Author: Ben Bajarin

The iPad’s form factor has been a subject I have been writing on for years. I’ve always believed Apple when they frame this product as the ultimate personal computer and the device that has the most potential to enable things not possible before with mouse and keyboard computers. The problem, though, is most consumers still struggle to see the iPad like that and while they may have an iPad as a companion or entertainment-focused device they still use a PC/Mac for the bulk of their production workflows. With the latest generation of iPad, Apple wants to change all of that.

Apple is touting the newest iPad Pro lineup as the biggest change to iPad since the first iPad. Which is important because they need consumers to start fresh in their mind when they think about iPad going forward. If everything has changed then all the preconceived notions they have about iPad can be put aside.

Ending the Debate
It does feel like an entirely moot debate, but many in the mainstream media still like to haggle with the idea the iPad is a computer. That being said, I do feel Apple still has to make the case to the end market that iPad is undoubtedly as capable, and in some cases more capable than a notebook.

While Apple has been building their marketing in this direction for a few years, I think this year is the full court press for iPad marketing. Note a couple of catchphrases I pulled off the iPad’s landing page on Apple.com.

A12X Bionic is the smartest, most powerful chip we’ve ever made. It has the Neural Engine, which runs five trillion operations per second and enables advanced machine learning.

Translation: It’s faster than most PC laptops.

It’s all new, all screen, and all-powerful. Completely redesigned and packed with our most advanced technology, it will make you rethink what iPad is capable of.

And what a computer is capable of.

Like a computer. Unlike any computer.

It’s more powerful than most computers. And more portable than all of them

It’s a computer that lets you do everything with touch.

iPad Pro does what a computer does but in more intuitive ways.

Use multiple apps at the same time with a few taps. Move objects between apps simply by dragging and dropping, or switch apps with a single swipe.

That is a small sample, and after I indexed the page, I counted 11 references with the word computer in it when talking about or comparing iPad. Apple also is hitting hard on most the main use cases from web browsing, email, multitasking, messaging, Office, wireless printing, and a slew of other things that normal consumers will see and conclude iPad Pro does pretty much everything they can do with their PC or Mac and more.

Having analyzed Apple’s iPad Pro landing page the last few years looking specifically for a full court press to position it against a notebook I can conclude this year is Apple’s biggest push yet.

It Boils Down to Workflows
Interestingly, in many of the end consumer research we do, when we talk about reasons they stick with a PC form factor it all comes down to a heightened awareness of their workflows. They always cite certain things they can’t or don’t think they can do with iPad that is a barrier to replace their notebook with it. I know many people who have successfully done this and aren’t looking back, but they are still in the minority.

Consumers start with workflows in their mind, even though they don’t think about it in those words. Then they look at the hardware and determine the best choice to fit their workflows. Apple has the best leverage here, as a major trend has emerged where the iPhone has become a central part of most consumers daily workflows. Consumers are waking up to how much their iPhone can do and how many workflows it has taken from the PC that there should be a comfort level that if their iPhone can do it, then iPad can do it, and more. This comfort level with iPhone as a critical part of most consumers daily workflows could be the most leverage Apple has in getting consumers to think about iPad as their next big screen computer.

Marketing and the Ecosystem
For Apple, it is up to their stellar marketing prowess to tell this story more broadly and entice consumers to go all in with iPad. The big design changes are certainly going to get their attention, and I have a feeling there is an aged iPad installed base that is due to upgrade, and this may be the year.

Lastly, the third party ecosystem is what can truly turn the tide for iPad. Apps for iPad are already numerous but we are still waiting for a large wave of creativity from developers when it comes to third-party apps for iPad that are unique, exclusive, and take advantage of all the unique hardware of iPad.

On this point, I’m leaning toward flipping my thinking about Apple’s efforts to bring iOS apps to Mac as a strategy for more iOS software on Mac. Perhaps the best way to understand this is to as a Trojan horse for more Mac specific developers to bring their apps to iOS/iPad.

For iPad, I’ve always thought the analogy of a blank slate was apt. It is a device where anything is possible and a blank canvas for its owner to use it in any way they see fit. Let’s hope the market sees iPad’s true potential.

Smart investors know to look for companies or technologies to invest in that are part of a wide infrastructure buildout. For the rise of the Internet era, stocks like Cisco and Qualcomm were practically printing money for investors as they were the backbone of the Internet and connectivity infrastructure. It’s the kind of thinking in line with the saying when there is a gold rush to invest in picks and shovels. This strategy is known as the pick and shovel play in investor circles.

With that in mind, the past 12-18 months about, investors have looked to semiconductor stocks, and specifically AMD and NVIDIA as companies that fit the pick and shovel investor play. Both AMD and NVIDIA graphics cards are critical on the backend and the front end of the blockchain movement. However, with the steep slowdown in the blockchain and crypto market, it seems these stocks are taking hits.

While NVIDIA will report earnings in November, AMD reported yesterday and continued to fuel a downward trend in semiconductor stocks. Yesterday after reporting a few positive numbers in both revenue growth and gross margin growth. However, all the positive figures for AMD were negated by weak channel inventor for graphics which was hit the most by the stall in the crypto/blockchain market. This market was strong end of 2017 and into 2018 and resellers believed the trend would continue throughout 2018. When the market stalled, and interest in crypto and blockchain wained, too much inventor was left in the channel and impacted AMD this quarter.

Broadly, however, it seems investors have turned a bit bearish on most semiconductor stocks. Which, at a high-level, is an interesting trend to unpack given there are some very positive trends for semiconductor growth ahead. But, it seems that crypto/blockchain was a bit too strong of a factor in most investors bull cases for stocks like AMD and NVIDIA.

It will be interesting to see if NVIDIA tells a similar story around crypto/blockchain impact when they report earnings. Both companies are continuing to see increases in cloud, gaming, and mix shifting to higher-end products. But the slowdown in crypto/blockchain is one of the biggest factors for negative investor sentiment as big banks continual to put our research reports that oversupply will continue to be an issue for the foreseeable future. There are a lot of picks and shovels sitting on shelves. This is a clear indicator that crypto/blockchain peaked and we will see where it goes from here.

The meta-point here is that it does appear the crypto/blockchain bubble has indeed popped. For how long, and how big the pop will be is still unknown. As I’ve written before, there is a legitimate reason to be optimistic about the blockchain, but there may be some pain and turmoil that has to happen before we see the true potential of the technology.

Lastly, the other main point that is impacting semiconductor stocks is the uncertainty of the US trade war with China. Nearly every semiconductor buy-side analyst report I read continues to cite this concern and the overall impact this trade war will have on the supply chain. This is a fair point and probably the biggest unknown factor. From nearly all vendors I’ve talked to, the trade war is a major concern issue, but many companies that are key parts of the supply chain in China are already seeking creative solutions to move some operations outside of China as they don’t want this to impact their business either.

From what I can gather, not too long after the start of 2019 we should see some clear solutions on how everyone impacted by the trade war on both sides of the Pacific ocean plan to move past this and manage through the trade war. That point also seems to suggest that companies both in the US and China don’t believe this trade war will be resolved any time soon.

It’s been discussed before that a car industry parallel to generations of designs is the best way to think about Apple’s iPhone design strategy. In case you haven’t connected these parallels before, you notice that car companies change the designs of their car models very often. Apple appears to be on a four-year schedule with hardware design language for iPhone. The design of the 4,4s,5,5s started the trend. Then came 6,6s,7s, 8 lines all following the same design language. Both these design shifts lasted four years. Which makes looking at the current collection through that lens quite interesting.

I sense a slight evolution is on the horizon with Apple’s design language strategy. The current iPhone Xs Max, Xs, and Xr are the begging of a clear premium line and an affordable line with some similar but also distinct design language between them. Again, not uncommon from how car companies have done it for years. The car analogy seems apt because it is something consumer understand and have used during the car shopping process. All of this context to say with Apple’s latest iPhone collection we are looking at the design language for the next 3-4 years, with perhaps some variation in colors and metals, but overall the hardware design is set.

