ENVS 1500 Lecture Notes - Lecture 14: Web Server, Computer Hardware, Database Server

Sam Ellis is worried. As president and CEO of Forward Software,Inc., Sam

introduced a new spreadsheet product, Cinco, to market lastyear. Forward Software has

been developing and marketing high-quality software packages formore than five years,

but those products were mostly computer software languageinterpreters, similar to

Pascal, FORTRAN, and C. These products received excellentcritical reviews, and

because of Forward’s aggressive pricing and marketing, thecompany quickly captured a

major share of the software market. Buoyed by its wideacceptance, last year Forward

Software decides to enter the applications area for the IBM andcompatible audience,

leading off with Cinco and following up with a word processingapplication, Fast.

The spreadsheet market is dominated by Focus Software, whoseproduct – Focus

A-B-C has an 80% market share. Focus A-B-C was released in 1981,shortly after IBM

personal computer (PC) was introduced, and the two products hadan immediate

symbolic effect. The spreadsheet was a major advance over whatwas available at the

time, but required the extra 16-bit processing power that theIBM PC offered. IBM, on

the other hand, needed an application that would make its PC a“must buy.” Sales of

Focus A-B-C and the IBM PC took off as a result of theirnear-simultaneous release.

At the time of its release, Focus A-B-C was a superb product,but it did have

flaws. For example, because the software was copy-protected, itcould be installed on a

hard disk, but the original floppy disk has to be inserted eachtime before the software

could run. Many users found this step an annoyance. Anotherproblem with A-B-C was

printing graphs. In order to print a graph, users had to exitthe software and load a new

program, called Printgraf, which would then print the graph.Finally, the product had a

list price of $495, and the best discount price available wasapproximately $300.

However, Focus A-B-C had a unique menu system that was intuitiveand easy to

use. Pressing the slash key (/) displayed the menu system at thetop of the spreadsheet.

The menu allowed the user to make choices and provides aone-line explanation of each

menu option. Compared to the cryptic commands or keystrokesusers had to enter in

other products, the Focus A-B-C menu system was a model ofsimplicity and clarity.

Millions of users became accustomed to the menu system andhailed its use.

Another advantage of Focus A-B-C was its ability to let userswrite their own

macros. Literally a program, a macro allowed a user to automatespreadsheet tasks and

then run them with a keystroke or two.

In 1985, a small company named Discount Software introduced itsown

spreadsheet to the market. Called VIP Scheduler, the productlooked and worked exactly

the same as Focus A-B-C. Pressing the slash key displayed theidentical menu as found in

Focus A-B-C. VIP Scheduler was designed to look and work exactlyas Focus A-B-C so

that users would not have to learn a new system and could startproductive work

immediately. VIP Scheduler also offered two advantages overFocus A-B-C: its list price

was $99, and the software was not copy-protected. Sales for VIPScheduler were strong,

but many consumers, perhaps feeling safer with the Focus name,did not buy the product,

even though critical reviews were positive. VIP Scheduler didfind a receptive market in

academia.

When Forward released its first spreadsheet product, Cinco, itwas hailed by

critics as a better all-around product than Focus A-B-C. It hadbetter graphics, allowed

users to print graphs from within Cinco, and was 100% compatiblewith Focus A-B-C,

but the menu and options were arranged more intuitively. Forusers who did not to invest

time to learn a new menu system, Cinco could emulate the FocusA-B-C menu system.

Both menus were activated by pressing the slash key, and theusers could specify easily

which menu system they wanted. All macros written for FocusA-B-C ran perfectly on

Cinco, provided that the Focus A-B-C menu system was being used.Because of

favorable reviews and aggressive marketing by Forward, Cincoquickly gained market

share. In a move that surprised the industry, Focus recentlysued Discount Software,

publisher of VIP Scheduler, for copyright infringement. Focusclaimed that its menu

system was an original work, and that VIP Scheduler, byincorporating that menu system

in its product, had violated copyright laws. Focus claimed thatthe look and feel of its

menu system could not be used in another product withoutpermission. Sam is certain

that Focus initiated this lawsuit because Cinco has made suchdramatic progress in

gaining a share of the spreadsheet market. Sam is also sure thatFocus’s target is not

really VIP Scheduler, because it has such a small market share,but Cinco.

After discussions with Forward’s attorneys, Sam thinks that ifhe makes a quiet

overture to Focus to settle out of court, Focus would beamenable to such proposal. This

overture, if settled, would stave off potential negativepublicity when Focus wins its suit

against Discount Software and then follows up with a lawsuitagainst Forward. Based on

projections of Cinco’s sales, Forward’s attorneys think thatFocus could ask for $5, $8, or

as much as $12 million in damages. Sam believes that theprobabilities of Focus agreeing

to $5, $8, and $12 million are 0.5, 0.3, and 0.2, respectively.Also the settling process

would cost Forward $1 million of the attorneys’ fee.

Sam knows that settling now means an immediate loss of income,in the amount

of one of the three estimates given, plus an admission of defeatand guilt for Forward.

On the other hand, Sam could wait for the outcome of the Focusversus Discount

Software suit. Forward’s attorneys believe that Focus has a 40%chance of winning its

lawsuit against Discount Software. With a win, Focus would haveits legal precedent to

sue Forward. It is by no means certain that Focus wouldinstitute a lawsuit against

Forward because Forward is a much larger company than DiscountSoftware and could

afford a vigorous legal defense. Also the case against Forwardis not a clear-cut because

Cinco has its own menu system as the primary mode of operationand offers the Focus A-

B-C menu system for those who want to use it. VIP Schedulerprovides only the Focus

A-B-C menu system. However, Forward’ attorneys believe there isa 90% chance that

Focus would initiate a lawsuit against Forward if Focus wins itssuit against Discount

Software. They also believe that Focus would not initiate anylawsuit if Focus loses its

suit against Discount.

