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Telum What You’re Doing, IBM – The Six Five Webcast
by Daniel Newman | August 30, 2021

On this episode of The Six Five Webcast hosts Patrick Moorhead and Daniel Newman discuss the tech news stories that made headlines this week. The six handpicked topics for this week are:

  1. IBM Launches the New Telum Processor
  2. Latest Earnings Report from Dell
  3. HP, Inc. Reports 3rd Quarter Results
  4. Salesforce Earnings Report
  5. Great Earnings Report coming out of Marvell
  6.  Apple Agrees to Settle Class-Action Lawsuit

For a deeper diver into each topic, please click on the links above. Be sure to subscribe to The Six Five Webcast so you never miss an episode.

Watch the episode here:

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Disclaimer: The Six Five Webcast is for information and entertainment purposes only. Over the course of this webcast, we may talk about companies that are publicly traded and we may even reference that fact and their equity share price, but please do not take anything that we say as a recommendation about what you should do with your investment dollars. We are not investment advisors and we do not ask that you treat us as such.

Transcript:

Patrick Moorhead: Hi, this is Pat Moorhead with Moor Insights & Strategy, and we are here for another episode of The Six Five podcast. I am here with my awesome co-host Daniel Newman, founder, big wig. I always forget his official title at Futurum Research. Daniel, how are you, my friend?

Daniel Newman: 91 episodes in, I’m amazed. 91 episodes, two major global events, dozens of other pods and you can’t remember my job title, but you know what? Titles mean very little if your analysis is top class and that my friend, is what we do.

Patrick Moorhead: I appreciate that. Titles are for the birds, but I did promote myself to CEO and Chief Analyst, so there’s something going on there. No, we have had some title inflation. I know, I got no thank you-

Daniel Newman: Congratulations, man.

Patrick Moorhead: … or congrats, on the promo.

Daniel Newman: When you own the business, do you go out to celebrate dinner? Do you go and take the wife and say, “Hey, I got a raise today.”

Patrick Moorhead: Yeah, yeah.

Daniel Newman: When you actually give it to yourself, is that how that works?

Patrick Moorhead: Yeah. And you can write off 50% of 38%, so that’s very nice. So hey, we have a big show today and if you’re new to The Six Five podcast, we talk about six topics for five minutes. We try to blow through the news because you could already read that somewhere else. We’re more about analysis, but sometimes we have to actually tell you what happened to give context. We’re going to talk about publicly traded companies today as well, but do not take this as investment advice. In fact, we’re going to talk about some earnings, some tech earnings and stocks, but don’t take this … It’s educational informational. In fact, just do the opposite of what we would ever infer. So with that, let’s dive in Daniel. We’ve got IBM, Dell, VMware, HP, Marvell, Salesforce, Apple, and more let’s hit it.

IBM released a brand spanking new processor. Before you say, “Oh my gosh, we really don’t care about this,” I want to talk about something. So, first off, I would say 30 years ago started the commoditization of the data center and consolidation. 30 years ago, you had primarily IBM, you had HP processors, you had deck faxes and believe it or not, Intel was just starting in the data center. Then pretty much the entire data center went x86, but where we are right now holistically with chips, is that you’re seeing more of them create fit for purpose solutions. You see Apple, who’s the full stack. You have chips, operating systems and applications out there.

You have AWS, that’s creating its full stack. Well, IBM’s mainframe unit, and for that matter POWER10, they create their own full stacks as well, except they were doing it 25 years before AWS and Apple and technically before POWER it was the RS/6000 and the AS/400. But anyways, I digress. IBM came out with a new processor for the IBM Z, the next generation, and really the key points here are its capabilities for integrated machine learning. And you might say, “We’ve seen that. We saw this with Intel for the last generation.” Keep in mind that most financial transactions, whether it’s a banking transaction or a retail transaction are done on an IBM Z. And the reason is because it is the most secure platform on the planet. And yes, I am saying that and I’ll stick to that, and you can challenge me on that if you’d like, but the other thing is, is optimized, it’s more of a throughput engine in the way that it’s architected. ASICs and offload engines have been cool for the last five years, but IBM Z processors already had compression and decompression cryptography, but what Telum offers, the biggest thing it offers is on-chip machine learning, which I think is pretty cool in the way they architected it.

