Weekly Stat: E-commerce Purchasing Trends

One of the many things I keep an eye on is overall trends in e-commerce. If you have followed my analysis, you know I am still waiting for a true tipping point in e-commerce. As I shared here, worldwide e-commerce is still less than 10% of retail commerce. This varies by country — markets like India and China have a much higher and more balanced percentage between online and offline. Developed countries like the US, the UK, and key parts of Europe range between 20-30% of online retail as an overall percentage. Most analysis on this subject is generated on the assumption this is a “Winner Take Most” category. Meaning, Alibaba in China remains dominant but other vendors like JD.com and other more segmented and focused competitors can carve out a niche but not challenge the dominant players. Similarly, Amazon is viewed as a winner take most in the US, UK, and several other markets where they are investing heavily in logistics. This does not mean other players will not take share, only that there will be a few dominant players and a host of smaller players. It is critical to understand the winner take most thesis applies to specific markets and is not a worldwide view. So, the winners in each market will vary heavily vs a worldwide dominant player in e-commerce.

Thre are many ways you can slice who the winners and losers may be when it comes to the point of purchase but I think an interesting way to start looking at this is to understand the dominant categories that are purchased online. From our data collection practices, I’ve charted the most recent look at Q3 e-commerce categories consumers said they purchased online in the last 30 days.

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We have quarterly data for over 90 categories but I’m showing you the top 21. With the exception of a few areas, you can sum up this list by fashion and consumer packaged goods. This is one reason why most analysis and data on Amazon has them threatening department fashion stores like Walmart and Target. If consumers start to get more comfortable ordering common and frequent CPG items online, then the likes of Target and Walmart are diminished to only the things you need in a pinch and ASAP. Obviously, if Amazon can also figure out within-the-hour deliveries, that can take some of that share. But I’m not convinced Amazon can blanket their markets with that solution.

It is abundantly clear the fashion department stores are in serious trouble. Fashion and clothing shopping behavior is clearly changing in ways many department stores can not adapt to. This chart from a Morgan Stanley clothing retail study shows some of the changing behavior in purchasing trends at department stores.

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The depth of selection and aggressive pricing strategy which made big retailers like Walmart, Target, Macy’s, JC Penny, etc., all successful are dead in the water value propositions for online commerce. E-commerce will always have more selection and better prices. The value of physical retail is being reduced to instant needs and that may not be sustainable either.

As I mentioned at the start, looking at the categories where purchasing behavior is changing is key to looking at the short and long term trends of which parts of physical retail is about to be disrupted and which may have a fighting chance.

Unpacked for Friday November 3rd, 2016

The On-Demand Fail – by Ben Bajarin

Just over a year ago, I shared some thoughts regarding the “On-Demand Economy”. In particular, why it works in China but may find struggles here in the US. I highlighted the US-based struggles in the form of two major problems:

First, US-based on-demand services lack two critical things which make many of these O2O services in China successful. They lack scale and they lack low-wage workers. The reason these services have a chance in China is because, in a city like Beijing, there are over 19 million people living in relatively close proximity. In Shanghai, there are over 22 million people. Several large tier 1 (meaning more developed and wealthier) cities have populations between 8-11 million people. China has an estimated 700+ million people in cities. Many of them living in developed cities and are considered part of the rising middle class, with higher disposable income. Contrast this with the United States where only 10 cities have populations of over 1 million people. Number one is New York with over 8 million, Los Angeles with over 3 million, and Chicago with just short of 3 million people. I make these points because on-demand startups like the ones I mentioned will require scale of close proximity urban living and this is something China has at much greater numbers than the US.

Second, China has low-wage workers. This is probably the most salient point about the contrast of the two on-demand economy markets. In China, you can not only have goods or services delivered in an hour or less but at costs only slightly above what it would be for you to go out and acquire the goods or services on your own. The economics work for not just the wealthy. Contrast this with the US where I know of a CEO of a large startup in San Francisco who pays $25 for a burrito once a week to have it delivered to his office from his favorite burrito joint. He could have walked down the street and paid $8 but instead wanted to stay in his office and work.

There has been some public news around funding rounds for on-demand startups like Door Dash, but this recent scoop on Instacart is interesting.

Instacart changed the terms of their payment structure and, it turns out, workers delivering for the company are earning less. The company claims this is necessary for the company’s continued growth. This is the lack of low-wage workers problem staring Instacart right in the face. They want to lower prices for delivery because the premium for on-demand services is way too high to ever go mainstream. To account for that, the on-demand companies were taking hits on their margins which is also unsustainable. This is the beginning of the likely downward spiral for US-based, on-demand startups as the entire system is unsustainable and prices simply can’t come down enough in this model to make it attractive to a significant part of the market.

It seems logical that there is a market for food and grocery delivery but it will likely be filled by Amazon or someone else with a better structured unit economics model. The idea is sound. The current execution by on-demand startups is not.

There is a Wider Opportunity than Large Enterprises for Microsoft Teams – by Carolina Milanesi

Last Wednesday in New York, Microsoft launched a new online chat application called Microsoft Teams. I attended a parallel event in San Francisco aimed at giving me the opportunity to demo Microsoft Teams at the end of a broadcast of the official launch event. The best way I have to explain Microsoft Teams – not Skype Teams as it was rumored leading up to the event – is it is a portal through which all team interactions happen. It is a web-based chat that adds to office 365 Enterprise and Business editions and will roll out in early 2017. It adds to current services like Skype and Yammer vs replacing their functionality, offering different options to users. While at first, Teams look very much like Slack, a few minutes playing with it shows the similarities are more on the look and feel of the portal than the actual functionalities. While you have teams and channels like you do in Slack, Microsoft Teams turns more into a hub where different tools plug into it from Microsoft and third parties that have access to open APIs.

As the presentation got under way and we moved to testimonials, it was clear who Microsoft’s target customers are: it is the large enterprises already invested, not just in Office, but in SharePoint, Power BI, Delve, OneNote, Planner, etc. It was also clear Microsoft was speaking to IT managers, not users. Microsoft Teams will be pushed down to users by IT which oftentimes sees even the most useful app met with resistance just because it is perceived as an imposition.

I believe Microsoft is missing two big opportunities: user push and education.

Letting individual users access Teams could have been a much stronger weapon against Slack vs. the IT mandate approach. Appealing to the user side and how work can be facilitated by a tool like Teams focusing on how it scales up but also how it scales down would have spoken to users more than IT managers. The only time there was a mention of users during the presentation was for trivial things like stickers and gifs. While it is true messaging has an entertaining component, I think it is patronizing to come across as implying all it takes for users to be happy is a sticker.

Education is another area where Microsoft is currently losing to Google and Apple and one that should be a priority when it comes to collaboration. It should be a priority for the short term opportunity of deployment but, more importantly, for the long term opportunity to hook millennials to the platform. Microsoft told Mary Jo Foley that Office 365 Education will eventually get Teams but I strongly believe the right way would have been to make it available in the Student Edition of Office. Once again, Microsoft is thinking top down rather than bottom up.

Overall the event seemed a bit of a contrast to the Devices event from the previous week where so much attention was given to individuals vs enterprises and creators vs employers. The focus was on empowerment of the individuals which ultimately is what Teams does but it did not come across as well in the positioning.

Fitbit and GoPro’s Results Highlight Challenges of Niche Hardware Companies – by Jan Dawson

I wrote a column last December about the challenge of being a one-trick pony in the consumer technology market. Two of the three companies I cited as examples in the article were Fitbit and GoPro. At the time, their businesses were generally doing well but the risks associated with being a niche hardware vendor have come home to roost at both companies since. Fitbit’s growth has slowed significantly, squeezing its margins, while GoPro has been shrinking markedly and losing money for four straight quarters.

Though each company has its own problems, they share most of them. They both provide hardware in categories with limited addressable markets – both fitness trackers and action cameras are niche propositions. In both cases, they also suffer from the combined effects of device abandonment and low upgrade rates among their bases. And both companies are facing low-end commoditization as well as encroachment from increasingly capable smartphones and other general purpose devices like smartwatches.

In both cases, the companies have dismissed concerns over saturating markets but it’s increasingly hard to ignore that these companies dominate their respective market segments, yet struggle to grow. The excuses for poor growth change every quarter, but the performance trends are remarkably consistent. Both companies have attempted to diversify into new areas – Fitbit into corporate wellness and GoPro into media. But neither company’s strategies are yet bearing meaningful fruit. Indeed, neither even breaks out revenue from these new categories in its financial reporting.

The future looks somewhat brighter for Fitbit, which continues to be profitable and is at least growing modestly. GoPro projects another year of losses in 2017, though also a return to growth. The challenge with GoPro is it’s missed its own guidance and analyst expectations so often recently, it’s hard to take its guidance seriously. The big question around both companies has to be whether they are best suited continuing to go it alone or whether they would do better as part of bigger consumer technology companies that could wrap ecosystems around them and leverage economies of scale and scope. Both are certainly considerably cheaper for potential acquirers at the end of the week than they were on Monday.

The Great Tech Wall of China

It is hard to not talk about China in so many industry conversations today. China has emerged as one of the most significant markets for technology we have ever seen because of the sheer size of their consumer market but also because of their hunger for technology and the continued rise of economic power to spend on technology. For the better part of the last decade with PC OEMs, it was fairly easy to get into and compete in China. Global companies had stronger brands and therefore the Chinese market erred toward a known credible entity to spend their limited resources on vs. the risky white label brand. Fast forward to 2016 and the entire atmosphere has changed. China is so large and so lucrative, many former no-name brands established themselves as mainstream players in the Chinese market. Huawei, Xiaomi, Oppo, and Vivo are the main brands today whose financial and brand success has been entirely thanks to China and, in reality, still only in China.

