New iPad Pricing, EDU, and the Clips Strategy

Reflecting on Apple’s announcements yesterday and it is clear the new pricing scheme of iPad is the most significant. What this demonstrates is a fascinating and nuanced observation. When needed, Apple is willing to compete more on price. In fact, I remember many years ago Steve Jobs on stage making a big deal about the iPod hitting a $199 price point and the significant jump in sales they saw when they hit that aggressive price. I view this move of bringing the price of the updated iPad Air, now called iPad, down to $329 in the same light. This move is going to all but crush many Android tablet OEMs ambitions but it carries with it a very interesting challenge for Apple as well.

While I have a hunch on how Apple will navigate this (by being this aggressive with the price of iPad), Apple runs the risk of significantly hurting the sales as well as their high-level strategy for iPad Pro as a competitor to Windows PCs. In fact, you can argue this iPad, at $329, could dramatically cannibalize sales of iPad Pro. To a degree, I think Apple is OK with this. We know the iPad Air line has been the best-selling model for some time. We also know 50% of sales of the iPad Air are to customers new to the iPad family. Up to this point, even at a $399 starting price, the iPad Air 2 was the entry level iPad. Apple has furthered and strengthened that proposition by now starting at $329. Another thing to note here on price is this will get very interesting during the holidays when we could see the price of this iPad well below $299 as retailers get aggressive with promotions.

An interesting story line to watch will be if this new pricing scheme pays off more with iPad upgraders or more with brand new iPad buyers. My gut sense is this will pay off more in getting new buyers into the iPad family, which I think is the more important strategic element of the two.

iPad versus Chromebooks
A market insight we acquired after the holiday shopping season in the West was the force behind an unusually strong Chromebook quarter at big box retail. Chromebooks had not traditionally sold well at retail as the bulk of the 1.5-2 million quarterly Chromebook volume was going direct to the education channel with very small percentages through retail. This last holiday had a slight change in that trend and the reason was because parents were noticing their kids were using Chromebooks in their classrooms and wanted them to have similar tools to use at home. At $250, with an angle for your child’s education, this seems like a no-brainer.

Apple’s pricing move with iPad is a subtle (or perhaps, not so subtle) shot at Chromebooks to attempt to gain some share back in the EDU space where Apple was gaining momentum early in the iPad lifecycle. Understandably, most educational institutions make the hardware purchasing decisions for their staff and students based largely on price. This is also slightly frustrating since I do not believe Chromebooks are the best tools for our teachers to get the most out of the benefits of technology to educate our kids and their future. But Chromebooks get the job done, in most cases. A key point is they are much more prevalent in k-5 grades than they are in Junior High, High School, or College where we see more traditional laptops and even iPads in use.

Apple has aggressively priced iPad at $299 for the direct to EDU channel which compares to the EDU ASP of Chromebooks of around ~$260 USD. The benefit to iPad is it runs all the main Google services educators use — Google Docs, Google Classroom, etc. — and it runs all the Microsoft apps educators use. Also, it has access to the apps on the iOS App Store. Competitively, it is well positioned. Apple also collaborated with Logitech on a ruggedized case that offers a direct to EDU price of $99. In total, for $399 including iPad and rugged keyboard case, with the benefit of all the apps and services educators and students need, all on one platform. The price may still seem high but we are going to talk to IT buyers in education over the coming months to see how the cost/opportunity has changed at all now that Apple has gotten more aggressive with pricing for iPad.

Strategically, we view this as an important battle for iPad and the next generation. Finally, there is an interesting trend brewing in education around BYOD for students. Since most of the software/services students and teachers use together all reside on the cloud, it technically does not matter what hardware students want to use for their needs. I’m very curious to see how this new iPad pricing strategy plays out as parents look to get their kids an educational tool they don’t just need for school but want to use for much more. Given the choice between a Chromebook, a low-cost Windows PC, or an iPad, what do you think kids will choose? I know where I would place my bet.

Clips Strategy
While I wanted this post mostly to be about iPad strategy, I did want to mention a few things about Clips.

First, this is an example of something I want to see more of from Apple. First party apps you can only find on iOS. I’ll be interested to see how Clips is accepted into the market. It will be a fascinating test for Apple to see what part of its base chooses to download and use a first party app vs. one that comes as the default. I will view this as an extremely encouraging sign if Apple can generate significant downloads and sustained usage of this app and I hope it yields many more creative apps from Apple that strengthen their differentiation.

With Clips, Apple is not trying to create an app that competes with Snapchat and Instagram, despite what people seem to believe. They are misreading the play with this app. Apple understands the importance of the camera as one of the pivotal experiences with our smartphones. This tool allows people to create and share to any network they choose. Folks may argue that young people today only live on Snapchat and Instagram and use their tools to create media. But the reality is it is commonplace for them to create media in one of those apps and then save their creation and share it broadly across many other networks. What matters is what that tool allows them to make that is creative and expressive in ways other apps do not.

My take on clips is it is extremely clever and a smart step in the right direction for Apple to own a few more core experiences with first party software. The voice to text and machine learning to know friends and family who are in the clip is also a very clever and non-threatening way to expose more people to machine learning and AI.

You can bet we are watching this one closely as well.

An Important Trend in Semiconductors

A distinct and important trend is emerging and worth paying attention to in the semiconductor industry. As I noted a few weeks ago, a renaissance is happening in the chip industry. Semiconductor innovation is not just cool again, it’s extremely important and perhaps, more important than ever. For a small period of time, the need for more processing power was not abundantly clear in many use cases. During the height of the boom in the Intel era, it was clear how slow our PCs were as we watched software open in time measured by seconds instead of milliseconds. The smartphone era saw advancements in semiconductors that gave us faster cameras, better visual effects, faster internet speeds, and made needed advancements in silicon. Today, however, things like AI, visual computing, autonomous cars and robots, etc., show us the limits of the performance we have today in our processors and leave us wanting more. This reality has re-ignited a competitive race in silicon design again by the incumbents like Intel, Qualcomm, Nvidia, and AMD. But an important shift has happened from the last boom to this new one.

From General Purpose to Specialized Architectures
The best way I can describe this trend is to say we are moving from a general purpose processor design to one more custom and more specialized to its applications. Perhaps the best thing to read that articulates this trend is this post from Qualcomm, who is leading the pack on this shift in some important ways.

What Qualcomm explains is how they, a semiconductor design firm, are embracing this new reality where designing a general architecture for as wide of an application as possible no longer yields a competitive advantage. Fascinatingly, it is no longer competitive for semiconductor companies to design the best processor architecture to yield the fastest chipsets around. Performance has become commoditized and, in its place, the value has moved from the single part, the processor design, to the entire solution designed to compliment the processor. To put it simply, the value has moved from one part to the sum of its whole.

For this reason, all the major semiconductor firms are now designing architectures that are much more flexible. They may design a core CPU or GPU solution but include flexibility in the design to allow for some variation in what is printed on the SoC from things like a modem, camera sensor, memory, etc., as well as complimentary co-processors for things like audio, video, etc. The optimization of all these parts, designed to work together to access more specific applications and use cases, is where the focus of the best designers in the world is now spent.

Perhaps the most interesting part of this trend is how it has allowed non-traditional silicon design companies to start giving headaches to the traditional firms. The highlight example is Apple, who now designs so much of its own silicon that companies like Intel and Qualcomm keep losing more and more of their Apple business to Apple itself. This may not be a problem if Apple was not the only technology company who needs, and ships, high-end silicon in volume. In fact, Apple ships almost as much 64-bit silicon as Intel does in any given year and Apple uses it only for themselves where Intel sells to the entire PC and server market. Apple was increasingly becoming Intel and Qualcomm’s most prized customer monetarily about the time Apple began designing them out of their products.

Similarly, Samsung designs its own processors and is increasingly designing as much as they can. Huawei designs their own silicon for many of their smartphone and network products through their wholly owned subsidiary HiSilicon. Most recently, Xiaomi has begun making its own processors for use in its products. Every time one of these companies starts making their own silicon, it is a lost revenue opportunity in some way for Intel and Qualcomm (mostly Qualcomm in the examples I listed).

The paradox in all of this, especially in the case of Qualcomm, is how the very thing which allowed them to rise to dominance is the very thing creating the many headaches. I’m talking about ARM itself. Qualcomm has benefitted from ARM IP and has been innovating on top of that IP for a decade or more. Now that ARM is making it easy for more and more companies to start using the ARM IP for their own differentiated advantage, it is opening the door for this competition and, more importantly, this deep customization we are seeing from the likes of Apple, Samsung, Huawei, Xiaomi, etc.

ARM’s continual pursuit in breaking down barriers for companies to license their IP, in essence chasing down more licensees as new customers, is the underlying foundation of this entire trend and I expect it to continue. More and more companies will start designing either parts of their own chipset solutions or the entire thing. This is one reason why I’m watching ARM in the server space so closely. If, and this is a big if at the moment, ARM servers become something that can take meaningful share of the market, then this same trend we are seeing in mobile may come to the server space. It would mean it would not only be possible but even likely Facebook, Amazon, Google, and even Microsoft may start designing more and more of their own server chipset solutions in order to differentiate. To be clear, I’m suggesting that what we see happening in mobile with the biggest smartphone companies in the world making their own chipsets, we could see the same thing happen in server with the dominant cloud services providers designing their own solutions.

All of this is possible because of the reality that the processor itself is no longer the key player. The value of becoming the total solution, wisely configured for optimum performance in its intended use case, has broken old paradigms and enabled a new era of architecture design. This trend is under-appreciated but also, potentially, fairly disruptive.

The Death of Cartoons

I want to make an interesting observation. We no longer have any need for cartoons. Now, I say that with the caveat that technology advancements, particular advancements in computer graphics, are the reason that a cartoon’s existence is no longer needed.

I was thinking about this when I first saw the trailer for Disney’s new “Beauty and the Beast”. When I was in High School in the late 90s, Beauty and the beast was first out and it was an animated film. I remember at the time critics commenting on it and specifically talking about parts of the ball room and reflections on the floor or windows and how real it all looked. Here we are, 20 years later, and the entire film can now be made using computer graphics for an increased realism of the “non-real” characters. Similar to back then, we look at computer-generated characters like the Beast and claim “look how real they are.” If you think back to the Golden Era of cartoons, we realize their existence was mostly based on the reality that, technologically, it was the only way to bring imagination to life visually. Cartoons were the only medium possible to create things which did not exist in real life. Today, that is no longer the case.

Look around broadly at motion pictures and we see incredible worlds and characters come to life in ways which were only possible in a cartoon. Advancements in computer graphics have made cartoons obsolete. The only reason to have a traditional “cartoon look” today is either budgetary, since they are less expensive to create and produce, or for pure nostalgia or an intentional element of visual style preferred by the producer/director. Technologically speaking, there is nothing that can’t be done in computer graphics and near absolute realism that can be done in traditional cartoons.