The distinction between the Xs design and the Xr design will be an interesting one to watch evolve. The role the Xr plays in this lineup strategy is an intriguing one because the distinction is mostly visual. It’s fascinating the screen size of the iPhone Xr is in many cases more attractive than the Xs screen to most consumers. Bigger screens are the trend and the preferred choice of an increasing number of consumers. On paper, the Xr feels like it is the mass market iPhone (entry level) and it will be interesting to see if that is the case as we track the mix of sales over the next year.

The Four Year Cycle
There is another interesting observation, uncovered by some recent data I came across. Looking over the past eight years, it appears four years is the magic number it takes for Apple’s installed base to shift to the latest collection. This is notable since as Apple moves their base to the latest technology platform regarding camera/imaging technology, CPU/GPU, AI, and AR capabilities, connectivity, and security, it means they give software developers new opportunities to sell new software and services experiences. In short, these cycles are important in keeping the Apple experience sticky and deepening the ecosystem with the help of third parties.

Understanding the routines of Apple customer base when it comes to hardware cycles is important in understanding the computing capabilities the bulk of Apple’s base has in its hands at any given moment. This gives greater clarity for both Apple and third parties to make the kinds of investments in new experiences and to do so at the right time.

Addressing all Price Points
I think an important distinction about the newest iPhone collection and price points is helpful. The Xr, while entry level to the premium collection, is not the device that is designed to appeal to price-sensitive buyers, specifically those in price sensitive markets. The Xr is a premium iPhone that is a part of the premium collection.

Apple’s strategy for price-sensitive buyers is to leave older iPhones in the lineup and aggressive prices. The lineup is then fully characterized by this slide Apple presented at the September iPhone launch event.

From top to bottom, this is essentially how Apple wants customers to think about their offerings that span price points, and capabilities. iPhone 7 and iPhone 8 at sub $600 prices are more attractive in emerging markets that folks may realize. One of the things I’ve mentioned before that I think is interesting is the unique position they have put themselves in by designing A series processors themselves. Their lead on the competition regarding benchmarks is about two years. Which means a two-year-old iPhone is competitive with current generation performance specs of competing devices. And that is true of the high-end devices. If you were to benchmark the iPhone 7 or 8 against a 400-500 Android Phone, it would outperform it handily in both CPU, GPU, and camera capabilities. Couple that with how long Apple supports older devices with software, again because of the chipset capabilities, and even those price sensitive and pragmatic shoppers can make the case to invest in an iPhone.

This is why we are seeing more switchers coming from Android in emerging markets and in some markets it is happening quite quickly. Over the next six months, as we see different country surveys reveal the mix of hardware brands, it will be very interesting to see where Apple is thanks to this new lineup.

Apple’s pricing lineup is easily its strongest yet competitively. The Xr in particular is well lined up against the competition. I spoke to a few of my carrier contacts after Apple’s iPhone launch event and they seemed to believe the Xr was going to stack up well against the competition and when you look at it priced against the Google Pixel ($799) and Samsung Galaxy 9 ($719). Some of my contacts even going so far to suggest the Xr could end up being more disruptive to competitions portfolios than any iPhone since the 6/6 Plus launch.

All in all, this is shaping up to be an interesting year to watch for Apple’s products, price elasticity, and the current collections impact on competition.

I’ve updated one of my more popular charts, and upon further reflecting and sharing via video conference at a couple of Ivy League business schools, I think there are some deeper observations to be made. Here is the chart.

This chart, in its most cursory interpretation, shows how Microsoft fell as the dominant market share provider of personal operating systems. Microsoft missed the mobile wave, and Google’s Android filled the void. I’d like to unpack this chart a little further and make what I believe to be some important business and industry lessons.

Market Share Does Not Equal Influence
This chart is helpful for a variety of reasons. Firstly it shows us two computing waves. It shows us the desktop and notebook computing wave and the smartphone wave. What’s key to note here, is these are the only two technology waves we can observe. So we need to try to learn some lessons from both but also be cautious before claiming that history always repeats itself. It may in this case, and it also may not. There are actually a few differences between the desktop and notebook wave and the smartphone wave I’ll get into. However, the lesson that I think is clear is market share does not equal influence.

When Microsoft acquired just over 98% share at their peak, Apple was still remarkably influential in the tech industry even with their measly >3%. Fast forward to today, and while Android captures over 70% of annual sales of personal computers, both Microsoft and Apple have more influence in the market than Google. Windows and iOS both have shares in the teens, yet both of them have much more vibrant economies built around them. Microsoft Windows has an extensive business ecosystem built up around it with many third-party ecosystems thriving because of it. The same is true of iOS. Apple’s mobile software platform is the most important economic mobile platform regarding sheer dollars and ecosystem value.

This point, I believe, is a repeating truth. Meaning, no matter what happens in the next wave or who can claim they are the market share king, it does not mean they are the most influential.

Only Open Platforms Can Garner Market Share Scale
I am not saying that closed platforms cannot be market share leaders of a category. iOS is the current market share leader in both tablets and wearables, and I don’t believe that will change any time soon. However, both of those categories are not that large in volume and may never become more than a few hundred million units a year in volume. The bigger the total addressable market, the more it favors open systems. Smartphones are the best example of this and with a TAM of nearly every adult on earth, or roughly 5 billion humans and ~1.5 billion a year in annual sales, a closed system can never become dominant in such a large market.

This statement brings up something important from a business perspective, and my chart helps us visualize the takeaway. Microsoft was an open system, meaning a platform anyone could put on their hardware and rose to dominance because of an army of hardware partners. The same happened with Google and Android. Android is an open platform that rose to market share dominance in the smartphone market thanks to an army of hardware partners. Only an open system can displace the previous open system who had the dominant position.

But what makes this interesting, is the very nature of the reason an open platform can scale and displace the incumbent open platform is that it is open. Meaning it is flexible, scalable, and customizable and any partner can do with it as they please. This is the reason it can achieve scale, but it is also the reason all is not lost for the incumbent player.

Had Microsoft embraced Android, instead of fight it, earlier on as they were losing the mobile battle, they would have leveraged it for their benefit much earlier on in the smartphone cycle. Only recently, has Microsoft decided to embrace Android and make it the best companion platform to Windows. A wise move indeed, but one that could have helped them a great deal should they have done it earlier.

The lesson for the incumbent open-platform is not to be afraid of displacement in the next wave should it happen. The very reason displacement is possible, thanks to openness, is also the enabler to usurp the platform from your competition to your strategic advantages.

The Big Waves Create More Opportunity
The last observation I want to make is related to the size of the market in a technological wave. When Microsoft had their 98% share, PCs were only shipping around 250-300 million units a year. The mobile wave was bigger, with a 1.5 billion a year shipment base, and it is notable the open platform (Google Android) did not get the same level of dominance in market share Microsoft did. This has everything to do with the size of the market.

So, I propose, if the next technological wave is bigger, the open-platform that absorbs the most market share will acquire less overall share than the wave before. In the second computing wave, Android acquired less total market share than Microsoft did in the previous wave. Moreover, in the next wave, I’d predict, whoever emerges as the open standard they will acquire less total share than Google Android did in the mobile wave. It’s a thesis, but I think it is plausible.

I’m excited to see, over the next 10-20 years how this plays out and if we see history repeat, or if something entirely new emerges. However, I keep coming back to the most critical point is that market share does not equal influence or even great value. What matters is building a platform that creates a healthy economic ecosystem for all. Do that, and everyone wins.

Bloomberg’s Spy Chip Report

Late last week, Bloomberg wrote a report titled The Big Hack: How China Used a Tiny Chip to Infiltrate U.S. Companies. The implications of this report are significant and in the end, whether true or not, will undoubtedly lead to a stricter and more secure supply chain.

There are a few things about this report worth pointing out. Although this article came out last week, I wanted to take some time to reflect on it and see what new developments unfolded before writing about it. I’m glad I did, because subsequent reports, and statements from the companies in question (Apple, and Amazon) brought more clarity to this issue.

Both Apple (What Blomberg Got Wrong About Apple) and Amazon (Setting the Record Straight on Bloomberg) came out with a detailed and focus denial of the report. In Apple’s report, the title specifically calls out details of the errors in the Bloomberg report, and even the title gives insight into Apple’s position. Amazon similarly came out swinging stating the article has so many inaccuracies it is hard to count. It is rare that two of the world’s largest companies, one now valued over $1 trillion dollars and the other hovering around that valuation, to come out so strongly publicly against a public report and shoot it down point blank.