Sam believes that even if Focus sues Forward, he would still tryto settle the case

out of court at that time or decide to go to trial. An attemptto settle out of court at that

time would be more expensive for Forward because Focus wouldfeel secure that it would

win its case against Forward, having already won its lawsuitagainst Discount Software.

Thus Forward’s attorneys think that Focus would settle for noless than $8 million,

possibly asking for $11 million or even $15 million. Therespective probabilities that

Focus would settle for these amounts ($8, $11, and $15 million)are estimated to be 0.3,

0.4, and 0.3. Also, Forward would have to pay its attorneysroughly $1.2 million to go

through the settling process.

However, if Focus sues Forward and Forward decides to go totrial instead of

initiating settlement proceedings, Forward could lose the case.Forward’s attorneys

estimate there is an 80% chance that Forward would lose thetrial, resulting in a judgment

of $8 million, $16 million, or $18 million against Forward, withprobabilities of 0.1, 0.3,

and 0.6, respectively. The attorneys also estimate that theirfees for a trial could run

around $2.5 million.

What is Sam’s optimal decision strategy and what is the expectedcost of that

strategy. What considerations would you like to bring to Sam’sattention?

An outside law firm has recently offered Forward Software for$0.7 million

dollars to conduct a detailed research on the likelihood thatDiscount Software will win

the lawsuit filed by Focus.

This law firm has a reputation in correctly predicting

outcomes of many copyright lawsuits similar to the one Sam mayrun into. In fact, the

prediction accuracy of this law firm in the past is about90%

2

2

The outcomes of 90% of the lawsuits were correctly predicted bythe law firm; i.e., P(Law firm predicts

Focus wins | Focus actually wins) = .90 and P(Law firm predictsFocus loses | Focus actually loses) = .90.

. Do you think Sam should

hire this law firm to do a similar study for Forward Software?In other words, is $0.7

million a good price for such a study, and if not, what shouldbe Forward’s counter offer?

Explain.

Accounting for the iPhone at Apple Inc.

On October 21, 2008, Apple Inc. announced financial results forQ4 of FY 2008 ended September 27, 2008 (see Exhibit 1). Under theU.S. generally accepted accounting principles (GAAP), Applereported quarterly revenue of $7.9 billion and net profit of $1.1billion. For the first time, the Cupertino, California-basedcompany included non-GAAP measures in its earnings announcement tosupplement its U.S. GAAP financial results. Apple’s non-GAAPquarterly revenue and net profit were $11.7 billion and $2.4billion, respectively. As Apple CEO Steve Jobs noted, “As you cansee, the non-GAAP financial results are truly stunning.”1 Heexplained the change in a rare appearance on the company’s earningsconference call later that day:

I would like to . . . talk about the non-GAAP financial results,because I think this is a pretty big deal. In addition to reportingan outstanding quarter, today we are also introducing non- GAAPfinancial results, which eliminate the impact of subscriptionaccounting. Because by its nature subscription accounting spreadsthe impact of iPhone’s contribution to Apple’s overall sales, grossmargin, and net income over two years, it can make it moredifficult for the average Apple manager or the average investor toevaluate the company’s overall performance. As long as our iPhonebusiness was small relative to our Mac and music businesses, thisdidn’t really matter much, but the past quarter, as you heard, ouriPhone business has grown to about $4.6 billion, or 39% of Apple’stotal business, clearly too big for Apple management or investorsto ignore.2
Jobs also noted that in terms of non-GAAP mobile-phone revenue, injust 15 months Apple had become the world’s third-largest phonemanufacturer behind Nokia and Samsung but ahead of Sony Ericsson,LG, Motorola, and RIM.

Company Background
Jobs and Steve Wozniak launched the personal computer revolution inthe 1970s with the Apple II. In 1984, the Apple Macintosh, with itsease-of-use and brilliant design, redefined the personal computer.Shortly thereafter, Jobs left the company, returning in 1997. UnderJobs, Apple catalyzed the digital-media industry with the launch ofits iPod portable musical player in October 2001, followed by theintroduction of its iTunes online store in April 2003.

In June 2007, the company entered the highly competitivemobile-phone market with its iPhone, the first smartphone (acombination of a phone and a mini-computer) with a touch-screeninterface and the company’s new mobile operating system, iOS.Several months later, Apple released the iPod touch (an iPhonewithout the phone capability).

Apple released its iPhone 3G in July 2008 along with itssecond-generation mobile operating system (iOS 2). Also in July2008, Apple introduced its App Store, which offered iPhone and iPodtouch users a wide variety of mobile applications ranging fromgames to social networking to productivity tools, mostly pricedunder $10. On July 14, 2008, Jobs noted, “The App Store is a grandslam, with a staggering 10 million applications downloaded in justthree days. Developers have created some extraordinaryapplications, and the App Store can wirelessly deliver them toevery iPhone and iPod touch user instantly.”3 Many of theapplications took advantage of the more robust iOS 2. By October2008, Apple was best known for its technical and design innovation,its “walled garden” approach (i.e., its mostly proprietaryecosystem of hardware, operating and application software, andperipherals), and its premium-priced products.

