Author: Ben Bajarin

We are on the cusp of watching something we have been talking about for a while go mainstream in a big way. That thing is Augmented Reality. With Apple’s ARKit and from what I’m hearing a Google ARKit competitor for Android coming soon, these new tools will usher in a new wave of app development and innovation. I’ve stated my point that AR will go mainstream through the smartphone and eventually to other displays. It is the topic of what those other displays may be I want to address today.

Over the weekend, rumors went wild about Apple’s supposed working on multiple form factors for AR glasses. This should come as no shock to anyone since Apple R&D labs likely have prototypes of nearly anything we can dream up. When thinking about the future of augmented reality, everyone seems to assume glasses. It’s possible that is the case. However, I’m willing to bet a plethora of screens in our life will rely heavily on AR, not just one.

One of the initial challenges we will have with AR is the limitations of the human eye to begin with. This became evident when I tried Google Glasses and many others I tried a few months ago at an Augmented Reality conference I attended. In nearly every example, the display presented quite a bit of information on the lenses, which required me to change my eyes focus to the lens in front of me and away from what I was looking at visually. This requires a tremendous amount of energy and the result is I entirely lose my peripheral vision. I’ve seen this as well in some futuristic automobile demonstrations where the windshield in front of you simply displays you information like any screen today instead of overlaying that information onto an object you are looking at like a street sign. There is a huge difference between these two approaches and the latter is key to my thesis on Augmented Reality.

Luke Wroblewski designed a great series on things that make sense to overlay digital information on in an augmented sense. Here are a few images but check out his whole series.

Luke makes clear at the beginning of his post he is making an assumption that AR tech will have eye tracking. Eye tracking is non-existent in every demo today because the technology is not yet militarizable enough to show up in glasses or compact headset. Eye tracking is technology where sensors that are pointed at your eyes can tell what you are looking at with precision. I’ve done a number of eye tracking demo’s in a few R&D labs where a mouse/curser has been modified to point exactly where my eyes go on a display. It is pretty scary how well and precise this works. Once my AR headset knows exactly what I’m looking at it will make it easier to overlay information on the object. This is key in having a user experience that makes sense for AR. As I mentioned, if the display just pops up information and causes me to change my focus it will distract me from the real world vs. enhance it which is the ultimate promise of AR.

In exploring other commercial applications in existence I found this trend applied as well. A few friends of mine in the Air Force confirmed their heads up displays in their helmets never cause them to change their focus on what they are looking at yet overlays the information they need on their target or map, etc. There is also mounting scientific research that displaying information to close to the eye puts significant strain on the eye and can lead early eyesight issues. This is the danger we face if augmented reality displays are treated simply as a display instead of just overlaying information on objects we are looking at in the world.

Beyond Glasses
Part of my thesis on AR goes beyond glasses as well. Glasses may be a key part of the experience since they are the one form factor which will have precise eye tracking, however, during this transition I think transparent displays will play a key role in maturing AR. It is entirely possible our smartphones will have a transparent display before humans embrace glasses as the primary display in their life.

Much science fiction captures this well. If you look at any major science fiction show or movie in the last decade, you will notice all their personal communications devices have transparent displays. They even often hold those displays over an object and use it to gain more information on what they are seeing.

Thanks to AR changing the behavioral paradigm with our smartphones, we will observe humans using this out in the world. We will watch in cities, stores, malls, parks, etc., as people hold their phones up and look through them at something. The upside for glasses is how this new behavior will highlight a pain point of having to hold your phone up in front of your eyes for long periods of time. Glasses will relieve this burden and likely become an attractive solution at some point in the distant future.

Like all new things, this technology is going to take time to go mainstream. Humans do not change behavior quickly, and they adopt new technologies very slowly. When I told someone I thought the adoption timeline would be more like ten years between the tech maturing, prices dropping, and humans embracing new behaviors they were shocked at how long the time line seemed. But I reminded them that HDTV took ten years to become fully adopted by the masses. To my knowledge, there have been few more technologically and visually compelling things in the last 15 years than HDTV to the masses, and it still took 10 years. So my timeline could actually be aggressive rather than conservative.

By my estimates, Fitbit and Apple Watch combined for nearly 50% of all wearable shipments in the June quarter of 2017. The market is a duopoly, and major questions about Fitbit remain. Fitbit’s ASP was just over $100 for the quarter while the Apple Watch was just over $300 in our model. However, Fitbit and Apple Watch are on two very different trajectories.

Apple Watch continues to slowly gain traction. In 2017, the Watch is already off to a great start and much better than the start it had in 2016. Since Apple Watch was announced I predicted it would be a slow growth path. We estimated around 20 million Apple Watches sold in its first year and the consensus number from a range of third party sources was around 15 million. So while we were not far off, some firms were predicting a range of 30-40 million in year one. I knew it would be a slow growth pattern because of the newness of the category and lack of familiarity with what a smartwatch was in general. Now, nearly three years later, consumers are starting to catch on.

I’m predicting Apple Watch to be on a growth trajectory in 2016 selling more than any year prior, and having an even better 2018. Apple’s marketing, and consumers spreading the word, as well as just starting to see them out in the world more often helps validate the product and generate interest. This simply took time and is playing out just as we suspected.

While Apple Watch is slowly becoming a thing, a major question for Fitbit is whether their smartwatch can follow suit. It is possible the growing success of Apple Watch will only help Fitbit’s efforts as Apple has helped mature the category. Fitbit’s CEO James Park seems confident.

