Silicon Valley Watcher - at the intersection of technology and media

Last week I wrote that Apple would have the ability to delete content on the iPad.

The iPad And Its iDelete Censorship Technology - SVW

It seems Apple is already giving us a glimpse of the future with is latest ban on "sexy apps."

Jason Kincaid writes that this is "scary" because the banned apps are apps that were Apple approved. . . until Apple suddenly, and without warning, changed its mind and yanked them from its App store.

...it's setting a scary precedent. It's showing that it's comfortable throwing out applications that developers have spent their time and money building, without even bothering to give them advance notice.

This also sets a precedent for the iPad because both the iPhone and iPad share the same apps, the same technologies, the same online store.

You can bet any unauthorized biographies of Steve Jobs won't get iPad approved. But what about a review of an unauthorized biography of Steve Jobs in the New York Times' iPad version?

I'm sure you can come up with other scenarios. This type of thing is bound to be causing many publishers planning iPad versions of their newspapers and magazine pause for thought.

The low-end iPad has a retail price of $499 and a materials and manufacturing cost of about $229, according to iSuppli.

Clearly, Apple has plenty of room to be flexible on pricing, just as it did with the iPhone, which started at $599 and is now $199.

Apple plans to take a 30% cut on any media that is bought by iPad users through its online store.

That means Apple could sell the iPad for $100 and still profit from all the media it can sell over the lifetime of the iPad.

But what is more likely is a situation where Apple can sell the Pad for $100 to publishers and then they can offer it for free as part of a subscription deal.

For example, Ryan Tate over at Gawker, reports that the New York Times is considering charging as much as $30 per month for a subscription to the iPad version of the newspaper.

At that price, the New York Times would have enough margin to offer a 'free' iPad with an annual subscription. Especially since it can charge advertisers higher rates for the richer ads it can deliver on the iPad.

Another scenario is that publishers will band together and offer a free iPad with a bundle of subscriptions, say a local newspaper, a book of the month club, and some magazines such as Atlantic Monthly or the Economist...

Whatever the bundle, there is clearly plenty of room for jiggling the maths and coming up with a free iPad deal in exchange for a subscription.

A key advantage for Apple is that the publishers will be advertising the iPad bundles, Apple won't have to spend a dime on that promotion -- another reason why it can offer the iPad for a reduced price to the publishers.

However, while newspapers and magazines can ask for higher ad prices on iPad media, they will also have to provide metrics data. Unlike a paper publication, the digital iPad will provide a means to track which pages were looked at, which ads were touched, videos viewed, etc.

The risk is that bundled deals might attract the wrong type of customers, those that want a cheap iPad. That means they aren't viewing the ads, and that means the publishers' ad revenue could be disappointing.

But for Apple, it's all good because more people have iPads and that means potential sales of all other media from other publishers: music, books, Hollywood, etc.

Either way, the economics of the media industry could set the iPad free. That means trouble for other eReaders. That also means preemptive strikes by Amazon Kindle. Techcrunch reports that Amazon is trying to figure out how to give a free Kindle to Amazon Prime subscribers.

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Please see:

The iPad And Its iDelete Censorship Technology

Analysis: iPad Is an iDRM Storefront For Apple Ambitions To Dominate All Digital Media Sales

Analysis: DRMStore Wars Begin...Bad News For E-Books, E-Readers But Good For Notebooks

The other day I discussed Apple's ability to 'iDelete' news content on the iPad.

Ian Betteridge pointed me to these stories:

Apple Bans iPhone Hackers From App Store? | Cult of Mac

Apple App Store bans jailbreak hackers? | 9 to 5 Mac

Apple has banned two people from accessing the iPhone Apps store 'for security reasons.'

The two people have discovered weaknesses in Apple's iPhone and have publicized those flaws. Apple has a choice in plugging those security holes. Instead, it has chosen to ban them from its iTunes store.

This is a bizzare reaction but it shows that Apple is determined to act against anyone that displease it, yet this is the only way it can act -- at least do far.

Future versions of the iPhone software will have stronger security, that means stronger DRM, and undoubtedly, more ways to hit back at Apple customers.

Since the iPad is based on the iPhone operating system, it runs iPhone apps, and uses the iTunes and Apps store, this means iPad will also have all these features.

Increasingly, Apple is becoming a closed system with absolute power in its universe.

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Please see:

The iPad And Its iDelete Censorship Technology

Analysis: iPad Is an iDRM Storefront For Apple Ambitions To Dominate All Digital Media Sales

Analysis: DRMStore Wars Begin...Bad News For E-Books, E-Readers But Good For Notebooks

Steve Jobs, Apple co-founder and CEO, held a meeting with staff to answer questions.