iPhone Business Model
The original iPhone 8GB model had a U.S. retail price of $399 andwas available through Apple and AT&T, the iPhone’s exclusiveU.S. mobile carrier. In the U.S., mobile carriers typicallyprovided subsidies to phone manufacturers, which lowered thepurchase price of the new phone. In exchange, most consumers signeda two-year service contract with the carriers. Apple and AT&Tagreed to a different arrangement, but did not disclose itsspecifics. AT&T did not subsidize the iPhone; instead, Applesigned a revenue-sharing agreement with AT&T that gave Apple ashare of the subscribers’ monthly service fees. Needham & Co.analyst Charles Wolf believed that AT&T paid Apple $10 permonth over a typical two-year contract.4 In addition, althoughApple did not disclose how much it sold the iPhone for to AT&T,analysts believed that Apple made an estimated $120 in gross profiton every iPhone sold.5
At the iPhone’s launch, Apple announced it might periodically offernew software updates and upgrades free of charge to its iPhonecustomers. In contrast, Mac and iPod users did not receive freesoftware features and upgrades. For example, users were charged$129 to upgrade to the new Mac operating system (Mac OS X Leopard)in October 2007, whereas Apple planned to provide newer versions ofthe iPhone operating system free of charge to all iPhone users.Apple’s chief financial officer Peter Oppenheimer explained, “SinceiPhone customers will likely be our best advocates for the product,we want to get them many of these new features and applications atno additional charge as they become available.”6
In addition, Apple’s management knew that smartphone users wereslow to update their software, and that few opted to buy upgrades.Therefore, the company believed it was necessary to offer newsoftware features free of charge to increase user acceptance. Incontrast, most other mobile software vendors reserved new softwareupdates for new hardware (i.e., phone) releases.7 Apple, AT&T,third-party application developers, and users would all benefitfrom consumers’ use of the latest operating system andapplications, giving Apple and its ecosystem a competitiveadvantage. AT&T would run a more effective and efficient mobilenetwork; third-party software developers would have a stablehardware and software roadmap; Apple could delist applications fromits App Store that weren’t written for its latest operating system;and all the while, iPhone users would benefit from an evolving anddifferentiated set of features and functionality. Many usersofcompeting mobile-phone platforms could not upgrade to neweroperating systems and applications because of compatibility issueswith their phones.
When Apple launched the iPhone 3G in July 2008, it revamped itsbusiness model, bringing it more in line with industry practices.Apple gave up its share of the monthly service revenue in exchangefor AT&T subsidizing the price of the iPhone 3G, which sold for$199 at retail. Again, the two parties chose not to disclose thespecifics of their arrangement, but the subsidy was estimated at$300 per phone sold.8 Apple continued to differ from most otherindustry participants when it offered existing iPhone usersupgrades to its second-generation operating system at nocost.
By August 2008, a month after Apple introduced its App Store, Jobsnoted that users downloaded more than 60 million programs for theiPhone, and Apple was averaging $1 million a day inapplication-software revenue. Apple received 30% of the App Storerevenue from the sale of an iPhone application, and the developerreceived the remaining 70%.9 Jobs stated, “Phone differentiationused to be about radios and antennas and things like that. Wethink, going forward, the phone of the future will bedifferentiated by software.”10
Also in August 2008, the New York Times reported that T-Mobilewould be the first carrier to launch mobile phones using Google’sAndroid mobile operating system; the phones were expected to hitshelves in late October 2008. On October 21, 2008, Google announcedthat Android was now “the first free, open source, and fullycustomizable mobile platform.”
iPhone Revenue Recognition
Software-enabled hardware devices (also known as “bundledcomponents”), such as Apple’s iPhone, Macs, and iPods, fell underthe software revenue recognition rules pursuant to AmericanInstitute of Certified Public Accountants (AICPA) Statement ofPosition (SOP) No. 97-2, Software Revenue Recognition. When Applefirst introduced the iPhone in 2007, the company announced it woulduse the “subscription method of accounting” under SOP No. 97-2 tobook revenue for its new iPhone. Oppenheimer explained:
Since we will be periodically providing new software features toiPhone customers free of charge, we will use subscriptionaccounting and recognize the revenue and product cost of goods soldassociated with iPhone handset sales on a straight line basis over24 months. So while the cash from iPhone sales will be collected atthe time of sale, we will be recording deferred revenue and costsof goods sold on our balance sheet, and amortizing both of theminto our earnings on a straight line basis over 24 months. We willcontinue to expense our iPhone engineering, sales, and marketingcosts as we incur them. This accounting policy will have no impacton cash flow or the economics of our business.12
In contrast, Apple generally recognized revenue and cost of salesfor its other software-enabled hardware products such as Macs andiPods at the time of sale (i.e., immediate revenue recognition)under SOP No. 97-2. This was because the company did not providenew features or software applications for those products free ofcharge. (See Exhibit 2 for the FY 2008 financial statement noterelating to Apple’s revenue recognition policies under GAAP.)
Apple’s decision to use subscription accounting for the iPhone camesoon after the company faced consumer backlash over a $5 upgradefee (later reduced to $1.99) it charged new MacBook buyers.13 In2006, Apple sold its latest MacBook with a wireless chip that wouldallow users to access the new and better Wi-Fi 802.11n technologyonce it became available and the chip was activated withsoftware.Apple did not tell MacBook buyers about the chip’s existence, andit also recognized all revenue at the time the MacBooks sold. Thus,the chip and its activation software were an unspecified, futureupgrade that did not have an established, objective, separate value(which would have allowed it to be accounted for separately) at thetime of the MacBook sale. To comply with GAAP, Apple faced twooptions: 1) restate its financials to recognize the MacBook revenueunder subscription accounting, or 2) charge users for the upgrade.The company chose the latter option.
Technology companies such as Apple were increasingly facing theissue of how to account for bundled components as the software andhardware in these products became more integrated and integral tothe products’ function. This placed U.S. technology companies onunequal footing with their overseas competitors becauseInternational Financial Reporting Standards (IFRS) allowedcompanies to use a more subjective measure—cost plus margin—when anobjective and separate value could not be established for a futuredeliverable such as a free software upgrade. Consequently, anoverseas company could report more than a fraction of its revenuewhen it sold a bundled component with the promise of a futuredeliverable such as a free upgrade. Company management couldestimate the cost and the margin of the upgrade and defer just thatportion of the bundled component’s sale until the upgrade wasdelivered.Subscription Accounting
The software and magazine publishing industries were well known fortheir use of subscription accounting. Magazine publishers reportedthe cash received for a subscription at the time that thesubscription was purchased, but recorded the revenue only as eachissue was delivered. The remaining balance was deferred into aliability account called unearned (or deferred) revenue. Forexample, if a year’s subscription of a monthly magazine cost $12,then the magazine publisher would recognize $1 per month in revenuefor 12 months as the unearned revenue account decreased by $1 permonth.
Under subscription accounting, Apple recognized the associatedrevenue and cost of goods sold for the iPhone on a straight-linebasis over the product’s estimated 24-month economic life (thetypical length of a mobile phone service contract). When Appleannounced its quarterly results from iPhone sales, its reportedrevenues (and other related metrics) reflected only an eighth ofthe revenue from iPhone sales during that quarter. This resulted ina deferral of the remaining revenue and cost of sales relating toiPhones units sold, although the company received and reported thecash in the quarter of the sale. Each quarter, Apple also reporteda share of iPhone sales (both the revenue and the associated costof goods sold) for iPhones sold in previous quarters. (See Exhibit3 for an illustration of iPhone subscription accounting.) As longas the number of iPhone sales increased each quarter, the deferralbalance increased. Costs incurred for engineering, sales,marketing, and warranty were expensed as incurred.
Reactions
In July 2008, iPhone users validated Apple’s decision to offer freeupgrades when they quickly adopted the free iOS 2. Apple neverintended to give iPod touch users upgrades at no charge, and itsusers expressed confusion and dissatisfaction with their $9.95upgrade fee for the same software.15 At the same time, Apple’s useof subscription accounting drew mixed reviews from the businesscommunity. A Business Finance article praised Apple’s “smootherrevenue curve” that resulted from its use of subscriptionaccounting, saying, “Apple shows how a mature, astute organizationcan use revenue accounting rules to its benefit.”16 However, anApple 2.0 Fortune Tech post stated:More than seven months havepassed [since Apple’s use of subscription accounting began] andnobody—not the analysts, not the investors, and certainly not WallStreet—has quite wrapped their mind around what this bookkeepingoddity means for Apple's bottom line. That’s in part because it’scomplicated, and in part because Apple hasn’t provided all the datayou would need to fully assess its impact.
But those so-called deferred earnings are adding up, and someprofessional Apple watchers are starting to realize that theirimpact could be substantial .... And to the dismay of Appleshareholders, the fact that these deferred earnings are piling upseems to have gone right over the heads of the institutionalinvestors who have driven Apple shares down nearly 75 points sinceDecember.17