Consumers will decide if Park is right. This is a very bold statement, however, and one that may not age well. At least he knows what is necessary for his company to survive. If Fitbit can keep customers from leaving their ecosystem and joining Apple’s, then Fitbit can still grow. In Fitbit’s latest earnings they stated 68% of consumers who purchased a Fitbit in the quarter were first-time buyers. This is a big number, and I have to imagine most of Fitbit’s sales the past few quarters have also been to first-time buyers. Fitbit has to help these customers go upstream and choose their smartwatch over Apple’s when and if they are ready.

While I believe Fitbit can make a decent looking smartwatch, that runs a capable OS, I’m not as convinced they can create the platform that is necessary to compete with the Apple Watch. When I say platform in this case, I mean more than apps. We know apps are still not a major factor on Apple Watch yet, however, Apple is growing the ecosystem around the Apple Watch by integrating with fitness machines at the gym, health and wellness programs, some insurance programs, etc. All of this helps in building momentum as consumers become more aware of all the things in their life Apple Watch can integrate with. Perhaps a more poignant observation here is how long it has taken, and even the slow head of steam, Apple itself has faced while trying to build an ecosystem/platform around Apple Watch. If it has been a challenge for Apple with Watch how can we expect Fitbit to fare any better any faster?

Last few points on Fitbit vs. Apple Watch. Perhaps the biggest challenge Fitbit faces in both hardware and as a platform is the large amount of overlap Fitbit has with iPhone owners. Data from our firm and others confirm a more than 50% overlap of iPhone owners who own or purchased a Fitbit. As Apple can out integrate Fitbit with current and new features around iOS, it makes it even that harder for Fitbit to stay attractive if their customer is now interested in moving from a basic fitness tracker to a more capable smart watch. It is with this overlap with the reverse point can be made that the Fitbit smart watch can benefit from Apple helping mature the category. With the bulk of Fitbit’s being sold were to new customers, you can argue Fitbit is helping Apple by getting customers familiar with the benefits of basic health and fitness tracking, and a good chunk of those customers may graduate to Apple Watch. This has been mine and a good chunk of Wall. Street’s thesis from the start that Fitbit will serve as a feeder to Apple Watch for many consumers.

What About Everyone Else?
In January of 2015, I wrote this post highlighting what I saw as the two most likely scenarios for the smart watch market. I encourage you to read the post, and download the report I wrote in 2015 for the full take but here is what I outlined as the first scenario, which is still the one playing out today.

Scenario #1
Apple will easily strongly influence the smart watch category in 2015 and 2016. It is hard to argue against Apple’s vertical advantage and tight control of their entire ecosystem. This advantage undoubtedly will give them dominance in the early stages of a category. If some things play out, we can see them command the category for the long term.

Apple had a near monopoly on the iPod/MP3 market. We can see a similar scenario playing out where Apple effectively “iPods” the smart watch category, maintaining dominant share over the next five to seven years. While the early success of the iPod was driven by Apple releasing iTunes for Windows, we don’t see the need for Apple to support other platforms to hold sway over the smart watch category. Apple’s existing iPhone customer base is large enough to keep it the foremost smart watch vendor and their smart watch platform as the reigning one in the smart watch category.

Apple is blessed by their developers and always has been. Developers for the Apple Watch will make or break the product. To dominate the category, Apple’s developers will tightly integrate the Apple Watch experiences with their apps and drive compelling use cases into the mass market. Apple’s developers are a large part of their competitive advantage for iOS, and this extends to the Apple Watch making it very difficult for other smart watch platforms to commit and attract developers or build an ecosystem. I believe, for the smart watch to go mainstream, it will take an ecosystem and Apple has history in their corner when it comes to building for a category.

This is still the scenario playing out and feeling most likely. My last point on developers is still the one lacking, but that can change quickly. By my estimates, Apple Watch owned 61% of smart watch market sales this last quarter. No single vendor or brand is even remotely challenging Apple in smart watch sales.

So what about scenario #2 around Android Wear? Most technology brands have given up on Android Wear, and the only group somewhat focused on it are fashion brands. Name brands like Fossil, Michael Kors, Boss, Movado, and more are dabbling with Android Wear smart watches. This move has done little to help Android Wear as a platform. However, it is a small victory for Google for now.

In reading some watch market industry reports, the early results from fashion brands sales of Android Wear devices is not promising. A number of brands who had been selling Android Wear smart watches were not pleased with the results nor were the retailers and are concluding it was not worth their time and investment. We will see if this new batch fares any different. The disadvantage many of these brands have is the channel since if it does not sell well retailers won’t carry the product. Apple with their own channel has been able to be patient and the constant presence in Apple stores is paying off for the Apple Watch.

One last point. China is and has always been a major contributor the Watch industry, and the Swiss watch industry in particular. I found this interesting point from an analyst note on Swatch.

Consumer spend running above wholesale orders, a positive signal for growth
Evidence from Chinese retailers, soft luxury, and our Global Blue tourist data indicates that Chinese retail demand has picked up since H2 16. With this nationality making up ~50% of Swatch’s sales we expect this recovery to benefit wholesale orders (70% of Swatch’s business) through 2017 and help allay bear concerns around wearables, high group inventory and Chinese demand for watches. Our conviction is reinforced by our view that the middle-class Chinese consumer will be the structural driver of the industry going forward. This benefits Swatch given its broad price offer. We believe organic growth is inflecting now: we see 2% in H1 17E, 7% in H2E, and 7% in 2018E.

