If I Were King

Shortly after Wall Street hammered Apple’s stock over health concerns regarding Steve Jobs, the company announced outstanding results for the quarter just ended. Both revenue and net profits were up nicely, at a time when any company turning in improved results is a shock. As always, the stories are mentioning that Apple’s gross profit margin was 34.7 percent, the same as in the prior-year quarter.

This is curious. In fact, this is nonsense. The issue is that the press is constantly comparing Apple to Dell or HP in this regard, but the comparison is silly. What they are overlooking is that Apple’s margin includes both the margin on the hardware, which is probably better than Dell’s but probably not all that much better, and its margin on the operating system, which is probably not as high as Microsoft’s margin on Windows. When Microsoft reports their margin, it’s closer to 85% on Windows. I have no idea what Dell pays Microsoft for an OEM copy of Windows Vista, but though it isn’t anything like the retail price, it isn’t trivial.

On server products, the advantage probably goes to Dell/MS or HP/MS. When a Windows server is sold, the base operating system is in the total to the tune of $500 and up, for five users, on which MS earns their 85%. But there isn’t much reason to buy a real server for five users, so the client buys sets of CALs – Client Access Licenses. Five additional CALs cost about $150, on which the MS margin has to be on the order of 99%.

In other words, the constantly repeated theme that Apple is making dramatically higher margins than their competitors is the result of poor logic and arithmetic skills on the part of the media. As has been said before on these pages, If I Were King, education would be focused on addressing this, and nobody with a high school diploma would be likely to make such an error. We assume that the media would continue to hire only those who have at least that level of education.

I published a selection of quotes from Thomas Jefferson on his birthday (13 April) in Quotes of the Day. For all his warts, Jefferson is among the founders I esteem most highly. Several readers challenged me as to why I didn’t use John Adams quotes instead. Well, it wasn’t John Adams’ birthday, to start with, and Adams has not been among my favorites. Specifically, my short list of the three most offensive and abusive actions ever taken by the US government starts with the Alien and Sedition Acts. (The others are Lincoln’s suspension of habeas corpus and Roosevelt’s internment camps.) The Sedition Act was designed to imprison those that published attacks on Adams, it was written by his party, and he signed it into law.

In general I make sure the themes for QOTD change regularly, but there are exceptions. I always feature Christmas quotes on 25 December and Jefferson and Shakespeare quotes on their natal anniversaries. Never before had readers complained. The proximate cause turned out to be an HBO miniseries on Adams, based on David McCullough’s biography, which a lot of folks apparently watched. I’m not about to sign up for cable so I could watch the series, but I did buy the book, finishing it last night.

I feared I was reading a hagiography in the early parts of the book, but by the time McCullough covered the ineffective efforts to secure support from France and Holland for the American Revolution, during which Adams and Franklin were squabbling with each other at Paris, it was clear that the history was being played straight. Alas, the story is not told with any enthusiasm and relies too heavily on long extracts from letters between John and Abigail. Interesting details emerge, and the character of Mr Adams is certainly clear, but the story deserved more narrative elan. I don’t think it will spoil it for you to say that Adams and Jefferson had completely reconciled with each other and were the best of friends by the time both of them died on the same day, the putative 50th anniversary of the Declaration of Independence which Jefferson wrote and Adams pushed through the convention. (According to McCullough, Adams considers the second of July the proper date, not the fourth, but both Adams and Jefferson routinely appeared at celebrations on 4 July for many years.)

I hesitantly recommend the book. I’m glad to have read it, but it’s no page turner.

Just a few moments ago I read an other-wise helpful piece about recording formats, extolling the “exponential improvement” of CDs over cassette tapes as part of the background to the main story of HD-DVD vs BlueRay. It was the third time this weekend I’d come across similar usage, and the royal tummy churned each time. Am I the only one left that knows what the word means? Exponential changes are those that recur over time, with the same proportionate change in every time period. Compound interest at the bank is one, Moore’s Law (transistor count doubles every 18 months) another, and so is radioactive decay (half life).

Exponential is not a synonym for really, really, big. No one-time change can possibly be exponential, no matter how dramatic. If the proportion changes from one period to another (as in your assets being eroded by inflation) it isn’t exponential. That passbook savings rates are at absurdly low levels doesn’t change the fact that the pathetic balance is the result of exponential growth. If I Were King, educators who fostered the error would be picking lettuce and students would learn to use the word correctly, incidents like the ones I encountered this weekend would decline exponentially. Slowly, to be sure, but exponentially.