Non-GAAP Supplements
By the fourth quarter of 2008, Apple’s management believed theimpact of subscription accounting on its financials was too big forthe company to ignore. Apple released select Q4 of FY 2008 non-GAAPfinancial results as supplements that gave Apple watchers theirfirst look at its revenue numbers without the use of subscriptionaccounting. Research suggested that companies issued non-GAAPsupplementary disclosures to communicate adjusted accountingnumbers that better predicted future performance, but also foropportunistic reasons.18 On average, investors appeared to weightnon-GAAP numbers more heavily compared to GAAP numbers when theyformed their expectations for future earnings, assuming they foundthe non-GAAP numbers informative and credible. Not surprisingly,research also showed that companies tended to emphasize measuresthat portrayed the most favorable performance.19
In 2003, the Securities and Exchange Commission (SEC) issued newnon-GAAP disclosure rules to address concerns about the lack ofoversight on these disclosures. The SEC’s Regulation G requiredcompanies that disclosed non-GAAP financial measures to use themost comparable GAAP measures when preparing their non-GAAPdisclosures, in addition to providing a reconciliation of the GAAPand non-GAAP results.20 Recent studies indicated that since thepassage of Regulation G, firms were less likely to provide non-GAAPearnings that excluded expenses of a recurring nature.21
In describing Apple’s non-GAAP financials, Jobs noted that iPhonenon-GAAP sales were a staggering $4.6 billion, 39% of Apple’s totalrevenue in the fourth quarter of 2008. See Table A.