There are positive signs all around in China with regards to the Watch market, and none of these reports have considered how those positive signs may help Apple. Apple Watch has had little success in China to date, as has the smartwatch category in general with only 9% of mainland Chinese consumers stating they own a smartwatch of any kind. It will be interesting to see if the same positive growth signs the Swiss watch industry is looking at in China pays off for Apple over the next year. It seems likely, but right now it is only a hunch.

I mentioned earlier in the year that I was helping researchers at the Clay Christensen Institute as they work to make some revisions to disruption theory for an upcoming book Clay is writing. In the conversations since it has become clear that disruption theory will face more and more challenges in the consumer era. There are key areas where the theory and overall framework are applicable, and there are other areas where they are not.

It is also important to understand disruption theory is a multifaceted theory. Most people gravitate to one particular angle of the theory around low-end disruption. The basic premise with low-end disruption has everything to do with the price of a product or service. It is a framework to understand how low-end competitors can displace high-end premium competitors and take the lions share of the market from them. In this scenario, the high-end competitors entrench and go even more premium to protect their margins but in doing only maintain a small share of the pie.

What stands out to me when you look at much of the framework for disruption theory is that it tends to work best when we talk about products which are, or will become commodities. Commodity products seem to be the ones most impacted by the low-end disruption. This is the fault many made when they assumed the iPhone would be disrupted (this is a long and complicated debate). The assumption was that smartphones would become a commodity and in that scenario, those with the lowest prices would win. This assumption missed how indispensable smartphones would become to their owners and even in markets where consumers are price sensitive, and economically disadvantaged, we still observe consumers move upstream and spend more with their smartphone purchases not going cheaper each time they buy a new one. The reason this bucked conventional wisdom was because the smartphone was and is not a commodity.

However, there is a bigger trend emerging that I think will pressure this theory even more. When we look at how retail is changing, computing is changing, travel and leisure are changing, etc., we observe consumers are developing an insatiable appetite for experiences. They want unique, differentiated, one of a kind experience and are seeking out products, brands, and anything which provides this for them. At a high level, it appears that consumers are raising their expectations annually and this may challenge some traditional thinking around disruption theory.

It doesn’t matter what business you are in, the consumer experience is going to matter more and more each year. Consumers will become harder to please, and expect more and the result will pressure the need to innovate significantly.

We see this happening in pockets but most visibly in travel, leisure, and food. I’m certain it will spill over to tech as well if it hasn’t already. Interestingly, a contributing factor to the high demands of consumers on experiences is social media. The pressure from the crowd to “one up” your friends and share your unique experience on social media is mounting. Everyone wants to get a selfie of themselves doing something no one else in their group has, or show off the amazing experience they had. Fascinatingly, in a recent poll I conducted with 300 mainstream consumers indicated that 58% of them had willingly put themselves in what they consider a dangerous situation just to get a selfie. Over half of the group put themselves in a dangerous situation just to capture a unique experience or moment. The idea of this poll hit me when I saw some teenagers take a selfie with a wild bear not too far off in the distance. No I didn’t encourage it, and yes I wish it was me that did it ;).

At a high level, what I’m proposing is that in the consumer experience era there will be fewer areas for commoditization and more opportunity for specialization which consumers will gladly pay for thanks to the vastly improved customer experience. This shift benefits those companies and brand who focus more on consumer experience over being the lowest cost competitor. The truth of consumer markets is it is not a winner take all market. There is room for many to play, and when that is the case it is better to not try and compete on price but on quality and overall customer experience.

Honestly, it feels as though Flash has been dead for some time. But today Adobe officially announced the end of life for Adobe Flash and all I can say is YES! Flash is an absolute resource hog on both CPU and battery and the Internet is and will be a better place without it.

Flash was originally designed for graphics, and vector graphics in particular. There was a time in our Internet history where designing websites in Flash was all the rage. Flash specialized in animations and much more “flashy” eye candy when it came to website design and UI. You may remember this period of time when you went to a website and there was an intro screen that played a flashy movie like intro the website you were visiting.

One of the first startups I was a part of offered a product to mid-size insurance brokers where they could build and modify their own website using a range of templates our product offered. We never offered any Adobe Flash templates but we got requests weekly for them. It was a hot trend that thankfully when away.

Adobe smartly realized Flash’s, and the products they built to program Flash was on its way to being obsolete as developers were moving away from media rich intros to their websites and website user interfaces that didn’t incorporate a range of motion and animations into their design. Adobe determined that adding video playback was Flash’s future value. The problem was that Flash was designed to be a graphic based engine, not a video playback/encode/decode engine. Yet that is exactly how Adobe evolved the product and it made developers lives easier since they could embed the Flash player into their websites and easily tie in their content delivery network (CDN) using a few simple lines of code.

From a lot of the design experimentation our startup was doing at the time, I had a strong sense Flash player and video were not going to play well together and even as my time as an analyst I’ve been on record saying Flash was not the most efficient video player and hogs tremendous CPU resources and thus drains battery faster.

Adobe’s PR unit even got on me during this time having seen my comments in the media and on TV spots. They claimed Flash had no impact on CPU and asked me to run many tests. Which I did, and was able to quantify for them that Flash indeed clogged up CPU cycles, and in many cases caused the processor to heat up and thus turned on your computers fan all contributing to battery drain.