Further developments even led to the US Government’s Department of Homeland Security to chime in validating Amazon and Apple’s statements saying they have not found any evidence of supply chain tampering and are in full alignment with the position of Amazon and Apple. So what is really going on here?

There are a few things to highlight. First, both Amazon and Apple indicate in their public statements that they had been communicating with Bloomberg reporters on the topic for a year or better. Both took a deeper look into the implications just to make sure they did not miss anything and did not find any evidence to support Bloomberg’s claim. Both Amazon and Apple express both discouragement and shock that despite their cooperation with Bloomberg the story ran anyway. What became clear in both Amazon and Apple’s accounts was they felt they were being as transparent as they could and as forthcoming as they could with Bloomberg to make it clear their report is a dead end. But the story went out anyway.

Now, as I look at this, we have two sides of the story and no reason to doubt either side is knowingly lying or trying to be disingenuous. In the case of Apple and Amazon, they are public companies and such blatant misleading of the public (if they were lying or covering up this story) would likely result in both CEOs losing their job and come under significant SEC and shareholder scrutiny. So it seems unlikely Apple and Amazon are lying. It also seems unlikely, they simply missed these chips or that they truly are unaware. Both companies did an extensive audit to make sure what Bloomberg reports was not happening.

We have no reason to believe Bloomberg is intentionally lying, or intentionally trying to mislead the public with a fake news story just to get clicks since they have a generally stellar reputation and do not want to risk that. I firmly believe Bloomberg had sources, most of them it cited were U.S. Officials, and that Bloomberg felt their sources were credible and accurate enough to go forward with the story.

This is a difficult story to parse out. But, a question worth asking is who stands to benefit from this story? Given that question I find it interesting that the timing is aligned with the U.S. current trade battle and increasingly worsening relations with China. Was this an attempt to make China look bad from a publicity standpoint? Perhaps, but we will never know. But the question of who stands to benefit by giving Bloomberg either incorrect or somewhat incorrect/misleading information for the story is the area to focus on if we truly want to know what is going on. But, as of now, I think we can say with a high-degree of confidence their report is inaccurate and there is no Chinese spy silicon/grand corporate espionage conspiracy happening in the supply chain.

I strongly doubt any response from Bloomberg but some clarity from them would be nice, and helpful at this point.

Facebook Portal
Facebook unveiled the home video conferencing system which has been rumored for sometime. It is called Portal and it has a few nifty features, one in particular where the device is on a swivel and follows the person around the room so they are always in the screen. The commentary on this product was predicable. Most saying they would never let a product like this from Facebook in their house. Others, correctly stating, that this is the worst possible time for Facebook to release a product like this given all the bad publicity they have received lately. These reactions sum up the major themes from commentary and they are both true.

Besides those two points, another issue is a question of what makes this product better than others in the marketplace? It has a few nifty features, but none of those features are enough to overcome Facebook’s lack of trust. If there was some truly amazing and highly differentiated feature then maybe I’d be more optimistic on this product–barely. But even then, given all of Facebook’s issues, and the many consumer studies (including several by my firm) showing how low consumer trust in Facebook is, I do not believe this product will do well.

The real question I have is why did Facebook make it? If they did any market due-diligence, every bit of information would have come back making the case against this product. My only guess is that, much like Snap Spectacles, Facebook needed to learn by shipping and go through the process of making this hardware in order to gather more experience building hardware. This product itself is not competitive in the market and both Google and Amazon offer better competing products and a richer ecosystem.

It also seems, for Facebook, their belief is we will all get together in VR someday so this device seems like it was built for the late-adopter who needs simplicity with their technology. This type of customer also tends to be extremely privacy conscious and the exact opposite of the type of customer Facebook would appeal to with such a product.

Even though this product is likely not to sell well, I don’t think Facebook is done experimenting and bringing to market other hardware devices.

I tweeted yesterday a chart I love to show, and always gets great reaction on Twitter, with the statement “the PC is alive and well and it comes in many shapes and sizes.”

I could spend a good hour or more talking about why understanding the various roles personal computers play in humans lives and why vast swathes of people have different needs and desires and therefore their needs vary and sometimes a small computer is all they need, and sometimes they can’t do their job without a large screen PC. The point is, the market is so mature at this point that consumers fully understand what they need and what they don’t. They are wise enough to know what things they value and what things they don’t. This is why we see a great deal of hardware, software, and overall feature differentiation. The landscape of personal computing has broken wide open into many slices of a big pie. Everyone is competing for their slice, and some slices are larger than others.

In light of that point, we see the broad evidence of extreme market maturity in both HPs and Microsofts hardware launch events from this week. HP launched a new laptop that is bound in leather and looks, as well as I assume feels, extremely nice. Microsoft continues to evolve the Surface strategy by making impressive upgrades to previous products and launching new premium colors and finishes to Surface hardware. These are classic examples of designing hardware with specific segments of the market in mind and not the entire notebook/desktop market as a whole. This is an important distinction of how the market has evolved and how the players are looking to compete.

In the good old days or the PC market, PC companies were making notebooks and desktops with the entire market in mind. Effectively, they were trying to compete for the whole pie, not just a slice. Interestingly, this was never true of Apple who always had their eye on a specific market and customer type. That strategy and laser focus from Apple paid off once the market segmented but it took much longer than they expected. Now, everyone is designing with specific segments of the market in mind, and we should expect that to continue for the foreseeable future.

This is how the personal computer is evolving. And it is important to know it is a constant and continual evolution. Touch and pen are the newest features of the PCs evolution, and neither has fully reached its full potential as a part of humans everyday productivity and creativity workflows. What companies like HP, Microsoft, and Apple are up against in the consumer space and commercial to a degree is the simple fact of behavioral debt. While much of this new hardware is capable of new and amazing things with the use of touch and pen, the reality is old habits (workflows) die hard, and it takes some serious effort to get people to embrace new ones. So while there is optimism humans will be empowered to do new things with these new tools, or existing things quicker and more efficient, it is simply going to be a slow process.

Android + Windows
Something else I find interesting as a strategy for Microsoft is how they have embraced Android in a way that they position Google’s platform as best companion to a Windows PC. Now, it is worth noting that if Apple’s iOS platform was as flexible and customizable as Google’s, Microsoft would try the same thing and deepen their hooks for Windows to iOS in the same way they are with Android. But Apple’s platform is much more tightly controlled and thus limits the depth Microsoft can create software hooks for Windows customers.

While a significant portion of Windows users are iPhone owners, I find Microsoft catering to Android customers interesting strategically. While Microsoft was, and in some cases still is, hostile toward Google a strategy they should have integrated long ago was to use Android’s openness to their advantage and attempt to usurp the platform for their benefit. This is essentially what they are now doing with Android and had they done this long ago, instead of buying Nokia, I think their position as a services player on mobile devices would be much farther along than it is today. Hindsight is 20/20 I know, but the nature of Android being more open should have been viewed more as an opportunity than a threat by Microsoft even back then.

What I’m getting at here is actually a fascinating point about the nature of open systems which threaten to displace or disrupt incumbents. Microsoft used to have 97% share of all computers sold every year. That number is now less than 10% mostly because of the ~1.3 billion Android smartphones sold every year. You could argue Microsoft was displaced in mobile because of Android and you are likely correct. But it is worth pointing out that only an open platform had a chance to displace the previous open platform. This is because an open platform enables a vast array of hardware companies to run their software. Which means, if I’m an open platform like Windows, and I get the sense another open platform is about to displace me, I should embrace that open platform as soon as possible and attempt to usurp it for my own gains. I know this goes counter to a lot of business theory and I understand why Microsoft did what they did. However, in this case, the nature of the threat from an open platform meant that they had and still have every opportunity to leverage the very thing that makes it possible for them to be displaced, which is the fact the threatening platform is indeed open.

This movie will play out again, and I’ll be fascinated to see how quickly the incumbents learn from history.

