important handbook to relentless improvement for big companies and beginning entrepreneurs alike. Read it, accept Peter’s challenge, and build a business beyond expectations.”
– Jeff Immelt, Chairman and CEO, GE

I honestly don’t understand this blurb. I wonder if Immelt even read the book let alone write this blurb. Why should any reader accept the challenge?

“When a risk taker writes a book, read it. In the case of Peter Thiel, read it twice. Or, to be safe, three times. This is a classic.”
– Nassim Nicholas Taleb, author of Fooled by Randomness and The Black Swan

Is NNT calling the readers slow on the uptake? Should they be spending time reading the book three times or spend the time in critical thinking to find alternative explanations for author’s observations?

“Thiel has drawn upon his wide-ranging and idiosyncratic readings in philosophy, history, economics, anthropology, and culture to become perhaps America’s leading public intellectual today”
-Fortune Magazine

If this is indeed true the readings must come through in multiple footnotes. You are only left guessing about author’s readings on these complex topics.

“Peter Thiel, in addition to being an accomplished entrepreneur and investor, is also one of the leading public intellectuals of our time. Read this book to get your first glimpse of how and why that is true.”
– Tyler Cowen, New York Times best-selling author of Average is Over and Professor of Economics at George Mason University

Tyler Cowan gives a circular argument.

“The first and last business book anyone needs to read; a one in a world of zeroes.”
– Neal Stephenson, New York Times best-selling author of Snow Crash, the Baroque Cycle, and Cryptonomicon

Neal goes one step further than Andreesen who stopped at, “the first book”. Neal adds, “the last book”. So just this book is all you need to start and run a business. Nice play on words, using zero and from title of the book to praise the book.

 

Question to you, where do you stand?

What can businesses learn from

This Monday you will read at least one article of this mold. A Google search will yield you at least dozens of them. From popular management/business/startup gurus to anyone who knows how to open a WordPress blog many will feel compelled to educate us masses about lessons that are hitherto unknown, came into existence only after the final whistle is blown in the World Cup finals and visible only to these writers who find it in their grace to share that knowledge with us.

The articles will no doubt be very nicely written, like a listicle. Key lessons called out and some supporting text to go with it. If you do not feel our collective intelligence is not insulted by that drivel you will share that article around. I bet the articles are being written if not already written. When the final score comes through one only needs to hit Publish on one of the two.

Say if Germany wins,

What can businesses learn from Germany’s World Cup victory?

Attack – Don’t wait for opportunity to come to you.

Plan-B – Always have a Plan-B when attack does not work.

Teamwork – They know what teamwork is. All around best teamwork, no individual star.

Hustle – Show mental toughness, tactical prowess, always be moving.

Plan for long term – This is the team that knows all 90+ minutes matter.

Rockstars don’t matter – Messi was a non factor because Argentina lacked teamwork …

On the other hand if Argentina wins,

What can Argentina’s World Cup win teach us about business?

Small team of A+ players can run circles around large team of B, C players – The problem with Germany’s team was there was no single A+ player. They all played good but none rose up to levels of Messi or Higuain.

Don’t rest on your half-time laurels – The problem with Germany was their big win against Brazil.

Teamwork- Messi was superstar yet every time he was cornered no one was better than Messi in passing the ball to his teammate.

Be Hungry – German uniform has three shades of red for their three past victories. They were not hungry any more.

Which ever way it goes we will know what we will see.

Can you look past these drivel come Monday morning?

 

Jack Reacher the Bayesian

Frequentist is one thinks of probability as countable – that is count the number of all possibilities and find the probability of specific event as fraction of those possibilities. Like 50% for heads in a coin flip. Talking of coin flip I came across this passage in a Jack Reacher novel by Lee Child,

      First time: heads or tails? Fifty-fifty, obviously.
      So, second time: heads or tails? Exactly fifty-fifty again. And the third time, and the fourth time. Each flip was a separate event all its own, with identical odds, statistically independent of anything that came before. Always fifty-fifty, every single time.

Then the hero Jack Reacher computes probability of four heads in a row, a simple multiplication of 1/2 X 1/2 X 1/2 X 1/2 as he correctly states that each coin flip is an independent event. Our hero  then goes on to calculate probabilities of events that matter to him,

    And Reacher needed four heads in a row. As in: Would Susan Turner get a new lawyer that afternoon? Answer: either yes or no. Fifty-fifty. Like heads or tails, like flipping a coin. Then: Would that new lawyer be a white male? Answer: either yes or no. Fifty-fifty. And then: Would first Major Sullivan or subsequently Captain Edmonds be in the building at the same time as Susan Turner’s new lawyer? Assuming she got one? Answer: either yes or no. Fifty-fifty. And finally: Would all three lawyers have come in through the same gate as each other? Answer: either yes or no. Fifty-fifty.

