AUDIO - Tech analyst Rob Enderle talks Apple, Tim Cook, iPad 3 and Foxconn troubles

Zetter: Hello, I’m Mark Zetter with Venture Outsource. We’re talking with Rob Enderle, analyst with the Enderle Group based in Silicon Valley.

Before we begin our conversation, if someone in our audience has suggestions for future conversation topics or feels there is a particular person they think would be well-suited for an upcoming conversation, you can email us your comments or suggestions at insight[at]ventureoutsource[dot]com.

So, let’s get started.

Rob, you’ve been heralded by ZDNet as one of the ten best techies to follow on Twitter. What are your thoughts about that?

Enderle: Well, it’s nice of them to do that. It’s always nice to be recognized, and I do stay fairly active on Twitter and try not to drive people nuts. So, it’s just great that they’ve identified me in that rarified list of tweeters. So, at least they think of me as a rarified tweeter and not a rarified twit.

Zetter: [Laughing]

Enderle: I’m glad for that.

Zetter: We’re talking about Apple, and a number of things in the news lately regarding the company. What are your thoughts about some of the leading stories in today’s headlines whether it’s the Apple browser and Google, or…

Why don’t we start there with recent reporting going on regarding Apple and Google and the browser.

Enderle: Well, first on that, the Wall Street Journal did an investigation and found out that [Google] had penetrated the security surrounding, Safari and had bypassed user settings and not – its user settings because the browser defaults as being secure, arguably more secure than what most other browsers do when they first install.

And Google decided that they would go in and bypass those settings and started tracking the Apple users without the permission of those Apple users. And did so after they had already signed a content decree with the FDC with regard to privacy.

And a content decree that a number of folks had indicated was – I mean simply didn’t go far enough. I guess this was Google’s way of emphasizing the fact that the content decree didn’t go far enough, and end result was Apple customers, had been tracked evidently for some time.

And then afterward, when this was pointed out, they turned off their process and ceased doing it, which I think would indicate that they were well aware that they were doing something wrong even though they argued at the time they were caught that they were not trying to get around Apple’s closed nature. And, do what they thought should’ve been done, which I guess is make sure that they’d benefit from the information that they’d collection from Apple users.

It’s like somebody getting caught after stealing from somebody and then saying, “But had I did it for the global good because the person I stole from was such a miserly fellow.”

It’s kind of a Robin Hood – instead of stealing from the rich and giving to the poor, you’re stealing from the rich and keeping it.

So the end result was – is that it’s been getting a lot of play, and of course today it turns out that they’ve done pretty much the same thing to the Microsoft browser’s as well, which resulted in the cease and desist order from Microsoft.

So, hey, if you’re gonna go around pissin’ people off why not go after both Apple and Microsoft on the same day. Few people have that kind of strength in their commitment.

Zetter: So looking at Apple, there have been some changes with Steve Jobs’ passing. What are your thoughts about the ability for Apple’s technology roadmap or future capabilities to execute against the same type of quality under Tim Cook compared to when Steve Jobs was there regarding innovation challenges, the makeup of the executive team.

What are your general thoughts on the company today?

Enderle: Well, the interesting thing is to really understand the role that Steve Jobs played. He wasn’t the innovation center of Apple by any stretch of the imagination. He took credit for a lot of stuff, but other people came up with the iPod, other people championed and drove through the iPhone.

Clearly, he was anti-tablet early the last decade, and you’ve got to believe the iPad was probably somebody else’s idea as well.

The trick with getting something through Steve Jobs was to convince him it was his idea so he would champion it, in which case he would husband it through the process.

“Tim Cook is not a product guy. He also doesn’t have somebody that can pitch a product like Steve Jobs did. Tim Cook doesn’t even like getting up in front of an audience.”

— Rob Enderle

And that was really his benefit. He could take something with largely an idea that somebody else came up with, and he could take it through to its full potential. He would assure that it was done right. And not belittling Steve. This is actually a very rare skill.

I mean, anybody can come up with an idea. We’ve certainly seen Microsoft, for instance, generate tons and tons of ideas the last decade – most of which didn’t go anyplace – from the Zune to their media center PC to the portable media player, to their origami tablet to some things people don’t even remember.

For Apple, they had very few failures.

Pretty much everything was a success and that success was largely driven by the fact that Steve Jobs husbanded the product. He made sure that engineering and design got along; that neither side was overtly overcome, that the product met certain critical standards.

And he basically was the focus group inside the company in terms of how something should be built.