Facebook was once viewed as invincible. When chatting with VCs, investors, and many in the business world, there seemed no safer bet than Facebook’s hyper growth business. It seems the invincibility of Facebook carried over into the mainstream media given the amount of backlash we received when we published some recent research on US adults that suggested 9% of US adults on Facebook had deleted their account and 17% had deleted the app off their smartphone. It was entertaining to watch the numbers of people on Twitter respond to our research saying we were crazy or the data was flawed. Most of this coming from people who have no idea how to do research or the details of solid methodology but that is a different discussion.

But it isn’t just our research confirming some changing behaviors of US adults and their Facebook usage. This report from Pew Research, which was conducted a few months after our research, not only confirms many of our same findings but has even more US Facebook users reporting deleting the app of their smartphone than ours did with 26%. Interestingly, it isn’t just ours or Pew’s research confirming thus, but I’ve read no less than three private studies from Wall St. investment banks all turning bearish on Facebook citing their research showing a change of behavior amongst Facebook users.

I have no doubt something is changing amongst Facebook users, and Facebook knows it. Anyone using Facebook is seeing regular Facebook messages in their feed attempting to assure users that Facebook is doing everything it can to preserve the community, focus on people and relationships, making sure toxic material is not used to divide, and a host of other positive messages. Facebook would only do this is they are very concerned and seeing data that suggests US users are becoming less engaged.

After we published our research, we shared a number of charts, but the one below is one we have not shared before. I picked certain answers from this overall sentiment question to save space and focus on ones that I believe are the most telling. (Click the image to enlarge)

Personally, I’m not sure Facebook recovers from this. It certainly doesn’t help that they keep having issues with hackers and data breaches. At a high-level the little trust users had in Facebook is quickly eroding. But the reality for Facebook is their users aren’t actually going anywhere. While I do think there will still be small pockets of people who stop using the service, I think the big impact will be people using it less. But I do not think there is a large scale opportunity for an alternative to Facebook. People have spent years building their network on Facebook, and there is too much sunk costs in Facebook in terms of human time. Staying in touch with friends and family remains the single largest indicator of US consumers motivation to keep using Facebook, and that isn’t going to change.

Facebook used to be a place where US consumers would spend a significant amount of time browsing, killing time, and generally using Facebook as a source of entertainment. All of that has changed, and I have strong doubts consumers will go back to that behavior. Instead, Facebook usage may be driven by events or moments in time instead of general daily browsing. Things like a loved one got married, someone you know is sick or dealing with a trial, or just something very personal you want to stay informed about that is happening with a friend or family member. These more specific events seem like more logical drivers of Facebook usage than the prior behavior of using Facebook being fun or entertaining since it is generally no longer such a place.

Making a Case Against Hyper Scale
In big-picture conversations about the future, I tend to make a point that sometimes seems controversial. I’m not sure we will ever see a company with multi-billion users like Facebook or Google again. I know one should never say never, but my hunch is the kind of scale Facebook has achieved is unique and the result of a point in time not the new normal.

Every company who reaches hyper scale, which is a billion users or more, becomes the target of malicious attacks. Some companies, like Apple, handle this better than others but just look at Microsoft, Facebook, even Google as examples of bad actors looking to exploit their platforms. This is inevitable when a platform has so many users, and as Facebook has proven, this kind of scale is not for everyone.

While I make the case that we may not see a company with such scale ever again, I talk with many startups and investors for whom this kind of scale is the goal, and often I argue it should not be. The hindsight view of such scale companies is that too often the compromises are not worth the costs. Sure, some people may make a great deal of money, but there are many negatives beyond that. Once a company gets to that scale, and is public, it then faces financial pressure that is honestly unhealthy and sometimes dangerous. There seem to be much more positive stories and customer experiences around companies who focus on owning their niche and profiting greatly from that niche. The problem is the VCs, investors, and often entrepreneurs crave that, but it comes at a cost and always will.

Let me start off by saying I genuinely hate when people use the killer app terminology. I say this because the thing that drives a technology into the mainstream is rarely just one thing as much as people desire to believe it is only one thing. In mobile, for example, the killer app was APPS, not any one app.

I have discussions with company executives, investors, venture capitalists, and more on a regular basis and many of my conversations are about the future. Augmented reality is a subject that comes up in nearly every discussion about where the world personal computing is headed. Naturally, the what is augmented realities killer app always comes up as a question.

The more I’ve thought about this and attempted to connect the dots, the more clear it has become to me that augmented realities killer use case is not going to be that sexy. Pundits and so called futurists often like to point to entertainment, gaming, and other more sexy use cases as the thing that will drive augmented reality. My current conviction is those use cases are not where the mainstream will find true value with AR. Rather, I think the killer use for AR is utility. Good old-fashioned usefulness. Let’s look at a few examples.

I recently came across an app called Memrise. Memrise is a language learning app, and while most of the app has similar experiences to other language learning apps one feature stands out to me. Memrise uses Appel’s CoreML to do image detection of any object and then shows the objects wording in the language you selected. Here are two visuals to help with the illustration.

After spending some time with the app, I was quite surprised how many objects the service recognized and how quickly it knew what the object was and gave me results on how to say it in the language of choice. World travelers will remember similar experiences of apps that translated words in other languages in real-time using the camera on your smartphone. Text translation was quite a bit easier than image recognition to translation, but none-the-less these are real world valuable use cases that any person can immediately understand and find useful.

Another unexpected experience was around Apple’s new measure app. If you are like me and you try to do most stuff around your house on your own, you know you can never have too many tape measures. My wife hates that I almost always buy a tape measure at Home Depot when a good deal on one shows up. Most of my closest friends are in construction and use a tape measure an uncountable number of times every day. I’ve never once worn a tape measure out, and they go through more in a year than I have owned in my lifetime. I showed this app to my brother-in-law, who is a carpenter foreman, and he doubted it’s accuracy. So he went around my yard measuring everything he could, and things that often a tape-measure is tough to use because of length. Even he was impressed with how accurate the app was.Also, while this app is no replacement for a tape measure. There are many times where you need to know roughly the length of something as you plan. See this example, of a current project to build a deck and new fencing in the back part of my house.

I just needed to know a rough idea of the distance from my house to the pasture fence so I could have a rough estimate for my planning of another fence. This would have taken two people and several tape-measurements, but I got it quickly with this app which was extremely close to accurate. I bring this use case up, and the Memrise one to make a broader point. These experiences were quick and useful, and the action itself was not that different from me holding my phone up to take a picture. The challenge I have with gaming use cases, or other more entertainment focused use-cases for AR is they all require you to hold the device for long periods of time for the experience. These more utility-focused AR experiences I’m talking about are much briefer in the interaction model, while simultaneously being extremely useful and solving a pain-point or shining light on a pain-point you didn’t know existed like with the measuring app.

Now, I’ll tell you what I would personally find extremely useful. Some app that I can point the camera and get a rough estimate of somethings weight. Like, for example, this hog.

Because I don’t know if you have ever tried to measure a hog to get its weight but let me tell you it is not enjoyable and borderline dangerous.

While I somewhat jest, I think it a number of these use cases it is important to recognize just how difficult being accurate can be. Also, I do believe that these experiences become more valuable the richer the information becomes. For example, a killer use case just waiting to be solved is an app that you point your camera at your plate of food and get an accurate calorie count. Meaning that it doesn’t just recognize the food on your plate but accurately measures out the portions to give precise calorie count. This seems inevitable and not that far off.

As I said at the start, most of these examples are not sexy, flashy, or the kinds of things that drive headlines. They are, however, things that can solve real consumer pain points in ways that were previously quite difficult or impossible to solve. With both Google and Apple going down this road, it seems that using the camera sensor as a way to get more rich information about the world is the next step in personal computing.

What is this plant? How do I solve this math problem? How much does this weigh? How tall is that tree? How many calories is this meal? what kind of food is this? What does that say? Who is this person? The list goes on but you get the idea. These are all new ways to think about using the image sensor to answer a question. I can see a shift from a question in a consumer mind being answered by pulling up a browser and going to Google to pulling out your camera and pointing it at something. This, to me, feels transformative and sets the stage to make it much easier for a consumer to embrace head-worn augmented reality solutions in the future.

