Apple's $3 Trillion Valuation

Apple just released impressive quarterly results: $57.8 billion in revenue, 51 million iPhones, 26 million iPads, 4.8 million Macs, and 6 million iPods sold. So how should we value Apple? How much is a share of Apple really worth?

Let’s combine a few things to value Apple: (i) Warren Buffet’s intrinsic value model, (ii) market disruption theory, and (iii) jobs-to-be-done innovation theory. 

To read the headlines, you might think Apple is, again, doomed: “Apple’s Shares Slump on Weak Forecast” and “Apple iPhone Shares, Outlook Come Up Short” are just two examples. These headlines always encourage people to tell Apple what they must do. Here is a great list of past examples of “Apple must do…” (via John Gruber). 

If you look at any valuation number for Apple (for example, a P/E of 12.6, an EBITDA multiple of 8.4) it is remarkably low relative to its competitors (for example, Google has a P/E of 32.2 and an EBITDA multiple of 18.6).

To put this into perspective, if Apple had Google’s P/E,  it would be worth $1.2 trillion (yes, trillion with a “t”) instead of the $452 billion it is worth today. So why is Apple valued with a multiple so much lower than Google?

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The Facebook Segmentation Problem

Facebook is about to go public, so obviously the company is getting a lot of attention and focus on its business and long-term prospects. I am not a frequent Facebook user, but I have enormous respect for fellow entrepreneurs and Mark Zuckerberg has done an outstanding job of building a product that people love to use and a very successful company. So congrats on the upcoming IPO. 

The big question, of course, is what is Facebook worth? It is an interesting discussion not only because so many people use Facebook, but because it is going public at an extraordinary valuation. Since Facebook provides a service that is free to users, it has to make money from its customers, advertisers. 

This is the interesting long-term question: can Facebook create more value for its customers (advertisers) than competitive solutions. If it can, it will continue to thrive, if not, it is a serious risk for any investor. Its users might be happy, but its customers won't be. 

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Pivot Away from Pivot

Pivoting is all the rage in startup land. But it is a concept that I believe is extremely harmful to entrepreneurs. Pivoting (and "failing fast") is exactly the wrong approach to launching a new company. 

The problems with "pivoting" don't get enough attention. Venture investors and successful entrepreneurs love to tell the stories of the early days of their startups. 

And this is understandable. I have been there, and the early days are exciting. You start with what seems to be a great idea, you raise venture capital, you start hiring a team willing to take enormous risk to build something new. 

Fred Wilson recently posted about startup creation stories. And there are lots of lessons to be learn from these stories. 

But there are many, many more lessons - and better lessons - to be learned from startup failures. 

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Market Sizing: Numerical Narratives

Chris Dixon posted about market sizing using narratives as opposed to numbers, and Fred Wilson agreed - even demonstrating market sizing with a cartoon illustration. 

It is easy to see why Chris' and Fred's "narratives over numbers" market sizing might be appealing. After all, as Brad Feld writes, "Almost every market sizing presentation is incorrect - by a lot. Enough to make it irrelevant." Chris writes, "you should never rely on quantitative analysis to estimate market size. Venture-style startups are bets on broad, secular trends."

This seems to make sense: tell a story because your numbers are going to be wrong anyway. But let's analyze the traditional market definitions to see why traditional quantitative methods are incorrect. Non-quantitative analysis (a story) is not enough. Market sizing has to be quantitative because it is a tool to make an investment (i.e. a quantitative) decision.

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Fail Fast vs. Zero Burn

Mark Suster has a nice post about the "fail fast" method. He rails against fail fast, and rightly so. He writes:

I have met so many young entrepreneurs who tell me, “we don’t need business plans anymore, there a waste!  We’re going to put our product out there and fail fast!”... or they tell me, “we’ll launch a bunch of products and see what works.”  That is the old “throw spaghetti against the wall and see what sticks” approach.  It’s intellectually lazy and I doubt many great companies are born this way.

I definitely agree with Mark's view. In fact, business plans are extensive and they take time and money to create for one reason: the goal is to never fail by reducing as much risk as possible before investing in development. Of course most of the venture community (and the broader innovation community) thinks this is impossible, but jobs-to-be-done innovation has shown it is possible by using scientific methods to understand markets and customer needs and significantly reduce venture risk. The problem is not with the idea of creating a business plan, it is with the inputs to the plan. The inputs (i.e. the definition of a market and a customer need) have to change, otherwise creating the plan will not result in a higher chance of success.

A better, lower risk model would be a "zero burn" model. In the traditional model capital is invested in overhead and development ("burn") to build and launch a product idea. The fail fast model just tries to accelerate this by launching multiple products with less capital, but the process is fundamentally the same.

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Top 12 Mistakes (3,4, 5)

I wanted to continue my analysis of Marty Cagan's Top 12 Product Management Mistakes. I already analyzed the first two mistakes here, and I included an introduction to jobs-to-be-done terms. I think it is helpful to look at the rest of the mistakes and offer ODI-based solutions. 

Mistake 3. Confusing Yourself With Your Customer

Marty identifies the third mistake as thinking "of yourself as more like the target customer than you are." This is a good mistake to avoid, but there are two dimensions to this mistake. The first is the functional job that the customers are trying to get done. Without a detailed understanding of the job, all the process steps in the job, and all of the needs in the job, it is almost impossible to make sure that your solution will meet the customer needs. The second is the consumption chain jobs (install, interface, learn-to-use, maintain, etc.). In this mistake, Marty is really talking about the consumption chain jobs (the "usability" in Marty's terms). 