So what it enables, let’s say a financial institution, to do is traditionally, if they wanted to do a fraud analysis, you had to do the transaction on the Z and then ETL that data out to, let’s say an x86 with an Nvidia A100 to do training and then maybe a T4 or something like that, a P4 to do the inference. Now you can actually do the inference on the chip without ETL-ing out outside. That saves time and I would say it even is … I can’t say it’s more secure, but it’s secure in the fact that you’re not moving data over. So, that is the big news.

The other thing I liked is it showed that the speed of this. So if you have 32 new Telums, which is in a four drawer configuration, 3.5 million inferences at 1.2 milliseconds, and that is nuts, that’s crazy, crazy fast.

The other thing I’ll add is that, listen, I know IBM has a reputation for being proprietary, but you know, the Zs run a full Linux stack all the way up to container management and even systems management, it is all based on open source. On this AI perspective, it’s fully Onyx compliant, which means if you want to run Keras, PyTorch, SaaS, MATLAB, Chainer, MXNet, TensorFlow, it can be accelerated by this new processor.

Usually I start with this, but I’m going to say last but not least, it’s an eight core, 16 threads per chip at a mind boggling five gigahertz. It’s a deeper pipeline configuration, maximum 32 core 64 threads. You might be saying, “Oh my gosh, that’s so small.” Listen, the Z is a transaction engine. You don’t need 128 cores. And also keep in mind that that a lot of the acceleration is either on cards or already on the chip itself when it comes crypto and compression and decompression.

So, I’ll leave it at that. Kind of geeky, but we love chips and listen, chips and SaaS is where it is all at. Theoretically, everything else can be disintermediated in the center.

Daniel Newman: Are we done? Are we done? Are we done?

Patrick Moorhead: We are done.

Daniel Newman: All right, we call it The Six Five, because we talk about six topics. Pat talks about them for five minutes and I get what’s left. Just kidding, look at you getting all sensitive. No, a really good analysis there. There’s a couple of things going on. I think first of all, the migration to public cloud has been greatly overstated. We’re still seeing a ton of workloads on prem. The other thing here that I think the market needs to really understand is that IBM has a very innovative part of its business that focuses on shift development, work side-by-side with companies like Intel. You might’ve heard that when Pat Gelsinger made some announcements earlier this year about what they’re doing and their long-term strategy. You might’ve heard about it with the two nanometer announcements that came from IBM, not so long ago.

By the way, this is just a show of understanding the market’s continued demand for custom silicone in mission-critical workloads for specialized needs, which by the way, is why Z has been so important for so long in this financial space and the transaction space. The need for this kind of processing continues. AI is only going to continue to grow, it’s exponential. These particular tasks to help improve transactions using inference is going to be meaningful. You also have to deal with cryptography, compression, sorting, and there’s a great opportunity to tie this all in with confidential computing and trusted execution environment and enclaves. I imagine IBM is going to continue to build this all in as part of the stack to show this connection between private, hybrid, public clouds is the route forward. IBM, thanks for telling us what you’ve done with Telum.

Patrick Moorhead: I see what you did there.

Daniel Newman: That’s it. That’s it from me. That’s it from me.

Patrick Moorhead: I’m a big proponent of it? No, no. I appreciate you doing the bigger picture as I nerded out in the deets. Anyways, let’s move on to Dell Technologies and VMware earnings. By the way, very soon, we are no longer going to be able to combine these two, even though they are two publicly traded companies, they are still symbiotically connected today.

Daniel Newman: Yeah, absolutely, Pat. October, I think will be the official split day. We’re going to get a little bit more from them during an investor meeting that’ll come out in September. They will have one more quarter reporting in line, meaning obviously Dell tracks VMware and shares. VMware reports its own earnings that’s been going on. Because I think it’s what? 81% is what it’s been, the holding. Listen, Dell’s quarter was outstanding. I mean record revenue, 26.1 billion, you’re talking a hundred billion run rate, a 15% growth.

Now, Dell has the luxury of being very diversified and having a significant client business and a PC and notebook business as well as their infrastructure business. That certainly played a part in that growth. Over 50 billion in the first half and some really great EPS numbers. I truly do believe Pat, that post-spinoff Dell is going to finally return to that full investor grade that the company has been clamoring for, which could really start to see investors get behind it and the price run higher and it’s already run really well by the way, throughout the pandemic just based on these strong results.