Flash has remained a backbone of the Internet for much of the Internet’s past 15 years or so. Even during the Netbook days I remember both Intel and NVIDIA actively working on solutions to bring lower power processors to Netbooks which could also play Flash. The reason was Netbooks simply would not sell if Flash player was not supported.

Flash was also a culprit for many critics as to why the iPad could never be considered a true computer. Comments flew around from pundits in reviews and commentary saying they could never use an iPad for all their needs because it couldn’t play Flash. All of this was simply a recognition of just how embedded Flash had become for most sites to handle their video. Flash was not the best solution for video playback, it was, however, the easiest and that is why so many sites adopted it.

There is another, perhaps lesser known, Flash player angle today which is just another reason I gladly say good riddance. Website scammers and hackers have been using the Flash Player download as a way to embed malicious code onto people’s computers. I first realized this when we bought a new Mac for my wife as she went back to school to get an additional teaching credential for special education. I set the Mac up for her and shew as off and running. During the course of her school work, she was required to learn new educational tools all which required Flash Player. But as she started to visit different websites for lesson plan ideas, or other educational information she kept being inundated with pop-ups saying she needed to install or update her Flash Player. I didn’t realize all this until she came to me one day and said her computer was slow and things were popping up asking her to install random tools. When I took a look, I found her Mac riddled with malware and spyware galore. She explained what these sites kept asking and then showed me the ones she was needing to visit. Sure enough, I saw the same popups and followed the download it was asking her to install. The install was not the official Adobe Flash page but something else entirely. It was then I realized hackers and scammers have learned that people are so conditioned to their need for Flash that they didn’t hesitate to download whatever the site was asking them so long as it was hidden under the guise of the Flash Player.

For all of these reasons and more, I am glad Adobe is ending Flash’s life. It has honestly made the web a worse place for more than a decade. The challenge will be for Adobe to work with the instructions where Flash is embedded most. Areas like education, and many different enterprise verticals. These are not industries that move fast but ones that move extremely slow. Hopefully, 2020 is enough time for these companies to adapt but they need to understand it is time to move faster to adopt solutions that are not Flash based sooner than later.

There will also be an onus on the browser companies to help make this transition. Apple has had Flash off by default for many years and has been aggressive at trying to move the industry away from Flash. Google and Microsoft still have work to do and hopefully, they will all work to make this transition smooth.

We are actively transitioning the Internet from websites to apps. This transition will still take time but the killing off of Flash is another step in this direction.

One of the most underappreciated aspects of making hardware is supply chain management. Many good startup ideas died due to failures, mostly by inexperienced entrepreneurs, trying to make a hardware product and failing miserably with supply chain. Often times, entrepreneurs can make a decent prototype, or product demo, but making that prototype into a design that can be manufactured at scale, cost effectively, is a rare trait at many companies in the market today.

I first got thinking about the supply chain game challenge when Andy Rubin was interviewed at the Code Conference, and he made a point about why his Essential Phone would be innovative. He said he didn’t have to worry about building a product that shipped 200 million devices in a year so he could use more innovative components and materials to make his phone stand out. The only problem is, at some point he will want to scale and at that point he will be locked out of getting the critical components he wants, and the market desire, at scale because the power to acquire those components and processes that scale belong to the companies that do sell north of 200 million units a year.

This is the fascinating element to supply chain most people don’t appreciate, or understand. If you are a company who sells a particular component which is needed, or in high demand, you are going to sell that component in bulk to the companies you know will ship in volume every year. Most of the highly sought after and critical components to have a competitive smartphone or tablet or PC are in very high demand and experience supply shortages themselves. After all, we can only make so much stuff every year given the global manufacturing capacity to make electronics today.

These companies sell just about all the components they can make to companies who will sell the most devices in a year. Thus bringing them the most money. They will prioritize a company selling 200 million smartphones a year over ones selling 50m a year every single time. To make it clear, companies like Apple and Samsung are the ones who secure these key component contracts and the rest of the brands need to wait in line or go find the parts from a range of other sources and try to get all their supply that way. Which in turn, creates a challenge of having to manage a more complicated supply chain thus leading to delays, and shortages as you try to sell into the market.

Of course, even Apple, a company who has one of the most efficient supply chains in the world can face shortages and delays. Often times this comes when they try to create something that is bleeding edge or want to use a component or manufacturing process that is not quite mature yet. A good example of this is the 3d sensing cameras, as well as the under display Touch ID sensor. Both examples of things we have already heard through the supply chain that will suffer from shortages or lower production yields.

Innovation often doesn’t scale right away and this is key to remember. As the industry looks to move beyond where we are today and shrink components, use new types of display technology, create faster devices, make our networks better and faster, etc., a slow moving supply chain which favors the big companies who are capable of shipping massive volumes will always get priority from the supply chain.

All of these challenges put together make it hard for smaller entrants, and even mid-size hardware companies to compete, but that is the reality of the supply chain game. Some play it well and some play it poorly.

I came across an interesting research report from a private note from UBS research. This study looks at the US market and goes into detail on what is happening with traditional Pay TV from a company like Comcast, Dish, DirecTV, etc., and streaming services like Hulu, Sling TV, YouTubeTV, etc. While I can’t share the whole report, I want to dive into two charts from the study.