Wired reported on what was said:

On Google: We did not enter the search business, Jobs said. They entered the phone business. Make no mistake they want to kill the iPhone. We won't let them, he says. Someone else asks something on a different topic, but there's no getting Jobs off this rant. I want to go back to that other question first and say one more thing, he says. This don't be evil mantra: "It's bullshit." Audience roars.

Was it worth it for Google to enter the phone business? It's not a phone company and it has managed to piss-off all the phone companies not just Apple. For what?

Mr Jobs wasn't very nice about Adobe:

They are lazy, Jobs says. They have all this potential to do interesting things but they just refuse to do it. They don't do anything with the approaches that Apple is taking, like Carbon. Apple does not support Flash because it is so buggy, he says. Whenever a Mac crashes more often than not it's because of Flash. No one will be using Flash, he says. The world is moving to HTML5.

The most unique and mysterious feature of the Apple iPad, is the A4, an Apple chip developed by the 150 plus strong engineering team it acquired when it bought PA Semi for $278m nearly two years ago.

The engineering team is top notch. CNET wrote:

While at Digital Equipment Corp., [CEO Dan] Dobberpuhl oversaw the development of the Alpha chip for servers and the StrongARM processor for handhelds...

Jim Keller, P.A. Semi's vice president of engineering, and Pete Bannon, vice president of architecture, worked on the Alpha as well. Keller then went to AMD and helped define the architecture for what became the Opteron...

EETimes says that Mr Dobberpuhl also led MIPS teams. [MIPS is another low-power high performance processor.] And it also has AMD Opteron chip designers too.

When Apple acquired PA Semi, it had developed a multi-core POWER architecture chip. POWER is an IBM processor architecture derived from a partnership with Motorola. It's what Apple used before jumping to Intel (and from Motorola 68000 microprocessor before that).

With PA Semi, Apple managed to acquire a hugely talented engineering team with bags of experience with every major microprocessor design.

Two years later, Apple has most probably invested about a $100 million a year in the PA Semi team. It has spent more than $500 million to develop the A4 chip.

That's a huge investment in a chip.

Apple is essentially saying that there is nothing like it on the market. That it could not have made the A4 chip using current designs. That's a big statement.

What's inside the A4?

We don't know for sure. We know it is an ARM based processor, running at 1 GHz. ARM gives it compatibility with iPhone apps, which are ARM based. But what else is in the chip?

It has graphics and video decoders, so it can display high quality graphics and HD video, quickly and easily, and at low power. But you can get similar capabilities from the large library of designs available off-the-shelf for ARM processors.

Why would Apple need 150 top chip engineers if that was all it wanted?

An unhackable system...

We don't yet know what else is in the A4 chip. My guess is that there is a bunch of hardcore digital rights management (DRM) hardware on the chip. It's essentially a large security dongle that happens to have its own processing and video/graphics capabilities.

This is important. All publishers love strong DRM and with the A4, Apple can offer the strongest DRM on the planet. That's what you need if you want to get music, movies, books, etc onto your platform. You have to convince publishers that digital versions of their products can't be pirated, they can't be hacked.

Apple has made what it considers to be an unhackable system.

That also means you can't clone it. You won't be able to port the iPad/iPhone OS to another system, as you can with the Mac OS, and run applications and content.

What's next from the PA Semi team? It has to be a multicore A44, so that you can run several DRM enabled pieces of content simultaneously, such as listening to music while you read on the iPad -- which you cannot do with the first version of iPad.

Then an A1, a version for the iPhone/iPod.

Apple Inside...

Apple is now a chipmaker. But the chips will only be used in its products, at least initially. Apple has spent more than half-a-billion dollars to develop what it believes will give it a strong competitive advantage, and that it could not buy from current chip vendors.

However, I can see Apple allowing the A4 to be used in PCs and other devices made by others. Because the A4 is designed to work with Apple approved content that comes through its iTunes, iBooks, and AppStore - its online stores. Why not let HP systems, for example, access Apple store media? Apple gets its revenue share either way. Not much profit for HP, but at least its customers are happy they can access rich, high quality digital media.

In the near future, there might be a little bit of Apple inside lots of computers and devices from many different manufacturers. Apple might even offer it for free, subsidized by media sales. You'll find 'Apple Inside' alongside 'Intel Inside.'

Oracle recently completed its acquisition of Sun Microsystems, it now has the SPARC microprocessor; IBM has its POWER microprocessor; Apple has the A4.

The question now is: Does Microsoft need to have its own chip? What about Google? They both want to sell media. Youtube, for example, has started renting movies.