VMware, which we’ll talk about more later, I mean, 8%, but I think the companies in flux. I mean you saw major transitions. First Pat left, then you saw Sanjay Poonen, who was really one of the heart and soul players of the company, he exited. The company is about to be fully spun off. So, I think there’s things going on beyond just running their everyday business that probably attributes to the fact that the growth is a little bit down. But remember, it’s really been tracking at around 10% each and every quarter. Quick touch on the infrastructure group saw growth, but it was modest, I think about 3%. Some solid numbers in the server space. Storage held back despite the fact that the company is still by leaps and bounds the number one storage company in the world, the high end tier of storage, definitely has seen bigger results in past quarters and that pinned the number down a little bit, but the company’s still very competitive.

You’re seeing these mid-teen double digits from some of the other pure storage, not actually talking about Pure, but maybe about Pure, but companies that are focused on just storage growing faster, but you got to remember law of large numbers. It still reminds me of it when everyone gets on AWS for not growing fast enough. But when AWS’s quarterly numbers are five, 10, 20 times larger, this is what Dell is up against here, is law of large numbers. So, definitely would like to see more growth in ISG. But remember, I mean, we’re looking … if you’re comparing with Cisco, with IBM with HPE, who’s coming next week, that’ll be more telling is, is ISG growing overall?

I think Lenovo has been the outsider there, actually had some very strong growth in their infrastructure quietly, and you had a great tweet about that and I’ll put it in the show notes. Last thing and I’m going to leave this for you to pick up here Pat, really, really impressive client results this quarter. We saw and we’ll talk about HP momentarily, but Dell, whatever they’re doing in their supply chain, whoever’s running their supply chain, the shortage does not seem to be impacting Dell as much as it seems to be impacting some of the other PC players. Very, very good results coming out of their client group. I think it was like 27% growth overall on the quarter, with commercial seeing 32%. So, I’ll leave a little bit in there for you here. I’m going to kick it your way because there’s a lot and I know you had some great thoughts on it.

Patrick Moorhead: No, you did leave a lot because there was a lot here. I mean, listen, they destroyed the quarter and yeah, I get Wall Street expectations versus all this stuff and how that works and their stock’s actually down, which is nuts. But I think they crushed … I mean, record revenue, record op inc, record PC revenue, record PC op inc, and they just killed it. I had some folks from a NetApp come on and remind me, except in storage, I know you had brought this up and Jeff Clarke was very clear on this, that we did not lose market share. In fact, double digit growth in the mid range. I believe there’s weakness in ISLAW which is the highest of highest of highest, that there’s only two providers in that space, IBM and Dell. And guess what? Even IBM had a soft quarter on its highest end storage.

So, I think it’s a market thing there. I think Dell does need to do a better job explaining that because it keeps coming up. Because when you see Pure and NetApp come out with huge growth, it begs the question. The thing about Dell and storage, it’s there an every single segment.  There’s not a segment of stores that Dell isn’t in but Dell needs to point that out.

Some other little nuggets here. By the way, I agree with you on VMware. They did have some, some big things. I mean, subs and Saas was up 23%. Their AWS Cloud was up 80%, but I think investors, they see that 8% and even comparing it, I think even to Red Hat, it’s just not as impressive.

Some other goodies that came out. We did see for the first time on the call, I think it was the first publicly time we saw the new co-chief operating officer and he was really just reiterating the opportunity here, the $1.3 trillion SAM, the expectation that the debt will be investment grade, post-spin, but all in all, I feel like Dell, I think, proved to the street that they do have some sustainable growth. Now they did at the very end, they were very clear not to overemphasize because if you look at where their growth came from, it was the PC market.

By the way, Dell did really well in PCs. They performed well and they could actually deliver. But the final comment is that they’re very highly indexed on the commercial market, which did actually have growth where the overall consumer market actually contracted. So, we’ll leave it at that. Overall, good job Dell.

So let’s move to HP earnings. This quarter was really about EPS, printer growth and PC profitability. I’ll be honest, I was a little surprised that the PC numbers came in so low and flat and primarily because of what Dell did. Now, HP is more tilted to consumer than it is to commercial, but HP still has a very large commercial presence and on a percentage basis, HP underperformed Dell in commercial, on percentage. So, at least what came up in our preview call and the earnings call with Emilio was basically, it’s about supply and essentially, that they have a full quarter of backlog, which is extraordinary. A typical backlog in a normal pre-COVID state is about two weeks. I can’t help, but to think Daniel, you know when there was HP, which was data center plus client, there are a lot of people saying, “How will HP and HPE deal with the supply chain? Because their supply chain is going to be a lot smaller.” I don’t know if this has proved positive, but I think this is the third quarter that we’ve heard from HP talking about supply chain challenges, when companies like Dell and Lenovo, they’re also citing challenges, but they’re muscling through it.