Apple cautioned that its non-GAAP calculations did not adjust forthe estimated costs associated with its plan to provide newfeatures and software upgrades to iPhone buyers free of charge. Italso warned investors that these figures were not prepared under acomprehensive set of rules or principles, since no standardsexisted for making these calculations. (See Exhibit 5 for Apple’scautions on use of its non-GAAP supplements.)
Apple also announced iPhone Q4 of FY 2008 GAAP sales that justmissed Wall Street’s estimates, but total income that easily beatanalysts’ estimates.22 Apple’s guidance for the first quarter of FY2009 was well below Wall Street’s forecast. Apple’s stock closeddown for the day.
Conclusion
The immediate analyst reaction to Apple’s Q4 of FY 2008 financialresults and conservative Q1 of FY 2009 guidance was largelypositive, although Maynard Um of UBS downgraded his rating from“Buy” to “Neutral” and cut his share price target to $115 (from$125), citing “potential macro- economic issues impacting Macsales.”23 In contrast, Shebly Seyrafi of Calyon Securities raisedhis rating from “Add” to “Buy” and increased his price target to$150 (from $130), noting that Apple’s earnings per share (EPS)would have more than doubled had it not been for the company’s useof subscription accounting for iPhone sales.24 Reactionto Apple’s decision to provide non-GAAP supplements was more mixed.Proponents of Apple’s use of non-GAAP supplements argued that theseresults were more consistent with Apple’s $24.5 billion in cash andshort-term investments. Under GAAP, they pointed out, the iPhone’sstrong shipments in Q4 of FY 2008 were not fully reflected inApple’s results. They also contended that valuations using non-GAAPmeasures were better indicators of the company’s true financialperformance.25n contrast, GAAP proponents asserted that the Streetpenalized technology companies reporting non-GAAP results. Theyargued that Apple’s management clearly believed future, freesoftware upgrades were critical to an iPhone buyer’s initialpurchase decision and necessitated Apple’s use of subscriptionaccounting. Further, they argued that non-GAAP supplements gave theiPhone too much weight, pointing to the fact that Apple’s quarterlynumbers became more sensitive to iPhone unit sales, which were morevolatile and difficult for analysts to predict. Perhaps mostimportantly, they maintained that investors knew to use cashrevenue numbers for valuations and ratios, and that changing tonon-GAAP measures should have no impact on the economic value ofApple shares.26
Apple announced that it would continue to provide non-GAAPsupplements during earnings releases. Only time would reveal theireffects, if any, on Apple’s share pricing.

Discuss GAAP, non-GAAP numbers and their impact on financialstatements

2. Which method best reflects the economic reality?

3. Should Apple lobby for their non-GAAP numbers to besanctioned by FASB?

4. Does it matter if the revenue recognition rule for smartphone changes?

According to the information below please answer the following questions:

ENTR 187 Business Plan App Translator

Industry Analysis

INDUSTRY SIZE

When you talk into your phone in any of the World’s major languages there is a suite of applications that can turn your words into a foreign language, either in text or electronic form. Mobile translation helps get rid of barriers worldwide. The top current mobile translation apps available for both iOS and Android are Google Translate, iTranslate Voice, SayHi, WayGo, and TripLingo. In addition to apps, there are two new devices that will translate in live time. The user speaks in their native tongue and the device will output the desired target language. These devices are The ili and The Pilot.

Industry at a Glance

The statistics above are listed from 2016. The industry that we have decided to incorporate our product into is “Speech and Voice Recognition Software Development.” The entire Industry saw Revenue of almost $25 Billion USD. In total, there is over 900 companies involved in the industry.

The biggest company involved is Nuance Communications Inc. which holds a 2.1% market share of the industry. After Nuance Communications Inc., the next biggest company involved is Google Inc. Google participates in the industry through its development of voice and speech recognition software for mobile and online services. This includes the “Google Translate” app available for any mobile device. Current market share data is not available. Apple is another World renowned company involved in the industry through their Siri services. Siri is available in 40 dialects of several different languages.

Industry Growth Rate and Sales Projections

The industry has been steadily growing over the past decade averaging an 8% growth rate in terms of revenue. Through 2021, annualized revenue growth is supposed to grow at a rate of 7%. The industry continues to grow as the widespread adoption of mobile phones continues to grow. The number of mobile internet connections is expected to surpass 331 million in the year 2021. Not every cellphone user actually needs a mobile translation app. However, as the demand for Speech and Voice Recognition Software continues to rise. The apps available on the market will continue to improve.

The potential rise of wearable smartwatches and other smart appliances is also expected to bring about growth opportunities in the industry. Speech and Voice Recognition Software is being implemented into these devices now and will continue in the future. Language is processed by machines as data. Machines are indiscriminate towards what languages they can handle. As long as data is being captured by devices, the software will improve in the future.

The industry is broken up into products and services. 50% of the industry is dedicated to PCs and Macs (such as Rosetta Stone) the other half of the industry is for Mobile devices and Automobiles. The Auto industry doesn’t necessarily use translators but they still use Voice Recognition Software.

Nature of Participants

In 2017, mobile apps have now became a key piece to a new way of doing business, a new way of communicating, and simply a new way of conducting life on a day to day basis. With the Play and App store housing hundreds of thousands of apps, competition remains very innovative as more and more developers (or developer studios, who provide application development for third party companies, entrepreneurs and so forth) continue to flood the market with free or purchasable applications. Also, with the vast changes in technology, the app has crossed over from the smart phone over to televisions, media players, and cars, allowing the app industry evolve into a broader economy. With that said, this plays into the ability for more doorways for different creative purposes that apps can be used for. As with every form of technology, what we thought apps were capable of just 5 years ago have soared way beyond those capabilities today.

Key Success Factors

There are many success factors that we have taken into consideration to assure that our product meets its highest potential. The number one factor should always be the experience that the customer receives from the product. Therefore, we will provide users a very friendly and easy-to-use interface, keeping it simple, while making sure that the features give them a complete and total experience so not one need is left unaddressed or unattended to. Focus groups will be conducted even after launch, to allow the customer experience to not only be the best it can be, but to also evolve that experience over time, keeping the app and its content and functions relevant to the users.

Secondly, the app will be universal for all mobile devices, including iOS and Android. The app will be able to function on all mobile devices, tablets, chromebooks, smartwatches, and any other portable smart device.