As I step back and look at Apple fall launch event, the big story in my mind is the incredible strength of the Apple ecosystem. This word ecosystem gets used quite a bit and may often be overused, or even attributed to things that are not truly an ecosystem component. Everything Apple has built from hardware, software, services, retail, customer support, and more has the Apple ecosystem as a central component. Apple’s management has often talked about and demonstrated the many ways Apple’s product work together seamlessly. This seems entirely logical, that of course, a company who makes many different products should have them work together, but often this is not the case. I’d argue that Apple not only has the strongest ecosystem but that their ecosystem compounds (get’s better with more devices) better than any of their competition.

The Best Ecosystems Compound
Just so it is clear, I regularly try and live in all the competing ecosystems like Windows, and Android/Chrome. I do this to make sure I see the benefits and differences of each platform offering as a complete whole. In some cases, the effort of living in an ecosystem is not limited to specific hardware, like in the case of Microsoft and Google there are software-centric ecosystem points. However, that does not discount the role hardware plays in an ecosystem.

The reason both Microsoft and Google have started making more hardware to run their software and services is that they understand what Apple knew all along which is that to provide customers with the best experience with your software and services you also need to have more control of the hardware which runs your platform. Partners who build hardware to run Windows and Android are important, but they often have a broader agenda that is not as aligned with Microsoft’s and Google’s. This point is made clear as I try products like Microsoft’s Surface and Google Pixel. Which are the best implementations of both Window’s and Android as well as more seamlessly integrated with Microsoft and Google’s services than any other hardware.

Understanding that the best ecosystem’s compound means that the more you have/use, the better the whole experience gets. Moreover, while this is somewhat true in a Microsoft and Google world when you use partner hardware, it is truer the deeper you go down each company own hardware solutions.

Apple and the Most and Best Hardware Endpoints
Continuing on the observation that first-party hardware is crucial to an ecosystem advantage, what makes Apple’s strategy here so interesting is how many hardware endpoints they make that extend and deepened this ecosystem. And not only do they make a variety of hardware endpoints, in most cases they make the best or among the best hardware of all hardware they compete.

So not only does Apple make the most hardware endpoints to experience and live in their ecosystem, but consumers also understand the options they have in hardware in the categories from Apple are also compelling choices. For example, if a consumer is interested in a smartwatch, the Apple Watch is the market share, customer satisfaction leader, and most talked about smartwatch on the market. If a consumer is interested in a tablet, the iPad is the market share leader, customer satisfaction leader, and again highly talked about among the top in the category. The same is true of iPhone, and Mac.

This is where Apple is unique, and their ecosystem truly stands out. For a consumer who is interested in all these categories, or even just a few, what company provides such a robust hardware lineup that is also viewed as the best or among the best in all their respective categories? From an ecosystem standpoint, Apple makes the strongest case as the ecosystem of choice for consumers who live in the modern multi-device era.

The breadth and depth of not just options, but also quality, followed with an explicit focus on hardware, software, and services which all work better the more devices you have is one of Apple’s strongest ecosystem advantages. Moreover, it is a luxury only they have at this point. Conceivably, only Google has the potential to match Apple’s hardware ecosystem since they can conceptually compete in all the same hardware categories as Apple but it is unclear if they will.

Consumers Understand the Ecosystem Story
The big question that has always existed was if consumers understood this story. For much of the history of personal computers, consumers have only really had one or two personal computers. But as we enter the multi-device personal computer era, consumers are waking up to the story that if they have one Apple personal computer, and are interested in another category of computing product, that getting another Apple hardware product means they will work better together.

From not just our research, but many other research notes I’ve seen, consumers note that Apple’s products working together as a primary reason to consider another piece of hardware from Apple. This is a critical point because it means the ecosystem story is strengthening not just for Apple but in the minds of consumers as well.

All-in-all, this means Apple remains well positioned in the short and long-term. Ecosystems not only compound but their value also gets spread quickly via word of mouth. Which also happens to be the most significant way people find out about new products and services.

Yesterday Qualcomm unveiled their newest Snapdragon creation which has been custom designed for the smartwatch/wearable category. On the heels of this announcement, there are a few critical observations to make when we think about the future of wearables.

Custom Silicon
The first observation, which should be obvious, is the role custom silicon will play in the future of wearable technology. While I say this seems obvious, what was interesting was how the first few years of wearable solutions from Qualcomm, and others, were repurposed smartphone chips. Alternatively, in some cases, in the early Pebble and Fitbit era, they were still off the shelf low-power and low-performance chips. Apple was the only company to launch with a purpose-built solution for Apple Watch. Moreover, that was a big reason Watch, on the whole, was superior to competing products.

This sheds light on an interesting problem most companies designing semiconductor platforms ran into. Their designs were primarily focused, and specialized to a degree, on certain large-scale markets like PCs, servers, and smartphones. With the advent of IoT, automotive, wearables, and many new things on the horizon, semiconductor companies like Qualcomm started creating an underlying architecture would be more flexible and with little effort, the base architecture could be tweaked in a way to focus on new markets and do so quickly. Creating a semiconductor platform used to be a 3-4 year process and now with a more customizable solution, it can take less than two years to create a specialized chip for any number of use cases.
This flexible platform approach, which is mostly employed by Qualcomm, puts them in a position to bring more customized parts to new markets, faster, and help competitors compete with those more vertical silicon companies like Apple.

Qualcomm and Android Wear
While we haven’t seen Apple’s latest offering with Apple Watch Series 4, Qualcomm’s latest solution looks to provide brands with a range of options that will allow them to differentiate and compete. The SnapDragon Wear 3100 gives brands a range of options to customize their digital experience around the things they want to emphasize. Where I think this gets interesting is the pure fashion brands, and how they may want to customize watch faces, complications, and other new experiences that are unique to their brand.

One of the smarter things Qualcomm did, enabled a pure low-power mode that will allow the smartwatch display to be on at all times. In talking with customers, specifically premium fashion brands, Qualcomm found the lack of always-on display was a big negative for fashion brands who develop specific looks visually of their watch faces. Having a watch face on a smartwatch that is always-on has been a long time customer request, and it will be interesting to see if Apple solves this with Series 4 or if Android Wear may have a significant differentiating point for a year.

While Apple still has the dominant smartwatch market share, varying from 45-50% of the market’s sales depending on quarter, I’m not sure we have seen the best foot forward from traditional watch brands, and it’s possible this new platform from Qualcomm, and new chipsets in the pipeline, will give new tools to watch brands to start to compete in new ways.

Competition in Miniaturization
I’ve said this before, that all the efforts Apple has been doing in silicon and with Apple Watch are paving the way for their efforts in all other forms of miniaturization. When you step back and look at what is happening in the semiconductor industry, I was getting worried that Apple would have such a large lead in miniaturization that companies would have a hard time competing in the small computer era.

From what I see right now, only Qualcomm is in a position to help companies compete in miniaturization. This is not just with smartwatches but looking ahead to augmented reality and other wearable technology that will create a network of personal technology on our bodies.

When you put together what it will take to compete in the small computer era with customizable silicon, flexible platforms, rich software experiences, and the ability to do miniaturized hardware engineering loaded with sophisticated technology, there are not many companies well positioned to do this. This is why Qualcomm’s efforts here are essential. Given the challenges of Intel and Samsung not selling semiconductor solutions to third parties, Qualcomm is the only company positioning itself to provide solutions for the next era in personal computing.

This is not to say there are not significant challenges remaining in the market. I still believe the more vertical solutions like Apple uses will yield the best customer experiences but not every company, most, do not have that luxury.

The vast majority of the market will rely on third-party platforms to help them go to market, differentiate, and compete. As tech gets smaller, and things that were once analog go digital, the opportunity becomes much greater but so do the challenges.

Several interesting observations are surrounding Amazon as the company briefly became the second company to reach a trillion dollar valuation. While Amazon’s market cap has dipped back below, they will inevitably get back to the trillion dollar cap and beyond.

What stands out to me about Amazon reaching this market cap is how much headroom they still have to grow. In nearly every category they compete for their market share is nowhere near to being saturated. In most parts of the world where Amazon competes like US, UK, and India, E-commerce represents a small percentage of overall retail leaving a lot of growth ahead and Amazon being among the best positioned.