What these charts estimate is the losses in traditional video subscriptions and the increases in streaming video services. As you can see from Figure 1, declines were modest really starting in the second quarter of 2015, it has been accelerating as of late and that trend line moving closer to 4% a quarter looks to be reasonable by early 2018.

Figure 2 looks at the net losses (estimated) and net gains (estimated) between traditional TV and streaming TV services. What is clear, is traditional TV is losing subscribers every quarter in the range of 500,000-700,000 people, and streaming TV services appear to be gaining around the same amount per quarter. The report estimates total streaming TV subscribers at 2.7m in total at the end of 2Q 2017. I share that number just to put into perspective the hard number of people who are what we would consider true cord cutters who pay for a TV service from a service like SlingTV, Hulu, DirecTV Now, PS Vue, and YouTubeTV. We talk about people truly cutting the cord and dropping their bundle in favor of streaming bundles, but the reality is not that many people have done so. Certainly, some consumers can get by with just a Netflix subscription and perhaps a base plan from Hulu (not the streaming live TV service), but the masses are still consuming cable either basic free over the air via an antennae or paying a service provider like Comcast, Dish, DirecTV, Charter, Cox, etc.

From my own experience living off just Hulu, YouTubeTV, and SlingTV, I can say I’m not convinced what they offer today is the answer. While the cord-cutting trend is continuing and losses in the hundreds of thousands and soon millions per quarter are moutning, I’d be genuinely curious what percentage of folks leaving cable for a streaming bundle want to go back to their cable bundle at some point. In conversations I’ve had with consumers looking into leaving their cable bundle for a streaming bundle, more often than not, the cable or satellite company does everything they can to keep the customer and ends up offering them such a low rate it makes no sense to switch. True, in two years time that bill will hike but again the opportunity to negotiate down will exist. I keep my Dish bill at $80 bucks a month by threating to leave when they try to raise the price.

No doubt, this is a headache most people don’t want, but my question about going back is rooted in two things. First a massive channel lineup. I’ve had a hard time finding a streaming TV bundle that has all the channels I want, and lets me watch my sports teams out of market. As I have mentioned in past articles, I’ve felt YouTubeTV was the best offering of the bunch with Hulu’s Live TV service a close second. However, on our recent vacation to Hawaii, I could not stream game 5 of the Warrior vs. Cavaliers finals game because I was out of my home market and thus blocked out. Given that I still pay that $80 bill to Dish I was able to open the ABC app and watch the game. So that $40 extra per month to Dish lets me truly get the content I want WHERE I want it.

The other thing that extra $40 dollars a month gets is the DVR to skip commercials. While Hulu does have a no commercial offer of their Live TV service for $40, it still lacks all the channels, some sports rights, out of market watching of live content, and more. Where for $30 for YouTubeTV you get a cloud DVR of shows but still have to watch the commercials. I’ve found having to sit through anywhere from four to six commercials just trying to stream a show extremely frustrating. Once you have had the ability to skip commercials it is very hard to go back to having to sit through them. I have to imagine many of those switching from a cable service with DVR and commercial skipping feel the same pain when moving to a streaming TV service.

As the report indicates, and many other data points we have suggest, we are certainly seeing this trend gain steam. There are no doubt trade-offs to the skinny bundle that you don’t fully realize until you have tried it. For this reason, I’ll be curious where this trend line is in a years time. Keeping in mind the cable companies won’t sit still will still compete for your business. If anything, the rise in popularity of streaming TV services are good for competition and thus good for consumers. I’m totally fine with an all-out price war between cable companies (who have had a monopoly for too long now) and streaming TV services.

One of the more distinct angles for Amazon’s purchase of Whole Foods has been how this move will help them accelerate their grocery efforts. It has been clear for some time that the fresh/grocery market was one that Amazon had been eyeing, but also one that would elude them without a broader physical retail strategy. Amazon needs prime real estate in the major areas where Prime customers may exist. Without question, they will acquire this exact thing if this deal is approved.

Whole Foods has strategically placed their nearly 450 stores in areas concentrated with people making over $100,000 a year. An interesting stat I found in a Morgan Stanley research note was 62% of Prime members are also regular Whole Foods shoppers.

The fact of the grocery business, is most consumers like and want to go the store and hand pick their fresh items. A recent report I came across provided overwhelming research concluding physical retail preference being a significant barrier to purchasing fresh groceries online. 67% of respondents stated “liking to select the fresh products myself” as the top reason they don’t buy groceries online. The second was “I enjoy shopping in stores” at 33%. The report shared the US market value of some consumer spending in the US. What is fascinating about this chart is how many categories Amazon is slowly dominating. The one they have been struggling in happens to the biggest one.

As you can see, groceries is just over 2x larger regarding absolute dollar value than the second largest category which is clothing. Groceries make up roughly 30% annual consumer spending in the US. On the value of the market alone, we can see why Amazon wants, and may even need, this category so badly as a mechanism for their growth. As I noted, most of these categories Amazon is well positioned to gain share with except the fresh/grocery category which also happens to be the largest by far.

A big question remains if this purchase has much to do with online commerce of groceries. It is easy to reason this can help because early estimates are that with the Whole Foods store locations, Amazon could deliver fresh items in 1-2 hours to the vast majority of Prime customers and thus dramatically expand their Amazon Fresh service. While this seems reasonable, we are still faced with overwhelming data on the barriers to online commerce, and we have to keep that factor in mind.