I found this to be a fascinating observation, one that carries with it a more future-forward possibility as well. If we shoot ahead another 20 years and think about the high price to produce the level of visual realism in computer graphics for a movie like Beauty and the Beast, we can wonder if, at that time, computing has advanced so much that this becomes entirely commoditized. Meaning, nearly anyone can make advanced graphical characters easily and affordably and bring all kinds of new imaginations to life.

Carrying out the thought exercise even further and we can see a day when computer graphics become so good we may not even need human actors. You are already seeing some form of this with actions which once needed a green screen. Instead, now they are simply recreating the entire human actor in CGI and having them do things that were never possible with a human actor and a green screen. In a similar way to the obsolescence of cartoons, we will be able to tell even more compelling visual stories when human limitations are no longer a consideration and all that is left is the imagination.

Not to weird people out too much, but what about a day when an artificial intelligence can come up with stories, create characters, worlds, movies, and more?

The death of cartoons is a fascinating example of technology advancing and bringing about new possibilities. We still have a lot of technological innovation in computer graphics and overall computational power ahead which makes thinking about where all this may go that much more interesting.

My favorite phrase of late is “the future is going to be weird.”

Smartphone Brand Stories in China

China is an incredibly important market for the global technology industry. It is also a fascinating one to study because, more often than not, the market as a whole is an anomaly. So we often see things that happen and work in China that do not provide applicable lessons for the broader technology market as a whole. One continual example of this reality is the smartphone market in China. Brands can seemingly come out of nowhere, sell tens of millions of phones in a year, then fizzle out. The technology battle that happens in China is very often one centered around brands. Chinese consumers are some of the most brand conscious in the world. It’s a fundamental idea to understand why Apple has had continued success in the region.

I decided it would be interesting to make a few observations on the Chinese market and the story of a few specific smartphone brands.
Take a look at this chart. I’ve shown the percentage of a few name brands in China and their presence by accessing a mix of Chinese apps and cellular network activity.

The data is collected from hundreds of millions of devices accessing developer tool kits provided by companies like Baidu (one of the standards for app development and analytics for Chinese developers). I see the analytics reports for all three major developer toolkits and have triangulated between them to make sure the above chart is consistent. The other point to note is this includes tablet traffic so, in the case of Apple’s share, it is what total iOS share makes about the analytics.

On the point of Apple, what you notice is the fairly consistent 30% device share using these metrics. The analytics data breaks down this data by device model for developers. They know what screen sizes, resolution, network capabilities, etc., have the majority share so they can is use their resources wisely. This is one reason so many developers in China continue to focus on iOS. Not only are Apple devices ~30% share of the market opportunity for them but Apple provides both better economic incentives for these developers (since they can make more money on iOS) but Apple also offers them far fewer hardware variables than the open ocean of Android devices that exist in China. A simple look at this data by any developer and it’s clear where your best software opportunity lies. Interestingly, the ~30% presence of iOS devices is pretty consistent with actual installed base estimates of iOS in China which we are confident is in the 30-35% range or about 280m iOS devices in total in use in China.

Samsung’s Decline
Perhaps the biggest storyline to me is Samsung’s decline in China. Before the smartphone era, and even into the beginning of it, Samsung was a dominant brand in China. Local brands becoming dominant in China is a relatively new phenomenon because, for a long time, Chinese consumers felt Chinese brands were not up to the quality of foreign brands and no one wanted to risk spending their hard earned money on a brand that could be lower quality. For this reason, Chinese consumers tended to purchase brands they were familiar with and knew were quality. Samsung was in that class. The other point to note here on Samsung is while their brand was viewed as reliable and high quality, it was also not playing in the high-end in China but competed with much more affordable, somewhat low-end devices on the price spectrum. This, I believe is the singular reason for their decline.

Apple has never competed on price in China. It kept them in a class unto themselves from a brand standpoint. Samsung’s strategy to compete on price and be affordable for a majority of Chinese consumers left them vulnerable once Chinese brands gained in recognition and were the same price or lower than Samsung. Perhaps a law of consumer electronics has emerged. Start by competing on price, and you will always compete on price. This is why we do not see brands that start in the low-end affordable market succeed in the high-end premium market.

Huawei’s Steady Climb
What impresses me most about Huawei’s growth in China is how remarkably steady their line is compared to other Android brands. This, I would argue, is the sign of a stable strategy in China and one that suggests to me they are not a “flash in the pan” story that grows fast and falls like other brands in the region.

The vast majority of data points we see on Huawei shows a continued rise in loyalty of buyers to repurchase a Huawei phone, not something we see of other Android brands in China. We also see the Huawei brand being one consumer are expressing a sentiment that they believe Huawei is innovative and, in some cases, Chinese consumers say as innovative as Apple. Also something that was not true a few years ago.

Huawei remains the brand to keep an eye on and, as I’ve said before, they are likely going to take over Samsung in many markets. I would not be surprised if, some day, Huawei takes Samsung’s place as the leader in smartphones sales worldwide.

Shooting Stars
Lastly, I want to point out the swap in places of Oppo and Xiaomi. Xiaomi was the solid number three brand in China, receiving all kinds of press, attention, and local love for their flare. Now, their trendline is in decline with no signs of recovery and Oppo is emerging as the clear number three brand with Vivo hard on its heels. It is notable Vivo and Oppo are a part of the same larger electronics company in China called BBK. If you look closely at the chart, BBK used to be a smartphone brand with Vivo as a sub-brand. Somewhere around the end of 2015, they decided to shift focus from the BBK brand to Vivo. Knowing this, if we add up the brand share of Oppo and Vivo, it comes out to 17.44% which means BBK devices as a whole would be the number two share leader in China above Huawei. This dual brand strategy of BBK is one to watch and the dynamic between these two brands, which can focus and compete in different areas independently, could cause Huawei some troubles they have not yet anticipated.

That being said, shooting stars in China can rise and fall quickly. It is important to not just look at who has the most sales share or a flashy sales data point and look at who is developing sustainable growth strategies that have worked over time, not just for one quarter. That is the broader story this chart tells.

Acquiring Into the Next Wave

As I woke up this morning to the news that Intel has acquired Mobileye, I changed my mind on publishing what I had written for today’s Insider post. For Intel, this is a key strategic move. Acquiring Mobileye allows them to better compete and solidify Intel’s position in not just autonomous and self-driving cars but the technology + automotive industry opportunity. In nearly all the discussions we’ve had with key brands and major players in the automotive space, Mobileye was a consistent name that came up. Emerging as a clear leader, Intel wasted no time making sure someone else didn’t sweep in and buy them first.

This signifies the continuation of the trend I’ve been talking about for the past few years as the semi-conductor industry consolidates into a few major players — Intel, Qualcomm, Broadcom/Avago, and Nvidia. This move also further validates my observation of the semiconductor industry’s renaissance and could even spur more startups to continue to make bold bets in new silicon startups. Lastly, this is another big win for the under-appreciated Israeli-based tech scene and Israeli-based semiconductor companies in particular. Israel has one of the most innovative semiconductor environments, with small/mid-size companies continually being acquired with key and exceptional IP around silicon-based chips and sensors. I hope this benefits the tech scene in Israel and that more great startups of all kinds continue to spring up from the country.

This latest move by Intel is also worthy of noting another observation. It is abundantly clear, as if it wasn’t before, that the big dominant tech incumbents are going to acquire their way into the next wave and to ensure they do not miss the next wave(s). As my friend Benedict Evans pointed out on Twitter this morning:

The above statement is not just apt but is also flexible as you can add any big companies name to the tweet and be correct. Apple, Microsoft, Google, Intel, Nvidia, Qualcomm, Oracle, SAP, SalesForce, IBM, etc., etc. They will all continue to acquire their way into not missing the next wave or waves of computing. It is understandably hard for big companies to disrupt themselves and risk hurting their cash cow. Too often that danger, known as the “Innovator’s Dilemma”, leads to not seeing what is around the corner that will inevitably disrupt your business. This is why these big companies’ M&A departments start to become a more important player in fighting disruption for those incumbents who have acquired a pile of cash from being the kings of the prior era of computing.

This single reality is also a big driver fuelling the continued momentum in venture capital. The knowledge that you don’t have to have a company you invest in go to an IPO for you to get a return. It may come as no surprise to many of our readers, including those of you in the VC industry, investments are often made with scenarios including which companies may be the target of acquisition by a larger firm.

Finally, all of this further convinces me the noted economics theory of “boom, bust, buildout” of new industries is completely at play. I articulate that theory in this post — this quote in particular:

The “boom” period is a period of euphoria where entrepreneurs, investors and early adopters rally around the product; followed by a relatively short “bust” where tough economic realities are faced; followed by an extraordinary “build-out.”

During the boom, an industry first gains traction and investment money floods the market. The result is that the supply outpaces the demand of the current market state. This is because the early interest is driven by early adopters, which is not a large market. The overflooding of capital, combined with an immature market, leads to the bust. The bust, however, causes a drop in price of essential market components, which leads to innovation.

In an example with the railroad industry, the “bust” led to such cost declines in essential components that it made it possible for enterprising entrepreneurs to create the frozen car, thus spurring the meat packing industry. The two-year railroad bust, however, was followed by a global build-out that lasted a century. That build-out occurred all around the world and forever changed transportation and commerce.

Through every cycle of the industrial revolution, this pattern has repeated. The initial boom of this current cycle was the startup bubble of the late 90s. Here we are, almost 20 years later and we still see the build-out portion of this cycle which will likely continue to last another several decades or longer.

Technology at large will sit in the center of all the major industry waves we see going forward. It is woven into our social fabric and is why the dominant companies of today will remain aggressive in acquiring their way into all new waves going forward. It is, simply, the natural order of things going forward. History will show, a company’s ability to remain relevant and avoid disruption will include, in part, the wisdom of their M&A departments.

Apple and Generation Z

I received a mixture of feedback on Twitter when I tweeted Phil Baker’s column from yesterday. Most of the feedback was critical of Phil’s point that Apple may be losing the younger generation. They argued that, because so many of them prefer Apple hardware to everything else, others do as well. This is a solid point and is mostly true. But, there are a few points worth thinking about on the subject of Apple and Generation Z.

First, I have two daughters of this generation. Second, it is nearly impossible to study this generation quantitatively because they don’t take surveys. In fact, most of the primary research we do at Creative Strategies never goes lower than 18 years old. Through some of our partner research we access, it can go as low as 16. I’ve never seen large quantitative studies from young people below the age of 16, though. Which means, for those of us working as researchers, all we have are our observational skills and an ability to study behavior and map it to future outcomes. With this point in mind, I’m going to make some observations I think will help us frame the question of Apple and the next generation.