Third, we will provide easily accessible customer service and reliability. Our support team will be available seven days a week by either phone or via live chat. Updates and maintenance will keep content fresh and any back end issues at bay.

Compatibility: Our app will be compatible with other apps and programs, allowing the user to easily share, store and access files outside of the app itself. Files can be shared via bluetooth, email, NFC technology, text message and social media. Files can be converted to wav. and mp3 format.

INDUSTRY TRENDS

-Business Trends

-According to smashingmagazine.com, consumers are evolving more rapidly than businesses. Today, the mobile Internet has clearly become a necessity for many users.

-According to App Annie reports, in 2015, the mobile app industry generated a whopping $41.1 billion in gross annual revenue and that this figure will rise to $50.9 billion

-According to Statista, a Windows Phone app fetches $11,400 on average per month, whereas iOS app generates $8,100. Android makes $4,900 in average monthly revenue

-According to Smashingmagazine.com, the subscription app model generates predictable, long-term revenue flow for the owner by keeping customer loyalty high.

-According to techcrunch.com, in 2016, worldwide downloads were up 15 percent year-over-year, time spent in apps was up 25 percent, and the revenue paid to developers increased by 40 percent.

Long Term Prospects

In the short-term, our success will tie into the success of the app market as it stands today. The same industry growth and advancement in technology will also be key for our long-term success. During our first year we will see success through free user downloads, building revenue through advertising. Subscription use will build towards the end of year one and continue to double as more revenue that is brought in through advertising, will then be used for marketing purchases, growing our impressions and gaining more and more subscription members.

-Growing Millennial population

-Growing percentage of individuals that own mobile smart phones or smart devices

-Growing percentage of travelers worldwide

-Advances in technology will continue to evolve the functions and features of the app

-Build on residual revenue through long-term subscribers

Company Description

History

The translation of natural languages by machine, first dreamt of in the seventeenth century, has become a reality in the late twentieth. Computer programs are producing translations - not perfect translations, for that is an ideal to which no human translator can aspire; nor translations of literary texts, for the subtleties and nuances of poetry are beyond computational analysis; but translations of technical manuals, scientific documents, commercial prospectuses, administrative memoranda, medical reports.Machine translation is not primarily an area of abstract intellectual inquiry but the application of computer and language sciences to the development of systems answering practical needs. After an outline of basic features, the history of machine translation is traced from the pioneers and early systems of the 1950s and 1960s, the impact of the ALPAC report in the mid-1960s, the revival in the 1970s, the appearance of commercial and operational systems in the 1980s, research during the 1980s, new developments in research in the 1990s, and the growing use of systems in the past decade.

A translation system allowing the Japanese to exchange conversations with foreign nationals through mobile phones was first developed in 1999 by the Advanced Telecommunications Research Institute International-Interpreting Telecommunications Research Laboratories, based in Kansai Science City, Japan. Words spoken into the mobile device are translated into the target language and then sent as voice to the other user's mobile phone. Machine translation software for handheld devices featuring translation capabilities for user-input text, SMS and email, was commercially released in 2004 by Transclick and a patent was issued to Transclick for SMS, email and IM translation in 2006.

In November 2005, another Japanese company, NEC Corporation, announced the development of a translation system that could be loaded in mobile phones. This mobile translation system could recognize 50,000 Japanese words and 30,000 English words, and could be used for simple translations when travelling. However, it was not until January 2009 that NEC Corporation officially demonstrated their product. Technological advances within the miniaturization of computing and communication devices have made possible the usage of mobile telephones in language learning. Among the early projects were the Spanish study programs which included vocabulary practice, quizzes, and word and phrase translations.

Soon after, projects were developed using mobile phones to teach English at a Japanese university. By 2005, they shifted their focus to providing vocabulary instruction by SMS. A similar program was created for learning Italian in Australia. Vocabulary phrases, quizzes, and short sentences were sent via SMS.

Now, Google Translate is the online translation leader. See also Info scope, which is a handheld device composed of a digital camera and wireless internet access, developed at IBM's Almaden Research Center. As well as Duolingo application has been develop to not only translate but also teach the consumers of today to read, write and speak the language, and finally the LLI has been introduced.

The ili is a new innovative technology that helps business professionals or travelers to communicate with other cultures, by simply by the push of a button. It allows the consumer to speak into the device and it will project it back in whatever language chosen by the consumer.

Mission Statement:

Striving to continually improve the language translation services by bringing convenience, quickness, ease, quality and reliability to our customers while bridging language barriers and bringing people with different languages together.

Product and Services

Consumers of today are now more interested in the new high tech gadgets, yet more than anything consumers are obsessed with their mobile device. And in now a day’s millennials are the consumer taking the initiative to be more diverse and have more experiences in life. That’s why we believe that combining both the ili translator and duolingo into one app would be the perfect product for the everyday person of today.

By combining both products, the app can be used in an everyday setting or in a professional setting. It will allow professionals to converse with clients from around the globe in a more personable level. And it will allow the everyday person to become more diverse and intuitive in more cultures.

The app will give the consumer the ability to understand another language, by having it translated directly back to the consumer’s language and vice versa. It will allow different cultures to communicate with one another. It will not only allow consumers of different culture to communicate with one another but it will also allow consumers to learn a new language. Each app will have a minimum of 3 free languages that will allow you to translate or will allow you to learn the language. Learning the language is taken from the aspect of duolingo, by having consumers learn how to read, write, and speak different languages by different game levels and educational readings. And every time, a consumer wishes to learn different languages they will have the ability to purchase more upgrades which will offer such languages.