Confusing yourself with your customer is only part of the reason usability testing fails to uncover flaws in the product. The real reason is because the product does not satisfy the functional job and the needs. Customers don't buy product to interface with them or to learn to use them. They buy products to get a functional job done. So it is no surprise that usability testing, no matter how much of it you do, fails to prevent a flawed product launch.  What is needed is testing of the features against the needs in order to validate that the feature satisfies the functional job's needs. And because needs in the job are metrics, satisfaction levels can be measured accurately. 

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Venturesome Consumers: The v1.0 Mistake

I'm reading Amar Bhide's The Venturesome Economy and he mentions Apple's iPod as an example of "the venturesome spirit of U.S. consumers".  He quotes a WSJ article about Apple:

"Steve Jobs can introduce 'clumsy, overpriced, 1.0 versions[s] and trust that the army of several million Apple true believers will rush out and buy. That is the crucial, often overlooked, key to Apple's continuing success."

I could not disagree more. Apple's success is not based on clumsy 1.0 versions at all. This is a simplified explanation of why their products often define new categories, and this type of thinking is why entrepreneurs and venture investors think the "fail fast" strategy will work. Focus on the early adopters and iterate the product until it is ready for the mainstream. 

The problem with this analysis is it does not focus on the job that Apple helps consumers get done. Consumer jobs are complicated and each one has  50-150 different metrics (needs) related to performing the job with speed, efficiency, and predictability. 

So why does Apple succeed? Because it focuses on the job the customer is trying to get done, and it is exceptionally good at identifying underserved jobs and satisfying the metrics (the needs) related to getting the job done. Think about the jobs they addressed with the iPod: storing music, listening to music, finding music, organizing music. The reason iPod v1.0 was successful was not because "true believers" bought it. It was because it got those music related jobs done better. 

I still use my v1.0 iPod as a music storage system for my car. And in 2009 it still works as well as it did when I bought it because Apple helps me get the job done better.

Why Apple Wins: It's the Job

Apple's winning streak over the past decade (OS X, iPod + iTunes, iPhone) is based on helping customers get jobs done better. Of course, their user interfaces are legendary, but customers don't buy products to interface. They buy products to get functional jobs done. 

This iPhone ad is a great example. The focus is on the jobs you can get done.

93% Chance of Getting It Wrong

Traditional startups are constantly iterating their strategy to find one that works. So it is no surprise that business plans are a waste of time for fundraising. VCs are really investing in the people, as they will readily admit. But it turns out business plans are a waste of time for product development as well. I have been looking for data to support this, and I finally found it. 

A study done by Amar Bhide, found that 93%(!) of successful startups reported that "the strategy that led to their success was largely different from what they had originally planned."
 
So now we know: a strategic plan won't get you funded and it won't lead to a successful product. What is an entrepreneur to do? There are two possible conclusions. 
 
First, get rid of planning altogether and just wing it. This is the fail fast strategy: build and ship quickly and cheaply to see it anything sticks. By definition this strategy will only work if you can make more bets and hope that a few win. In other words, this strategy doesn't change the success rate, it just changes the number of bets and hopes a very small number of successes make up for all the losses. It is basically a lottery. See Y Combinator and Tech Stars
 
The second option is to fundamentally change the way strategic planning is done. From the perspective of the entrepreneur, this is the only option because starting and running 20, 30 or 100 companies is not possible. The starting point has to be a different unit of analysis for strategic planning. And that unit of analysis has to be the job the customer is trying to get done. 

Why Virtual Is Real: It's About the Jobs

Bill Gurley has a great post about monetizing social networks. He analyzes TenCent, a Chinese IM company, and uses virtual world examples to demonstrate how social networks could monetize their huge base of users. The model has a few different names: freemium, digital item, micropayments. The New York TImes also has an recent article on digital goods.

Bill writes: 

It is my perception that most U.S. executives have trouble conceiving and believing in the digital item model. For starters, they simply think it’s strange. “Why would someone buy clothes for their virtual avatar? That’s weird.” What they fail to realize is that U.S. consumers pay for “virtual” things all the time.

And he gives a good example of consumers buying brands that are basically virtual, i.e. non-functional. For example, the willingness-to-pay for a pair of Channel sunglasses drops significantly if the Channel logo is removed. "People are buying an image" because they "care greatly about how they want to be perceived."

So yes, customers do by products that project an image about themselves in both the virtual and real worlds. In other words, they have emotional jobs that they want to get done in both worlds (and these jobs can be personal or social). 

The crucial distinction is between the functional and the emotional jobs, not the physical and the virtual worlds. In both worlds customers will need to get functional jobs done to accomplish goals and complete tasks, and they will need to get emotional jobs done (personal jobs to improve how they feel about themselves and social jobs to improve how they are perceived by others). 

If social networks want to analyze the opportunities for monetization, they need to focus on the functional jobs for two reasons. First, because these are the jobs that customers are more likely to have a willingness-to-pay for, and second, because it is much harder to consistently build solutions to satisfy emotional jobs (think about how fast brands and trends come and go).

It would be interesting to look at all the virtual products that have been sold by TenCent, Second Life, and ChangYou and divide the revenue and margins into functional and emotional job buckets (i.e. how much revenue has been generated by functional jobs vs. emotional jobs). 
 
I suspect that the opportunity for solutions to functional jobs is much higher than that for emotional jobs.