How will they convince publishers that their DRM systems are good enough? That they have unhackable DRM?

From e-media to i-media...

If I'm right about reading the tea leaves, Steve Jobs has a killer strategy to dominate the sale of all media. Excellent job Mr Jobs.

It was interesting to see that Apple did not choose Intel's Atom microprocessor for the iPad.

Intel's Atom chips have been adopted by many companies building netbooks, which are similar in format to the iPad.

Instead, Apple chose to develop its own microprocessor design, the A4, based on the Atom rival architecture, ARM. The A4 chip was produced by the design team Apple acquired when it bought PA Semi nearly two years ago.

It's surprising that Intel wasn't able to win the iPad contract because it would have been able to offer Flash memory and other components to Apple as part of a package deal, for a lot less money than sourcing the components separately, and having to design your own chip.

ARM is designed for mobile applications and low power use. Plus there is a large library of add-on designs available that can be used to customize ARM chips for a variety of tasks.

But Intel's Atom architecture has a key advantage, it offers X86 capability. As long as netbooks need to run Microsoft software, Atom will prevail over competing ARM based configurations.

But will netbook type computers always be reliant on X86 software? Google's Android and Chrome OSes can run on both architectures.

The key trend to watch is whether smartphone OSes move up to netbook/tablet devices in a similar way that Apple has done with iPad.

But, some of the ARM advantage, in terms of low-power use becomes less important in computer devices with larger displays.

Steve (Chippy) Paine, points out:

When you get to screen sizes of 4" and above, something happens that levels the playing field for Intel somewhat. Their CPU platforms (*1) don't idle down very well but in a typical 'internet-connected' scenario on one of these 'smart' devices, that becomes almost insignificant as the screen backlight adds such a huge load to the platform that when combined with Wifi, 3G, BT, GPS and audio, the CPU is just 10% of the total load. Swapping Intel out for ARM would save you just 5-10% battery life in an 'active' scenario.

When you add up the entire power-bill for a device with a screen larger than 4 inches, then Intel's Atom family measures up fairly well compared to ARM based systems.

And with Intel's ability to crank out hundreds of millions of Atom chips at very low per-transistor costs, constantly driving down prices -- ARM based chips will face strong pricing competition in a segment of the market that is very price sensitive.

But, there are other factors to consider. With wireless data plans, it is possible to subsidize production costs.

And companies like to encourage competition, they don't like having to rely on one large vendor.

While Apple's choice to use its A4 might turn out to be a more expensive choice, it provides it with some useful strategic value.

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Here is another view of ARM from Jon Stokes "Thin clients and the cloud: how ARM beat x86 to the punch" :

As I poked and prodded the Lenovo Skylight, I pulled out my Nexus One and dropped it on top of the unit for a size reference so that we could snap picture of it. As I stood there looking at the phone laying on top of the smartbook and contemplating the fact that both of these (Android-based) devices had 1GHz, ARM-based Snapdragon processors in them, I glanced across the booth and spotted an ARM-based game console sitting right next to the ARM-based iRex Iliad e-reader. And then there was the portable media player (PMP) positioned not far away... then it really sunk in: smartphone, netbook, e-reader, PMP, game console--all popular consumer electronic categories with real computing needs and a huge audience, and all on ARM right now.

Intel, in contrast, is currently in the netbook, is aiming at the smartphone, would've liked to be a game console (they had an internal team pursuing a win with the erstwhile Larrabee GPU), and has yet to signal any interest in the booming and ARM-only e-reader market (though the chipmaker does have a kind of e-reader for the blind).

In 1976 Apple was one of the first of the microcomputer companies -- selling kits that hobbyists could build, then selling fully assembled systems.

In those early days, every microcomputer company had its own hardware and software, there was very little that was common between companies and that was seen as the key to success.

As businesses began using Apple microcomputers, IBM jumped in and created the first standard platform -- the PC -- a relatively open hardware and software system using common of-the-shelf parts. Microsoft provided the operating system and made it available to anyone. It led to hundreds of IBM PC clone makers and the modern PC industry was born.

Apple stayed proprietary and closed. It later experimented with licensing its technology to Mac clone makers but that didn't work out.

Gradually, it moved onto industry standard Intel chips, it adopted PC standards such as USB, and made its disk operating system files compatible with the PC world.

With the arrival of the Internet, the browser on the Mac offered the same user interface as on the PC, and it became a common software platform. At that point, there wasn't too much difference between the Mac and PC worlds. And that's still true for Macs and PCs today -- In fact, you can (unofficially) port the Mac OS to a PC systems and it runs Mac apps.