Ben Thompson wrote an interesting article yesterday, suggesting the actual customer Amazon is looking to acquire is the grocery retail outlets themselves in which Whole Foods becomes the first customer of Amazon’s broader logistics and technology service.\. This is a compelling viewpoint given Amazon’s expertise in logistics, and rather than take a percentage of the ~780 billion dollar grocery market Amazon could move to take a cut of every dollar spent on groceries. Ambitious efforts for Amazon, no doubt, to take this route given a deeper need for localization and specialization, in some cases that don’t have the same scale as generic items. Given Amazon’s expertise in analytics and logistics, I don’t see this as a major barrier.

Ben’s viewpoint is compelling and lines up with a similar theory I had for Amazon’s Go grocery retail outlets. A point I made in that analysis was how Amazon’s true play with the Amazon Go stores was to showcase the technology and then sell that technology to other retailers. If you put mine and Ben’s angles together, it means Amazon wants to sell technology and logistics behind products into the massive US grocery market.

Perhaps, of course, it is a mix of both and Amazon wants to sell fresh online, and goods and technology to other retailers as well. An interesting angle mentioned to be in a conversation on Twitter was perhaps Whole Foods with a Blue Apron model is the key to unlocking fresh delivery online. This would allow just the right fresh proportions for a meal and full recipe could be more compelling than a grocery list and a fridge full of inventory that may not get used. Certainly another angle to think about.

The fascinating fact facing many retailers is that Amazon is driving them to be technology companies whether they like it or not. Technology will become the only basis in which many retailers can compete with Amazon, and many will fail to try and perhaps have to have Amazon help get them out of a hole.

What About Pharmaceuticals?
Another bit of analysis being thrown into the Amazon/Whole Foods deal is the pharma angle. Should Amazon be interesting in the healthcare market then this is another segment where physical retail is relevant. In a US consumer market study from Morgan Stanely, they found less than 20% of consumers have ever purchased pharmaceutical products online. Of that 20%, only 4% stated they always buy their medicines this way. Here again, we can conclude we either have a behavioral barrier or a massive upside. The survey went on to state that only 26% of consumers across all age groups, young and old, express an interest to purchase their pharmaceuticals online. Even diving down into the answers from each age group, the average was still roughly 25%.

It will certainly be interesting to see how Amazon uses the space they acquire with Whole Foods. However, a potential culture clash of Whole Foods employees and shoppers could come into play if Amazon changes too much of the instore experience at Whole Foods. A delicate balance for sure Amazon will need to balance.

Whether more acquisitions of brick and mortar retailers are in store for Amazon will have to wait to be seen. I do, however, predict tough times still for many retailers and expect further consolidation to happen over the next ten years.

It seems odd, in light of the momentum behind Google and Facebook, to even talk about a slowdown/recession in Internet advertising. That is a term I hear quite often from folks deep in the industry. The advertising industry is, without question, shifting more dollars from offline ads to online. However, some trends around ad-blocking, and now Apple adding both auto-play and tracking blocking to Safari, signal trends that will impact some of the more basic Internet advertising techniques and could open the door for others beyond Facebook and Google.

Big Impact to Display Ads
The biggest potential impact of these moves is too generic Internet display ads. These are the ads that often show up all over a website and throughout an article and in general clutter the web. One can argue these moves will do wonders to help us clean up the web browsing experience. But there are no doubt display ads will be hit the worst from these trends. Reports I’ve read estimate display ads, in the US market, represent roughly $25 billion or ~40% of the Internet advertising market annually. While not the majority, a pretty big chunk to be potentially impacted by browser changes and the rise in consumption of ad blockers.

The targeting of blocking could be one of the most impactful changes since its efforts have led to a quantified ROI for advertisers who found it favorable in many regards and were continuing to pour more budget into retargeting techniques. Now Google isn’t likely to add features which limit tracking into Chrome since this is a core offering of their advertising offerings. To put some market share numbers into context, Google Chrome makes up the majority of US web browsing share at ~51%. Safari, by contrast, represents roughly 7% of US web browsing. So if tracking disabling is only limited to Safari, it may not impact targeting ROI as much. However, it will present a much more pleasurable web browsing experience for Mac users who use Safari as their primary web browser.

When it comes to ad-blocking, a recent private study I read stated that about 40% of PC/Mac users in the US are actively using some solution to block ads on the notebook or desktop. Roughly only 15% of US consumers are using an ad-blocker on their mobile device. The demographics of ad-blocking skews younger with the majority of folks who use the technology are under the age of 40.

These trends are interesting, as they will force some important shift in tactics from online advertisers. The question is what are their best options going forward for ROI, but hopefully, we are moving toward a needed improvement in website browsing experiences since it is a hot mess today.

Strategies for Going Forward
It seems the beneficiaries of these trends are websites and apps which have active logged in accounts and highly engaged users. This will create a user-base with a much more captive engagement in which to present ads, or something like ads, but also give much better hyper-targeting options than what is available for general web browsing. Here again, Facebook and Google with their large, engaged user bases in assets like Facebook, Instagram, and YouTube will be beneficiaries of these shifts. Fun fact, nine of the top 15 mobile apps are owned by Facebook and Google. Similarly, Twitter, Snapchat, Pinterest, etc., could also stand to benefit more from these shifts than if they did not happen.

Similarly, games/gaming sites and apps can benefit given their niche audience which is large and global. Twitch comes to mind as a beneficiary of these trends as advertisers look to move away from general display ads as large parts of their budget and more to more niche engaged audiences in the hundreds of millions of user bases.