Technology Observations of K-8th Grade Students
As a part of several research projects specific to education, I have been talking to both educators/teachers and IT managers deploying thousands of devices — Windows PCs, Chromebooks, iPads, and Macs — in their school districts. One inescapable reality I continually encounter in this research is the dominance of Google’s Chromebooks in the lower grades. When I dig into the realities behind this (which is a lot more than simply the cost of the hardware), the real value for students, parents, and educators is that they live on the cloud. I frequently heard stories of how great it is they don’t have to worry about things like file management since all assignments, documents, homework lists, projects, etc., are always stored in one central location accessible from any device they choose. This is the deeper value proposition and daily workflow this generation is using as they grow up. While it’s true to say this generation is growing up with technology, the more profound point is this is the first generation growing up depending on the cloud.

Technology Observations of Higher Education
As these kids get older and move on to high school and college, a few things change. First, they stop preferring Chromebooks and begin desiring something more like a Mac, a Windows PC, or a tablet. While their hardware desires change, they are still relying on the cloud on a daily basis. As they move up, new avenues to the cloud emerge. It is no longer just for staying connected with their teacher, managing personal assignments, etc., but it evolves to also include collaboration. The value of the cloud moves from a singular experience, one mostly via teachers and students/parents, to one that broadens to include fellow students as they collaborate on projects.

While I’m making a few big picture observations, the image I’m trying to paint is one where the cloud has become central to generation Z’s workflow. Most of the software and apps they use regularly are much more cloud-centric rather than being specific to any one hardware platform. These conclusions lead us to a few outcomes worth mentioning.

First, this generation is growing up depending heavily on the cloud. However, it is largely not Apple’s cloud. Second, the vast majority of their day-to-day software experiences are not one Apple provides — with the exception of iMessage in a few markets like the US and Safari on iOS. Things like Facebook, Instagram, Snapchat, Google Search, Google Docs, Gmail, Chrome, etc. all rank higher in daily usage than any of Apple’s first party apps on iOS for the majority of Millenials via a recent survey we just completed on 18-24 year olds.

My concern is that Apple, while still being a valued brand that makes high quality, desirable hardware for this generation, is simply becoming “just a hardware company” to them. At which point, their potential to switch to Android or something else entirely becomes more feasible when most of the main apps and services they use exist on other platforms. The reality of this, if it comes true, is Apple’s only sticky proposition to this demographic is the hardware. Which I fear runs the risk of Apple’s ecosystem lock-in wearing down over time.

If I was Apple, the first thing I would do is double-down on first-party software. I’d make sure I had a few must-have apps this generation can’t live without. Second, I’d go all-in on the cloud and try to create cloud services this generation “lives and dies on” — a phrase I have heard more than a few times from this demographic when it comes to Google Docs.

Fortunately, we have the ability and access to keep on eye on this and see what new developments take place with this younger generation of consumers. The big takeaway from me is just how cloud-centric this generation has become.

Unfortuately, while they may grow up with Apple hardware, they are not growing up in Apple’s services. Project out ten years from now, as more and more core computing experiences move to the cloud, and you can envision why that may be a problem for Apple.

The Government wants to Hack Your Smartphone

Yesterday, Wikileaks published what it believes are details of hacking tools used by the CIA in order to spy on Americans. There is a lot of speculation and misinformation about the ability the government has to hack our devices or spy on us. We know from the whirlwind that was Apple’s battle with the FBI that there are still limits to the tools they have at their disposal to get into our most personal computing devices. Much of what the government does have requires them to have the device in hand, meaning they have acquired it through legal means and have the ability to attempt to acquire information from it. While there is no doubt they have the ability to monitor phone/cell networks, the move to things like messaging as a primary communication method has made it harder for them to spy on us over traditional airwaves.

The point is, while there is still doubt and skepticism around the extent any government can monitor its citizen’s communications in things like a messaging client, you can bet everything you own they are going to try their hardest to do so. If anything, the events of the last few days, and a great deal of the commentary around it, only confirm a key narrative Apple has been describing: we simply can not stand still when it comes to security and privacy techniques. The bad guys, and this often includes our governments, are continually getting better and trying ever harder to come up with techniques that give them access to our devices. Unfortunately, we will never be safe because of the relentless pursuit of others to invade our privacy for their own gain.

What is fascinating is we are having this discussion with still only a few connected devices per person. How much more opportunity will there be for hackers, including governments, to attempt to spy on us when we have microphones, cameras, and other forms of biometric scanners and sensors all over our homes and in common spaces like cities, malls, and places of business? As more digital devices invade our lives, the threat level will only increase. As it increases, the responsibility will still fall on those who provide us with these digital devices to go above and beyond to do all they can to provide security and privacy for their customers. Sadly, only a small handful of companies even seem to be serious about this and consumers are now only waking up to the reality. Many will not become aware until it’s too late.

This is why I found it interesting that Consumer Reports is now adding the evaluation of data security and privacy to products they report and provide recommendations for. I found the first two paragraphs interesting. They explain why Consumer Reports feels they need to add this additional component to their products and services evaluations:

One day in August 2015, Jared Denman got a frightened phone call at work from his wife, who was home with their 2-year-old daughter. A song was playing through the couple’s baby monitor—the Police’s “Every Breath You Take.” The monitor was the kind that connects to the internet so that parents can see and talk to their baby or caregiver when they’re away from home. The device had been taken over by a malicious hacker, and the song’s lyrics were particularly ominous: “Every game you play, every night you stay, I’ll be watching you.”

Incidents like this may illustrate the need for consumers to be better educated and more vigilant when it comes to digital security. But if a breach could happen to Denman, who is an IT administrator with a sophisticated understanding of computer security practices, it can probably happen to most consumers. Some products, like the Denmans’ baby monitor, are sold by their manufacturers with vulnerabilities that leave them open to attack, such as a setup process that doesn’t require users to change the default username and password. And it’s not just homes with baby monitors that are vulnerable. It’s also homes with routers, security cameras, health-and-fitness apps, and even cars.

As I said, as the number of digital devices containing microphones, biometric sensors, and cameras increases, so does the threat level dramatically increase as well. We have to remember we are, to a degree, dealing with scenarios we have not had to deal with before. The convenience levels of connecting our digital products together is high but that can’t come with a security trade-off as it has so often in the past. The ability of the news, social media, and instant communications can make these issues travel quickly and enlighten consumers in near real-time. Our latest security and privacy study revealed that sentiment from consumers is increasing on these issues and awareness is at an all-time high. We, as an industry, still need to wrestle with the reality that consumers are becoming more savvy to security and privacy issues.

An Industry In Transition

I understand how easy it is to zoom in on the minutia of the tech industry and examine both the good and the bad under a microscope but I’d like to make a point that requires taking a step back and looking at the bigger picture. With the news and hype cycles what they are, it is understandably easy to miss the forest for the trees. In an effort to keep a pulse on the tech industry at large, I feel that, when we step back and look at the whole picture, we see an industry in transition and clear groundwork being laid for what comes next.

Smartphone Hardware has Run its Course
As Carolina pointed out today as she reflected on Mobile World Congress, smartphone hardware differentiation is nearly impossible. What is clear is the last big push will be around optics, cameras, and sensors. While it is true we will still see some important innovation in these areas, we are undoubtedly nearing the end of major hardware innovations in smartphone hardware. In many ways, the smartphone is where the PC, and possibly the tablet, are as well. Iterative changes will come, but no significant shift is on the horizon which blows the paradigm open.

This is not to say the smartphone may not serve as the underlying foundation for new hardware innovations in things like Augmented Reality or Virtual Reality. It does mean there will become an increased emphasis on software and services experiences. Years ago, I wrote an article called “Our Services Destiny”. My point was based on a tried and true historical viewpoint of the industry which outlines how the value of new markets always starts in hardware. Then, as that hardware innovation slows, the value moves to software. As software matures, the value shifts and ends the cycle in services. This observation had been mostly limited to enterprise case studies. The smartphone is the first market we can now observe and learn from that same dynamic in consumer markets. This a key reason why we are seeing an increase in the software/apps industry from a revenue and value perspective and we are now starting to see the consumer services side of the industry pick up steam. As I look ahead, I am focusing on what consumer services mean for the future and which companies are best poised to own this space in the future.

AI is in its Infancy
Nothing we have in the market today is really “artificial intelligence”. We see some clever algorithms attempting to predict or understand us but these are mere shadows of what the AI experience in the future will be. Taking a big picture view of this market shows us the real work being done today is more machine learning than AI. There is a race to train your network in play at the moment. This requires not just a lot of data but a lot of really good data. I’d argue the vast majority of criticisms we see from companies talking a lot about AI — Amazon, Netflix, Google, and perhaps even Apple to a degree — is due to the lack of really good data. This is something I want to dive deeper into and take a look at the weaknesses in every major company’s AI strategy but right now, these services are attempting to offer me value from how their network (or AI-engine has been trained) and I’m left still baffled by how little they actually know about me.

Part of this has to do with two fundamental pieces of the puzzle which are still being worked out. The first is in semiconductors. As I’ve noted before, we are in the 1980s PC era when it comes to AI chipset technology. It still takes hours or weeks to train a network. The only solution is many many years of silicon architecture advancements which are still yet to come and will not be easy. Semiconductor technology is a mature science and there is no magic revolutionary breakthrough coming which speeds this up. Companies like Intel, Nvidia, AMD, Qualcomm, and even Apple, have their work cut out for them to solve extremely difficult challenges to give software and services companies they computing power they need to deliver instantaneous network training and true AI technologies.

The second piece yet to come is unsupervised learning. Today, most networks are trained with “labeled data”: a human has labeled an image of a dog or a street or a person. Text is, by nature, already labeled but when it comes to teaching computers to see this, it is a major problem. As the industry gets to a point where machines can be trained without human intervention, we will be one step closer to better training and better AI. This is one reason why I found Apple’s first published paper on AI interesting since it speaks to a process of unsupervised learning by using graphics instead of physical images to teach computers.

5G: Important Infrastructure but Years Away
Lastly, 5G will provide desperately needed network capacity to bring so much of what I outlined above, and more, to fruition. We are about six years into the shift to LTE. Qualcomm likes to remind us that network technologies generally live for about 18-20 years and, at about the midway point (ten years in), we tend to see the next evolution trickle out to the market. If this pattern holds, around 2020 we should start to see 5G begin to trickle into the market.

5G will be relevant in many markets beyond computers. Automotive is a key market where we need the kind of network technology 5G will enable. Cars will be processing tremendous amounts of data and balancing onboard and cloud processing to enable features related to autonomy, safety, and more. Services, like AI, and many others will require 5G, given how much they will rely on cloud processing as well.

5G will also bring with it a slew of new connected devices. It may be much more common to see devices which have yet to be connected to the network become connected via the benefits of 5G.

These key things, which are some of the underlying transitions the industry is going through, are critical enablers of what is coming next. The point to take away is how this transition is not over this year, or next year, or probably not even five years from now. I’m not saying exciting things are not going to happen, only to remind our readers to not get caught up in the hype of what is coming next and realize we are years off from that reality. However, with a view of the big picture, we can keep our eyes open as these fundamental changes occur so we are ready.