But over the past ten years, since the introduction of the iPod, iPhone, and now the iPad, Apple is becoming less and less open, it using fewer standard components and chips, and far fewer Internet technologies common to Mac/PC desktop and laptop systems.

The iPhone and iPad, for example, doesn't support common Internet platforms such as Adobe Flash or Microsoft Silverlight. That means you cannot watch streaming video from Hulu, or Netflix.

And while iPhone chips are available from other manufacturers, the iPad runs only on the A4 processor -- an Apple designed chip that no one else can buy.

Why is Apple becoming more proprietary and closed? Because that's how you make money.

Proprietary and closed systems mean you can only get it from Apple. If you have great apps, content, and a great user interface (user experience) you can charge more money than if you produce a copycat system that is easily available from many manufacturers. Less competition means larger profits.

There's money in closed systems...

It's a lucrative formula and that's why with each new device, Apple is moving further back to its proprietary roots because that's where you can make a lot of money.

Thanks to iPod, iPhone sales, Apple is now a $50 billion a year revenue company. Since the iPod was introduced in October 2001, its share price has multiplied by more than 23 times from $8.78 to $207.88.

The strategy works, and it works great.

What's puzzling though, is that Apple has a very enthusiastic, early adopter customer base, which consists of people that are big supporters of open standards, and open platforms.

Yet these "Fanboys" haven't seemed to have lost their enthusiasm for Apple products despite the increasingly closed nature of Apple.

Maybe that will change with the iPad, which is a much more closed system than any of Apple products from the past ten years. Will the Fanboys rebel? Will it matter if they do? Probably not.

Foremski's Take: My first impression of Apple iPad is that its low price of $499 is due to the fact that it's basically a storefront for Apple's iTunes and iBooks online store.

It looks like there is no Adobe Flash video support, or Microsoft Silverlight video support, which means no Hulu, no BBC iPlayer, no Netflix Direct. You won't be able to stream video from anyone but Apple.

Belt-and braces DRM...

By using the iPhone OS and its own proprietary hardware, Apple has managed to build a solid belt-and-braces digital rights management (DRM) system, that is the platform itself.

Applications and media designed to run well on the iPad will be optimized to run on the Apple iPhone OS and also, on its proprietary hardware, the A4 microprocessor.

This provides an extra level of DRM support making it more difficult to pirate apps and media onto other platforms.

Buy all media through the Apple funnel...

Apple says iPad "comes with iTunes and iBook" stores. Apple is setting itself up as the funnel for all other media.

Media creators, after Apple approval, will be able to sell their content: tunes, movies, TV shows, books, podcasts, newspapers, apps, etc through its online store, delivered to Apple devices such as iPad, iPhone, optimized to run the media at its best.

Apple takes a cut of the revenue...

By building a proprietary, closed platform, with its own hardware and software, Apple is able to capture a larger part of the value stream from selling media.

The benefit to customers are:

- cheaper devices subsidized by media sales
- A very good customer experience because the media and platform are co-optimized for each other.
- Easy access and purchase of media through WiFi to iTunes or 3G (AT&T data plans.)

Issue for media publishers...

The issue for creators is that Apple is the only way to get media and apps onto the iPad and iPhone. You have to go through Apple.

Will they try to weaken Apple's position by making their media available on other platforms? Yes. But Apple knows the customers will decide and it has a very strategic customer base of early adopters.

Fanboys...

Although Apple has a tiny share of the overall computer and phone market, its customers form a large share of the early adopter market. This is a well-heeled group with lots of money to spend on media -- more than any other comparable demographic.

From the early adopters comes the development of mass markets. The iPhone went from an elitist toy to a mass market phone in less than 2 years, in many countries -- a trend that will get larger after exclusive carrier contracts expire.

From e-media to i-media...

Apple is making a bold bid to tie up a dominant share of the future media e-commerce market -- the sale of digital books, movies, newspapers, etc.

Its proprietary hardware and software strengthen its DRM; media creators want strong DRM, which will attract them to Apple. And it's iTunes store distributes the media for them and collects payment.

In this way, through its closed and tightly controlled systems, Apple can provide a high quality experience to users, and provide media and apps creators with a highly efficient commerce platform.

This is how Apple will dominate the sales of all future forms of digital media.

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UPDATE: Nicholas Carr seems to agree. He has written "Hello iPad, Goodbye PC"

Towards the end of his article, he writes:

"Today, Jobs's ambitions are grander than ever. His overriding goal is to establish his company as the major conduit, and toll collector, between the media cloud and the networked computer.

Jobs doesn't just want to produce glamorous gizmos. He wants to be the impresario of all media."

Please see:

The Mysterious Apple A4 Chip - Where's MSFT's and GOOG's Chip?