While not the sexiest market, cloud computing is poised for growth and while Amazon is among the market share leaders, there is still plenty of share to go around and growing. Putting Amazon in a growth position in cloud as the world transitions to cloud platforms as a foundation to run their business.

New media among TV, movies, and even music remain a growth area as many consumers begin to embrace new types of online content packages and leaving traditional ones offered by content service providers.

Lastly, and the area I want to explore today, is Amazon’s potential in the growing digital advertising market. Digital advertising is close to a $90 billion market and growing. While it is true Facebook and Google control roughly half of that budget, Amazon seems well positioned to capitalize and some recent research we did highlight this reality.

Consumers and Product Discovery
We recently explored how consumers feel about online advertising, and which mediums they believe serve them best in finding and discovering new products or services. When it came to the most common ways, consumers discovered a new product or service it was no surprise that word of mouth and friend/family recommendations top the list. For reference, here are the top five drivers for product or service discovery:

• Word of mouth – 57.38%

• Recommendations from friends or family – 55.91%

• Online advertising – 43.88%

• Television advertising – 41.98%
• Amazon – 40.30%

Search engines, browsing retail stores, and Facebook came on the heels of those top five. When I look at this list, and how I phrased the question focusing specifically on discovery, it is interesting that discovery seems like more of an organic process and not something consumer go hunting for. Which makes some sense, and is a bit different than what we found in our App discovery study. In that research we found, more often than not, consumers go hunting for an app when they feel a pain point and start looking for a solution to their problem. Word of mouth certainly played a role, but there seemed to be more ambition from consumers to go search out apps that fill a need. Perhaps this is thanks to the “theirs an app for that” marketing which led to an expectation that an app must exist to fill a need. Interestingly, there is not a “there is a product or service for that” mindset in goods or services the same where there is for apps.

We also asked consumers overall how they felt about advertising and, in general, most consumers had a positive opinion and sentiment toward ads. They overwhelmingly agreed, they enjoy discovering useful and valuable new products and services and overwhelmingly agreed that advertising is the best way for brands to reach them. Despite some bad actors allowing too much lousy advertising and consumers having some bad experiences related to ads, it seems clear the ad market is not going away and if anything can still become more relevant to consumers.

We asked consumers when it came to advertising mediums which most influenced their purchase history, television advertising remains king, but interestingly both Facebook and YouTube were in the top five most influential mediums.

Having a sense that consumers do enjoy discovering new products and services, but also don’t necessarily go searching for new products or services at a whim, we tested the idea of an opt-in service that once you tell it your passions and interests would help surface products or services that align with your interests or needs. While a total hypothetical, it was interesting that 61% of respondents answered favorably to this idea either saying yes they would use such a service or interested but need to learn more. We then presented consumers with a list of companies they would trust for such a service, and that is where Amazon stood out.

Amazon topped the list with 35% of consumers saying they would trust Amazon the most to offer such a service. No other company, including retailers, Google, Apple, etc., even came close. The results here underscore the trusted position Amazon has become when it comes to commerce and how Amazon may be a better place for direct to consumer advertisers to spend their time than on Facebook. Especially since we found that while Facebook ranks solidly as a place to discover new products or services it does not play a role in the transaction part of the equation. Amazon could handle both discovery and the transaction if they play their cards right.

I’ll end on this point. I recognize this would be a delicate balance for Amazon. Should they go down a path of allowing advertising to become more of a distraction or a nuisance to their customer experience then they run the risk of losing or eroding the trust they have built with their customers. Amazon has to implement this in a way that truly links up buyers and sellers in a way that leads to truly valuable discovery experiences. I believe Amazon has all the underlying platform infrastructure pieces to pull this off and take significant share from Google and Facebook in the digital advertising market, but they will be well advised not to rush this effort and make sure it reflects the best customer experience possible.

As an analyst with a background in the semiconductor industry (my first tech job was at Cypress Semiconductor), and heavily covering the semiconductor industry when I first joined the Analyst community in 2001, I was beginning to think this knowledge and expertise was helpful to have but becoming less relevant. For a stretch, it seemed like the semiconductor industry was growing stale. An industry that was once the pinnacle of enabling innovation felt as though it was an afterthought as smartphones, tablets, wearables, and more got all the attention.

However, in the past few years, the semiconductor industry has been undergoing a fascinating renaissance. A sector which one felt like it was a background conversation is now back in the, and I couldn’t be happier.

While there are so many things I can write on, including a dedicated analysis of what is happening in memory, the foundry/manufacturing topic is an important one to understand.

The foundry conversation made headlines earlier in the week when Global Foundries announced they would not be pursuing the 7nm process node anytime soon. The implications for this move mean that only two foundries exist for customers who want to design chips on 7nm and those are TSMC and Samsung. There is a critically important point to understand as the foundation for what is happening and how things may play out from here.

It’s All Apple’s Fault
Fascinatingly, you can draw a line to Apple as the source of some of the turmoil happening in the semiconductor industry. To understand how it is important to look at why Global Foundries is abandoning 7nm and why both TSMC and Samsung can afford to pursue 7nm and beyond.
Global Foundries simply stated there was not enough customer demand for 7nm. This is a partially true statement when the correct way to describe the problem is not enough customers can afford 7nm chips. It is becoming increasingly more expensive for foundries to purse new process node technology meaning that they need customers who can afford the premium pricing 7nm chips will command AND have the appropriate scale to buy in mass. Only one category, and only one customer has both the ability to afford the premiums of latest process node chips and the scale to buy hundreds of millions of chips, and that is Apple.

While this is entirely speculation, I can say with a high degree of confidence that this foundry situation would be different if Apple were not designing its chips. How different is up for debate, but assume for a second that Apple was buying chips from Intel, as was reportedly discussed by Steve Jobs and Intel then CEO Paul Otellini. If Intel were making chips for Apple, it would have given them the financial boost to keep investing in leading-edge process technology because they would have had the margins and the scale to make it worth it. Had Intel worked with Apple on this instead of Apple designing their own, there is an excellent chance Intel would have been able to maintain process technology leadership.

The other area where Apple has impacted the semiconductor market is by dominating demand for high-end chips at scale in the smartphone market. Because Apple is the ASP leader in smartphones, they have mostly sucked the life out of the high-end for everyone else. This carries with it the implication that competitors need to compete in much lower price tiers which means they can’t afford the premium tier of semiconductor chips. This point alone lessens demand for the newest chips at cutting edge process nodes and thus makes it hard for manufacturers to invest the significant RND necessary to keep pursuing next-generation transistor designs.

This ultimately will lead to a theory I laid out a while ago about the last foundry standing. It stands to reason that if it becomes increasingly expensive to get to new process technology and only a small handful of companies can afford to pay the premiums to help justify that investment that fewer fabs will try. If only TSMC and Samsung are making 7nm now, and Intel and Global Foundries are years behind, then a big question mark emerges about who can afford to get to 5nm? Again, I firmly believe this is less a technology problem but more an economic one. Yes, it is becoming increasingly difficult technology-wise to get to 5nm and beyond, but enough R&D is what is needed to do it. Few companies can justify the investment in R&D because few companies can afford to pay the premiums.

While I fully expect Intel to get to 7nm, I think it will become increasingly clear to Intel and their new CEO that economically it may be even harder and possibly not feasible to get to 5nm. Basically, for all the reasons Global Foundries found it not financially viable to get to 7nm, I think it is likely 5nm will cause even more turbulence.

So the question will remain, who is the last fab standing and interestingly, Apple has a lot to say about who wins and loses. For a company not making semiconductors a decade ago to now essentially have such incredible influence in the semiconductor industry is pretty fascinating.

To date, approximately 65 million smart speakers have been sold worldwide. Most of those to North America, but the rest of the world and China, in particular, is catching up fast. The YoY growth in the market has been impressive. It is, without a doubt, the fastest growing category in consumer electronics. In our analysis of this category, I mentally include smart speakers in the smart home/smart home tech category which by itself just looking at connected home categories is growing quite fast. Put all this together, and the big picture observation is that smart home/connected home technology is exploding in growth and further evidence that it is the next consumer electronics battleground. Here are two charts from my model to help visualize the market.