In a number of recent technology studies that have come out of China, the brands I mentioned above have risen in popularity as well as provided a strong brand sentiment and aspiration in the region. It is no longer embarrassing to hold a local Chinese brand and several are beginning to rival Apple as far as aspirational purchases — but at more affordable prices. Recent evidence from local studies suggests even the younger demographic, who used to go to massive lengths to get an iPhone, are choosing a high quality, yet affordable brand like Oppo or Vivo and not aspiring to iPhones as much.

China’s local manufacturing boom is continuing to get better and better at producing quality consumer electronics and it is the fuel behind local brands starting to create massively appealing hardware designs at reasonable prices. This is clear in smartphones but is starting to bleed into all other categories of electronics in China. My conviction is, China’s consumer electronics scene will continue to be dominated by local brands. Part of this conviction comes from what we see and hear from foreign technology brands and the trouble they are having competing in China. The Chinese government is unquestionably starting to tighten the reins and control more of what happens in consumer electronics as well as who the key players are in the area. We have even heard rumblings they want their own state-controlled operating system to provide an alternative to iOS and Android. If there is any market where this could work, it would be in China and, if the state wills it, it is certainly a strong possibility.

It is this tightening of the nation state which is contributing to this great tech wall, making it increasingly difficult for foreign brands to enter China and compete. This wall may also be playing a key role in keeping Chinese companies from leaving China as well–at least for now.

China remains a market unto itself. It is big enough companies can have incredible fortunes and never leave the country. The unique environment that is providing success in China has yet to lead to any major Chinese OEM breaking out into a market outside of China or the surrounding SE Asia region. While a small percentage of Chinese OEM exports are making their way to India, it is the only other market with even a hint of success, but only in the extreme low-end. Chinese smartphone brand strategy here is to dramatically undercut the price of the locals and Samsung and hope for the best. This is a hard fought strategy and Chinese vendors fighting the razor thin margin game may find themselves out of business due to the lack of sustainability in this strategy. However, if they can succeed at establishing their brand, and this should be the ultimate goal, then it opens the door to other categories where, collectively, they hope to see better overall margins.

Chinese consumer tech companies are learning to scale in what is possibly the hardest market in the world to scale based on sheer size and costs. Chinese companies are not just perfecting their ability to scale in China but to also do so with small margins. This strategy is why they seem poised to meet the needs of a global population with aggressive price points. But we are still waiting for a Chinese brand, other than Huawei, to have any kind of significant volume outside of China and also at prices higher than $200 USD in volume.

My core thesis for Chinese consumer tech companies is they will follow a path like their predecessors from Asia — Japan and Korea. But the brand development and brand establishment strategies are still gaping holes in Chinese OEM strategies I’ve yet to see them take seriously enough. As I’ll share on my piece on Monday, these companies will live and die, not by the design of their technology products or the price at which they sell, but by how strong their brand becomes.

Mobile vs. PC Commerce

One of the main stats we track is what is happening globally with m-commerce vs. PC/desktop/notebook browser-based commerce. In many developed countries, we are yet to truly see the shift from desktop-based commerce to mobile-based commerce as the majority of transactions. Perhaps even more interesting to track as a part of this analysis is how much headroom e-commerce has to grow as a part of overall purchases worldwide. Here is the current share of e-commerce as a percentage of retail transactions and the forecast from eMarketer.

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As you can see, e-commerce has tremendous upside globally. It is one of the main reasons to take the long view of companies like Amazon, Baidu, and others who are poised to dominate the share of online shopping in many parts of the world.

Our belief is the mobile device will be the catalyst that will drive e-commerce to continue to aggressively take share from physical retail. This is not to say physical retail will not participate in this trend but that the mobile device will become a central gateway to purchasing many of our most common goods from both online and physical retail outlets. Part of our thesis here is because of our conviction of things like Apple Pay and Android Pay to eliminate many barriers to friction in transactions across the board. As consumers become more comfortable with mobile wallets, we believe this will act as a catalyst to drive a hyper growth cycle of e/m-commerce.

Another part of this thesis is built from what we see in markets like China, where mobile wallets within WeChat and AliPay are driving the same kind of cycle we think mobile wallets can drive in the US. While PC penetration is nearly 60% of the online population in China, purchasing from the mobile device has overtaken PC based e-commerce thanks to mobile wallets. In India, only 10% of the online population has access to a notebook or desktop and the rest of the online population uses only a smartphone as their primary computer. This is true of markets like Indonesia, Vietnam, Philippines, etc., where mobile-only is the norm.

As of this latest quarter, here is a snapshot of a few select countries and the percentage of consumers who said they buy a product online each month via either PC or mobile device.

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As you can see, the more developed countries with a larger and more mature PC (desktop or notebook) installed base is still seeing the majority of online transactions from traditional PCs whereas, the more mobile-first or mobile-centric regions have more mobile e-commerce transactions than desktop or notebook ones. However, it is worth noting that, a year ago, both the US and the UK were in the low 20% range of mobile commerce and are now well over 30%. We think when mobile wallets are more widely accepted we will see a sharp S-curve take place in mobile commerce vs. the slow steady line we see today. It is also worth noting that the younger millennial demographic is already much more mobile-centric in their buying habits in countries like the US and the UK. Millenials are already well over 50% who say they engage in monthly buying of goods from their smartphone. Highlighting another element central to our thesis that younger generations in developed parts of the world are showing many similarities to other mobile-first consumers in other parts of the world.

Again, this is not to say that only Amazon, or Baidu, or other online market places are the only winners here. It is a recognition that even physical retail must stay on the ball or risk losing customers. WalMart, for example, is struggling to figure this out as Amazon continues to eat much of their business. Retail used to be about breadth and depth of selection and price as a basis of competition. Hence, WalMart’s advantage for the better part of the last few decades. However, every single advantage big box retail offers is destroyed by online merchants like Amazon or Baidu. Retail has to change if it is to compete.

This was a central theme from the Money 2020 conference I presented research at last week. The value of retail needed to move to more customer experience-based vs just breadth of selection and price. It’s hard to see how a WalMart, Macy’s, or Best Buy survives this transition but companies like Starbucks, which offer “order ahead” via mobile, or Home Depot, which offers order ahead or inventory searching in store for contractors, are adapting nicely. Home Depot, for example, now sees 40% of their online store transactions coming from in-store via their app. This is fascinating since last year at this time, it was only 10%. Contractors are seeing a huge need met via order ahead and in-store ordering at other locations when the current doesn’t have stock. These are two examples of how mobile adds a new dimension to physical retail and the kind of enhanced commerce experience physical retail needs to develop if they are to stay competitive.

If retailers think Amazon and others threaten them today via mostly PC-based commerce, just wait unitl they see what happens when mobile starts to play a bigger role.

Reflections from a Day with Microsoft and a Day with Apple

Getting Thing Done vs. Doing New Things – by Ben Bajarin

My friend Benedict Evans had a great post a while back where he outlined how, when a technology is toward the end of its cycle, it tends to be at its best. This sticks in my mind as I reflect on the last few days with both Microsoft and Apple releasing some of the best PCs we have seen in some time. In fact, if you look at the modern PC lineup from all major PC OEMs overall, they are they best we have ever been.

This makes sense for a category over 30 years old. By now, we know exactly what people do with these devices and are able to focus innovations in hardware and software on the tried and true behaviors of PC users. Here again, Steve Jobs’ metaphor of the PC being a truck is proving true. When you look at the modern innovations of trucks — how much they tow, innovations in the truck bed for more durability and heavier loads, the lowering of the tailgate with a gesture, etc. — they are optimized for workflows of a very specific type of worker. This is exactly what we are seeing with the PC category.

The focus of all hardware and software in the PC category is not about doing new things. It’s about doing the things we need to do even better. There is a hyper-optimization trend for the specialized user who values things like a full tough screened all-in-one computer, or pen input, or a TouchBar. But we must not forget this is a very small segment while also a valuable one. It makes perfect sense for Apple and Microsoft to focus their innovations in hardware for a group who values it. This, again, is exactly how trucks are made and why trucks are not cheap.

We are expanding our tools for computing so that we are now in a space where the type of job you have will dictate the type of tool (PC) you use. This reminds me of hammers. I have a hammer. It is a very basic hammer and, as far as hammers go, there is nothing special about it. My brother-in-law, who is a carpenter, has a different kind of hammer. His hammer is specialized to the task he does every day and makes his life easier. He has a framing hammer which has a longer, curved handle, larger head, better weight distribution to drive framing nails into studs with less effort, yet innovations in wood, carbon, and steel make it lighter than my hammer. It also costs $100. He hammers nails every day and I hammer maybe once a month. Hence, I’m not spending $100 on hammer. Yet, while he could get away with using my hammer in his day job, he uses a tool better suited for the task. This is exactly what we have now in the PC category.

When you hammer nails all day, you look at framing hammer features and functions and can see why they are valuable to you. You are self-aware of your pain points and what products have features which speak to you and help you do your job better.

Looking back, competition is what got us here. It was Microsoft’s desire to respond to the competition of the iPad that led them down the path of an ecosystem of touch-based PCs in the market today of all shapes and sizes. I’d argue it was competition from touch-based PCs which led Apple to the TouchBar. All desktops and notebooks used to look the same in form and function but now we have a diversity of the portfolio, each focusing on a piece of the pie instead of the whole pie itself. This is good for everyone who needs a PC on a daily basis to get stuff done.