Snap, Inc.’s IPO and Investor Expectations

Snap’s IPO basically ended where it started, which I view as a good thing. Overall, this IPO has many inside tech circles, from VCs to investment bankers to startups themselves, looking to it as a bellwether for future IPOs of companies of all sizes. Strategically, many IPOs of late have been priced low to start in order to have an initial bump and not drop below their opening price too quickly. This is a critical strategy for investor and company morale. Should a stock drop well below its IPO, as Facebook did, it creates a confidence drop in nearly everyone associated. I recall the panic from close friends who worked at Facebook at the time and were worried their big stockpile was not going to amount to much if Facebook’s potential was not as big as they all believed. Morale and sentiment around the stock matters, which is why it’s better to not have your IPO crumble and end below its opening price.

Conversations I’ve been having with many investors lately, both on the institutional side and with the VC community, have been around what it will take for public market investor expectations to normalize and not be wildly unrealistic. A message I’ve been trying to convey to those who will listen is the likes of Facebook may be the outlier when it comes to the new tech landscape. There are likely to be very few companies, maybe only Facebook, who touch two billion humans regularly. To believe that X company is the next Facebook may be completely unrealistic. Instead, we may need to embrace the idea of small to mid-cap tech company IPOs and be OK they are not hyper-growth stories. But that seems to be the root of the problem as shades of the dotcom era still resonate in people’s minds. We have done a decent job, at least, better than in the late 1990s, at valuing a company as they IPO but still a terrible job of truly understanding their upside. The point is, Facebook may be an anomaly so its unwise to use them as a comparable for an IPO.

There are a lot of healthy private tech companies who could have a successful IPO and continue to grow moderately. These companies are fearful of going public as they worry investor expectations will be too high. The result could be turmoil in the IPO which would dramatically hurt employee confidence and the ability to attract top talent to their company. This is the dilemma they are faced with when debating the right time to IPO.

Many I speak with are hopeful that Snap will be able to manage expectations in light of the slowing growth they are facing. The real test will be over the next few quarters when they likely show very little user growth but may show some advertising revenue growth. While not exactly the same comparison, many are watching Twitter in a similar vein. Twitter went public after their growth cycle ended but they are working to be creative and tell a story around business growth without necessarily having user growth. These are the kinds of narratives many are watching to see if investors remain patient or punish the stock based on how they set their expectations.

One of the more interesting dynamics of late for many tech companies, and specifically consumer ones, is not only how quickly they can grow but also how quickly they can hit their max total addressable market. This is quite deceiving because it creates the false appearance of a company in hyper-growth mode when, in reality, they are only hyper-growing for a year or two until they reach as many users as they are going to reach. I call this the easy growth, even though not all growth is easy. Once you hit your TAM, which you rarely know how big it is to start, growth gets really hard. Twitter, Snap. Inc, Netflix, Amazon, etc., are all in the tough growth stages where getting new users is not as easy as it once was. All this reality does for startups is make it hard to trust that their big growth booms are true reflections of the size of the market vs. just how quickly and easily it is to get a few hundred millions users nowadays because of how fast things travel with social media.

The reality is, markets may look larger than they really are for many companies and this changes the game on how you do the analysis to size your true potential. Given we help many startups and even big companies do this, I can say this skill is largely missing from many organizations since the rules of the game have changed — but many have not yet adapted.

Lots of challenges are ahead but there are also lots of opportunities.

The Almighty Smartphone Camera

Without question, the next phase of smartphone innovation will be focused on the camera. This year’s Mobile World Congress is more confirmation of that trend as hundreds of smartphone brands and dozens of smartphone manufacturers highlight the innovations of smartphone cameras as the primary feature they are promoting and what makes each of them “different”.

One of the more interesting examples comes from Oppo, a Chinese smartphone brand you will certainly hear more about (if you are not following them already) with the design of a 5x optical zoom lens. Many others, including Huawei and Sony, also tout key features of the camera as their primary differentiator. Innovation in the camera is also likely the main thing to watch for from Samsung with their upcoming hardware announcements.

No question, when it comes to smartphone hardware, the camera is one of the most important features that get consumers excited. Where instant communication like a phone call, text, or email used to be driving force of mobility, now it is instant capture and sharing of pictures and video. Our mobile experiences are increasingly becoming visual ones and this shift cannot be ignored.

As new innovations in image and video capture technologies, including things like 3D, depth sensing, 360 video and more trickle into the mainstream, it will enable many new forms of consumption experiences. A simple example today is to notice how things like 360 video or even Apple’s Live photo support in apps like Instagram and Facebook are deepening the engagement experience with media posted by friends and family. You can see how future solutions around Augmented Reality can creep in as well and add more elements of media engagement — all driven by needed innovations in smartphone camera hardware.

The exciting part of all of this is the software capabilities of our favorite apps and even new ones yet to be invented that will take advantage of new inventions around smartphone camera hardware. Just a casual look at many of the most popular consumer apps today and you see how critical the visual (photo and video) is to the total experience. Things like Snapchat where filters and complex image processing is being done with a combination of hardware and software. Even the bokeh effect with iPhone and Huawei to a degree are enabling entirely new classes of consumer photography and with these advancements. And more is to come in consumer videography. Consumers are doing things today with the camera in their pocket complex visual tricks that professionals used to need dedicated hardware, special software, and special training and skills to accomplish.

The smartphone has been around now for nearly two decades and one would assume we are nearing the end of the hardware innovation cycle. Yet, there is so far still to go that will be driven by fundamental step increases in local computational and cloud computing power on smartphones, display technology, network infrastructure speed as we move from 4G to 5G, machine learning and visual processing and, of course, years of innovation ahead in smartphone image capture technology.

Breakthroughs in computational power in our pocket computers will remain a significant driver of so many future experiences. It is a primary reason why we will continue to see the smartphone disrupt so much of the world still to be disrupted. It is also a reason we will continue to see things which were once exclusive to professionals become commoditized and available to everyone. We are already seeing professional photographers use iPhones during photo shoots and even short films made entirely on iPhones. I can imagine a future where even adding complex and visually rich graphics and special effects will be possible and easy to implement on our smartphone-captured video, making it possible for anyone to capture and create motion picture quality movies with their pocket computer.

With all the hype around VR/AR/AI, etc. (which are all likely to be built from the smartphone ecosystem), I still find myself having to remind folks in the industry that the smartphone is still the next big thing.

The Tablet Computer is Growing Up

I vividly remember when the iPad first hit the scene. Much of the commentary at the time ranged from confused, to skeptical, to wildly optimistic and then some. However, very few people truly grasped the underlying shift to the touch-based computing paradigm that was underway. In fact, throughout a good portion of the tablet computer’s life, the form factor has continually fallen short of its full potential. Most were convinced this device could never be a productivity machine. These folks missed the broader reality that many millions of people were being extremely productive on their smartphones using a touch-based operating system and generations of young people would grow up with an intense familiarity and comfort level using touch-based systems as their primary computing platforms. It was this broader shift of workflows, from a mouse and pointer to ones which used touch, that I articulated in one of my first public columns back in 2010. “From Click to Touch – iPad & the Era of Touch Computing”:

It is interesting to have observed the barrier to computing a keyboard and mouse have been for so long. I was always amazed at how older generations stumbled with a keyboard and mouse, or how the biggest hurdle of learning computers for my children was the keyboard and mouse. Even my youngest, who had issues with the mouse and is just learning to read, is operating the iPad with ease and engaging in many learning games she couldn’t on the PC with the traditional peripherals. Think about the developing world and the people who never grew up with computers the way we in America have with a mouse and keyboard. How much more quickly will they embrace touch computing?

This point, which I have expanded on and further articulated through the years, has served as the basis of my bullish view on the tablet’s potential. Touch-based operating systems, built from the mobile/smartphone experience, eliminate the complexity that exists with Windows and macOS and makes computing more accessible to the masses who are, admittedly, not the most technology literate people. Mobile operating systems like iOS and Android abolish the need for tech literacy classes yet still yield the same potential end results in creativity and productivity as any desktop OS.

In the years since the iPad’s launch, the broad observation of the power in touch/mobile operating systems has manifested itself with Windows and the PC ecosystem creating products more like tablets, Apple with the iPad Pro, and now Samsung with the Galaxy Tab S3 just announced at Mobile World Congress looking to make tablets more like PCs.

However, now we are several years down the road. My concern is tablets have not gained as much ground on the PC as the PC has gained on tablets. It’s true iPad has tens of thousands of dedicated apps and both iPad and Android tablets are utilized in enterprises for mobile workforce computers but, when it comes to the average consumer, they are still not turning from their PCs to iPads or Android tablets as a replacement. In a research study we did in the second half of 2016 on consumers usage and sentiment around PCs and tablets, 67% of consumers had not even considered replacing their PC/Mac with an iPad or Android tablet.

As you may have seen, the tablets trend line is not encouraging.

While it is true the PC trendline isn’t much better, over the past year or so a fascinating counter-trend has been happening in the PC industry. The average selling price of PCs is actually increasing. In the midst of the tablet decline, many consumers are realizing they still need a traditional laptop or desktop and are spending more on such computers than in many years past. Our research suggests a key reason is because consumers now understand they want a PC which will last since they will likely keep it for 6 years or more. They understand spending to get a quality product, one that won’t break frequently or be a customer support hassle, is in their best interests and they are spending more money on PCs than ever before. This single insight is a key source of my concern for the tablet category.

Another key data point in the tablet and PC conversation is how the tablet continues to fall by the wayside when it comes to the most important device to consumers. While the smartphone is the obvious choice consumer pick as most important, the tablet still ranks lower than both desktops and laptops — this is true of iPad owners as well. Tablets and the iPad have yet to overwhelmingly move from luxury to necessity for the vast majority.

I’m still as bullish as ever on the tablet’s potential. However, my concern is consumers may be extremely stubborn and lean heavily on past behavior and familiarity with PCs instead of going through the process to replicate the workflows and activities they did on their PCs and transition to tablets. This is a year where Apple needs to take great strides in software around iOS for iPad if they want the iPad to become more than it is today and truly rival the PC in the minds of the consumer. While tablets have no doubt grown up, they still have a little more growing to do if they want to truly challenge the PC and Mac.

The Semiconductor Industry Renaissance

At my first real tech job in 1997, I had a role at Cypress Semiconductor working with engineers to draw and model designs of the products. It was during this time I developed a love of the fascinating world of semiconductors. The science behind them is remarkable. The kind of stuff where, when it’s explained to you, there is a feeling as if there is no way that should be possible, yet it is. The semiconductor industry is also very small in reality. There are only a handful of companies who have the talent to push the limits of silicon process and architecture design.