Current Status and Ownership: We are a Partnership as there are five partners in ownership who are personally liable for all business debts.

Legal Status and Ownership

Key Partnerships: None at this time.

Market Analysis

Market Segmentation and Target Market Selection: This App translator will be an innovative tool in the travel and the translation industry. The market segment the app will target will be the younger generations such as the millennials, which is considered to consist people within the ages of 16-34. One reason why the app should target the younger generations is because they are more interested in traveling abroad than the older generations. The United Nations estimates that this demographic of the younger generation generates more than $180 billion in annual tourism revenue, which is an increase of nearly 30 percent since 2007. The American Express Business Insights also stated that millennials are the fastest growing age segment in terms of money spent on travel. Millennials are also considered to be always connected to the internet with mobile devices and continuously on the move. Millennials do not spend their vacations similar to the older generation on the beach but they tend to spend their time traveling through cities and getting to know the country they are in. These factors of the younger generations traveling more, different way of traveling and an increase in spending while traveling are the textbook conditions for the App translator. Younger people always have their smart phones on them which is why it will be easier for younger people to have translation through an app instead of getting a translator or carrying an extra device. Since younger people like to travel in cities and immerse themselves in the culture, it is again just much simpler and more accessible to have their translation service on their phones.

Buyer Behavior:

Millennials have a lot of influence over older generations and are trendsetters across most of the industries from food to fashion. For millennials reviews of a product from friends and other like-minded people carry a lot of weight. Which means that if people from a certain group do not like the product than other people in that same group are less likely to buy the product. The fear of debt has been instilled in millennials because of student loan debt and the soft job market. This fear has led less and less millennials to purchase using credit cards and going into debt, which why is a recent Bankrate study revealed that over 65% of millennials don’t even have a credit card. That is why millennials try to save up to make the purchase with cash or debit. This does not mean that millennials are buying less, it just means that they are finding alternative ways of purchasing. An example of a different way of purchasing that millennials are doing is financing, this allows them to buy an item now and spread out their payments over several months. One of the best ways to see the buying behaviors of millennials is to watch the social media outlets. Research shows that 81% of millennials are on Facebook, and they also check their social media apps on their mobile devices around 43 times a day. An example of how social media is working well for consumers is popular unboxing videos on YouTube, where an individual films the process of unpacking new products and letting viewers know what they can expect from the product when they purchase it. Most business miss with some of their products because the products did not have innovation with purpose. This means that millennials are more likely to try new products but only if the new product makes their lives easier in some way.

Competitor Analysis:

Currently there is no product like this in the market, that utilizes an app to translate as smoothly as device that translate in live time. A person can use google translate, iTranslate Voice, SayHi, WayGo and TripLingo, but they are not as smooth/accurate. The product that is closest to the app translator would be “ili” and this product has not even been released yet, it is set to be released this year. “ili” offers the users real time translation by speaking into a handheld device in 0.2 seconds; but the drawbacks are that you have to purchase and extra device and also that it can only support three languages on one device for different languages a consumer would need to buy an another “ili” device. The reason why there are no real competitors for the app translator is because the app translator will be combining real time translation of “ili” and language teaching capabilities of Duolingo and Rosetta Stone.

Estimates of Annual Sales and Market Share:

Looking at the trend of the rapidly growing app usage we can assume that more people are likely to download the app than carry an extra device that will help with the translation. Not just the technological part but the entire translation industry is very fragmented; which means there are a lot of firms providing either regular translators or devices/apps to help with translation.The market of the translation industry is expected to grow to $37 billion by 2018. Since the market is highly fragmented it is hard to tell how much of the market is allocated to each of the firms. Which is why we can only estimate that we will attain around 5-10% of the market share in the first couple of years. We can estimate that we can get at least 40 customers a month but the goal is to try to reach at least 50 a month on the first couple of months. Most of the assumptions are based on estimations because there is relatively no data on how the market share is distributed in this market and what is the expected growth rate for the massive number of firms in the translation market.(Translation, n.d.)

Economics of the business

Revenue Drivers and Profit Margins

In the first twelve months in developing the application, our goal is to convert consumers to the subscription and have a minimum of 50 customers per month with the ad block included. We would be selling the one time subscription fee for $24.99 per customer as well as the one time adblock for $9.99 and the monthly fee would vary and is not included in the table below. In just the subscription fees the App would have 3 language software subscriptions and if the consumer pays more the prices would vary. Our total expenses to begin the business would be $25,080 in the first year including everything from advertising to the manufacturing of the app. In the first year out net income would be at a negative $4,092. In some businesses in order to increase the profit you have to lose money to begin with. At first we might lose some money if you want to look at it but our long term revenue is sure to surpass the net income of the first year.

Fixed and Variable Cost:

The company’s fixed costs will mainly be Attorney fees, Internet, Licence/Permit fees, Office equipment lease, phone bills, software development, software manufacturing, technical maintenance and web hosting. This is because all of these expenses are expected to stay the same throughout the first couple of years. These costs are expected to stay the same because the company will be relatively new and the expected growth is not exponentially high in the first couple of years. The costs that are variable are the marketing, employee wages, and travel. These costs are the variable cost because these costs can change very fast as the needs of the company change over time, compared to fixed cost which only change after a large effect on the business such as increase in funding or growth over the years forces the company to expand.