From a hardware standpoint, what I found interesting was how the difference in philosophy between desktops and notebooks and between Apple and Microsoft have led the Mac to be on an island all by itself. No touch screen, but TouchBar. Which, in my mind, means the iPad Pro is what is actually competing with Windows PCs and tablets that are pushing touch experiences and software as a part of their work flow. If consumers compare the tools this way, I think things may get very interesting from a sales perspective.

Now, thinking about the future. Everything from this week is about getting things done, not doing new things. The big question facing the industry is, what’s next? Inevitably, letting humans do things not possible before with any previous tool is part of what is next. My gut says it is something in the AR/VR/AI spaces. This is where Microsoft’s announcement around Windows that the upcoming release will support Windows holographic VR and AR experiences is interesting. Arguably, by the end of next year, Microsoft could have well north of 400 million PCs in the market capable of having an AR/VR experience with hardware built on the Windows Holographic platform which can start as low as $299. As software developers start enabling humans to do new things, then we are breaking new ground. This is exciting and the next decade is going to be very interesting but the PC, as we know it, is nearing its end. Parts of the old will still linger in the new but it will be all the new things made possible with the latest tools that will lead us to look back at PCs of old and reminisce.

What Was at Stake this Week for Microsoft and Apple? – by Carolina Milanesi

Ben focused on the touch approach of these two companies and the impact of what was announced this week might have on the market. I would like to take a moment to talk about how different these two events were as far as the impact they will have on the two brands.

For Microsoft, we were at their device event yet we were asked to imagine what we could do with Windows 10 and with the Creators edition in particular. It took almost an hour to get to the new devices in Microsoft’s attempt to continue to balance a platform for all the partners and their own portfolio of devices. Overall, however, the day did a lot to lift the Microsoft brand and Windows ecosystem.

Paint 3D and the whole focus on bringing 3D to the masses; People, the new app that puts people at the center of your communication flow; HoloLens in B2B and B2C — all point to a Microsoft really focusing on setting the foundations for the next era of computing and investing in becoming the go-to brand for the next generation. As I mentioned on Twitter during the event, it is so refreshing to see Microsoft looking ahead to the next generation of users without letting the current users drag them down and limit their possibilities.

Surface is the best showcase for that next vision. A vision that started with Panos Panay’s team rethinking the PC in 2012. A vision that, while from a hardware perspective required a few iterations, it was one others within the Windows ecosystem as well as Apple and Google validated by launching similar products. What we saw yesterday however, is even more powerful than the first Surface as software, apps and hardware really came together with the Surface Studio to an extent we have not seen before. Validating Steve Job’s vision: “People who are really serious about software should make their own hardware.”

So let’s forget about the fact the Surface Studio might not be for everyone because of pricing and the focus on drawing/sketching. Let’s focus on the excitement the device is bringing to the Microsoft brand and Surface by drawing people into stores. Let’s look at the impact the Surface Dial might have in having developers think of how to take advantage of it. Finally, let’s think of the people that might end up considering a Surface Pro because of Surface Studio.

At Apple, the story was different. Apple did not need to re-energize its brand. Nor did it have to show they can deliver a piece of hardware very much in tune with its software. Apple needed to deliver a new MacBook Pro many have been waiting for. Apple could have easily followed the trend and delivered a touch-screen enabled MacBook Pro – at the end of the day they said they would never do a pen for the iPad until they did a pencil. Instead, they remained true to their idea that, when you have a keyboard, touch should be close to where you fingers are most of the time — is close to the keys, not the screen. So the MacBook Pro gets the Touch Bar. Apple reinvents the MacBook Pro, not its brand or its vision.

As I looked at the Touch Bar, I started thinking about how iPad Apple reinvented Mobile Internet Devices and Tablet PCs by focusing on apps and building on the ecosystem they created for the iPhone. Through apps, we did things differently. The Touch Bar has the potential to do the same for the MacBook Pro. Touching something with my finger in the same way as I would do with my mouse does not necessarily change my workflow. But we saw today how Photoshop and Final Cut Pro took advantage of the bar to perform common editing tasks differently. This is the power the Apple ecosystem has over Windows. While the Mac app store has not been as vibrant as the iOS one, the Touch Bar might ignite more interest, especially as the MacBook Pro is now clearly positioned as a higher-end device with users that are prepared to invest more in their tools both for work and play.

Apple also had to explain where the MacBook Pro and the iPad Pro sit and, although the rationalization of the story here might be a little more difficult to follow, I believe it boils down to one thing: Apple offers choices. Their computing offering spreads from the iPad Pro 9.7″ all the way to the MacBook Pro 15”. This explains the pricing we saw today – aside from the fact Apple might also want to make a statement this was not a simple refresh.

Two school of thoughts on touch, no right or wrong. Two brands that, despite their differences, have done a lot this week to show that the PC market still has innovation and, while sales will not bounce back overnight, we might see much more engaged users going forward.

Painting a Clearer Picture of the Global Smartphone Market

Oftentimes, our peers in the analyst community put out press releases on category and vendor market share numbers and the true insight of the market gets lots in a set of very generic statistics. I understand why they do this. They make them fuzzy on purpose so people inquire about their data and pay them for the broader cuts. My frustration with this approach is it almost always leads the press astray with a headline because the media rarely understands how to ask the deeper questions. So a headline like “Nobody is buying an Apple Watch” gets published when it is total nonsense. I cleared this up in this piece where I outlined why we are revising some parts of our model for wearables going forward. That was just one example (of many) that happens when market share numbers get reported. In an ever increasing effort to more thoroughly educate our readers, I’ll make this point. Statistics are not insights. The insight comes from how those statistics are interpreted and the deep truths of what is happening in the market and why are communicated. Prepare yourself for a flood of similar headlines around the smartphone market.

I’d like to make a few generic smartphone market points then focus the rest of the article on what is happening in China, since that is where I foresee most of the disingenuous data will come from.

Globally, there are only six brand names worth keeping an eye on right now. They are, in no particular order: Samsung, Apple, Huawei, Xiaomi, Oppo, and Vivo (I am leaving LeEco out for the moment until I see where they are in six months). Oppo and Vivo are subsidiaries of a larger Chinese company called BBK, who also has a financial interest in OnePlus. Only Samsung, Apple, and Huawei sell more than 100m smartphones per year and it remains to be seen if any other brand can cross the 100m annual threshold.

This chart, which I have adapted from Morgan Stanley research, paints what I think is the best look at understanding a critical point about the smartphone market — pricing.

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As you can see, the chart paints a picture of who makes money and who barely does, even if they ship large volumes of smartphones each quarter. This also tells you where their focus on the market is and thus, where their growth can come from.

Apple sells annually more than any other brand in the premium tier of the market. They have a near monopoly on the high-end and that is extremely unlikely to change anytime soon, if ever. Only Samsung should even be considered in the conversation for high-end smartphone sales. For them, that equates to around 60-70 million high-end phones each year (potentially declining) to Apple’s 180-190m high-end phones sold annually (potentially increasing). For Apple, in nearly all the big markets where they compete, they have nearly saturated the number of customers who can afford north of $500. So, their cycles are now largely replacement driven or driven by switchers. Either way, it’s a slower growth curve than when they were adding tons of new users. This is why analyzing Apple’s growth prospects now largely depends on understanding replcement cycles, payment plans, and other dynamics of replacement markets.

Interestingly, it appears global smartphone shipments may be up in 2016 which is contra to what most were forecasting early on. I attribute this to a much more predictable upgrade cycle in the developed markets than what was anticipated in early 2016. This, however, is leading many to believe 2017 may be more of a down year and most consensus data we see has people shifting the dynamics that were leading to negativity toward 2016 to 2017. Then again, look for accelerated growth overall for the category in 2018.

When it comes to a big key market like the US, we are seeing what looks like a bigger upgrade cycle this fall than originally thought. Which means it is possible next year’s cycle is not as strong. For Apple, the idea of a 2017 super cycle may be more myth than reality. Right now, China is the most interesting market to talk about as some new developments are starting to take shape.

What will get missed in a lot of the China market share forecasts is the biggest factor changing the shape of market share is tier 3-6 (the lower income tiers of China) are starting to contribute to the growth of China as a whole. When you look at brands I mentioned before like Oppo and Vivo, which look to having impressive gains, they are acquiring those gains given their strategy to attack the tier 3-6 parts of China with offline stores and nicely designed phones and specs in the $200-$300 range which is largely considered mid-range nowadays.

The rise of Oppo and Vivo are showcase examples of a major theme about how developing a strategy for the next 1-2 billion consumers who are yet to get smartphones in the least developed parts of the world is a completely different strategy than how you go after the current most profitable billion plus consumers with more mature and refined interests and greater disposable income. Only a handful of companies can do this and globally I think Huawei is building this strategy as they look to Africa and other continents with hundreds of millions of people yet to get a smartphone. This dynamic will likely boost the market share of certain vendors but it will be important to know what price point they are shipping in volume as it will be in the lower tier. Apple is clearly not going after this audience and it is unknown how Samsung will go after them. Both of these companies seem to be hunkering down to go after customers who don’t want to compromise and that self-identification only comes with time as consumers themselves learn what they want.

An interesting example of this is in India where it is clear Apple is not the favorite (due to their high prices) to see a big share gain any time soon. However, in a recent study my firm conducted in India, we asked which brand consumers felt was the market leader. Overwhelmingly, 61% of consumers in India said Apple was the clear market leader citing a range of reasons, mostly around software quality, design, etc. They acknowledge Apple is the best and said Apple is the phone they WANT to buy. Yet, they still are not going to, for a variety of reasons our research indicates Apple can solve.