There has been a debate in the last five years about whether the silicon era is over. One of Broadcom’s founders, Henri Samueli, was fond of stating during keynotes and other speaking engagements that “We will not see any new silicon startups anymore”. Basically, his tagline was the semiconductor golden era had ended. Over the years, I have had many conversations with Henri on this topic. His logic and reasoning was no doubt sound but it seems his views discounted things like virtual/augmented reality and artificial intelligence as drivers of computing power that still does not exist today.

In context, Henri’s comments were more directed at core computing startups — components like CPUs and GPUs, or new computer architectures — and less about sensor or companion processor type startups. He also was looking at how the big silicon companies were becoming so dominant and how much capital it seemed necessary a silicon startup would need to compete. There remains truth to much of his logic today but we are seeing a fascinating renaissance in the semiconductor industry.

It turns out, the future has not yet arrived. Things like VR/AR/AI and other common buzzwords of today are only shadows of what they will be in the future. We simply do not have the computing power and underlying computing technology to bring this vision to market. While all the heavy hitters in semi — Nvidia, Intel, AMD, and Qualcomm — are working on solving these big hairy problems, we are actually seeing some new startups use combinations of licensable and customizable ARM IP, and/or lab and research institution techniques along with other kinds of technology, allowing them to create solutions that attack the gaps the big silicon companies are ignoring currently. We have companies successfully raising money to accelerate network machine learning like Wave Computing. Silicon Catalyst is a local accelerator here in the Valley that provides funding as well as other assistance helping new semiconductor companies grow and compete. I’ve even done a number of due diligence work with Silicon Valley firms who have put capital into new, mostly still stealth, semiconductor startups.

All of this is driven by the opportunities and challenges which have recently come to light from various industries I have mentioned above. Many were quickly reminded computing power is not yet commoditized once AR/VR/AI and more hit the scene. More importantly, they realize semiconductor roadmaps are guided by static scientific principles and thus, we have a pretty good idea where we will be in five years. We know that, even then, the silicon we have will not be powerful enough to get us where we want to go.

Few things visualize the upside opportunity more than Nvidia’s stock price over the last few years.

It was certainly true the past decade seemed to suggest we had enough computing power and the need for dramatically more did not seem necessary. However, innovation found a way and we now find ourselves in a situation where the future can not come fast enough. Yet, we still have to solve extremely hard problems that will be lead by semiconductor companies.

I’m a big believer in and fond of saying that there is no single greater predictor of the future than understanding semiconductor company roadmaps and what those roadmaps enable in terms of computing experiences. Given where we were a few years ago, I honestly didn’t think doing semiconductor industry analysis would be as “cool” as it was in the early 2000’s but now, the interest is there again and as big as ever. We have things like AR/VR machine learning and artificial intelligence to thank for it.

While we likely won’t see a boom like we did in the post-Fairchild Semiconductor era, it is encouraging to see investors and founders not afraid to take on the big boys and innovate.

Apple, Content, and Exclusivity

Exclusivity = differentiation. This is a key point to understand. Apple has always remained differentiated in the market on the back of what they offer that no one else can. Apple’s management likes to call this out in presentations and earnings calls by using the phrase “only Apple.” What they are referring to is something they alone are uniquely positioned to offer. While it is true many parts of their differentiation has to do with procedures and philosophies related to hardware design, the real differentiation is combining that with the genuine nugget of exclusivity which is iOS and macOS. I can confidently say both Apple’s margins and volume sales of iPhone would be half or less of what it is today if they shipped the same Android software as everyone else. While software remains a key differentiator and the biggest factor as over time as hardware differentiation diminishes, understanding elements of content exclusivity is the next piece of Apple maintaining broader ecosystem “stickiness”.

Apps aren’t always the Answer

One of the more interesting things we have learned is the limits of the app ecosystem on Apple products beyond iPhone. While it is true Apple has the most robust developer ecosystem out there, the most fruit yielded from this seems to benefit iPhone more and other products not so much. When we looked at the upside for iPad, Apple TV, and Apple Watch, the default answer on why be bullish with these products against the competition was always the apps. However, this has not played out as a major factor for iPad, Apple TV, or Apple Watch the way we or others have thought. Of the three I mentioned, perhaps the strongest argument where this has worked is with iPad, but I’ll save some concerns on this related for a separate post on why I think Apple’s iPad strategy is at risk. That being said, what if the future of Apple TV and Apple Watch, or any other new category Apple creates, is not apps? What if the value of Apple’s large and robust developer ecosystem only yields the most fruit for iPhone and, to a degree, iPad but nothing else? While I don’t want to discount a long view that this can change, we can certainly make the case that, up to this point, apps have not moved the needle for either platform. This is where my mind turns to the need for exclusive content and services.

While it is right to be skeptical about Apple’s entry into producing original video (a la “Planet of the Apps”), largely because it is not a core competency of the company, exclusive content, both in music and video, is the only thing that will make the services themselves more valuable. I strongly believe that, without exclusive video content, Apple will have a very hard time growing the Apple TV business. As much as Apple believes they can solve the search and discovery problems of TV, there will remain very little to differentiate their Apple TV box from a much lower priced Fire TV, Roku Box, or any number of third-party hardware which play all the same apps (HBO Go, Hulu, Netflix, Amazon Prime Video (which isn’t on Apple TV)) as well as all the network apps that let me access the content I pay for. Besides a few exercise apps I use on Apple TV (admittedly not a mainstream use case), there is very little differentiating the Apple TV experience for me as opposed to other devices I use. This will remain the Apple challenge until they build consumer pull-in exclusive content. Note this stat, for example, from a series of Morgan Stanley reports I’ve read. They found that 37% of new Amazon Prime subscribers said Amazon’s original content in Prime Video was the single biggest factor in their decision to subscribe. As of Q4 2016, over 50% of new Netflix subscribers said Netflix originals where the primary reason for them to subscribe. Not surprisingly, that number goes above 70% for HBO Now. It should come as no shock that exclusive original content drives subscriptions to entertainment.

This is why I think Apple is going down the road of creating exclusive content is an important one. I agree with the assessment that Apple does not need to try and compete with Netflix or Amazon on volume. However, they must compete with them on quality or none of this will work. The analogy I’ve been giving the investor community on this was all Apple needs is one Game of Thrones. That alone could drive the differentiated value. This is the crucial step for Apple’s TV ambitions. It is chicken and egg. Reports are likely correct Apple is having trouble getting content deals done, which is no surprise because they have nowhere near the leverage they once did in the iPod era. They won’t have that leverage until they have a large enough base of customers on Apple TV, which they won’t get until they have more exclusive content. A real strategic web to navigate.

Smartphone Brand Repurchase Intention

As I’ve said before, the global smartphone sales race is establishing the global consumer tech brands to fuel the next decade. When we talked about global consumer technology brands in the past, companies like Samsung, Apple, LG, and Sony were in the spotlight. Out of those, only Samsung and Apple are left with companies like Huawei solidifying themselves in the discussion and others like Xiaomi, Oppo and, to a degree, Vivo, trying to get there. Smartphones are the entry point for the next big tech brands and, while most can make a healthy living staying in China, they will not enter the global brand picture unless they can succeed elsewhere. As Huawei attempts to grow in Europe, Africa, and parts of the Middle East, Xiaomi and Oppo are the only other brands we track beginning to make inroads in markets outside of China. Since this is a brand (or future brand) discussion, I think its helpful to see how sticky the brand is when it comes to repurchase intention.

This is likely one of the more global looking brand repurchase intention charts you will see. Most do not cover as many countries as we have access to. However, for the sake of where these brands have some traction, I’ve included a specific list of countries for balance.

The chart depicts top “brands to purchase” as the consumer’s next smartphone. I have charted it out by smartphone owners of said brands. As you can see overall, Apple’s repurchase intent is quite high. As is Samsung’s and Huawei’s when we look at the average across the six countries. You may have seen stats of Samsung’s repurchase rate being high 60% before and we can arrive there when we look at just a few countries. Similar to Apple, it varies quite a bit by specific country when we look just at that country’s responses but, given this is a more developed market look at North America, Western Europe, and China, I think it gives a holistic picture.

When I dig into this data, I’m looking more at how the Android brands are performing and where consumers are looking to go next within Android. Apple seems to maintain a 20-30% range of interest from Android brands any given quarter consistently. Where we see these spikes of intent are as consumer jump from Android brand to Android brand. Looking specifically at this chart, it seems Huawei is poised to gain a lot of customers from Xiaomi and Oppo in the near future, particularly in China. It follows along with the trend we have been seeing with Chinese consumers sentiment toward Huawei continuing to grow. In fact, recent research studies we have read from Mainland China suggest Huawei is coming up on the heels of Apple as a brand local consumers consider most innovative.

From a global perspective, Apple and Samsung are holding relatively steady. The data suggests Huawei is stabilizing as well, thanks to their efforts in recent years since there was a time when their churn was quite bad. Huawei is in a strong third place and the real question is, can any other vendor cross the 100m smartphones sold a year bar? Xiaomi came close, Oppo is nearing Xiaomi’s range with 60-70m per year but that seems to be the ceiling at the moment and largely driven by China alone.

It is worth remembering that pulling off a global brand is exceptionally difficult. Right now, Apple and Samsung are the two that have accomplished this to varying degrees. Apple has maintained a premium global brand status where Samsung has done that in some markets but not all as Apple has. Huawei is using the “affordable premium” strategy and, depending on what other hardware they feel they can tackle, it will be interesting to see how far and wide their brand can go. But, from the data we are seeing, I’m not sure anyone beyond those three is even remotely close to being included in the discussion.

Note on the data: It is not longitundinal which would yield the most accurate repurchase intention, however, I am confident it is directionally accurate.

Snapchat Spectacles and Making Memories

I recently acquired a pair of the elusive Spectacles by Snap Inc. the parent company of Snapchat. While not the most stylish design, the best way to describe them is whimsical, playful, fun, and entertaining. Phrases which I also believe are the best way to understand Snapchat and Snap Inc. as a whole. Strategically, Snapchat is positioning themselves as a camera company. However, it really is not as simple as that when you dig into what Snap Inc is up to.

An important element to understanding a typical Snapchat user is the vast majority of its user base is equally both a content consumer and content producer. This dynamic is somewhat similar to Instagram but quite different from Facebook where more users are consumers than producers. A highly engaged producer of content, both in videos and photos in Snapchat, is key to the services future. In this light, Spectacles make a great deal of sense. Your smartphone is no doubt an amazing capture device. However, your smartphone is not always handy. The value of having a camera on your face, in this case in sunglasses, is the ease and convenience of instant capture. While not the biggest Snapchat user (certainly not like my teenage daughter), my contribution of video to stories on Snapchat has dramatically increased thanks to Spectacles. Increasing the amount of video created by users lies at the center of where Snap Inc. is going as a camera company.