Lastly, it will be interesting to see if Amazon continues to grow their pie of advertising share over time. Amazon continues to increase their user base, and Prime members are now either around 100 million people globally or close to it. But Amazon remains one to watch here is well.

The narrative continues, this is a winner take most scenario, and that still feels right for the foreseeable future. Google and Facebook continue to drive the vast majority of online advertising growth and were responsible for 90% of that growth collectively last quarter. The winner take most scenario here remains a duopoly between Google and Facebook, and over the next few years, it will be interesting to see how the shifting dynamics in online advertising create opportunities to break that duopoly or only cement it further.

Apple has not traditionally talked much hardware at WWDC. However, when you think about it, it makes perfect sense. Any and all hardware advancements are the foundations for developers to build upon. Developers will be the first to tell you they never want to see hardware innovation stop because hardware innovation is what gets them excited and empowers them to create the software of the future. Advancements in CPU, GPU, image sensors, etc., are all things that let developers do more than they could with previous hardware.

Understanding the relationship between hardware innovation and software/developer innovation is why it actually makes sense to show your developer community the powerful new and innovative hardware you have coming and the toolkits you are enabling them with to utilize that new hardware. That being said, there were a few important software updates, really core technology updates that really got the crowd excited. I’ll discuss those first then talk about the hardware which was the start of the show.

Software, and Core Technologies Laying New Foundation for Future
Much of the commentary was the software updates, the front facing things, were really incremental improvements rather than big leaps forward for MacOS. iPadOS was a different story and we will get there shortly. But even by the name High Sierra, we can gather this update is really an improving on the last one vs. something entirely new or a big step forward. Next year will probably be the year for macOS to take a leap. But at the foundational level many new kits and developer tools were released that give us some hints of where Apple is going. Kits for machine learning, and augmented reality were two of the big core technologies coming to either macOS or iOS 11, or in some cases both.

Apple’s operating systems are acquiring the foundation in the core architectures to start to learn and adapt to their users. Even in many cases today, Apple’s machine learning is hidden in plain sight and my experience with predictive text, Siri suggested apps, Maps, etc., is not like yours because they have both learned our habits and traits and start to customize their user interface to our unique needs. This is only going to deepen going forward as Apple’s operating systems becoming learning and more dynamic operating systems providing unique experiences to their users. In many analysis in the past, I’ve used the word anticipation engine to articulate how a piece of software can become more user and more contextually user aware. At the core, Apple is turning macOS and iOS into an anticipation engine.

ARkit is really a big deal and it was obvious. Most folks have never really had a good AR demo so it was interesting to see all the reactions from folks experiencing incredible AR demos on iPad and iPhone in the hands on areas. Developers can download the kits and the examples and start learning how to use them. Apple’s statement, that day one, they will have the largest AR development platform in the world is something to seriously consider. While one could argue Facebook has more reach, we know Apple has more engaged users and developers and this single factor trumps reach and gives Apple the advantage. Just looking at the devices it supports, it is likely that by the end of the year over 80% of Apple’s iOS installed base is an augmented reality customer. That equates to a market opportunity of around 600m people by the end of the year. Developers will be quite pleased with that.

The App Store redesign is also worth mentioning. Apple stated 500 million people visit the app store every week. This design is being updated for better discoverability, but most interestingly, the addition of a Today tab could increase that weekly number to a daily number. If this happens, then the app opportunity for developers goes up exponentially. This one change could end up being one of the biggest changes to the App store for both consumers and developers.

The Hardware that Stood Out
In what is turning out to be a bit more transparent Apple in terms of roadmap (a welcome pivot in the new world), they offered a sneak peek at a few products. First is the new iMac Pro, which is a workstation beast that can go up to 18-Intel Xeon cores and has AMD’s latest and greatest Vega discreet graphics architecture. The sleeper addition here, and for all Macs in general, is the new support for eGPU (external GPU) solutions. Through recent years, Thunderbolt has acquired the ability to reliably push massive bits of computations over Thunderbolt cables meaning we can stack modern GPUs together and make our notebooks, or all-in-one devices like an iMac, expandable with the most important chip in today’s world, the GPU.

Let’s also be clear, the iMac Pro is not the Mac Pro Apple said they are working on. We are not sure what the timeline for that is but we do know they are not the same. This did, however, help ease the concerns of the pro community that Apple was letting them down. I think they can rest assured Apple is still committed to the Mac as ever, and honestly, the eGPU support is a really big deal that I’ll dive into at some point.

Apple made some important new performance and screen size updates to iPad. Going from 9.7 to 10.5 inches on iPad Pro truly did yield more screen size value than I initially thought once I played with it. The 20% more screen actually feels more like 20% and the full-size keyboard support single handily moves it up as a productivity device. Between the screen, and the CPU/GPU performance updates the new iPads truly enter a class of productivity they were not before. But it really is the software that will finalize this claim.

From what I saw, the specific updates to iOS 11 for iPad look very promising. From the feature that lets you organize multiple workspaces, like spaces on macOS, to drag and drop for multi-task, to screen shot edit, to screen record, etc., are all things once reserved to “computers.” Now the list of things you can’t do on iPad that you can on a Mac or Windows PC has dwindled, to perhaps, just using a mouse.