This is a prime example of my thesis that, as portions of consumers in immature markets mature, they will slowly gravitate toward Apple. Even if the growth happens incrementally, I’m convinced Apple will still grow their unique consumer base, which could hit a billion users in the not too distant future.

There will always be tiers of smartphones but I maintain the strongest fuel for growth is brand. We can bet on those who have strong global brands. Companies like Xiaomi, Oppo, and Vivo are attempting to make a global brand but they will live or die on their success to become a brand consumers trust and love.

There is no question China is a very big market where we will see many companies attempt to create a global brand. Right now, Samsung, Apple, and Huawei remain the most fundamentally sustainable global brands, with a variety of different market nuances helping each independently. The main story to watch is if Vivo, Oppo, Xiaomi, and perhaps LeEco can break free from the cutthroat China market and become global brands. This is the hill they have to climb and it is going to be more costly than I believe they anticipate.

One last point on pricing. I maintain that, if you start in the low-end/low mid-range, it will become nearly impossible to ever go upstream too far. Once you sell a cheap phone, I think a “cheap” stigma will always be on the minds of consumers and will be very hard for those brands to compete in segments with Apple and Samsung. This is still a thesis but we have yet to see evidence it is not true in computing segments. I’m happy to be proven wrong and will point it out as a key case study if it happens.

I leave you with my estimates for Q4. While the line looks bad for Samsung, our research indicates it is likely they can recover from this as most of their customers will remain loyal. It could impact their growth prospects, however, which is a key dynamic to keep an eye on.

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Securing our Internet of Things

If we learned one thing from the DDoS attack that took down many websites on Friday, it is we still have a long way to go when it comes to securing all the connected things in our lives. This particular attack used insecure devices like IP-connected cameras with weak security as tools to perform the attack. This type of focused attack is one way to interrupt internet service and could be used to take down, not just websites, but our payments grid or any number of things which could wreak significant havoc on our society. Let’s hope this attack serves as a wake-up call for the industry.

This whole ordeal caused me to think about the range of connected devices I have in my house and wondering about their security. Most of the devices I have, I have personally secured and I don’t have my DVR (one of the types of IoT devices used in this attack) connected to the Internet. In most cases, I know the security I have in place for my IoT devices but one in particular I had to look into more deeply–my solar panels. Our solar array is connected to our network so I can monitor how it is performing. We secured the log-in with a strong password but they can also be remotely accessed in case we need support from the company we purchased the system from. It was this remote access that I was not aware of the security measures in place.

In many cases, I was fairly aware of the security measures. I’m guessing most consumers are not. The challenge the industry has is to bear the burden of taking the necessary steps to provide increased security and encryption of these devices because the reality is many consumers will not know to take additional measures themselves.

Apple outlines the security measures in place for Homekit devices and this is a solid initiative to provide a framework for security. However, many of the companies selling connected refrigerators, thermostats, IP cameras, coffee pots, etc., are likely not to use just Homekit but other emerging standards as well. The burden of responsibility is on companies providing these consumer products to enforce either stronger passwords or two-factor authentication (or both) in order to make sure consumers are taking the nececcesary steps to secure their IoT devices so they can’t be used for malicious cyber attacks.

Interestingly, in this case, it wasn’t necessarily the fault of the brand selling the IoT products but the component company behind them. Hangzhou Xiongmai Technology admits its products were used in the attack as a malicous worm exposed the weakness in the default security in many of the products their components are found in. The company has said they have sinced patched this vulnerability and consumers should update their firmware if they haven’t already.

My concern with the state of the market right now is the companies rushing to capture a part of the growing connected and smart home market are not fully thinking through the implications of dozens of connected devices in consumers’ homes they may not secure correctly. Consumers, although they will say they want and understand the value of security, rarely take the steps to ensure their own security and privacy. This is why it is so important for companies to bear the burden of this for consumers where they can or making sure they help consumers step up the level of security around their connected products.

Apple and Microsoft’s Battle for the PC Market

Next week looks to be an interesting one. Microsoft is having a hardware launch event where we expect new Surfaces to, wait for it, surface. Apple is also having an event the day after, which we assume is to update the Mac line.

When we look at the trajectory of the Microsoft Surface, it is clear they are going after the same high-end professional audience Apple has had a monopoly on for some time. Many of the things I predicted for the PC market are starting to happen.

Things like, we are seeing ASPs rise. In fact, premium Windows hardware, not just Surfaces, are starting to gain in share against the Mac in quarterly sales. Part of this includes a steady rise in high-end gaming systems but, even as consumers and enterprises start to refresh their PCs, we are seeing them spend more money not less. The behavior behind this is due to PC buyers knowing they will hold onto their machine for 6,7, or even 8 years and are therefore willing to spend the money to make sure it lasts.

We are slowly seeing PC consolidation. Acer is not the player they once were. They are falling slowly and their share is being taken by more established brands. White box, or less established brands, are shrinking in sales again as the market consolidates around brands.

The PC industry overall continues to decline as we are still waiting to see where the bottom is in annual shipments.

We suspected the dynamics were changing around these points and that is indeed what has happened. The market for people who still need PC hardware is likely around a billion, maybe slightly more. That is not a small market and a reason why it is a key market and will remain so for some time. Humans everywhere still work, learn, play, and more on these devices. We simply don’t refresh them as often as we used to. They last longer, the technology is good enough, and a host of other things have changed the dynamics. They are still important. But they are no longer the main computer device in consumers’ lives.

Microsoft got into PCs about four years ago and has been going along with roughly ~1m units of sales per quarter but making solid margins and strong ASPs. Microsoft has targeted the high-end from day one and their partners tend to target the lower price tiers for their volume sales. Microsoft is, in my opinion, the one PC brand that can actually challenge Apple. I say this for a few reasons.

First, they have been building a strong PC brand around Surface. We continually see the Surface brand rising in sentiment among consumers and, in particular, millennials. I have said this before — Macs are a dominant PC brand with the younger cohort and enterprises everywhere will tell you they can’t hire millennials unless they offer or support Macs. Microsoft is the only other brand besides Apple where we see strong sentiment and purchase intent from this group. But Microsoft is strengthening their case in enterprise as well. They also are showing up on the IT menu of offered devices, much to the chagrin of their partners. Microsoft, with their 4th generation of products, is viewed as a credible maker of quality PCs and that is what is driving their upward trend.

Second, the first party hardware group inside Microsoft is very much like a mini-Apple, culture wise, inside Microsoft. The more time I spend with Panos, who runs this group, and the team he has assembled, the more I see things that resemble the Apple way of doing things. This continually impresses me and is a key reason I am bullish on the Surface family of PC hardware.

Both Microsoft and Apple seem to be positioning themselves to go after the same target customers. Those who value design, experience, integration, ease of use, brand, and are willing to spend more than others to get the things they want. Apple customers don’t settle, they don’t compromise, and I’m finding similar profiles of the growing customer base for Microsoft Surface.

My keys for both Apple and Microsoft next week is to show me they understand the customer they are going after and provide unique innovations for this group of people who still know and love their PCs because they use them for many hours every day. I want to see unique software for this form factor and how both will foster novel development of software from third parties for both their high-end PCs. Mobile platforms have seen most the focus of third party developers but both Microsoft and Apple need to foster different software that caters to the everyday PC user.

The everyday PC user is a key and valuable demographic. They want to have tools which focus and cater to them and their workflows. This is what I hope the emphasis of both new Surfaces and new Macs includes.

Weekly Stat: Top Brands Fueling iPhone Gains

Last week, we completed our fall smartphone market study and came away with a pretty clear picture of the market and confidence outlook for the next year. You can read the top level results at our company blog here.

One of the things that has been top of mind the past few years has been the dramatic increase in customers leaving competing brands and ecosystems for the iPhone. Years ago, a colleague named Carl Howe, who was then an analyst at the Yankee Group, put forth the theory of “The Android Leaky Bucket”. Carl’s position was Android’s ecosystem was less sticky than iOS. Consumers who owned Android devices tended to shop with more of a focus on hardware capabilities than any specific pull of the Android OS when they looked for new devices. His conviction was loyalty in the Android ecosystem was far weaker than loyalty to iOS.

I agreed with Carl then and I still agree with him today. His theory has played out and we have been able to track and quantify it for the past few years. Since the iPhone 6/6 Plus cycle, the leak in the Android bucket got a little larger and is leaking faster than before. We also noted a significant correlation of length of smartphone ownership to the likelihood of switching to iPhone, which I point out in our findings. Our interpretation of that point is, the longer consumers have owned a smartphone, the more refined their interests become. At that point, the iPhone, combined with the proven lack of loyalty to Android, begins to become more attractive.

When looking at the iPhone as a continued long play for Apple, I’m convinced this way of understanding the story (over time, as consumers value basis refines and matures, the iPhone becomes more attractive) is a key way to look at Apple’s prospects to grow their base. This is a patient game Apple is playing and they are waiting for customers to come to them, which, while appearing to be contrary to popular wisdom, is exactly what is happening in many markets.

We dug into the catalysts for switching brands and ecosystem quite a bit in our study but I wanted to share the top brands consumers are firing in order to hire the iPhone. We architected a series of questions that allow us to look at brand switching by year but, at a high level since 2007, these are the top brands consumers said they left behind to buy an iPhone.

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It is quite interesting how the corporate factor worked so well for Apple with iPhones when it did not work out well originally with PC hardware. As the market moved away from Blackberry, Apple benefitted the most. Gains coming from Samsung were predictable but also a much smaller part of the yearly switcher pie as Samsung’s brand loyalty and re-purchase intent remains the highest of all other brands. This has only changed slightly since the Note 7 incidents and we do not expect dramatic defections from Samsung to iPhone any more than is usual per the brand switching rates we currently see.