Part of the clear upside with Snapchat is the number of hours its users spend consuming video content. This remains a clear benchmark Snap’s management uses and is, amazingly, on par with Facebook’s number of video views but with roughly a tenth of the daily active users. Video is central to Snapchat’s upside. The playful, whimsical, and entertaining nature of the videos created by its user base is also key to its differentiation. While I don’t expect Snap Inc. or Snapchat the service to break from this fun and entertaining focus, there is a broader point about Spectacles and my experience with them that I think is worth making. The camera in your smartphone remains one of the most important features year over year consumers gravitate to. I’d argue this is not because of the picture taking capabilities and but more subtly about the memory making capabilities.

Making Memories

I was an early adopter of GoPro cameras. I live a relatively active lifestyle and being able to create video underwater, snowboarding, biking, etc., was extremely appealing to me. Most of those use cases don’t make it convenient to hold your smartphone while you take video of yourself plunging down a mountain. So, the ability to strap a capture device to your body, turn it on, and go have fun made a lot of sense and still does today. The side benefit of the GoPro I did not realize until I owned one was the role it would take in making memories, not just of some crazy stuff I did but of my family.

I was that guy. The dude who strapped a GoPro to his head and walked around Disneyland with his family.

Yes, I got strange looks from people but I didn’t care. Getting great memories of my girls’ first time on a roller coaster or skiing or ice skating for the first time was, and still is, worth it. When you have a first person capture device on you, you realize something profound when you use it in the memory-making context. In my experience, when using it for birthday parties, Disneyland, and other key moments I want to remember, a device like a GoPro and Spectacles (in concept) allows you to remain present when the moment is unfolding. Who wants to watch all of their kid’s firsts through the screen of your smartphone camera? With a GoPro and now, with Spectacles, you can watch the moment as it happens and be totally present in it but still capture it on video for all of eternity. This is the broader opportunity for a less invasive camera that we have in our glasses, on our head, or wherever it may end up in the future.

What has gotten better over the years, as GoPro has evolved and even more with Spectacles + Snapchat, is the ease to go straight from memory capture to sharing/saving. I’d argue the experience with Spectacles + Snapchat is the most seamless I’ve used yet with a device that isn’t a smartphone. With a GoPro, it could take me several minutes to get a video I just took, add some slight editing, and share it, With Spectacles, it takes seconds since the video is quickly synced with your smartphone and available in the app to edit and share. The great thing about Spectacles is they truly function like an extension of your smartphone camera that seamlessly integrates back into the software. This is an area where I feel there is a broader opportunity for companies, Apple and Facebook in particular, and perhaps Google to continue to explore.

While the smartphone will remain a primary capture device for some time, capture accessories that become extensions of our smartphone camera, like a GoPro or Spectacles, make a great deal of sense when done right. Particularly with things like virtual and augmented reality experiences in the future where we can relive memories in virtual reality or simulate being present at a sports game or event in another town without having to be physically present. In most cases, these capture devices will not be your smartphone and will most likely come from companies perfecting the optics, silicon/sensors, design, and software today. Which is a key reason, Snap Inc., in making their key mission to be a camera company, is so interesting.

Virtual Realities’ Slow Start

Regular readers will remember the many posts I’ve written on Virtual Reality and my continual reminders that this market is going to develop slowly. The tech industry tends to get very excited about new shiny things but regular consumers don’t see the point and just want to get on with their lives. This is why I’m not surprised by the naysayers who used the news of Best Buy and Facebook closing down a large number of the Oculus VR popups in many locations as confirmation bias of their negative view on VR. VR is certainly niche today and how far it will reach beyond a few verticals remains to be seen and the progress we make technologically will ultimately define how mainstream it can go. These are very early days in VR and a few points of context are important with this news.

  1. Oculus Does Not Demo Well. Problem number one is the Oculus Demo is a hard demo to give. The headset is uncomfortable, the navigation requires using an XBOX controller (an acquired skill if you have never used one), the cable is thick and it’s annoying having it constantly hit you in the back. To be fair, this is true of all VR rigs tethered to a PC or game console. Having gone through the demo, even in a perfect situation from Facebook/Oculus folks themselves, I’m not surprised the experience did not go over well with consumers.
  2. Content Matters. One of the other issues with most of the demos I saw at Best Buy for Oculus were gaming related. This again will be lost on the general population who are not the typical consumers of most of the VR experiences which truly show its potential on something like an Oculus or HTC Vive. I’d assume some demos had examples of video where you are under water or in a foreign city, etc., but most of what I saw were more gaming related because that is where the market for premium VR is (and what Best Buy wants to sell) and where the market is today.
  3. Gear VR Demos Still Doing Fine. Demos of the Gear VR headsets are still getting good traffic per the folks at Best Buy I’ve talked to. Here, again, is an example of the right content and simpler overall experience. Putting on a Gear VR headset is much less daunting than the big cabled headset of the Oculus. The content that make up Gear VR demos tend to be things much more interesting to the general public and demos of this I’ve witnessed in store tend to have the associate set up the video and then hand it over to the customer to just watch and experience. With Oculus, there is more participation in the navigation on the part of the customer from demos I’ve seen. While not the best VR expereince out there, the Gear VR demo continues to provide a better demo experience overall and is less of an awkward and frustrating experience compared to the way Oculus is presented.

None of this means it’s game over for VR. From a technology standpoint, we have years of very hard technical innovation which still has to take place before we get to the full vision of virtual experiences. That being said, the way consumers first experience VR today matters. The concern is negative experiences today could sour consumers on the concept overall and make it harder for them to give it a second chance down the road as the experience dramatically improves.

I know first-hand that, when the demos of good VR are done well, there is no doubting this has very broad appeal in entertainment, communication, collaboration, and more. The PlayStation VR demos I gave friends and family over during the holidays were all the evidence I needed to validate that consumers across the spectrum would appreciate the potential of VR once it becomes affordable and we solve a few technology speed bumps. I gave demos of exploring foreign cities to family members who love to travel and have adventures. I gave demos of sitting courtside at an NBA game to family members who love sports. Even my 80-year-old Grandma Joyce got to explore the bottom of the ocean and Mars and was completely blown away.

There is no doubt VR will play a role in the future of consumption of media and, with the inclusion of things like AR, we can add elements of productivity and core computing capabilities as well. This technology has broad application in the future but it’s going to take a lot longer than many realize.

The Bull Case for Snap Inc.

Subscribers were not surprised regarding the slowing user growth of Snap Inc., which became clear in their IPO filing. We have been tracking quarterly user data via surveys for over a year and we noted the spike in user growth (which is what I think prompted them to file) and the follow on slowdown in user growth (which I don’t believe they anticipated). While all available data suggests they will have a hard time growing their base for some time, I think it’s helpful to look at the potential arguments for the upside for Snap.

A New form of Personal Entertainment
Viewing Snap as a new form of personal television, particularly the short form variety, is essential to understand the kind of company they are becoming. The key for Snap is not just getting every professional content producer they can to produce content for Snap apps and service but also to maintain an active community of user-based content creation as well. For example, if you look at the series of stories they produced around the Super Bowl yesterday, they included a mix of produced and user-generated content. It made the experience compelling and unique, something you could not get on your big screen broadcast. This combination of produced and user-generated entertainment is one of the things I believe appeals to a wider audience — more than just the mostly Gen Z and Millenial user base Snapchat has today.

There is no question the ultimate upside for Snap must include some assumptions of user base growth and, in particular, beyond the under-30 demographic. Getting more compelling produced content is key to attract the older-than-30 crowd. Interestingly, more content producers will likely continue to produce for Snapchat (like this example from the BBC to bring Planet Earth II to Snapchat). Through Snapchat Discover, publications have been mixing video and text leading to an article. I’m more optimistic about publishers who focus on the video element, not just the text/article.

In many ways, the upside for Snap must be viewed more like YouTube than anything else. While it has been a while since YouTube has released active user numbers, our estimates peg YouTube around 1.3 billion people who have watched at least one video monthly. Ultimately, YouTube is the model I’d look at for Snapchat than anything else, with the exception that the vertical video format is a clear differentiator for Snap over YouTube. This may seem like a backward step but I genuinely believe young people appreciate not having to turn their phone sideways with vertically produced video — with YouTube, you need to re-orient the phone to get the full screen experience. Again, this may seem like a little thing, but re-orienting your phone between widescreen and portrait is seen as inconvenient.

If Snap can continue to get users engaged with their unique style of short form, personal TV experiences, then they certainly have a chance to be relevant in the ever changing media/TV landscape.

Grabbing the Next Generation
Another angle for Snap’s bull case is their projected upside depends on future generations. Perhaps they don’t acquire the above-30 yearr old crowd in droves but, if they continue to be relevant and compelling as future generations get smartphones, you can argue their upside potential is based on people who are not yet owners of smartphones but who will be in massive numbers over the next ten plus years. This is a true long view for Snapchat but not out of the realm of possibility that they are the inevitable personal TV experience for future generations. Personally, I think this scenario is more likely to add to their user growth than their chances to acquire Gen X users and beyond.

The part that causes me pause is millenial parents who perhaps are more skeptical of Snapchat going forward and caution their kids against it. We hear frequently from parents who let their teen or pre-teen kids use things like Facebook or Instagram but not Snapchat. It will be interesting to see if this perspective sours young kids on Snapchat or fuels their desire to use it even more.

I fully expect a lot of noise, both good and bad, to come out around Snap’s IPO. Some of it is likely to get quite ugly. Ultimately, investors are going to need patience with Snap and be long on their upside for the public market to yield what Snap needs to continue to invest in their products and services holistically. As of now, what I’m hearing from many investors is they may be more short than long, assuming the stock will rise a bit but then drop in the same way Twitter, Fitbit, GoPro, etc., have all done.

Whatever happens over the long arc of time, Snapchat management is likely going to have to manage the investor community closely to make sure they understand where they are going and inspire the confidence they can reach their ultimate upside.

Privacy, Security, and the Mind of the Consumer

A few weeks ago, we decided to launch a US-based consumer study, focused on understanding how non-techie consumers think about both privacy and security. Our goal was to learn what consumers understand both these terms to mean, what core behavior changes do they make (if any) with products and services based on their privacy or security concerns, and which companies they trust more than others in both cases. Prior to launching the study, I looked at many different studies done by consulting companies, banks, and financial institutions, as well as government studies, to see what kind of questions had been asked before. I also spent some time interviewing consumers to hear how they talk about privacy and security when it came to different products and services. Even with all the prior work put in, this was still one of the hardest studies to get consumer participation. The difficulty of the subject matter itself, along with the high initial abandonment rate we suffered on the study, was a lesson in and of itself. We left comment boxes in certain places of the study and, quite frequently, consumers felt they weren’t adequately informed enough to participate, didn’t have strong opinions, didn’t want to think about it or just didn’t care. The open comments sections were some of the places we received the keenest insights into how consumers view these subjects. With with a few wording changes and adaptions to the study, we finally got enough people to complete it for it to be statistically representative.