Now we have a few problems. Can you spot them?

First, the fact that there are only two outcomes should not be confused with their chances of occurring. For example if you bought  PowerBall for tonight’s drawing, the next day you will either wake up as millionaire or not. So is your chance of winning 50-50? Same reasoning for the four outcomes Reacher is worried about – they are not 50-50 just because each has a yes-no answer.

Second problem is not all four of the events Reacher is concerned about can be modeled as countable events. For the first, third and fourth events described above the definition of probability is a measure of uncertainty and should not be modeled as countable events.

For the second outcome, “Would that new lawyer be a white male?” – it sure can be modeled as countable rather than as a measure of uncertainty but it is still not 50-50.

But Lee Child, the author, is likely deliberately misleading readers with this. Starting with 50-50 in the absence of no prior information and given only two outcomes is actually not a bad start. That is if you understand this is uninformed estimate and make an effort to refine the estimate with new information.

That is you are moving from being a frequentist to Bayesian. And Jack Reacher does seem a Bayesian,

Statistics were cold and indifferent. Which the real world wasn’t, necessarily. The army was an imperfect institution. Even in noncombatant roles like the JAG Corps, it wasn’t perfectly gender-neutral, for instance. Senior ranks favoured men. And a senior rank would be seen as necessary, for the defence of an MP major on a corruption charge. Therefore the gender of Susan Turner’s new lawyer wasn’t exactly a fifty-fifty proposition. Probably closer to seventy-thirty, in the desired direction. Moorcroft had been male, after all. And white. Black people were well represented in the military, but in no greater proportion than the population as a whole, which was about one in eight. About eighty-seven to thirteen, right there.

And so on and so forth Reacher goes on to refine the probabilities of four outcomes with new information like a Bayesian would do.

I am impressed.

Do you know your p(A), p(B) and p(C)s?

 

 

You better sit down for this

Most journal papers go unnoticed by general public until a version of it sans any of the caveats mentioned in the study pop up in popular media. There is one such article from Quartz that gives us a dire warning about our sedentary work life. You better sit down for this, errr  stand up,

Why not even exercise will undo the harm of sitting all day

Quoting from a recently published meta-analysis of observational studies the article says, (emphasis mine)

Sitting can be fatal.

It’s been linked to cancerdiabetes, and cardiovascular disease. In this latest meta-analysis, Daniela Schmid and Michael F. Leitzmann of the University of Regensburg in Germany analyzed 43 observational studies, amounting to more than 4 million people’s answers to questions about their sitting behavior and cancer incidences. The researchers examined close to 70,000 cancer cases and found that sitting is associated with a 24% increased risk of colon cancer, a 32% increased risk of endometrial cancer, and a 21% increased risk of lung cancer.

Before we look at the numbers let me tell you I spend most of my workday standing up. I am fortunately enough to have a standing desk and even when I did not have one I rigged up one by placing the monitor on a book shelf and propping up boxes on the work desk. I should be happy to jump on this evidence and tout it as validation of my behavior. A part of me did that. But however favorable a piece of evidence looks like you need to question the method it was arrived at.

While the reported study was enough for some to make a case for standing up some of us have a the undesirable job of calling into question the hypothesis formation, data and method.

Here are the problems I see in adopting this report

  1. All the studies included in the meta analysis are observational studies and not controlled experiments – which is very hard if not impossible to do with sitting/standing.
  2. The studies are based on self-reporting by participants and not based on observations by experimenters – so it is hard to verify whether or not the subjects exercised as they reported.
  3. The meta-analysis clearly states this is just correlation – that is lost on Quartz. When you see a statement like, “sitting is associated with a 24% increased risk of colon cancer”, you must ask, “is it likely that the people are sitting down because of the illness?”
  4. Finally what does the 24% increased risk mean? It is the relative risk that is increased. If people who sit 0 hours are at x% risk of getting colon cancer those who sit 8 hours are at risk of 1.24x%.   Colon cancer is indeed the second leading cause of cancer related deaths in US but you should note that its incidence rate is 1 in 20 or 5%. And individual factors affect the incidence rate far more than other factors.

So at 1.24 times relative risk if you are sitting down for 8 hours of work the incidence rate goes from 5% to  6.2%. But what other factors have higher relative risk that you should worry about?

If you want a standing desk, get it. But don’t settle for correlational studies to make a case for it.