Like any proper analysis, this market is layered with interesting narratives. Not only, is the market a growth category YoY but if current trends hold we will pass 70 million in sales in 2018 alone. Which highlights the point that the vast majority of smart speakers sold in total have come in the past 12 months.

While I frown upon hanging too much emphasis on quarterly market share, I prefer to look at installed bases, the big story of the past few quarters has been Google’s market share growth in the category. Many articles came out making the point that Amazon had more than 70% share of the category, and that was true, but it was true when the category was only selling a few million units a quarter. Inevitably, as the market got larger and more competitive, we would see market share sales balance out. This is how markets work, and it is no surprise it has balanced out. Google and Amazon are hands down the sales leaders by market share, so I’m showing just their sales by quarter broke out.

As you can see, 2018 has been a much evener battle between Google and Amazon. Of course, it is worth noting the vast majority of the sales of these products has come at lower price points. The significant sales spike during the 2017 holiday quarter was because of Echo’s and Google Home products in the market for less than $100. For the time being, we can conclude low-cost smart speakers drive the market. This is at least the land-grab strategy for both Google and Amazon are employing. Their hope is a low barrier to entry price wise will lead to hooking customer on the value and then over time the same customers will look to them for more premium offerings but will be addicted to one assistant and not interested in switching. This, at least, is the theory and we will see if it plays out this way.

The Smart Speaker Market is Evolving
It is interesting to see some evolution in this category start to take place. Amazon’s Echo Show demonstrated the value of a voice assistant paired with a screen. The key to this product was the addition of voice as the primary UI to navigate as a screen based product. The result, was a computing solution where a consumer could control a screen with their voice, freeing up their hands to do other things, or operate the screen from a distance since touching it was not necessary to use it. This signaled the first major evolution of this category to smart screen based voice computers.

Below is the left to right evolution of the products from Amazon and Google.

The screen-based products are most interesting to me right now from a competition standpoint. I’m not joking when I say I’ve used every one of those products pictured in my home and tested many different scenarios and use cases with them. In doing so, what I observed was the value of the assistant was relatively equal when no screen was present. Enter the screen, and Google’s assistant started to perform better and in more valuable ways than Alexa on the Echo Show. As of now, that Lenovo smart speaker with Google Assistant is my favorite product of the bunch and has displaced the Echo Show in my kitchen.

What further got me thinking about how this category can evolve and get positioned was how these screen-based assistants might start to appeal to different segments of the market. I stumbled across this highly influential YouTube blogger whose main influence is on millennials and Gen Z. His name is Dave Lee, and he reviews many tech products, but I found his positioning of the Lenovo/Google Assistant smart display as an accessory for college students quite interesting.

Strategically, getting millennials and Gen Z hooked on assistants while they are young is essential. If we believe, as I do, these smart assistants play a role in the next major platform, then creating dependencies now on existing computers is strategically imperative for everyone hoping to compete. What makes Google interesting in this, is how Google Docs, Google Search, Gmail, and a host of other Google services are standard tools college students use as a part of their workflow. Which is why positioning these smart displays as an accessory for college students, for use not just as entertainment in their dorms but also as an educational/productivity tool is extremely interesting.

There is still a lot we don’t know about this category, and while we are attempting to answer essential market questions, it is still evolving quickly before our eyes. For all of our clients, and anyone interested in this category I continually stress that we are still very early days despite the strong sales and growth we have seen thus far. I’m bullish on the category, but I still think a great deal of evolution regarding product market fit is going to take place and while having sold well, I think many of the current products in the market will be outdated relatively quickly over the two-year time frame.

This market represents a significant opportunity as not just consumer homes, but retail spaces, businesses, public spaces, educational locations, and more are all opportunities for smart screens and voice assistants. It is a significant category, but that opportunity will also come with significant challenges. In some cases, these challenges will be much steeper for consumer tech companies who have had a reasonably easy path getting to where they are.

Magic Leap recently gave members of the tech press hand on demonstrations that led to a series of articles and reviews of the previously mysterious augmented reality headset. Before this, all the public saw were brief accounts from influencers or investors and a few demo videos from Magic Leap’s website. Last week, the cat officially came out of the bag.

While somewhat optimistic, most tech reviews were pretty negative and the 10,000-foot view conclusion that was clear from nearly every account is that we are still years (many years) away from this technology is ready for your average consumer. I’ve used Magic Leap as an example and proof point for a variety of dynamics happening in our industry and I think it is worth using them again to make some additional points.

Tech’s Pause
I’ve attempted to articulate the period we find ourselves about the tech industry by explaining a period of innovation pause. We just came out of a series of waves that were very close together if we look back at the last 30 years of technology innovation. The entire industry was heading to calm period, and I believe we are in that cycle now. I’ve used the surfing analogy before, that a set of rideable waves generally comes in a pair of three which is then followed by a sometimes annoyingly long pause before the next set. I believe we are in the pause before the next set, and I’m not sure how long it will last, but my gut is it will last longer than many realize.

This is the main reason why most tech companies are looking to enhance their existing innovations through small improvements focusing on efficiency and functionality rather than chase whatever may be next. It is undoubtedly true, whatever fuels the next wave of innovation may stem from these functional improvements and more continuous innovation, however, the point remains that gradual progress rather than leaps forward is where we are at in an industry cycle.

Which means many pundits, industry observers, entrepreneurs, and investors but exhibit something they are not generally good at–patience.

Patient Innovation
I do much work with venture capitalists and entrepreneurs, and the one phrase I always found interesting was patient capital. There are companies, often some of the ones investors are most bullish on, which everyone involved agrees will require patient capital. That is money that is willing to be invested with the noted expectation that it will take a long time to become a return on investment. This is often because the company is viewed as disruptive (like Uber) or that the technology itself is well ahead of its time but the overcoming the technological hurdles now will be worth it at the end (closer to Magic Leap’s position).

What I’m adding to the patient capital conversion is the idea of patient innovation. Magic Leap may be extremely successful because of the early work that went into solving technology problems, or they may be an example of a technology solution that was just too ahead of its time. Regardless of how the chips fall with Magic Leap, there is a need for them, and many others in our industry to innovate patiently.

Since Magic Leap’s primary product is one that is dependent on a market being ready, they don’t have any other products or revenue streams to rely on. Where a company like Apple, Google, Microsoft, or Amazon is undoubtedly working on similar hardware, they have the luxury of being able to be patient where Magic Leap does not. Which is where Magic Leap’s strategy begins to get interesting as they try and develop things, whether they be software or hardware, that can bring in revenue in the short term to stop the bleeding of cash, and make them somewhat less dependent on venture or debt capital in order to wait until the market is ready for their solution.

While I can appreciate Magic Leap wanting to be first and wanting to be early, sometimes this is more a curse than a blessing. I’ve seen too many times companies who are too early to a market learn the wrong lessons rather than the right ones and make grave mistakes about what the market wants because of the wrong lessons being learned about what customers want.

What I expect Magic Leap to do, which is not unlike what Microsoft is doing with HoloLens and their partner ecosystem around Windows, is to go after the enterprise market to start with. Enterprises are often good test beds for early innovations, and when it comes to augmented/mixed reality, there are use cases big corporations are interested in today. While it is not a big market, nor will that market profitably any time soon, it is an excellent place to start building a business.

We as humans, and as a tech industry, like exciting products. The industry is hungry for something new, and this is one reason it is easy for Magic Leap to get a lot of press. However, the use cases take a much longer time to work out and find a fit in the market. Unfortunately, the big pie of the consumer market does not need AR yet. Eventually, I think they will, but this market is more like ten years out than five years out.

I’ll end this article with a saying I’m fond of that has continually proven true and is relevant to this topic. Consumers adopt solutions to pain points very quickly and adopt brand new technology very slowly. AR falls into the latter category for now, and that is why we should expect a long adoption cycle and the testing of the patience level of everyone involved.

Ever since Apple has gone all in developing custom silicon chips like their A-series processors as well as companion chips like connectivity modules, an image sensor, display modules, and several others they don’t talk about publicly, other companies have followed suit.

I often get asked why companies feel the need to start making their chips when there are often great options from companies like Qualcomm, Intel, NVIDIA, and AMD, and many other semiconductor companies who have deep expertise in this area. The short answer is more and more companies are going to want more control over specific experiences with their products and therefore will want to have control over how those experiences are differentiated.