Daniel Newman: Yeah, it is interesting Pat, because based upon Enrique’s comments that we were able to hear from him-

Patrick Moorhead: By the way, sorry. I said Emilio, my mistake.

Daniel Newman: Yeah, absolutely. No, moving fast, but based on Enrique’s comments, he basically cited a full quarter of backlog, a full quarter, which I think was like quick math, six to eight times normal. Effectively the company would have been in a strong, double digit growth based upon the demand, if they were able to fulfill that demand. Clearly the companies you mentioned that did see those double digit growth rates in PC, did it based upon being able to fill and having still significant, but not full quarter backlogs. So, there is definitely a bit of an inward look here on supply chain. Is the company doing everything possible? I mean the volume, Pat, you’re still talking about a company that’s doing more than 15 billion in revenue. Maybe they’re not as big as the combined company, but this is not a small operation.

I think, as you suggested, the commercial numbers, I’d like to maybe looking in that backlog, is were there significant of commercial numbers and growth, because that seems to be where the demand and that immediate fulfillment is going. The margin was something that really was impressive though, is I think they have about a 71% year over year margin growth. So, while the revenue was only up seven it’s, 71% growth in margin, and this came from a few things, there’s definitely the strong growth, 20 plus percent growth coming out of print. Print compared to the personal systems, generates about twice as much profit for the company. If you heard, I believe 10 million subscribers now, to the company’s print as a service business. So, every company that’s in hardware right now is trying to figure how to innovate, whether it’s AAR services, recurring revenue, ARR services, cloud services.

Well, HP is putting print out there as a service and is doing extremely well, delivering huge volume and these are much more profitable businesses, which when you’re able to put a lot of cash to the bottom line, you’re able to make changes. So, any supply chain changes required will be more robust because of all this cash made available. Not to mention the company seems to have a firm belief that its undervalued because it’s paying a dividend on a quarterly basis, but it also made massive … I believe it was like 50 million shares of stock repurchased in the last quarter. So, there’s a very significant reinvestment in the company. Pat, I think that supply chain deserves a deeper look and we’re going to have to do that.

Patrick Moorhead: Yeah. And by the way, I just want to reinforce, on the profit side, they did great. I mean, PC EBT was a 52%. Print EBT was up 78% and they did phenomenal. By the way, I looked up the commercial number, commercial PCs were off 1%. I think Dell was in the 30%, 30% growth. But listen, when you don’t have the top line revenue, what are you going to do? You’re going to maximize fricking profits and that’s all you can do. I’m wondering if this does provide any pressure to HP, go after Xerox, or something. We’ve been talking about that. We’ve written about this, but the instant revenue bump that a Xerox acquisition … If you remember, Xerox thought it was going to acquire HP, which was a joke, which was actually more of a stunt. But anyways, thank you for letting me do a boomerang on that. Let’s move into SaaS, gigantic, gargantuan company, Salesforce, and the Slackquisition. How did Salesforce do for the quarter?

Daniel Newman: I keep tweeting the Slackquisition and I keep hoping it catches on. I’m not entirely sure it has, but I think I’ll trademark that, the Slackquisition. Another great quarter for the company, 23% growth followed up from 23% growth. Again, another law of large numbers situation. Now jettisoning past six billion on the quarter, beating expectations or strong beat over 50% on the earnings side as well, so more profitable. Something very interesting that was going on there was, I think in the top end, it gained about a billion dollars in software revenue, while only adding about cost at about a 10%. So, there’s really interesting economics of scale, economies of scale with software that you buy capacity, infrastructure, support, and then you can grow to a certain point without adding a ton of cost.

Eventually you have to buy more, so you’ll see those margins compress over periods of time. But the bigger story here, what’s really interesting is CRM, CRM both as a category and as the ticker for Salesforce, we always thought about the sales cloud. I mean, that’s really where it was at. That was what the business was. Well, just so you know, there’s four major segments, sales, service platform and marketing and sales is now the slowest growth category. It’s also the second smallest of the four categories now. The missing story here, and I wrote a piece on MarketWatch about this and I’ll put it in the show notes, is that what investors, and what the market, and what industry really should be paying attention to when it comes to Salesforce, is their whole platform play.