While I can isolate brand switching data by year, this chart paints a picture of the brands consumers have left to jump into Apple’s ecosystem since 2007. One quite fascinating point is the top write-in answer for “other” was Verizon Droid. Lots of consumers got their first smartphones around the Verizon Droid timeframe and, while at the time it was viewed as negative for Apple, the data suggests this actually helped Apple in the long run as those customers onboarded with Android but, over time, a good chunk of them switched to the iPhone.

Overall, from the depth of market data we acquired from US and UK consumers, we stil believe there are gains ahead for Apple. The Android Leaky Bucket theory remains intact and we are observing points of time in the year when the leak is slow and times when it is faster.

Long Live a Free Twitter

Many of you know my love of Twitter. A major part of my role studying this industry is to gather information and stay on top of everything as close to real time as it happens. Twitter plays a significant role in my daily workflow to do that. I don’t know exactly how much time I spend daily on Twitter but it is significant. Just look at my top app in usage the last 5 days.

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Twitter’s journey has been an interesting one. In the beginning, we thought they were a social network. Now, they say they are a news service. In reality, both are true but news may make more sense to more people. What makes Twitter fascinating is the experience that everything happens first on Twitter. Whenever a major news story happens, it seems to go big on Twitter first then everyone else catches up. If I’m not on Twitter and I hear of something major, the first thing I go to is Twitter to see what is happening and, more importantly, what PEOPLE are saying. The voices on Twitter are broad and dynamic. To read a story on a news site, I get one voice whereas, on Twitter, I get many voices in near real-time — both professional journalists and regular people. It is the most unique blend of news and conversation I’ve ever encountered.

I do, however, recognize not everyone uses Twitter like I do. Their active user base is somewhere in the 300-400 million range with a potential audience size of ~700-800m logged out users )those without an account who still see content from Twitter in some fashion). From data we see every quarter, we are able to track a range of behaviors related to Twitter. Compared to other social networks or news apps, Twitter has a relatively engaged base. 21% of consumers say their average daily time spent on Twitter is 30 minutes to one hour and 19% say they average 1-2 hours per day. This ranks among the top of all social networks we track in terms of engagement. So, while Twitter’s base is not as large as Facebook’s, it is as engaged or more so than most of Facebook’s active accounts.

The top five most common actions, from the most recent Q3 2016 Twitter behavior data, in order:

– Read a news story (by far the most common activity)
– Liked a Tweet
– Watched a video (not a live stream)
– Looked at trending topics
– Clicked on a tweeted link

What you notice about these activities is none of them are actually tweeting. It confirms my early analysis that Twitter is more attractive to the mainstream as a consumption service than a broadcast service. This seems obvious now but much of the criticism of the platform several years ago were people claiming the service was useless because “who cares what I had for breakfast today.” This completely misses the point that broadcasters have reasons to broadcast. They report news, are celebrities, etc. and. for most people, Twitter is simply a near real-time medium to consume that content from broadcasters. Twitter is not actually different from a magazine, website, TV show, news program, etc., with the exception that it is more real-time and allows for the possibility for two-way communication. Again, unlike any other medium.

The other interesting behavior in the top five activities is looked at trending topics. This behavior has grown more over the past two quarters than any previous time since it started being tracked. In both Q2 and Q3 2016, it grew 60% QoQ in its rank as a core behavior. It was not in the top 10 prior to these two quarters. Which, again, suggests the mainstream is embracing Twitter as a content consumption platform.

Many people seem to think Twitter needs to be bought. In my opinion, only Facebook or Google made any sense to buy it and, if neither were interested, then let Twitter be free. Those two companies could have let it keep on doing business as usual and just slotted it into their advertising buying program and added Twitter metrics to their own to sell ads. Considering both these companies are off the table, I’m inclined to want Twitter to stay independent.

Lastly, perhaps the most interesting thing of late is Twitter starting to broadcast live content. You can watch a Thursday night NFL game via Twitter. I watched the US presidential debates last Sunday via Twitter. Recently, Bloomberg West started streaming on Twitter. The list of streaming content options on Twitter is increasing and the feedback I am seeing is extremely positive. I honestly thought it would be more of a gimmick when I first heard Twitter was lining up streaming deals but, having experienced it, I like it quite a bit more than I thought. Many others I talk to seem to agree. It seems like we active Twitter users were adding Twitter, via a second screen, to our TV watching when in reality we needed to add TV to Twitter. I really believe Twitter is on to something here and I expect their engagement metrics will only accelerate their ability to line up content.

The trick is to capture the new eyeballs they get from live content and turn them into consumers of more media on the platform and get them to use the service more. This has been the issue for Twitter for some time and my sense is, this opportunity around live is their best chance to grow their user base. And, for the moment, I am convinced their best chance to execute on that challenge is to stay independent.

The Weekly Stat: Forecasts for VR and AR

Our firm tends to stay out of the forecasting game for a variety of reasons. First, they almost always change. When we do a forecast, we attempt to come up with a reasonable set of assumptions and scenarios to explain a best, base, and worst case scenario for the growth of a segment. The caveat is, things will always change, so the updates to the forecasts and scenarios in any given year are the most valuable part of this work. This is why we tend to focus more on the short term when forecasting rather than the long term. Most forecasts that go five years out will be wrong and will need to be adjusted annually.

We are, however, perfectly happy to comment and share our thoughts on other people’s forecasts and articulate where we agree or disagree with them using our research. So today, we will look at some broader AR and VR forecasts from third party sources.

I looked around at a range of estimates, from larger Wall St. Hedge funds and third party firms like Gartner and IDC, to come up with some kind of consensus for projected revenues for VR and AR. From what I’ve gathered, this chart reflects the ranges of a number of sources:

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The chart reflects total revenue from hardware and software and, as you can see, there is much more optimism around Augmented Reality than Virtual Reality in terms of market size and growth. I fully understand this assumption. An augmented reality product allows you to still be present in the physical world and, so the theory goes, you can use it for more applications throughout the day. VR, at the moment, is being positioned more within a core “immersive” experience set of functions and, therefore, the assumption is less time will be spent using VR than AR in the course of our day to day lives.

There is no hardware path that necessarily suggests these two dynamics stay separate. I can see hardware capable of both AR and VR experiences but that is technically not possible yet and won’t be for some time. The blending of these two experiences is often referred to as mixed reality, yet no one seems to be making a separate forecast or breakout for true mixed reality devices, instead lumping them into the AR category. I’m not sure I agree with this.

The below approach is one I’m fond of and, while I don’t have the space to outline all the scenarios for each of these forecast assumptions, it gives a look at some reasonable scenarios for shipment growth of AR and VR devices.

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While I can slice this by type (standalone head mounted display, smartphone-based like Gear VR and Google Daydream, or PC/console based), I think looking at total units is helpful mostly to gauge how many consumers may have a VR or AR device in their possession at some point in time over the next four to five years.

The most bullish forecast here assumes prices come down dramatically over this time horizon, content catches up, an ecosystem develops, and that most of the hardware units are like Gear VR or Google Daydream since they will be lower cost. If I had to bet on which scenario plays out, I’m probably more in line with the medium adoption. I still think we have a ways to go, technologically, to create what is a mainstream consumer experience across all the vectors and visions for the industry.

With over 70% of consumers still not having tried any kind of VR experience, the context in which consumers try this first and what their initial experience with VR is will matter. While the Gear VR and Daydream type devices are lower cost, they are also a base level VR experience and perhaps not the true showcase of the full VR experience. For that, I’m optimistic something like the Playstation VR does well and may be the first true VR for many who try it at a friend’s or family members house.

2018 and 2019 is the time I think we can see real momentum for this space, as it lines up with both technology roadmaps and content developement timelines. We still have a lot of time before anyone is late to VR and AR but knowing the consumer experiences and behaviour patterns over the next few years will be key and the main focus of our market research.

Google’s Potential Strategic Blunder with Pixel

A few posts came out yesterday that provided greater clarity on Google’s ambitions with Pixel and how those ambitions may impact the overall Android ecosystem.

First, an interview with Hiroshi Lockheimer came out yesterday where he explained in detail how Google is separating the hardware team from the Android team. Hiroshi leads the Android team and said he would basically treat Rick’s internal Google hardware team just like any other OEM. He is telling us to think of the Google hardware team like any OEM. They have the ability to take what the Android team does and use it in ways they see best for their hardware ambitions. Here is the full answer giving a little clarity at this point:

Lockheimer: Being a platform provider and knowing a manufacturer on the other side will take your platform customize it and commercialize it — that’s one model, and it’s worked great for us at massive scale. That is a different kind of engineering than Rick’s team. We’ll continue to develop the platform — that’s my job. Rick’s team will take that to a level of completion, polish, thoroughness that a platform by itself in abstract won’t get. That’s a pretty big shift. The Nexus devices have been the purest form of Android in the past. Pixel is the purest form of Google, which is Android plus a whole lot of other stuff like the Assistant, our VR platform and so on.

It makes sense to have the Google hardware team isolated from the Android team. In many ways, Microsoft’s Surface team operates under the same organizational structure to keep them at arm’s length from the Windows team. Both companies’ platform and software efforts view their hardware divisions as just another partner.

The question I still wrestle with is what will Google do to differentiate Android on their hardware? This article from Techcrunch may provide some additional clarity.

Google is bundling on the new device things like Allo, and their Photos app, along with a few other things where OEMs have choices. OEMs can ship any number of different email, calendar, contacts, photos, and more type apps when they make Android. Users can generally install other things from Google on the Play Store and use all the core Google services they are bundling on the Pixel. But most people don’t do that, which is why the core bundling of all the Google services out of the box is the big differentiator here. As Hiroshi says in the Bloomberg interview, the Pixel is not just the best of Android, it is the best of Google bundled onto one device.

