Industry

In early 2008, shortly before the iPhone SDK launch, I met a gentleman with a very big mouth. He boasted obnoxiously for some time until someone mentioned buying an iPod touch. This guy subsequently warned the entire room not to buy, because new models were coming soon. He knew this, he said, because his job involved managing the flash memory supply for iPods and iPhones, and recent capacity orders suggested the model line was about to change.

He worked at Samsung.

It’s clear to me that over the last five years or so, Samsung has built not only a multibillion-dollar business, but a corporate culture around having Apple’s number. The partnership has had irreversible conscious and subconscious effects on the way Samsung’s product divisions think and do business. The proof is on the store shelves. It’s sickening.

But is it illegal?

That’s the question we must ask ourselves as Apple v. Samsung heads to the jury. The trial’s drama has distracted from what I see as its real long-term implications.

I must say I believe Samsung’s defense has been terribly flawed. Apple has argued that Samsung illegitimately profited off of Apple inventions. Rather than “We took inspiration, but here’s why that isn’t infringement,” Samsung’s rebuttal seems to have been “These are our own inventions.” I don’t see any reasonable jury believing that for a second, but depending on Judge Lucy Koh’s instructions, they may not hold it against Samsung either.

On the topic of damages, Charles Arthur writes for the Guardian that when rebutting Apple’s $2+ billion figure:

Samsung argued that Apple, which was struggling to keep up with demand for the iPhone 4 from July to October of 2010, did not have the capacity to have delivered on those additional sales. “Apple couldn’t service its own customers with the iPhone 4, but it could service customers it didn’t have?” Samsung attorney Bill Price asked…

This took my breath away. Here’s an opportunity to say “These people chose to buy Samsung instead of Apple. We are clearly bringing something to the table,” but instead, Price concedes “These people settled for Samsung because they couldn’t have found an iPhone anyway.” (Samsung may well know this for a fact because it’s supplying many of the components Apple needs to satisfy customer demand; see “having Apple’s number” above.) It was extremely shortsighted.

The stakes in this trial are enormous. If Samsung is vindicated, it will embolden competitors everywhere to aggressively mimic the iOS experience. That would be immeasurably bad (and familiar) news for Apple.  If Apple wins, the damages check will be the least of Samsung’s problems, and Apple will itself be emboldened to further press its rights.

Most importantly, this case brings the ever-brewing controversy of software patents further into the spotlight. Apple’s case is far from patent trolling, but I do worry about the precedent it could set. If a verdict is reached, lawyers and judges across the country will surely look back to this case repeatedly during their own. In closing arguments, Apple attorney Harold McElhinny told the jury:

If you find for Apple in this case, you will have re-affirmed the American patent system.

Many people in the tech industry don’t see this as a good thing at all — so much so that one might think Samsung’s lawyers said it as an argument against finding for Apple. An Apple victory will surely inspire other far more cynical parties to beat down would-be competitors.

I must admit I’m uncomfortable with the idea that the world’s largest corporation, whatever its name, could be given such a big stick as early as this week. However the verdict falls, I feel like there are no winners here in the long term — certainly not us. Maybe that’s why Judge Koh has been begging for a settlement.

This past Sunday, Apple abruptly scheduled a Monday morning conference call “to announce the outcome of the Company’s discussions concerning its cash balance.” The call, followed by a press release, announced two initiatives: a $2.65 per share quarterly dividend and a $10 billion stock buyback. Macworld has a full transcript of the call; audio from Apple is here.

The announcement itself was intriguing. Why a conference call? What’s wrong with the press release? (I asked this on Twitter  regarding both dividends and buybacks.) When Apple stands up to talk, people expect something big. Anything less is bound to disappoint someone. I can’t imagine investors receiving this news differently in print versus audio form. It felt like a departure from Apple’s typical controlled communication style. Maybe Tim Cook just likes talking to investors.

The Buyback

Cook and Peter Oppenheimer repeatedly cited “dilution from our employee equity program” as the reason for a buyback, and it’s a good reason. Stock compensation remains instrumental to attracting and retaining talent, and Apple needs to keep that incentive strong. Horace Dediu has a nice breakdown on the buyback numbers.

People love to talk about Apple “taking itself private” as the cash pile grows. Steve Jobs famously loathed shareholder meetings, so it’s fun to think about. But it makes no sense. If Apple bought itself out, it would have no free shares to reward employees with, and no cash left to replace those shares with bonuses.

The Dividend

At face value, I don’t get it. Just look at this chart. If you’ve consistently sworn off Apple shares just for lack of a dividend, I question your sanity. If you have Apple shares, and are still holding your hand out in the face of these stratospheric gains, your hubris is breathtaking. Apple has always acted in its own interests, and spent money in places that it believed would yield benefits for the business. A dividend does not do that. How can they just start throwing away billions of dollars a year?

One thing a dividend does is encourage long-term investment, which could help stabilize the stock price. It’s bound to slow down sooner or later. The question is, when will that happen, and how dramatically? Perhaps Apple is attempting to impact that part of its destiny as it does any other. Reducing heavy speculation on the stock could cut down on future dramatic corrections, which would be good for Apple’s “real” investors — especially its employees, whose compensation is tied to the stock.

Apple grants restricted stock units (RSUs) to employees. These are shares at market value, as opposed to options, which have a strike price. With options, the stock needs to grow above the strike price before the employee makes any money. By contrast, the employee can sell RSUs at any price and get all the money.  The use of RSUs makes growth nearly irrelevant to employee compensation.