Privacy and Security, Same or Different?
We broke the study out into two sections: one on privacy and the other on security. We asked consumers what they felt each term meant and left the same answer options for both questions. Below is the merged chart for both the privacy definition question and the security definition question.

As you can see, consumers felt the strongest definition of privacy was “Not selling personal data, or letting third parties access personal data.” When it came to security, consumers felt the strongest definition was “Secure and encrypt my data so no one can hack or steal it”. But, as our gut sense suggested, there is a fair amount of overlap in how consumers think about privacy and security with the same two answers being quite high in both questions. A core conclusion was, while privacy and security are two separate things, consumers tend to blend their understanding of them into the same definition. In the mind of the consumer, what is private is secure and what is secure is private.

Who Do You Trust With Your Privacy and Security?
Thanks to some other studies, I read quite a bit about how consumers trust things like government and financial institutions. We wanted to look at some of the bigger names in tech and social media as a start.

Apple and Microsoft were nearly neck and neck for the top spot of consumer trust when it came to privacy. Apple squeezed out the top spot overall and, not surprisingly, the top spot among iPhone owners. Microsoft was the most trusted company with privacy by Android owners followed by Apple. Google was in a solid third place regardless of age and smartphone owned, followed closely by Amazon and then Samsung. We asked consumers to rank these companies with a “1” being the most trusted and “8” being the least trusted. Facebook came in at 5.7 followed by Twitter at 6.2 and lastly, Snapchat at 6.7. Interestingly, the ranking did not change much even when we looked at younger consumers 18-25, who are within the Snapchat demographic. Snapchat moved up to the 7th place with this demographic and Twitter was last. Snapchat falling into last place overall is not surprising since a good portion of our respondents did not have a Snapchat account or use the service.

Here is the top line results on company rankings on privacy. The results for rankings with security were not much different.

Reading the comments about why consumers made some of the choices they did proved insightful. It is clear there is a understandable trade off consumers make when they use things which they know are more public, like Facebook. Consumers know what they post is open for anyone to see. Therefore, their feelings around privacy for these services are somewhat less strict. With companies where their actions and behavior are not public like Apple, Microsoft, and Google, they seem to embrace a higher degree of trust since what they do on their phones, PCs, and even what they search for, is not publicly tied back to them as an individual the same way what they do on social media can be tied directly back to who they are. This became clear when we examined behavioral changes they make on social media. The top answer was to be more intentional and careful about what they share/post on social media.

Google was an interesting one for us to explore. We created a few questions just around Google and what consumers believe Google knows about them and what they don’t. While most consumers use Google’s search, they acknowledge the creepiness factor of when you are on a different website seeing ads for things you searched for on Google. Interestingly, while Google was the third most trusted company in both privacy and security rankings, 52% of consumers said they really have no idea how much Google knows about them.

Privacy and Security Fanatics
We know there are some hard core consumers with very strong feelings about their privacy and security and, until now, we didn’t know what percent of the market these consumers made up. We asked some specific questions to help us narrow the field to those who are the most privacy and security conscious. For example, 20.3% of our respondents said they cover their device’s camera with a piece of tape. 13% said they have installed privacy enhancing plug-ins in their devices browser. 15% installed some kind of security software on their smartphone. 11% specifically switched their text/messaging service to one they consider more private and secure. We asked many more to narrow this down but, in each instance, we did not see responses go above the 20% mark. Which leads me to believe the percent of US-based consumers who are the most privacy and security conscious make up around 15-20% of the market, approximately. This demographic tends to skew older — 50+ and heavily female.

While not a large group, it is helpful to get an idea of the size of the market for more privacy and security conscious consumers, especially as more companies are looking to sell products and services with a heavy emphasis on these issues.

As I mentioned at the start, the most interesting takeaway was the difficulty of the subject matter and that it is a difficult topic, one where there is more uncertainty than certainty. I am convinced that any company’s message that over-indexes on the privacy or security angle will only resonate with a portion of the market. Still, I encourage companies to keep pushing both privacy and security forward on behalf of the consumer simply because it is the right thing to do. Consumers will appreciate it, even if they don’t fully understand, or care, about all that is involved.

Juicy Takeaways on Apple Post Earnings

Don’t Count Us Out In Smarthome
All of Tim Cook’s commentary during his opening statements was a shot at Amazon’s Echo and Google Home. In case you missed it, here it is in full.

“The number of HomeKit compatible accessories continues to grow rapidly with many exciting solutions announced just this month including video cameras, motion detectors and sensors for doors, windows and even a water leak.

Perhaps even more importantly, we are unmatched when it comes to securing your home with HomeKit enabled door locks, garage doors and alarm systems.

I’m personally using HomeKit accessories and the Home App to integrate iOS into my home routine. Now when I say goodmorning to Siri my house lights come on and my coffee starts brewing. When I go io the living room to relax in the evening I use Siri to adjust the lighting and turn on the fireplace. And when I leave the house, a simple tap on my iPhone turns the lights off, adjusts the thermostat down and locks the door. When I return to my house in the evening as I near my home, the house prepares itself for my arrival automatically by using a simple geofence. This level of home automation was unimaginable just a few years ago and its here today with iOS and HomeKit.”

Apple wants to make sure folks haven’t forgotten about them when it comes to the smart home. Certainly, the smart home is new and just getting started with related products having their best quarter ever this last holiday at US retail. Apple is no doubt playing the long game and is strategically positioning Siri on your iOS devices as the control center for your smart home. With all the hype and buzz around Amazon’s Echo, Apple wanted to remind folks they are just as relevant in the smart home buzz with a product over 600 million people have (iPhone) vs. one ~10m people have (Amazon Echo).

Customer Base is Growing, which is Key to Services Narrative
Apple’s services narrative is no doubt one of the more interesting story lines. Understanding this narrative requires understanding a few key points.

  1. Apple’s ARPU increases over time. There is something about Apple’s ecosystem; the longer you are in it, the more you tend to spend. This is why Apple made a point of saying revenue per user is increasing. Apple’s base is maturing and increasingly spending money on software and services to consume on their iOS devices. Apple threw out a data point we had not had before — 150M paying subscribers of subscription-based content. That includes Apple’s first party subscription content but also third party. The third party point here is key. Apple just sent a signal to the industry that, if you want to thrive with a subscription business, iOS is the platform for you.
  2. The Market Comes to Apple. Understanding that key point about the Serivces business carries with it the dependency that Apple’s customer base grows. Here again, time is on Apple’s side. Our research confirms that, the longer a consumer owns a smartphone that is not an iPhone, the more likely, over time, they are to consider buying an iPhone. Take this chart, from our fall smartphone study, which shows the year a person first got a smartphone that was not an iPhone but who has since switched.What this chart visualizes is how the highest switching percentages from Android to iOS come from people who owned a smartphone, in this case, an Android smartphone, the longest. Time favors Apple. A cleaner way of putting it is, the market tends to come to Apple vs. the other way around. This is essential to understand as Apple continues to take share in the US, China, major parts of Europe and now on a slow increase, in India.
  3. iPad Gains New Customers. Apple’s clarified on the call that a significant portion of iPad sales came from first time customers is an important one. We know the iPad replacement cycle is very long — 4-5 years. A bit longer than a smartphone and a bit shorter than a PC. But while the iPhone is clearly their largest driver of the services business, when it comes subscription services and, in particular video subscriptions like HBO Now, Starz, Hulu, Sling TV, etc., the iPad is a key platform for media services. The fact this base is growing and first time customers are joining the iPad family is a key data point.

Apple’s confidence during the call was clearly a testament to the extremely valuable customer base Apple has. They spend more money on apps and subcription services (an Apple customer is 3x more likely to subscribe to Netflix than an Android owners – via Creative Strategies Consumer Smart Cloud Study) and the clear evidence that, as a first time customer comes into Apple’s ecosystem, they spend more on a year over year basis on average. Services is an interesting business because it appears to be less impacted by seasonal trends than other products. While the $5-7b range of services revenue per quarter is not anything close to something like iPhone, the fact that it’s growing and will continue to grow and contribute increasingly meaningful value to Apple’s bottom line is significant. Apple’s goal to double the services revenue business over the next two years feels ambitous but could actually be conservative when you study the trend lines within their user base.

My main takeaway statement from this quarter’s earnings as we look out the next few years is Apple continues to perform against all odds.

A Deeper Look at FB, Instagram, Snapchat, and Twitter

When we look at behavior data across many different social networks, it is interesting that not all social networks are created equal. Behavioral patterns are the key things to look for, especially with the ones I’m going to look at here. It is key to know if consumers are behaving in a way that works with the current monetization plans. For example, if no one watched video on Facebook all the while the company was trying to monetize their video strategy, we would know that would yield little value to an advertiser. We do know watching video is the second most common behavior on Facebook by the general global population, so it seems Facebook’s move here is a good idea. If Twitter came out and said they had a huge strategy to monetize “Moments” and were selling packages to advertisers, I would know this is a bad idea because only 3% of their user base uses Moments on a monthly basis.

With all the ways I can slice our analysis of the major social media services, I always find it helpful to remember these services depend on the most valuable part of a consumer’s life — their time. So I think looking at usage frequency is a great starting point to know which social network services are leading the pack and which are struggling.

The key question is, which social networks are a daily habit? Or, in some cases, a more than once a day habit. Below is the key chart.

The key stat here is the percentage of people with active accounts on these services who say they use it daily. Having the “more than once daily” option is really icing on the cake. Companies that have this have a disproportionate engagement of time than those who just have a strong percent of daily interactions with their customers. Clearly, there are social networks here with dramatically more users than others. Facebook has over a billion, WeChat has nearly 800 million and Instagram has 600 million or so. Snapchat is rumored t have 150-200 million and Twitter has approximately ~300-350 million. Knowing the proportion of users certainly is helpful when looking at this chart but also strengthens the case for the likes of Facebook and Instagram when we know how many users they have and how engaged most of their users are with the service.

I make the point that Snapchat is more like Twitter than Facebook (to much heated debate in emails from readers), but this data tells the story. Both are tiny on the grand scale of active accounts and both dramatically trail other services in daily engagement. While these stats cover a global population, if I isolated only millenials via this data on Snapchat, it would show much higher daily engagement. Everyone knows they own millenials, unfortunately, to make the claim they are trending more like Facebook, you need to look at every demographic, not just teens and 20-somethings.

I mention WeChat, isolated to only China responses, to show how engaged this service is in China. It shows us WeChat is much more like a social network than just a messaging platform. WeChat is, for all accounts and purposes, the true Chinese operating system. Key point is WeChat, and their nearly 800 million active users, has similar dynamics to Facebook.