Really the story as I see it, is there are many players in each of the four categories. If you go to CRM, if you go to service cloud, if you go to marketing, you have competitors. Some really good companies, you’ve got the SAP’s, Oracles, you got Adobes. But what Salesforce eye is on is not any of those individually. Salesforce’s eye is on this two horse race with Microsoft. It’s very clear what’s going on here and the $27 billion acquisition of Slack, a company that was only running at a billion dollar run rate at the time of the acquisition, 27 times revenue and a company that was growing at about 10% as fast as Zoom during a pandemic that was powering remote work, was all about building this operating system for work of the future.

Salesforce and Marc Benioff understand that if you want to win the net revenue expansion across all your products, what you need to do is build the epicenter of how people engage with work. The past was email, the future is asynchronous collaboration and communication. There are many tools that allow us to video meet. There are many tools that allow us to chat, but there are a few tools out there that allow us to connect, our ERP, our CRM, our marketing stacks, our entire data, our platforms, our infrastructure, our unstructured data sets, social media, contact center, services and make it all available. And by the way, connect at all where you can use a chat app to make meaningful changes, inputs and communications throughout your organization. That’s what’s going on with Salesforce. So, while the growth in their platform of 24% powered by Tableau and MuleSoft at this point largely, now Slack is going to get added into that category, but it’s not just about the revenue that Slack is going to add into that category, it’s about the fact that all of these other things that Salesforce wants to sell are going to become more saleable because of Slack.

That’s the whole gamut here. Salesforce nails this, they’re going to be very competitive with Microsoft. Now, there’s some gaps, Salesforce doesn’t have IaaS, but they have a very deep partnership with AWS. Salesforce doesn’t have video yet, in the sense of Slack is not really the tool for doing video and that’s where a Zoom tie up with Five9 gets more interesting. That’s where Teams is obviously interesting, WebEx from Cisco, but I believe it’s an easy add, including they could use Chime if they really wanted to go there through their AWS partnership to add that layer in there.

They have a productivity stack with Quip. It’s been underutilized and undersold. So, there’s just a lot going on here, but that is the untold story of these earnings. The numbers were good, the numbers were fine, but the question mark is can Marc Benioff, who’s talking heavily about the future of work being remote and hybrid and not changing back to an office-based work environment, capitalize on a $27 billion acquisition by tying in his entire stack of services, using a few strategic partners and trying to compete with the amazing job that Microsoft has done building an entire, IaaS, PaaS, SaaS ecosystem, head to toe, fully integrated and ubiquitous all on the Teams surface? I guess we’ll have to see, Pat.

Patrick Moorhead: Yeah. So I do appreciate you leaving me content. I mean, listen, first of all, congratulations on financially architecting a great quarter. Big questions I have are, do you know, a single person who uses Quip? Have you ever met anybody who uses Quip? And how many people are using Salesforce email systems or Salesforce video? Most of the information, at least about companies, is being created in email and video and in productivity applications. How does Salesforce get access to that information?

Now, it has good access to customer information, hence Salesforce from a CX perspective. I give them credit there, but how do they tap into any of that information without buying their own video service, building their own video service with AWS, like I think they’re doing now, where they can get access to that video?

And to your IaaS commentary, compared to Microsoft, Salesforce cannot access that profit pool. So, AWS has a 31% op inc and let’s say they give Salesforce 50% discount, which takes you to 15% op inc, that’s 15 points. By the way, they would never do 50% for them. But let’s just say worst case, that’s 15 points of margin that the company doesn’t see. The other thing that I’m going to start digging into are acquisitions. Like you said, sales was basically flattish. If you look at the acquisition of Slack, Acumen, Velocity, Evergage, ClickSoftware, Tableau, Datorama, MuleSoft since 2018, those businesses were generating $3 to $4 billion annually on their own. So, I’m wondering what is the net additive effect? I give credit to Salesforce salespeople for doing this, but I have yet to really see the true power of integration aside from selling, which is important.