However, this section from the Techcrunch article is a little puzzling and the root of what would be a strategic error potentially:

Most notably, Android 7.1, the updated version of Nougat that powers the Pixel and Pixel XL, is lacking Google Assistant. This smart virtual helper is Google’s answer to Apple’s Siri, Microsoft’s Cortana, and Amazon’s Alexa. It’s a lot more robust than Google Now, the current digital assistant that ships on today’s Android devices and in the standalone Google app.

People were tweeting this article yesterday commenting on the percieved exclusivity of Assistant. This would be a huge strategic blunder, even though I understand why they may consider it. The AI piece of this is critical. Google needs as many people as possible using it to create some lock-in around the personal assistant. I maintain, whoever cracks this “most personal” assistant for me has as a customer for life. There may be no single more sticky feature than a powerful assistant that knows me intimately and works on my behalf to make my life easier. The personal AI will be the critical consumer battle over the next decade.

Pixel phones will represent such a small share of the overall Android pie for some time (if not indefinitely) that, by keeping this most critical element of the future exclusive to a small minority, is a tactical mistake. However, I don’t actually think that is what Google will do. In Hiroshi’s interview, he makes this statement:

Lockheimer: Rick’s team will use our platform, but they will also work very closely with Google’s Search team, or the Maps team, or the Assistant team in ways that perhaps other OEMs may not want to. Other OEMs may want to differentiate and do their own thing, their own Assistant for example.

The answer he provided sound like Assistant is or will be exclusive. It does sound like there is flexibility on how Assistant can be used and integrated, but it also sounds as if an OEM came to them and wanted to use it, they would be able to. It also may be likely that Assistant comes as a dedicated app or something from the Android Play Store and iOS someday as well. Again, Google can’t leave potential users on the table here given how important AI is to the future.

They do recognize other OEMS may want to do their own assistants and that is fine. But what if I buy a Samsung phone and a Google Home? What assistant will I want to use? Am I forced to use Samsung’s when I may want Google’s? Google may say, well that’s why you buy a Pixel. However, this is not how consumers actually work nor is this how Google’s business model works. If Assistant stayed exclusive to Google Pixel, then it will likely never have as big a userbase as Siri. At which point we would conclude Apple won the personal assistant war over Google? This is why I doubt Google keeps it exclusive.

Trying to balance the horizontal and vertical is exceptionally difficult and we are honestly in new territory with Google and Microsoft attempting to do something that has not been done before and has a great many strategic issues surrounding it.

I like Google’s positioning of “the best of Google” on a device. That will likely always be true of the Pixel experience. However, should any OEM come to them and want to bundle many of the things bundled on the Pixel, it would be impossible for Google to say no. Yes, Pixel will always be the best experience at a premium, but an OEM can build a “good enough” Pixel and bundle many of the same features and sell it for less. I have no doubt this will happen, particularly in India and other emerging areas.

Apple’s margin, meaning the premium price consumers are willing to pay over a low-end, good enough option, have everything to do with the exclusivity that is iOS as a whole. This is where Pixel and Surface differ dramatically from Apple’s strategy and the core reason why both Surface and Pixel will always be subject to a good enough competitor — thus limiting their full market potential outside of some niche areas in the high end of the market.

Why “Made by Google.”

Understanding the why behind so many things is perhaps the single most important knowledge we can strive for. I’ve been saying all week I was hoping Google would explain why they needed to make their own first-party hardware in a range of categories, smartphones in particular. They have just told us all we needed to know without actually spelling it out.

As I have written before, Microsoft and Google’s first-party hardware strategy is remarkably similar. Both companies are now, technically, in direct competition with their partners, with the caveat that they are playing in the market space many of their competitors do not–premium. In both strategies from Google and Microsoft, they are focused on areas dominated by Apple where their partners generally avoid. Apple has the lion’s share of premium PCs and smartphones. Microsoft and Google seem like they want to help balance the equation. With Microsoft, their focus on premium was a direct statement to the market that their partners have been letting them down in the premium Windows PC department. So Microsoft decided to fill that gap themselves. What makes this move of Google’s interesting is Samsung is doing a pretty good job in premium smartphones (exploding batteries aside) and, therefore, there is less of a void in premium smartphones as there was in PCs. Should Google be successful with smartphones here (a big if), it would actually hurt Samsung more than Apple. It is hard to know if this is by design and Google simply wants Samsung’s share or if Google mistakingly believes this move will help them take some premium share from Apple. This is, however, extremely unlikely.

Interestingly, as solid as the design and specs of the Pixel devices are, they are Google’s least well-positioned products of the bunch announced. Neither of these devices will sell in any substantial volume, so the real question we have to ponder is, how long is the long game for Google with smartphones? I’d say they are in this for the long haul and their goal is to continue to develop credibility in the high-end of the smartphone market. I’m sure part of their hope is these devices will serve as the gold standard of Android and Google integration and they hope others may be inspired to do the same. This is a page from Microsoft’s playbook with Surface and it did not work. Nor will this work with Pixels. Google and Samsung will remain the only ones going after premium.

The low-end market disruption dynamic will always be in play when companies can not meaningfully and sustainably differentiate themselves. When you ship the same software experience as your competitors, the threat of low-end disruption is remarkably high. When you ship the same software as your competition, you are only as good as your lowest priced competitor. We will see sub $300 Android phones with specs and Google cloud + AI and all the trimmings from Google’s partners. This likely would have happened anyway, even if they didn’t do the Pixel.

Nonetheless, it is a good showcase device for the best of all things Google. I’m just less optimistic of their chances here than the other two products they launched.

Daydream and Google Home
While their smartphones are the weakest positioned devices, their Google Home and Daydream products are quite well positioned. Here, Google has a chance to be in the market with first-party hardware, from this “Made by Google” initiative, and be in on the ground floor of these markets as they develop. They may be early, but they are not late. Unlike with their smartphones where they are a few years too late.

What stood out to me most about the products not named Pixel was the aggressive price points. Note their pricing lineup.

Pixel – Starting at $649
Google Home- $129
Daydream View – $79
Chromecast Ultra – $69
Google Wifi – $129

One of these things is not like the other. From the demos I saw, Google Home was the clearest expression of their AI vision, even though they pitched the Pixel as the best manifestation of that vision. The reality is, people will get a Pixel smartphone and not use it all that differently from their current smartphones. Meaning, not fully utilizing or buying into the AI due to behavioral debt. However, Google Home is the product that can create entirely new behaviours around voice and UI. That’s the product Google should push and, at $129, that seems like a good possibility.

I believe the voice platform, something I am calling the invisible platform, is a key battleground technology. Current platform companies like Google, Microsoft, and Apple, can not lose this battle or be left out of the conversation. This plus AI is a key part of the future and can strengthen or weaken current players if they aren’t careful.

When it comes to all the hot buzzwords like Voice, AI, AR, VR, etc., it is actually not anyone’s game. It is a handful of companies’ game. These markets are likely not to be a “winner take all” market either. So, while the battle will rage, it is still early and we can expect much innovation ahead in those core areas by many of our favorite companies.

Behavioral Debt

I’m fortunate to be a part of several circles here in Silicon Valley that get together frequently to discuss big ideas and engage in all kinds of technology related philosophical questions. I started sharing a concept with this group and was encouraged to flesh it out further. So I would like to introduce it to all of you for thoughts and feedback. Consider this one of those posts you need to have your thinking cap on. I’m calling this concept “Behavioral Debt” and it explains why a company’s customers don’t act or do the things they want them to.

The simplest way to understand this is with the popular saying, “You can’t teach an old dog new tricks.” I am attempting to put more understanding around this idea as it relates to the consumer tech landscape. I run into issues around behavioral debt regularly in my research on the consumer market. Companies want to know why their customers aren’t buying new products or services they offer while their old ones seem to be all their customers are interested in. In most cases, what we observe is simply entrenched behavior that is very difficult to evolve. Once a behavior is established, debt is built up around it. The longer that behavior remains entrenched, the larger the pile of behavioral debt. The larger the pile of behavioral debt, the more difficult it is for that customer to climb out from under it.

Let’s use a tangible example in Facebook. Facebook would like to move into a more transactions-based model for the buying and selling of goods on their platform. Here we may likely see the messy reality of behavioral debt rear its ugly head. Consumers have built up years of behavioral debt doing a few main things on Facebook. Consumers are likely content in this reality and, when they want to buy something, they go to Amazon or some other established online merchant. Facebook wants to offer them the chance to do this on Facebook so they don’t have to leave and spend time and money somewhere else. But “you can’t teach an old dog new tricks” and I have a feeling convincing consumers to do anything more than they do today will prove quite tricky for Facebook due to the many hours/years spent building up behavioral debt in how they use Facebook.

Similarly, Intel, Microsoft, and the PC makers would all like to sell more of the 2-in-1 PC concepts. These devices are not the cheapest machines on the market but they offer better margins. The problem is, 2-in-1 PCs sell at a fraction of the volume of notebooks. What Intel and Microsoft have not yet learned is there is a massive amount of behavioral debt built up around the PC form factor. People understand it, they are comfortable with it, and they have established workflows on it. Many of you have heard me say those who grew up with a PC have a bias for it. This bias is explained by behavioral debt.