The really impressive stuff to me was how the touch-based workflows for things have improved. If Apple would have shown us this OS when iPad first came out people would have laughed, maybe cried, and there is no way the product would have done as well as it did, or get the opportunity to grow up into the mature adult it is today. The file system demos were truly unique in that it was not just a file system duplicate of what you get on a PC. It was truly a rethink of the workflows around file management in the modern, mobile, touch-based world.

Lastly, HomePod. As I wrote in my case for a Siri speaker last week, the whole room audio use case is the strongest. Most consumers simply don’t have this and we know it is a highly desired experience they have tried to fill with low-cost Bluetooth speakers that sound ok but not great. Sonos is a great solution, and they have always been the company with a target on their back in my opinion. I have friends with a Sonos and it really is an amazing solution, but one that Apple can do better and it looks like that is exactly where they are going.

I had the opportunity to hear the sound quality of the HomePods and they were truly amazing. It’s worth mentioning, that over the years I have done projects with high-end speaker, audio codec, and audio technology companies and had my fair share of demos in a controlled room listening to a full surround theater set up costing north of $5,000 and in some cases $10,000 dollars. I’m not joking when I say the sound quality out of these was not that far off. The spatially-aware technology on how sound is intelligently distributed is the true enabler here. The device was able to know what parts of the track were center audio (lyrics), accompaniment, and ambient like background vocals or percussion, and smartly distribute that sound to the right speaker and off the right wall in order to fill the room with sound. This is going to be one of those things you need to hear for yourself, but I’m confident in my audio knowledge to stand by the claims I made.

Apple led the value proposition with Music which I think is very smart since playing music is the top and most frequently used use case of all smart speakers today. However, that does not mean HomePod is not going to be great at assistant features also. Much of the commentary was Apple did not lead with Siri because Siri is not great, but whether that point is really true or not (and I may have quantitative evidence to dispute this claim), the reality is leading with Music is what the market will be most attracted to today. Average consumers are not buying Google Home or Amazon Echo because of their assistants, contrary to what many believe, early adopters may but average consumers are not. Music is the lead the mass market will appreciate and the rest is just icing on the cake.

That being said, Apple confirmed to us there is a lot they did not share about HomePod. Today was truly a sneak peek and more information on all it can do will come later in the year.

Overall, this WWDC set a new tone, and hopefully a new pattern of a combination of talking new hardware and new software tools together at WWDC. Apple covered a lot of ground leaving the fall just for the next iPhone. These two events together may be looked back on defining moments for Apple in their transition to the next era of computing.

The shift in how consumers consume entertainment content has been top of mind for us from a research perspective for some years. The fundamental questions and behavioral shifts we have been watching are how consumers are shifting time from live TV experiences to more on-demand ones and what technology/devices are they consuming the different types of content with.

Looking specifically at the options consumers have to consume entertainment media, it is interesting to see how different age demographics engage differently with the options presented. See this chart below looking at the different options for consuming TV content and the ones each generation says they choose on a weekly basis (note data is the US only).

As you can see from the chart, TV content, in general, is still heavily consumed. Nearly every age demographic says they consume TV in some form on a weekly basis. This isn’t terribly shocking. But as we look at the differences between live and on-demand things start to get interesting. Baby Boomers still consume most their TV content live. Younger generations consume their TV content mostly from on-demand services. One stand-out data point here is how millennial’s and Gen Z don’t tend to watch much DVR content compared to other age groups. I find this point interesting given the likelihood they grew up with DVR technology in their home. Perhaps a dynamic at play here is the DVR was either the family or their parents DVR. Perhaps even more relevant is the big screen was mostly controlled by their parents leaving then with little options to watch what they want to watch when they want to watch it.

This last point is quite profound when you think about what every person in the household now having a smart device like a PC, tablet, or smartphone enabled as it relates to TV content. When TV content was exclusive to the big screen, there was likely a fight in the home when one person wanted to watch one thing, but others did not. How you found time to watch the show you wanted to watch that no one else wanted to was a problem. Now that everyone in the house can watch whatever they want, when they want, on their personal TV screen (PC, tablet, smartphone) the addressable market for content went up. Unbundling TV content from the TV screen to the smart screen only benefits media content and has given vastly more options to consumers on when and how they consume the media they want.

The younger demographic seems to be benefitting the most from TV on your time strategies since getting their TV screen via their smart device. Interestingly, this begs the question as to whether this demographic will still want/own a big screen TV when they have their place someday.

Which brings me to some data on the types of devices used to consume different kinds of TV. When it comes to the big screen TV, 90% of baby boomers use this device as their primary way to consume TV content. 78% of Gen X use the big screen as their main TV consumption device, but less than 55% of millennial’s and Gen Z say the big screen TV is their primary screen for TV. The big difference in screen preferences happens the most with younger generations who primarily state the smartphone or PC is their primary screen for watching all forms of TV (live, catch up TV via network app, streaming service like Netflix/YouTube).

From all the research I’ve been sifting through, it seems apparent the younger generation spends most their time watching most their TV content on their personal screens vs. the big shared screen in the living/family room and older demographics still prefer the big screen. Content is shifting to more on-demand consumption methods, just more slowly with the older demographics. As more content owners embrace on-demand solutions either through their apps or by empowering new service providers like Hulu, Sling, Playstation View, YouTubeTV, and even new entrants not yet in the market, it seems the path to unbundle TV services from the monopoly players like Comcast, Dish, DirecTV, etc., is creeping ever closer.