So, those are my thoughts. Congratulations to Salesforce on their quarter. Daniel, let’s move on. We said chips and Saas, but let’s go from Saas to chips. Marvell had a very good quarter. And by the way, Marvell is all about data-centric chips for the data center, and the cloud, and the edge have done a really good pivot here. I think the big highlight here is revenue is up 48%, which is phenomenal. Data center was 40% of their revenue. That to me, clearly shows this four-year turnaround here where they were primarily consumer. Consumer and a little bit of storage. And through acquisitions, through divestitures they’re at this position here.

Biggest thing, which is in here, the breakout. They broke out their business and Daniel, you and I both know that as a sign of confidence. We talked about it with Qualcomm and we’re going to talk about it here with Marvell. Their new breakouts are data center, carrier infrastructure, enterprise networking, consumer, auto and industrial. And what did we see there? Well, we saw what we expected, that consumer, as a percentage is down. In 2019, it was 37% and now it’s 16%. Other big shifts, data center was 27%, now it’s 40%. So essentially, these breakouts are just another affirmation that the strategy is working and I also think providing confidence to consumers because more information is always better for investors.

Daniel Newman: Yeah, it was a very solid result, what? 48% revenue on a year. Seeing a lot of the shift, you mentioned away from consumer. The data center’s now tapping into about 40%. The company’s definitely tapping in to the areas of growth that the market is excited about that are going to continue to scale. They didn’t really mention this specifically, but the company’s a really interesting foothold into 5G. It’s got strength in data center, infrastructure, networking, and in automotive. These are segments that the biggest tech companies in the world want to be a part of.

Marvell has earned a very strong multiple on its earnings because people see it executing. Matt Murphy has done a very good job since he’s come in, his new leadership team, people he’s added, the acquisitions that have been made, whether that’s been Inphi, I mean, obviously Cavium spurned it all, and the company’s continuing to make moves, Pat.

Innovium this quarter, you and I had the chance to talk to Chris Koopmans and other executives from their team about the specifics of that deal, basically broke this story, didn’t we? Seeing that they’re continuing to identify, what I like about their strategy is they seem to find these little spaces between, and they really lean into it.

I mean, we have heard a lot from Nvidia about the DPU, but Marvell was really the company that started breaking this into the market and you know what, Nvidia just put its super power behind it and watch it go. But this whole idea of being able to break out your networking and storage and give more processing power to the core CPUs to do what they’re best at doing, this is a big deal as we’re trying to scale up the throughput and scale up the ability to support workloads in the growing data ecosystem.

So, that’s what I like about Marvell. The numbers are good, but what I really like about the companies is they’re finding spaces, where their business isn’t under a ton of duress. They’re seeing as a company that really offers value in these white spaces. There’s a lot to like about that because it’s just a situation where growth is going to be there because they are where they’re needed, and they’re side-by-side with some of these big names, not going head-to-head all the time, which is a really good thing.

Good quarter, good quarter, Marvell. Excited to continue to watch the company grow. I think the market has definitely recognized it, but I think there’s still potential.

Patrick Moorhead: Yeah, there is. It’s so sticky, with the two acquisitions they made and they have a lot of IP that you can’t just trade out like you can a CPU. So let’s move on, we’re now The Six Seven podcast.

Daniel Newman: Six Six.

Patrick Moorhead: Yeah, Six Seven, but hey, let’s go to this final one. So, Apple came out with an announcement last night that that says, “Hey, we’re the good guys here in respect to this class action lawsuit.” What’s going on, Daniel?

Daniel Newman: Yeah, this is a really interesting one and I really enjoyed your tweet. You came out, broke it first. Couple of people pinned it into my inbox right away. So over the last several months, you and I both had a lot of opportunities. I’ve made my Network Circuit, CNBC, iFinance, MarketWatch talking about regulatory. There was these new bills that got passed and we’re looking at the scrutiny, we’re looking at the future. We’re saying what antitrust legislation and what antitrust activities out there really have a shot of creating meaningful change?

So this is interesting because it was self-inflicted by Apple, essentially coming out and saying, “We’re going to settle. We are going to go ahead and we are going to settle a class action lawsuit with the developers.” The charges would’ve been led by the Spotify and Epic Games, those are the two most notable that have taken place over the past several months, where the developers are saying, “There is no option for us.” Apple controls over 50% of the US smartphone market and a significant chunk of the world. For a developer like Spotify and Epic Games that wants to give their users a chance to pay directly to them, to use the service on a device without having to go through the App Store was impossible. It didn’t exist, there was no way around it.