This idea of behavioral debt also showed up recently in our mobile payments study. In markets like the UK, where consumers have been tapping to pay with their physical credit cards for years, many consumers (nearly 40%) said they have yet to embrace paying with their smartphones (which they acknowledge is safer and more convenient) because it is still easier to use their physical cards to tap and pay. Another 25% said they simply forget they can use their smartphone to pay instead of their credit card. This is a prime example of behavioral debt and showcases why changing an established and entrenched behavior is extremely difficult.

This is why we observe consumers in emerging markets or the Gen Z kids of today do things with their smartphones and tablets many of us can’t believe. We see them do things and think there is no way they can do them without a PC. The reason this “you can’t do real work on a tablet” phrase keeps erroneously showing up is because those who use it have a ton of behavioral debt around PC-based workflows. Those who do not have PC behavioral debt are free from those biases and are able to break what seems like new ground but is entirely natural to them.

This should also be recognized by startups trying to do something similar but better than what a popular service already does. We see startup after startup offering a feature, like a messaging app or a commerce store that proposes to be better than what hundreds of millions of people already use. More often than not, these fail because, when behavioral debt is built up, the person rarely wants better — they simply want familiar.

Getting customers to break free from behavioral debt is very hard. It also seems it is very rare given the case studies I’m finding and working through. In fact, it could be observed it is so rare when consumers fundamentally change a behavior that it should be considered quite profound. Doing so means an acknowledgment the new way is dramatically better and thus the behavior change is swift. This happens less frequently than we often believe in consumer markets. This one point, circling back to Facebook, is what makes something like Snapchat so interesting. Snapchat is on pace with Facebook in the number of videos played. The main difference being the vast majority of videos played on Facebook are not clicked on where in Snapchat they are. Facebook wants/needs videos to be successful but their users just want to get on Facebook, post a picture or share something, see some posts from others and move on. Getting video engagement has been a challenge for Facebook because of their users’ behavioral debt. But with Snapchat, video was the assumed experience from the beginning. Starting fresh means starting without behavioral debt. This is why, in my opinion, Facebook must continue down the road of acquiring a family of assets which encompass the needed consumer behavior. Buy Snapchat for video, Twitter for real-time news and global social communication, and whatever else springs up.

The Weekly Stat: DSLRs and Pocket DSLRs

I truly feel there is something happening as we give consumers better and better pocket cameras. Whether it is because I have many friends who buy tech early or the iPhone 7/7 Plus is selling better than many expected, I’ve noticed a distinct upgrade in photo quality on my Facebook and Instagram feed by those taking them on the new iPhone 7. Whether it is pictures in lower light, landscapes, family, pets, or food, it honestly seems like the pictures are of higher quality.

I am close friends with a number of professional photographers across the globe. With those folks, the quality of the photos they post were unquestionably magnitudes better than the general ones I see from non-professionals. I’m convinced, over the next few years, all of that is about to change.

Let’s talk specifically about the DSLR trend for a moment. We knew consumers were purchasing DSLRs because of the upgrade in picture quality. What most missed in this trend was consumers were buying DSLRs to be better versions of their point and shoot cameras, which typically were slower and underperformed compared to a DSLR with an interchangeable lens. The vast majority of consumers who purchased DSLRs were buying a product that vastly overserved their needs, yet very easily yielded high quality, high-resolution photographs.

I did a quick poll with a small sample of one of our panels and found 30% of consumers in this representative panel owned a DSLR. However, the vast majority of them only owned two lenses (often, DSLRs come with two lenses, one telephoto and one short range 18-55mm kit lens). What is most interesting to me about what the new iPhones offer over these DSLR kits is the f/1.8 aperture fixed length lens. In many ways, the new iPhones are bringing a signature tool of professional photographers known as a prime lens.

Having taken many years of photography in HS and college, I am a prime lens shooter with my DSLR. I have apertures as large as f/1.4 ranging from 28-80mm. These are what I take many portrait photographs with and the new iPhones have brought the capability of prime lens shooting to me at all times. This gets enhanced even more with the new portrait mode on the new iPhone 7s, which is nothing short of amazing technologically.

In the poll I mentioned above, I asked those who owned DSLRs what was the largest aperture lens they owned. I used f/2 as the benchmark and asked if they had a lens with a number that was lower than f/2 (assuming most would have no idea the smaller the number, the larger the aperture). Only 10% of those who owned a DSLR had an aperture lens of this size. Which suggests to me that 10% were the more professional of the audience. Fascinatingly, 22% did not know if they did or not. That’s very telling of a segment of the market who bought a DSLR just to be a glorified point and shoot. 70% said they did not have a lens with an f-stop larger than f/2. Knowing how most kit lenses come packaged, it is unlikely the vast majority of DSLR owners have lenses with an aperture larger than f/2.8.

What all of this means is, not only do the new iPhones basically do all the jobs regular consumers have been hiring DSLRs to do the past few years, but it also gives them an aperture size they have never had access to with their DSLR. Which, I would argue, means for these DSLR owners, the iPhone 7 and all subsequent iPhones will, on average, yield for them a greater number of more quality photographs. As Apple makes things like bokeh (shallow depth of field) techniques easy and acceptable, I’m even more inclined to stand by this prediction.

The amazing thing is Apple still has a lot of room to grow. We could see them get to an aperture size of f/1.4 in the near future but also add more advanced software techniques and effects which bring professional capabilities to any and every consumer who needs no more training than simply how to frame or compose their pictures better. That’s something that can more easily be learned than having to adjust ISO, WB, shutter speed, f-stop, and do many things manually like I had to learn.

We have this odd family tradition where each family stand in front of the Christmas tree and has their picture taken by nearly every other family there with a DSLR. Usually it is three of four DSLRs all snapping photos and flashing us blind. I’m yet to ever see any of those photos make their way to me via email, Facebook, Instagram, or any other sharing medium. Our family probably has years of Christmas photos all sitting PCs or memory cards and none get shared. The ones from these events that do get shared are the ones taken by the smartphones. Let’s usher in this era of DSLRs in our pocket.

Which leads me to this last point. Perhaps the biggest difference here between where the iPhone, and smartphone cameras in general are going, is that these great photos will get shared. I’d wager more often than not all those wonderful photos taken by consumers rarely leave the PC they get loaded onto, if they get loaded onto a PC to begin with.

I told my wife this over the weekend as we were hanging out in Santa Cruz taking pictures at different locations. Thanks to the vastly increased capabilities of the iPhone 7, this next year will undoubtedly be our best year in both quality and quantity of our family photographs.

Re-Evaluating the Wearable Market

Here we are, a few years into the market for wrist-based wearable technology and I thought it would be helpful to check in on what we are seeing.

Unquestionably, the market for smart (like a smartwatch) and basic (like a Fitbit Charge HR) remains one solely focused on health and fitness enthusiasts. The problem with the market today is it simply is not very large compared to other categories. Based on a health study we did, where we were able to segment consumers around some health and fitness related themes, we concluded the total addressable market for health and fitness tech is about ~18% of consumers who are a target profile. In absolute terms, if 18% of consumers in more mature markets are the only targets for these products, we are talking about a market size of only around 200-250 million. Not bad, but not huge. In fact, I’ve reconciled the market for these type of wearables, including smartwatches, and it may not be as large as I thought initially. It’s one of several scenarios on market size I have gamed out.

When we look at wearables at large and try to make educated guesses or forecasts of where the market may go, we include things like smart clothing, ear-based smart tech, enterprise-focused smart tech, and a range of other smart tech which may sit on our person. Overall, depending on how the category gets further defined, it could seem large if we just look at the top line forecast. However, it will be a highly segmented market by type of wearable.

Right now, the market is dominated by wrist-based fitness and smartwatches. I’ve been maintaining a model on this market for a while and recently updated it with how I think the Fall and Holiday quarters will go. Below is my model of wrist-based smart tech by vendor.

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For those of you who keep a close eye on the market, you will note our estimates agree with the sentiment that Fitbit still leads the category. We do not believe this will always be the case but it is today.

Apple and Fitbit do most of the volume on a per quarter basis with Apple leading the category in profit and ASP. Xiaomi has been hanging in there, mostly in China, but I still maintain that, at sub $20, it is surprising they are not selling more than they do. At that price, I’d actually consider ~3m a quarter to not be successful. This is either a criticism of the category in China or their brand. I’m not sure which one.

We see a strong holiday for Fitbit and Apple on the back of the new product lineups and aggressive promotional pricing by retailers. The health and fitness angle Apple and Fitbit are focusing on still leaves head room to grow in this space. But I emphasize, if we can’t break out broader consumer use cases, this market will not be much larger than it is now.

With smartwatches, which we think are general purpose wearable computing devices, we see much more potential than basic fitness devices. Our upside forecast of the market depends on consumers embracing the value of fitness and health as the entry point and discovering value beyond health and fitness thanks to an ecosystem which can develop once the installed base is larger. I’ll spare you the host of assumptions we are making and just show you what we believe a reasonable and educated forward-looking forecast looks like.

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Mind you, this includes a range of other wearable tech products, not just fitness bracelets and smart watches. But looking at the growth trend thus far and where we believe the market and vendors are heading, this is our best guess of the next few years for wearables at large.

A major key to this market’s growth is to simply get consumers to have a first experience with the product. As we examine behavior and satisfaction once a consumer tries a wearable product, we are encouraged by what we see. Enough to maintain our conviction there is something here.

It is crucial to get beyond the less than 20% of the market of fitness and health products and that smartwatches in particular start to develop an ecosystem of apps which can extend the use cases well beyond health and fitness. We are optimistic, with Apple Watch in particular, that the upgrade in hardware features and performance is the catalyst that gets more developers excited about watchOS and to start building more apps which expand the value. This will remain the largest point of focus for us over the next year as we wait and see if smartwatches, and the Apple Watch in particular, can go mainstream.