At this stage, then, management is incentivized to prevent the stock from crashing rather than keep it climbing; to keep those shares, which Apple is about to spend a lot of money buying back, stable. Viewed in this light, and alongside the buyback, a dividend does invest in the business and its employees, while also pleasing the open mic comedians who descend on Town Hall every February. It also feels more like Apple-style thinking, which is to say not your average executive team that mortgages everything just to make the stock go up.

Apple said Monday’s news was all about cash, but it was really about stock. It highlights the company’s shift from an underdog-turned-juggernaut, to the world’s biggest company securing its position as the world’s biggest company.

These people do not get it:

Under a new deal between the two companies, Netflix users won’t just have to wait 56 days to rent Warner Bros. movies on DVD. They’ll have to wait 28 days to add the movies to their queues.

Also under this new deal, pirated movies remain free of charge, free of non-skippable ads, free of five-minute load times, and are now nearly three months ahead of the competition.

iTunes changed the music industry because it was more convenient than stealing. Most people made the value judgment that ten bucks for a clean, legal digital album was worth the alternative of fishing around for files that may or may not be damaged or infected.

Hollywood continues to completely ignore that lesson. It continues to punish the people who play by the rules with an insufferable customer experience. This is the sole reason piracy is up and profits are down: because doing it right totally sucks. And that’s apparently how the studios want it.

Edison. Ford. Disney. Jobs.

An era has ended, and we now sit to reflect on our good fortune for having lived in a time when a true giant walked the Earth. I had certainly contemplated his passing many times, but now that it has happened, I am struggling to grasp the concept that Steven Paul Jobs is gone and not coming back.

You can love or hate the man, his company, and his products. You can simply not care much either way. But there is no disputing that everything we know and think about technology today has been dramatically influenced in one way or another by Steve Jobs. His vision and leadership have repeatedly changed millions of lives for the better. He is one of the most significant individuals of our generation, of the last century, and when all is said and done, probably in the history of this world.

It’s not every day that the President of the United States writes a two-hundred word eulogy. To really see Steve’s impact on the world, though, you need to turn to his adversaries. Google’s Vic Gundotra, who famously skewered the man and his vision just last year, went out of his way to tell a long story of admiration and respect on Google+ when Jobs resigned as Apple’s CEO in August. Sergey Brin, Larry Page, and yes, Bill Gates have all chimed in following Wednesday’s news. Steve’s passing is a loss for the world. We are now left to think about what could have been.

It was only the day before that we watched an Apple event launching new hardware and software products. Steve was not in the building, but he sure as hell was watching on Tuesday. And I’m sure he was reviewing slides and demos to the very end. He held on for one last launch, the first out from under his tenure, to see for himself that his legacy was intact.

And so more than ever, I find myself inspired. Steve’s untimely death reminds us we can never give up. He could have given up at any point in the seven years since his first cancer diagnosis, but he did not. The vast majority of Apple’s unprecedented resurgence took place while Steve Jobs stared death in the face. How many of us could have lasted this long at all, let alone accomplish all that he did along the way?

Ten years ago today, we still had not yet met the iPod. The last of Steve’s five decades on this Earth ended up being his most accomplished by far. Remember that whenever you think your best days are behind you. We can’t control when our lives begin, and we can’t really control when they end. All we have is what’s in between. Make it count.

Steve did.

In the 14 years since we started Netflix, we’ve gained more than 25 million customers worldwide by providing the best DVD by mail service anywhere. Along the way, we’ve built an unrivaled streaming service that continues to grow every day. Today we want to tell you about some big changes at Netflix as we get ready for the future.

To begin, we’re adding a video games upgrade option to our DVD by mail service. Similar to our upgrade option for Blu-ray, DVD members can now rent Wii, PS3 and Xbox 360 games. This is something we’ve been asked to do for years, and we’re pleased to finally provide it.

As we worked on this new addition, we could no longer deny that the DVD and streaming services are growing apart very quickly. These are in fact two very different businesses, with different customer needs. We even have different offices for them! Providing an experience that simultaneously addresses these two very different worlds has become an increasing challenge for us as we grow the company and evolve the website.

That’s why today we’re announcing significant changes to our company. First, we are renaming the DVD by mail business to Netflix Classic. This is the same DVD rental service you’re used to, but it’s more than just a name: Netflix Classic is a new company, operating independently as a subsidiary of Netflix.

Moving forward, Netflix as a company will be dedicated to streaming media. This is a realization of our original vision, and of the company’s name: watching movies over the Internet. The Netflix.com website and mobile apps will exclusively service our streaming library. DVD members will manage their queues at classic.netflix.com.

If you subscribe to both services, you’ll see two charges on your credit card instead of one, but you’ll pay the same total amount per month you do now. This, along with our recent pricing changes, is just a necessary outcome from creating two separate companies. DVD members will of course still receive the same red Netflix envelope that has been familiar to them all these years.

Members can log into both sites using the same login. This will allow streaming-only members to add DVD by mail, and DVD-only members to upgrade to streaming, at any time. The websites, however, will remain separate, so that we can start giving these different worlds the unique attention they deserve.

We think the benefits are going to be huge. We’ll be rolling out the new websites in a few weeks, and you’ll see right away what we’re able to accomplish by providing a dedicated experience for each service. Until then, check out this video we made to see just a few examples of the new sites in action.

We want to thank you for supporting us for all these years, and we are very excited about all the new benefits Netflix and Netflix Classic are about to bring you. We can’t wait for you to try it out yourselves.