So Android has a way around it. It’s not a very good way around it, but you can do it. That was the thing, when I’ve been basically talking, Pat, to anyone that would listen. I was saying that this is the one that’s going to happen. Apple, if they do not change … First of all, they continue to raise their rates, which was very monopolistic, knowing they had so much power. Remember they went from 15% to 30%? And then on top of it, as Android and others gave some option, Microsoft probably leading the charge of being most open, yet not having necessarily the mobile OS in the same capacity, Apple just doubled down. They literally doubled down.

They doubled their price and they said, “No, we’re not changing. Our platform is awesome. You want to use it? You pay the toll.” That’s the thing, you can’t have a toll. In the anti-competitive space, you can’t toll people for using your platform. Although that’s what’s happening every day and that’s what regulators want to know. Can we fix this? Can we change this? I think the change is this. Platforms are largely awesome. I don’t care if you’re talking about Facebook, Apple, Amazon, they offer a ton of value. People’s experiences are better because of them, but you can’t give no option.

You give no option, now you are basically throwing out the checker flag for regulators to come after you. Apple said, “You know what? We’re going to pay now and hopefully get out of the way.” Pat, you and I both love The Wolf Of Wall Street, remember that inflection point where he could have taken the charge when the SEC gave him the chance to walk away and he didn’t walk away? Apple’s walking away and I think they’re making a good decision here that’ll probably slow down, major antitrust against their App Store activities. Although this may or may not be the end, but I think it’s a gesture with the intent of slowing down enforcement.

Patrick Moorhead: Yeah, I’m going to just say right now, this is not the end. This will have very little impact with Epic versus Apple and the global antitrust scrutiny of Apple. Essentially what Apple agreed to do was allow ISVs that are on the platform to email their customers, and also let them know that there’s another way to pay for it. By the way, that doesn’t include an alternative payment on the platform itself.

Daniel Newman: Nope.

Patrick Moorhead: And this was a group of small ISVs in this class action lawsuit and this gesture … I don’t always agree with what the folks over at The Verge say, but I just cracked up with some of their comments. We’re definitely on the same page on this. Any of the press that gets sucked into … By the way, awesome PR. I mean, Apple is incredible in PR. Really needs to really do the double-click on what this really means and what it doesn’t. I believe they’re going to be forced to accept alternative payment methods in the app itself, in the Apple platform. So with that, Daniel, any other thoughts?

Daniel Newman: No, I just wanted to say you made a great point. Looking at the macro here, the fact is,  I think hopefully when I summated this about being a gesture, what I guess I’m saying about the gesture here is that Apple is showing a willingness to acquiesce. And I’m wondering if they’re hoping that regulators will slow their roll. That’s all I’m getting at is, “Hey, slow your roll.” Because unquestionably, the most monopolistic behavior I could identify on all the platform companies was Apple’s App Store. It just was. There’s just nothing else that was more clear. There was other minutia about algorithms and ways that products are prioritized on different platforms using AI and search. But Apple was just like, they were just leaving their stuff, they’re leaving their laundry in the road and they were like, “Come after us.”

So this just to me, was a gesture. I just don’t know how much it’s going to work, but I feel like you said their PR so good, so much feel good about this. Like, “Look at these nice guys doing this great things for the little companies now.” I don’t know, it’s going to be a fast…

Patrick Moorhead: Daniel, I got to tell you, I think they knew they were going to lose this class action lawsuit, and so they just gave up.

Daniel Newman: It’s not charity, dude.

Patrick Moorhead: They’re smart. I mean, look what they did with Qualcomm. The second day of what’s called the Qualcomm ODM trial in San Diego, they saw what they were up against and they quit and they settled and signed a multi-year licensing agreement with Qualcomm. So Daniel, we have turned this into The Six Seven show. We need to wrap this up. I just want to say, thank you for everybody coming on the show. If you liked what you heard, you can find me on Twitter. If you disliked what you heard, you can find Daniel. Press that subscribe button, as I hear Mr. Fanzo, smash that, smash the button. Press the damn button.

Daniel Newman: What’s up Brian?

Patrick Moorhead: What’s up Brian? But here we are, have a great weekend. Thank you for tuning in and we appreciate you.

About the Author

Daniel Newman is the Principal Analyst of Futurum Research and the CEO of Broadsuite Media Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise. Read Full Bio