In fact, you could see his influence when you compared products like the iPad, which he really supported, and Apple TV. He’d never really understood – he never really understood or liked television, and Apple TV didn’t receive his full support.

And, of course, Apple TV, while it’s arguably the best product in its class, it didn’t do particularly well.

And so, without Steve Jobs, Apple has lost its primary product focus – kind of its quality core. Also, it has lost its principle pitchman because the other thing that Steve Jobs did is he could get up in front of an audience and he could convince us of something that we otherwise wouldn’t buy.

I mean, let’s take the iPhone, for instance. It’s basically a direct copy of the LG Prada. The LG Prada didn’t sell particularly well.

The iPhone, of course, has had all kinds of sale records. Almost an identical product, the iPhone was better crafted. In other words, better finished. But, it was also better presented even though the LG used the famous Prada brand.

LG didn’t really promote it all that much, and in fact, the people here in the U.S. probably never even saw it. Apple put the full strength of Apple marketing behind the iPhone, pieced it out, got people excited and then it became – it went from a form factor people just wouldn’t buy because, before that, some people were not buying that class of phone in any real volume no matter who made it – to the one that’s set the standard for all other phones.

That was the magic of the Steve Jobs pitch, and right now Apple doesn’t have somebody with Jobs’ power to husband the product.

Tim Cook is not a product guy. He also doesn’t have somebody that can pitch a product like Steve Jobs did. Tim Cook doesn’t even like getting up in front of an audience. And, really, nobody else has Steve’s stature, and so that’s where Apple’s going to have some difficulty.

It’s not like they’re not going come up with great ideas. It’s just that making that idea magic, assuring that it’s done, making sure that it’s properly finished, and assuring that it is pitched to an audience in a way that will have them salivating to buy it….rhat’s the skill set that they have not replaced, and I still don’t think they recognize that they’ve really lost it.

And the end result is as we go into the fourth quarter I’m very concerned with Apple being able to maintain its very high numbers. Up until the fourth quarter, it can probably roll through on momentum.

I expect a new iPad this month, to do reasonably well. But, I do think we’re going notice dramatically, the way the product is presented, that it’s simply not going to have the magic that previous versions have had even though it’s going to be a lot better.

So, we kind of saw that with the iPhone 4S. It came to market and, because everybody was expecting the iPhone 5, it got very disappointing reviews even though it was substantially better. Largely, a brand new and redesigned phone from the iPhone 4. Much better.

But people just didn’t get quite as excited. They still eventually lined up and bought it in high numbers. But that’s the difference between momentum and somebody that’s actually driving the engine, and I think to a certain extent, while Apple is still running on momentum and a substantial amount of it, the fire and the boiler – if you want to use the old steam engine analogy – has significantly dampened with Jobs’ departure and unless they figure that out and light a fire underneath it, that train’s going to eventually slow.

Zetter: Looking at the executive team minus Steve Jobs, what would you say is one of Apple’s top strengths? And, what would you say is one of their top weaknesses from an executive team level?

Enderle: Well, in terms of operating efficiency and design talent, engineering talent, they’re still arguably one of the best companies, if not the best company in the world. They have been quietly bleeding talent for those folks that didn’t receive the large retention bonuses. A number of them had been wandering out.

I’ve been to a number of meetings where you know first- and second-line managers that are recently ex-Apple are now going out on the roach pitching their now current company, many of them being startups.

But in terms of the top executives, they mostly remain in place and their ability to execute the design of product, and to engineer product, still is pretty much the top of Apple’s game.

Where Apple is short right now, is the ability to really husband through a product and make sure that there’s the proper balance between engineering and design. If [Apple] it strips too far to the design, you get a product that’s pretty but [it] doesn’t work well, and it’s too far to engineer because when it’s well engineered, we get a product that, you know works well but it’s not particularly attractive.

And in either case, if you lose the ability to pitch the product, really – pitch it so people see it for its damages, for its benefits as opposed to its faults, then you’ve got a serious problem because the faults in an over designed product or the faults in an over-engineered product are pretty pronounced.

And we see this in a much more competitive market these days with tablets and phones that have mostly been using Google’s platform that wrapper Apple on all sides. And we do have the Windows 8 launch, with now, an estimated $1.2 billion of marketing for a variety of vendors behind it hitting in the fourth quarter. And that will easily eclipse Apple’s available budget probably by a factor of ten.

So they’ve spent a lot of marketing money pointed at a market, and with at least somewhat similar products, but not so much the whole Nokia-of-Microsoft-home-thing related that caught a lot of steam.