While it is true that many semiconductor companies will offer solutions that seem like a more logical choice to be used in a particular product the reality is many companies will continue to invest in their differentiation which will lead to more investments in proprietary hardware and silicon in many cases.

Google has been going deep down this road with their TPU efforts, and now with their TPU 3.0, their chipset strategy has been refined and focused on machine learning acceleration. Similarly, Tesla has now shown their cards on their custom silicon development stating they are preparing to shift away from NVIDIA and go all in with their chips dedicated to their autonomous systems.

While I expect this trend to continue, with other big companies starting to enhance and strengthen their differentiation with custom hardware, I’ve been thinking lately about the risks associated with this strategy for many companies.

What’s at Stake
By going down the proprietary silicon route, companies are betting their differentiation on this strategy. I say it this way because of one common theme with companies efforts in custom silicon is how focused it is on a specific area of differentiation. If one did an in-depth analysis competitively, you would likely find where these companies believe they are differentiated by where they try to build custom silicon to enhance or deepen that differentiation.

The risk, however, in this scenario is their efforts in custom silicon are not able to sustain their differentiation as companies like NVIDIA, Qualcomm, Intel, AMD, etc., design better, more powerful solutions that enable said companies competitors to have an even better offering. To elaborate, I’m going to pick on Tesla.

Tesla dumping NVIDIA seems like a fairly significant risk. Especially, since Elon Musk and company are saying they are going to build a better autonomous system, including all the extremely complicated set of chips needed to create self-driving cars. Essentially, Tesla is saying they can make a better solution than NVIDIA, and I find that hard to believe.

With Tesla, the risk may be more multi-faceted than it is with other companies because human safety is a factor as well. Do we believe that Tesla has the experienced semiconductor engineering teams that can out-innovate NVIDIA a company with decades of experience and some of the best silicon engineers on the planet (many focused solely on autonomous systems)? Alternatively, to make the point another way, would you trust a self-driving car running unproven Tesla silicon or proven and vetted NVIDIA technology?

In this scenario, Tesla will be up against NVIDIA who will likely be powering the vast majority of Tesla’s competition in the automotive industry. While Tesla will focus their efforts on some specific areas like AI and machine learning, I have a feeling they will be challenged to keep up with NVIDIA in the more fast feature set around automotive. There is a significant risk Tesla is not as competitive not just in fully autonomous systems but the broader landscape of technology invading many corners of the automotive experience.

Tesla’s risk is not unlike Apple’s in that Tesla has decided to invest in the total solution as they want to develop a CPU/GPU and additional sensors needed for autonomous systems. Similarly, Apple is becoming increasingly less dependent on third parties for their silicon, but the difference here is Apple has not only purchased core expertise by buying semiconductor companies, but they also have hired/built one of the best teams on the planet poaching many of the best silicon engineers from companies like Intel, Qualcomm, NVIDIA, and AMD. Tesla has built no such group, and I’m skeptical they can.

While Google is at risk as well, they are focusing just on a few areas with their chips. They aren’t trying to eliminate NVIDIA, AMD, or Intel but rather develop semiconductors that accelerate or compliment those companies technologies. This makes their risk slightly less, but the proof will be in the execution and performance. Google’s cloud platform benchmarks in these competitive areas will need to yield on-par or better results than companies like Amazon or Microsoft who are using the total solutions from third parties, for now.

If Google’s performance benchmarks don’t remain competitive and companies like Intel, AMD, and NVIDIA out-innovate Google with their total solutions then companies who rely on the above names then their investments in silicon become a disadvantage instead of an advantage. Here, like Tesla, it all comes down to talent. Here again, the best silicon designers are not at Google, and I’m skeptical they will go there.

While I appreciate the strategy and efforts of companies investing in silicon, I also know how steep this road will be for many of them. Time will tell if this strategy becomes a strength or a weakness competitively, but there will be more pressure and more spotlight and scrutiny on the Google’s and Tesla’s of the world as they embark on this path to prove their efforts will pay off.

Apple’s ASP defies the logic and assumptions so many have built up over the years. In fact, I could argue the smartphone, in general, is continuing to defy the logic of many but even within the smartphone market, the common sentiment (note I did not say common wisdom) was that the market would commoditize like all consumer electronics categories do as good enough products and low-priced products and vast competition in the lower price tiers would create a race to the bottom.

This is the theory most business schools teach, most business consultants abide by, and many pundits agree with. In fact, some will argue (and I’ve had these arguments) that from a pure disruption theory standpoint Apple has been disrupted. Their logic is that Apple is doing what all disrupted players do and entrench in the high-end. What many of these disruption theory fundamentals don’t reconcile is their positions require that the disrupted company loses a chunk, if not the majority of their customers to the low-end players. Their position can not account for Apple’s growth of new customers, often from those lower-price tiers, and the simultaneous ASP increases at scale. In line with this point, I found this tweet entertaining.

It is the scale part that is confounding to many. What Apple is doing in getting customers to move upstream is not uncommon in pockets of a market. It is, however, extremely uncommon to do so at the scale which Apple is achieving. But what might be most interesting to this conversation from a business theory perspective is how Apple alone seems to be the only one pulling off raising ASPs.

Open Vs. Closed
Part of the understanding that needs to occur is related to some new dynamics we are observing in the open vs. closed systems debate. Many of the assumptions about the race to the bottom theory have been made using business examples, not consumer ones. This is not to say the dynamic does not happen in consumer markets; it does, we are just learning more about what categories are isolated and which are not. For example, TVs are subject to this dynamic, but smartphones are not.

But we also have to understand that the typical theory of open systems always winning and killing closed systems is not always true. Not only is it not always true, but it may also very well be true much less than many business theory experts understand. While new enterprise case studies are showing up where closed systems are gaining traction, the best example we have in consumer markets is the smartphone market.

What I find most interesting about this, and ASPs are a core part of the dynamic, is the difference in ASP performance the last quarter between Samsung and Apple.

In the last quarter, Samsung had weaker than expected earnings largely because of struggles in the smartphone unit. Samsung’s smartphone sales volume was not dramatically lower; rather their ASP mix skewed much more heavily toward the low-end. Essentially, Samsung higher ASP phones are struggling to sell, and they are selling more lower-priced phones.

In the same quarter, Apple successfully increased their ASP, in a quarter that typically skews toward more price sensitive buyers no less. Explaining this is where many business and market theorists will be challenged. What’s more, if you take the tweet I mentioned above and apply it to what happened, the low-priced Android smartphones (race to the bottom) has notably impacted Samsung and not Apple. Now, Samsung will likely have better ASP quarters ahead, but in general, they are struggling to keep market share in certain price-sensitive markets, and the result is a continual pricing battle Apple is immune to.

While I’ve made this point and observation before, it is worth repeating that the sole reason Apple doesn’t just maintain ASPs but also increase them can be summed up with one word–exclusivity. I use a broad term as exclusivity, where most would just point to Apple’s monopoly on iOS because it is not just iOS that Apple has exclusivity with. They have exclusivity with some of the world most advanced semiconductor components, an unprecedented exclusive retail experience and reach for a consumer brand, amongst other things. But this point, is about all the things Apple has combined together as a package that delivers consumers an exclusive experience they can’t experience elsewhere. This, at its root, is why Tim Cook and Apple management can make such statements like “things only Apple can do.” Apple’s ability to layer exclusive things into their products is among on of their strongest competitive advantages.

The business takeaway here goes deeper than differentiation because differentiation alone does not create a dominant market position. That differentiation must be built on fundamentals that are exclusive to your company or product. We advise many of the biggest tech companies in the world, so I understand how this is not always the easiest thing to do. However, one constant I’ve learned is the earlier you can integrate an exclusive advantage into your business or product the better.

Stepping back to take the thousand foot view for a moment, I do think we are in a position to offer fresh critique to many entrenched business theories and in particular around the assumptions often applied open vs. closed systems. This is worth addressing in a dedicated analysis at some point in time, but that will have to wait. Until then, simply appreciate how Apple has defied all conventional business and market logic as they approach their journey has spanned near bankruptcy to soon be the first company with a market cap of one trillion dollars.