Operating Leverage and Its Implications

Operating Leverage

Implications

Start-up Costs:

The company I-lingo will be a brand new business with startup expenses as every other company does. In producing the app, partnering with Doulingo the company will be able to expand on Doulingo’s original application and venture out to a more advanced application. The company’s total expenses in the first year would be an estimated $25,080. This estimated number was calculated by the estimated amount it would cost to develop the app, the amount of money we would need to pay employees, advertising/marketing, etc. The financial sector of I-lingo found an app develop estimator online that gave us a really rough estimate on where to start our expenses in just producing the app itself, which would have cost us twice as much with an average price of $100K. The estimate of $15,000 to produce the app led us to think of other expenses such as paying employees, licenses, permits, utilities, advertising and etc.

Break-even Chart and Calculation:

I.Marketing Plan:

A.Overall Marketing Strategy

B.Product, Price, Promotion, and Distribution

C.Sales Process (or Cycle)

D.Sales Tactics

Proprietary Issues:

The company will have to get a patent on the way app delivers the translation at a fast and accurate pace, because the technology that will be used in the app will be new and innovative in that field. The type of patent the company will need to get will be a utility patent from the US Patent and Trademark Office, this is because a utility patent covers the creation of a new improved/useful product, process/machine. After filing for the utility patent the company will be able to hold the patent in the United States for up to 20 years.

The name of the company ilingo will be trademarked in order to create an exclusive identity of the company’s product/services and the recognition of the company’s ownership of the brand. To file a for a trademark in the United States the company will have to file with the US Patent and Trademark Office. The trademark in the US will be renewable every 10 years as long the the company remains the use of the name.

The other licenses that the company ilingo will need to acquire will be patents and trademarks in other countries around the world. Since ilingo will be a new startup it would not make sense to start applying for patents and trademarks in other countries in the first couple of years. However, when ilingo gets a large enough customer base in the United States and it is considering marketing to potential customers in other countries ilingo will need to secure their intellectual property in other countries at that point.

Operations Plan

General Approach to Operations

Day to day operations will mainly consist of back stage activities, as our tangible capital will remain very limited. The five founders provide sound and efficient staffing for maintaining business needs as well as customer demands.

-Labor: There is currently no need to operate outside of the five founders, which will keep labor costs down and keep activities within day to day operations very close-knit. Future planned marketing campaigns may consist of volunteers or interns, in attempts to spread awareness of our brand and product. Small incentive programs may become available, as in a free 3 month membership to our app, but all interns will be cost free and 100% volunteer work.

-Roles of the 5 founders:

-CEO:

-

Remain focused on people, product, and market.

Brand management and increase market credibility.

Maintaining relationships with partners and investors.

-COO:

-Designing and implementing business strategies, plans and procedures.

-Establishing policies that promote company culture and vision.

-Overseeing operations of the company and the work of executives (IT, Marketing, Sales, Finance etc.).

-Evaluate performance by analyzing and interpreting data and metrics

-Write and submit reports to the CEO in all matters of importance

-Assist CEO in fundraising ventures

-Participate in expansion activities (investments, acquisitions, corporate alliances etc.)

-Manage relationships with partners/vendors

-CFO (CTO):

-All financial overseeing will be done in house, but the more important role of the CFO related to day to day operations is their duty as the head of Technology. The CFO lead the development of the app, and will continue to work as our IT and technical support, and will work directly with customer inquiries, and pushing through timely updates for the app.

-CMO:

-Evolve product for consistent market fit, adapt to market changes.

-Continually collect new data to test changing demand.

-Track customer acquisitions and lifecycle to improve and expand demand.

-Work directly with advertising partners, building outside relationships.

-Works directly with CFO/CTO on maintaining image and brand.

-Builds new partnerships to increase and expand target market, customer use, and customer engagement by creating new marketing channels worldwide.

-CHO (Head of HR): Not applicable at this time.

- Materials and equipment: All materials and equipment will be personally funded and incur zero cost to the company.

Business Location/Facilities

A key element of keeping costs down with more flexibility to maintain profits is that there are no overhead costs for business location. All business will be operated out of in house facilities that will not incur any fixed or variable costs. If any costs are involved in the area of location, these costs will be personal costs and will not fall under the company’s finances. Ultimately, much of our operations could take place in any facility that has basic internet and wifi access.

Section VIII: Design and Development Plan

CURRENT STATUS:

Our product is currently under development by our information systems engineers and our software development engineers. The app will use the GNMT data base. The GNMT database is owned and powered by Google. GNMT stands for Google Neural Machine Translation system. It essentially takes into consideration source words and phrases, but also broader contexts of where they appear in sentences, and what are the other words and phrases around them.

For example, when translating Spanish-English, French-English, we are able to then code the system from translations of pairs it has not seen before. It is a self-learning algorithm. The database will then “learn” how to translate between French-Spanish by using the base language of English.

Our Company is partnering with Nuance Communications to help develop our translation software. Nuance focuses on server and client side speech recognition. They have helped companies such as, Apple, when they came out with Siri.

Similar to Siri, we need our product to be able to combine speech recognition with advanced natural-language processing. The hardest part about this process is normally translators require an internet connection, which allows the client to connect to the server. We want to change the game by storing the base language and the target language directly on the client for faster translation. The amazing part about not needing an internet connection is that our users will be able to go to rural vacation destinations and assimilate with the natives of that country.

CHALLENGES AND RISKS:

The team is working diligently to introduce the product into the market. We need more funding for our software development and overall costs. Creating an application that can be independent of an internet connection is very expensive. However, we are not paying ourselves a salary until we become profitable.

1.What Are the legal status and ownership process to this new app?

2.What would be the ideal operating leverage and its implications?

3. What is the desired profit margin?

4. what are the sources and uses pf funds statement?