But Samsung and Android have been doing rather impressive things of late. And the tablets with Windows 8 should be pretty compelling, so that hits both the iPad and the iPhone. And, Amazon, in the fourth quarter, did show a potential Apple weakness with the Kindle Fire, which set sales records, and a first real tablet that set sales records that wasn’t from Apple.

So, I think fourth is going to be a problem for the [Apple], but I’m still expecting to think things up until we approach the fourth quarter. And then we should start seeing weakness, with the first weaknesses, I’d say – being when the new iPad launches – we should then get a sense for just how far off the mark Apple is with regard to presenting offerings.

Zetter: And you’re referring to the iPad 3, of course.

Enderle: iPad 3, right.

Zetter: So, getting products to the market… Prior to [this] they’ve got the manufacturing and the factories and the facilities in Asia and, so forth, with Foxconn. What are your thoughts on the recent discussion and admission by Foxconn to be raising employee hourly rates. And, what type of adverse impact do you think that’ll have on the supply chain, or Apple’s pricing and their go-to-market strategy?

Enderle: Well, if Steve Jobs was still there, I’d say it would have no impact. But, Steve Jobs said it was very clear to Foxconn that if they increased benefits to their employees they [Foxconn] were going to absorb the cost.

And to the one new plant that they built specifically for the Apple employees, that meant they actually shifted manufacturing out of that plant to an older plant where the costs were lower and the conditions were much worse. That was last year.

Tim Cook is different from Steve Jobs in a number of ways. One of them is that he’s much more empathetic, and I think he’s willing to take some of the risk of increased cost.

You know, typically technology comes down in price over time, so letting, for instance, the iPad hold the price and letting perhaps the new – what is rumored to be a smaller cheaper iPad – come in at a slightly higher price to maintain margins seems to be the most likely path that they’re going to take.

And they recognize that the labor in China isn’t that expensive to begin with. So, where you might pay a 25 percent increase for assembly staffed here in the U.S. could be significant, in terms of dollars it’s not as much in China.

They’re also eliminating overtime, which could actually increase the overall quality – or lower the cost of quality problems because, you know, people are tired. They just don’t do that kind of work often, and they were really working a lot of these people to death.

So probably creating secondary quality problems, or raising costs, and the combined impact of that is probably somewhere in the neighborhood of $10.00 to $25.00 per product.

Clearly, in the iPhone lines, that ought to be absorbed by somebody because the market won’t accept a price increase. They’re already at break point.

But in the iPad products, I think they can pass most of that onto the individual consumer just by not reducing prices as quick, or making some different technology choices inside the product, to allow them to maintain margins.

Zetter: Rob, is there anything else about thoughts you have on Apple or Apple products you’d like to share with our audience?

Enderle: Well, the only other thing is, it was unfortunate that Apple was held up with regard to the Foxconn problems. Clearly, Foxconn and many of the Chinese; Taiwanese, Indian, Eastern European manufacturers treat employees pretty roughly.

In fact, in a lot of the emerging markets employees are treated very poorly.

The Apple builders were actually some of the better treated.

Apple was just called out because they’re such a rich vendor and they’re so successful.

The problem with picking on just vendors that are very successful is all you end up doing is making them less successful. I mean, Apple really is not in a position to change labor practices in a foreign country.

They’re only in a position to be able to bid stuff out, and they are in a competitive market. And by pounding an Apple, there is a pretty significant risk because all you do is you shift business between Apple and Samsung, who exist in Korea, and who would not be under the same pressure.

So, I think that was just an unfortunate event, and one that’s made in the end, actually makes things more difficult for a lot of workers in China, than it is going to actually improve their working conditions.

Yeah, it’s going to be a great effort to make things look better, but recognize that when prices go up in one place they’re invariably being cut in another and Foxconn’s not going to cut their own margins and recognize that if prices don’t go up for Apple products that means Foxconn’s going to be absorbing it, and the way they’re going to absorb it is they’re going to cut benefits for the non-Apple assembly people, and that means for a number of folks things are probably going to get quite a bit worse.

We probably won’t look at that, and so we won’t have a problem with it happening, you know. Where, as a group, we look at the sparkly object.

And often, vendors are like magicians, they keep us distracted from where we would otherwise want to look and fix things. So, I think the way to fix a problem like that is at a government level and not by pounding on any one vendor. But, that’s a personal opinion.

Zetter: Again, we’re talking to Rob Enderle, analyst with the Enderle Group. Rob, thank you.

Enderle: It’s been my pleasure.