Lastly, and another reason I am bullish on Facebook, is while their unique user number is well over a billion and heading toward two billion, the sheer number of humans using different apps/servivces in the Facebook family is massive. Besides the number of Facebook and Instagram users, they have over 900 million people using Facebook Messenger. They also have WhatsApp with around a billion users. Each of these is a dedicated service for Facebook to monetize besides just the Facebook service. This is truly global scale the likes we have not seen before. While Google is well positioned to benefit from the offline to online advertising shift, Facebook will remain the single biggest beneficiary of this shift and the most dominant player in it. This is likely to be a “winner take most” scenario and I think Facebook is that winner. What’s more is, there doesn’t appear anyone remotely close to challenging that dominance on the playing field.

Why Apple can’t Lose the Future Services Battle

I recently found myself in a conversation with some friends (thanks again to Dan M. (@OhMDee), @zcichy, and Eric (@mobile_reach) I made on Twitter (yes, you can make friends on Twitter). Our conversation was a frequently productive and sometimes frustrating back and forth on Apple’s privacy position and what risks it may have on their future competitiveness with services, namely AI/Siri.

While Apple is not going to be a pure play services company, there is no doubt services will play a much larger role in consumer experience in the coming years. It is reasonable to believe one’s ability to compete in features around machine learning and, eventually AI, will depend on the depth and quality of data acquired to train your networks and AI assistants. So let’s start by looking at Apple’s relationship with customer behavior data.

Is Apple Getting Enough Useful Data?
Apple’s relationship with customer data has always been clear. If you agree to share analytics/diagnostic information with Apple, you are opting-in to share some data with Apple. They are upfront about what this data is used for as they state very clearly they are collecting data on user behavior which will be used to help make products and services better in the future. Pointedly, a key difference here, as opposed to many other services, is even if you opt out of sharing data, you still get to use the full features of the service. With their advancement in tactics around privacy, including differential privacy, they are purposefully anonymizing that data so any information collected — things you say to Siri, what apps you install, what news you read in Apple News, etc. — can never be tied back to the individual. The technical term for this is Personally Identifiable Information. Apple’s goal is to make it so no information collected can ever be tied to personally identifiable information. While no one will dispute Apple’s attempts to go above and beyond to protect our privacy is admirable, there are a few concerning points I’d like to call out.

First, we have acknowledged Apple is using information about us to make their products and services better. But we simply have no idea how much information is being collected or analyzed. The rub is Apple’s services are progressing (or, at least, feel like it quite often) at a rate much slower than other companies who do collect and analyze more customer behavior data like Google, Facebook, and Amazon. There is no doubt Siri still has advantages in global language support and integration across all of Apple devices while the competition still has limitations. While Siri is certainly competitive with Google Assistant and Amazon’s Alexa (none of them are perfect yet or without faults) you have to admit both are pretty advanced and comparable to Siri in many ways. Both Google’s Assistant and Amazon’s Alexa have been on the market less than a year while Siri has been on the market in five years. Despite technical advancements in machine learning and natural language processing during that four year gap that benefited Amazon and Google, there is no doubt in my mind their massive data sets on behavior was useful in feeding their backend engine to reach near parity with Siri from a machine intelligence standpoint.

Look at my brief time on Android using Google Now compared to Apple’s Proactive and now Siri apps. Both are supposed to be learning about me and making intelligent and contextual recommendations that sometimes work but more often than not, don’t. I’ve been on iOS since 2007 yet, a few months on Android yielded better contextual and relevant recommendations on a more consistent basis than both Proactive and Siri. This observation leads me to believe competing services are learning and getting better, faster by using more of my behavior data to analyze than Apple. The only thing I can think of is it’s because of Apple’s desire to have a hands off approach to my data.

All of the above points lead me to my final observation. I believe it is essential that Apple is competitive with services like Siri, and many others, against those whose business models depend on more on data collection than Apple’s. While I don’t believe Google and Facebook are the bad actors Apple portrays them as (and neither do consumers via evidence from our surveys), the bottom line is their business model, the financial lifeblood of their company, depends on their ability to sell advertising with the data they collect on customers using their service. Where Apple’s business model does not depend on using customer data collection to sell advertising, it is necessary for their model to make products and services that delight their customers. Within this viewpoint, Apple is already a trusted entity with our privacy since their business model does not necessitate mining that personal information. Based on some recent research we did, Apple customers overwhelmingly listed Apple as the top company they trusted with their privacy over companies like Microsoft, Google, Amazon, Samsung, Facebook, etc.

However, getting useful and good behavioral data is essential for Apple to make better products and services and, more importantly, compete with those services down the road. I’d almost prefer that, instead of Apple’s stance being not only to collect as little data as necessary and also to universally anonymize that data, they would simply say, “Trust us with your data. We will keep it safe and secure and we will deliver you superior products and services because of it.” I could also be satisfied with a hybrid approach where, for the most security conscious customers, Apple gives them the option to keep the existing privacy protocol as well as their differential privacy techniques, but also allow others to opt-in to giving them more data so that things like Siri, News, Apple Music, etc., benefit from that data and thus, deliver those customers a much more personalized and useful service. With some of the recent changes in iOS 10.3, I feel they are getting closer to exactly this scenario.

My genuine concern with Apple solely relying on an “above and beyond” approach to consumer privacy is we don’t know yet if this process will work and the existing evidence causes a great amount of speculation. My concern is they are mortgaging their future competitiveness around things like AI and better services holistically with this stance. Thus I view it as somewhat risky even if it seems like the right thing to do. If their approach does not work and their services truly not compete, some of their customers may use solutions from competitors whose business models open the door for them to be irresponsible with our data. If that happens, the customers lose because Apple — and I include Microsoft in this statement — have the least motivation to be irresponsible with our privacy. Their business models do not depend on directly monetizing that data. Say Google becomes the AI agent of the future and, all of a sudden, they fall on hard times and the only way to right the ship is to compromise or alter their privacy stance to keep making money. While it is only a hypothetical, it is still a valid concern if a free service monetized by ads becomes the majority services monopoly in the future.

I truly hope Apple is continuing to take a hard look at how their services compete in the market against comparable ones. Should there need to be some pivots on how data is collected and used to compete, I think the market would be OK with that. They are no doubt doing the right thing for their customers but, if going above and beyond with differential privacy yields non-competitive and thus less relevant services, then it will be all for nothing if their services aren’t used and can’t protect their customers.

Adventures in Machine Intelligence

(Tech.Pinions: Today’s Daily piece, “Adventures in Machine Intelligence” was an Insider post we originally published on December 12th, 2016. We post it today as an example of the daily content for our Insider subscribers. You can subscribe, yearly or monthly, at the page found here)

While I tend to stay away from high-performance computing and data center analysis, I’ve taken up the effort to better understand the soup-to-nuts solutions being developed for machine learning, everything from technical details around chipset architectures, software, network modeling, etc. Luckily, a large number of our clients have assets in these areas so engaging in discussions to help me better understand the dynamics has been straightforward. I’m not going to proclaim to be an expert but my technical background, as well as staying current in semiconductor industry analysis, is proving to be quite helpful. I’d like to share a few basics I find quite interesting.

A great deal of the work up to this point has been around data collection. Large amounts of data on specific subject matter, or around specific categories of data, is the key for machine learning. Simply put, data is the building block of machine learning and intelligence. Interestingly, and somewhat contrary to some opinions, it is not the person or company with the most data who is best positioned but those with the right data. A key part of this analysis about where we go in machine intelligence and how that translates to smart computers (AI) needs to be grounded in collecting the right data. So fundamentally, the starting point is data and the right data.

Lots of companies have been gathering data. Google has been gathering data from searches, world mapping and more. Microsoft has been gathering enterprise data, and Facebook gathers social data. There are a lot of companies gathering data but many are still in the early stages of making their backend data collection efforts into smart machines. In fact, very little of the technology we use is smart. By smart I mean something that is truly predictive and can anticipate human needs. We have a tremendously long way to go in making our machines truly smart. In a recent conversation with some semiconductor architects of machine learning silicon, I asked them if we can estimate a point in time in the history of the personal computer and liken it to where we are today in machine learning. Their answer? No later than the early IBM PCs. This was from folks who have been in the silicon industry for a very long time. The context for this discussion was around how much silicon needs to still advance for machine intelligence and AI to truly start to mature. So it is worth noting their comments on the early IBM days would include their knowledge that the early IBMs ran an Intel 8086’s with 4,500 transistors. Today, we have architectures that have more then 10 billion transistors.

After being convinced we still have a tremendous amount of innovation in semiconductors to get where we need to be in machine learning and AI, I started looking into what is happening today. The next step is to understand how to train a network or how to teach a computer to be smart(er). I stated above it all starts with data, good data, and the right data. Some of the most common examples of network training today are around computer vision. We are teaching computers to identify all kinds of things by throwing terabytes of data at them and teaching them a dog is a dog, a cat is a cat, a car is a car, etc. Training a network is not entirely arbitrary. It is calculated and intentional. The reason is network models have to be built/programmed before they can be trained. Leaning on decades of work on machine learning, many programs exist to train a network in some more common fields that work with large data. Medicine, autonomous vehicles, agriculture, astrophysics, oil and gas, and several others are areas where people have been focused creating this network model. Many hours of hard work and hard science go into the training of these network models so data can be collected and given to the machine so it can learn. Companies playing in this field today are picking their battles in areas where big money is to be made with these training models.

What is fascinating is how long it takes to train a network. With a modern day CPU/GPU and machine learning software, a network can be trained in as little as a few hours depending on the data set. To train a network what a dog is, with roughly two terabytes of data, could take 3-4 hours. However, there are many cases where the data sets are so large it could take several weeks to a month to train a computer just on one single thing. This again underscores the point of how far we still have to go in silicon. I’m reminded of early demonstrations of Microsoft Office running on Pentium chipsets where the demo shined because Excel could process a massive spreadsheet in 30 minutes or less. Today, it is nearly instantaneous. Someday, training a network will be nearly instant as will its ability to query that data and yield insight or a response. Both instant and in real time is the holy grail but we are many years away.

Knowing how early in this stage we are makes it hard to count any company out at this point. But it does emphasize how the right data being collected is key. Companies are right now setting the stage by getting the right data they need to carve out value in the future with AI. What is fascinating is how deep learning algorithms are helping networks learn faster with less data. Expert consensus affirms that having the largest data sets is not necessarily the guarantee of who wins in the future. Because specific network models have to be built, it emphasizes the collection of the “right data” philosophy.

What this means is companies and services can benefit from months or years of the right kind of specific data and still train a network model. Even companies who are starting today and just starting to gather data have a chance in this future leveraging machine intelligence for themselves and their customers — if the data is good.

With some context of where we need to go, silicon architectures — CPU, GPU, FPGA, custom ASICs, as well as memory — are all key to advancing technology in the data center for more efficient and capable backend systems for machine intelligence. But all are still governed by science and we have a relatively good idea what is possible and when. Which is why we know it will still be many, many years and, hopefully, a few new breakthroughs before we get even close to where we need to be for our intelligent computer future.