Mobile Payments: The Future is Here, just not Evenly Distributed

If you have made a payment at retail with your smartphone and are anything like me, you’ll feel this is the future of payments. But as the famous quote from William Gibson says, “the future is here. It is just not evenly distributed.” After conducting some research in the US, UK, and Australia, it would be hard to find a more appropriate phrase for mobile contactless payments.

Last fall, the United States went through a drastic disturbance in consumer retail stores thanks to the EMV shift, which moved us from swiping our credit cards to inserting them into a terminal and waiting for the transaction to complete. With the average transaction time still taking between 5-10 seconds, down from 15 seconds six to eight months ago, US consumers have had friction added to their checkout process. It is with this retail experience in mind we were hopeful, last fall, that mobile contactless payments would take off. Toward the end of 2015, roughly 17% of iPhone owners had used Apple Pay, and 7% of Android owners had used Android Pay. Part of this had to do with less than 50% of the iPhone installed base in these markets having devices that are Apple Pay capable. An even smaller number of Android-based devices in use are NFC capable. Here we are a year later, with exponentially more smartphones in the market NFC capable, and interestingly, not a lot has changed.

When it comes to tap to pay terminals, the US is well behind markets like the UK and Australia. While we are still in early days with consumers paying with their smartphone in those markets as well, a majority of consumers there are already using tap to pay on a regular basis using their bank-issued card with an NFC chip in it. We decided it would be interesting to study consumers in the UK, Australia, and the US in order to see the contrast between mature contactless (tap to pay) payment markets and one like the US where it is all brand new.

We asked consumers in the US, UK, and Australia if they have ever used a form of contactless payment, defined as tapping to pay with your bank-issued card or mobile phone.

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As you can see when it comes to contactless tapping to pay behaviors, markets like the UK and Australia, with bank-issued cards that have tap to pay functionality and the vast majority of merchants accepting tap to pay, it paints a very different picture than the US market. Where ~80% of consumers in the UK and Australia have used a tap to pay method, 80% of consumers in the US had not. Part of this has to do with minimal acceptance of contactless methods at US retail, compared to many merchants accepting it in the UK and Australia.

To further highlight the stark differences of the US market compared to the UK, and Australia, where a form of contactless payment is a normal transaction behavior, 61% of US consumers said they are not that familiar or not familiar at all with any kind of contactless payment method. One solid conclusion from our research is we still have a lot of educating to do on the US market.

Room to Grow for Mobile Payments

After studying all three markets, what I found most interesting was first, the disparity between consumers using contactless in the UK and Australia and those not using it in the US as outlined above. The second thing that stood out was how all three markets were remarkably similar when it came to usage of mobile contactless payments. Meaning, using something like Apple Pay, Android Pay, or Samsung Pay.

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The chart shows the types of contactless transactions consumers have tried in all three markets. Interestingly, while tapping to pay with your credit/debit card is an established behavior in the UK and Australia (over 50% of the market uses this method on a weekly basis), consumers in those markets have yet to fully transition their contactless payment behaviors from their credit/debit card to their smartphone, even though it is accepted almost universally in their country.

When it came to which mobile contactless payment was most popular among those who said they have used their mobile phone to tap and pay, Apple Pay is the most common form of mobile payment with 62% usage share of mobile contactless methods compared to less than 30% for Android Pay and Samsung Pay respectively.

While we are still new to paying for goods and services with our smartphones, the future seems bright. Our research found consumers who have used Apple Pay, Android Pay, and Samsung Pay had high satisfaction levels with the experience, with speed and convenience the biggest factors in their satisfaction, and a high propensity to use it more often in the future.

Security Still the Largest Barrier for Non-Users

The sleeper story for consumers is security. While this happens to be one of the single most important reasons to adopt contactless payments, it is also the one least understood by consumers. In all three markets, 40% of consumers listed security concerns of adding their credit/debit card to their smartphone as the main reason they have yet to try it, while 29% said not trusting the transaction was secure as their main reason.

In an era of heightened awareness of identity fraud, merchant breaches of credit card data, and more, it is not surprising security concerns came up time and time again in our study. Yet, a data point that stood out was 45% of consumers stated an increase in willingness to use mobile contactless payments if retailers and banks helped them understand the security benefits of using something like Apple Pay, Android Pay, or Samsung Pay. This was listed as the single biggest thing retailers and banks could do to get them to use mobile contactless payments.

As I analyzed the data of over 50 questions between all three markets and the responses of 1,761 consumers, I’m convinced as ever mobile payments are the future. As more banks support it, merchants accept it, and consumers understand the security benefits, I’m convinced we will get to an era where paying with our smartphones is the normal and most common behavior. However, our research strongly suggests it is not consumers standing in the way of adoption. It is retailers and banks who need to make the appropriate moves to bring this safer and more secure way to pay to their customers.

I’ll be presenting the full findings of our research at a VIP event hosted by NXP in Las Vegas on October 24th. If you are coming to Money 20/20 or are a VIP in the banking and transaction industry, or media, let me know if you would like to attend.

Snap Inc: The Spectacle of Spectacles

Late Friday night, media drama ensued. Business Insider broke the story of Snapchat’s (now Snap Inc.) not so secret hardware product. It became clear moments later that the Wall St. Journal had been given the exclusive to announce the new product, and Snapchat’s new company name, to the world. Publishing this late Friday night was most certainly not the plan and was prompted by the leak from Business Insider. The Wall St. Journal published a detailed look at Snap’s new product called Spectacles as well as an interview with CEO Evan Spiegel on why he believed in this product and Snap’s future as a camera company.

Many will compare this to Google Glass. I encourage you to resist the urge. While a healthy bit of skepticism is warranted, these are quite different from Google Glass and, if anything, more similar to GoPro. Spectacles, the name of Snap’s glasses, will also cost $130 instead of the more than $1000 Google Glass cost. Most importantly, in the eyes of their target demographic, Snapchat is much cooler than Google.

Reading the WSJ article, it was this bit from Spiegel’s experience that stood out to me on using the protoype glasses:

He remembers testing a prototype in early 2015 while hiking with his fiancée, supermodel Miranda Kerr. “It was our first vacation, and we went to Big Sur for a day or two. We were walking through the woods, stepping over logs, looking up at the beautiful trees. And when I got the footage back and watched it, I could see my own memory, through my own eyes—it was unbelievable. It’s one thing to see images of an experience you had, but it’s another thing to have an experience of the experience. It was the closest I’d ever come to feeling like I was there again.”

Anyone who has used a GoPro understand the value of this statement. Remember, I’m the guy who wore a GoPro on his head when his kids were little to capture these memories from a first person perspective.

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Lot’s of kids have GoPros, especially active ones. They use it to record themselves skateboarding, bike riding, hiking, skiing/snowbarding, swimming, etc. We may as well rename this generation “The Capture Generation”. That is the demographic Snap Inc. understands. These glasses are born out of millenial and Gen Z behavior with their devices and the urge to capture and share as many experiences as possible.

The first generation of any product is hard to make definitive claims regarding its future. You need to be very long on Snap Inc. in order to buy their story about these glasses. That being said, the concept is sound and having capture devices on our person, on our eyes, makes sense at least some day in the future. Even though a low-barrier to entry the Chinese manufactuing ecosystem creates makes it easy for anyone to be in hardware, hardware will remain hard to do. Just because anyone can, doesn’t mean they should. If Snap Inc. can get the best hardware engineers out there (aside from the ones they have plucked from GoPro) then we can take them more seriously.

On an end note, one thing I found interesting was where the camera is are located. If you notice, they are located about eye width apart.

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Having two cameras is a key factor in capturing 3D and VR content. Perhaps this is a broader signal of where Snap intends to go.

Unpacked for Friday September 23rd

Facebook Overestimates Video Consumption – Ben Bajarin
In an interesting twist to the Facebook narrative, a report came out that Facebook is letting advertising partners know they overestimated the metric for time spent watching videos on their platform.

A number of Wall St. notes I saw late last night warned of investor concern that this could have a negative impact on ad spend budgets as advertisers cut back on their ads due to this blunder. As much of a tactical error as this is, I don’t believe this will have much impact on Facebook’s advertising prospects.

Going back to the early days of Facebook ads, numerous times in discussions with big companies or advertising companies running campaigns with Facebook, I heard the dissatisfaction in the ROI in working with Facebook. This was one of the main reasons Facebook took as long as they did to truly be relevant to advertisers. What these interactions told me was how advertisers were scrutinizing and measuring the ROI with digital ads more than they were with analog ones. It was almost as though they trusted analog ads work since they have for so long, while they were skeptical of digital ads’ ROI and, therefore, they tracked it more closely.

Through the years, Facebook’s strong gains in ad budgets can only be supported by the fact these ads are working. Advertisers are finding it worth the increased ad spend they are giving Facebook. And this could possibly be with an overestimation of video metrics. I stand by my thesis on Facebook — few companies are better positioned to benefit from the shift of offline ads to online ads over the next five years and beyond. This could certainly spur the embracing of third party metrics for Facebook as there are with other digital mediums, like TV, but advertisers can’t afford to not continue to embrace Facebook and their assets in a major way given how much time consumers spend in the Facebook family of apps.

Google’s Allo Makes a Strange Coming-out Party for the Google Assistant – Jan Dawson

At Google’s I/O developer conference in May, it announced the Google Assistant as well as a couple of communication apps, among other things. Duo, the video calling app, debuted a few weeks ago, and Allo, the messaging app, debuted this week. But Allo is also the coming-out party for the Google assistant, Google’s first attempt to brand and provide an identity for its AI, which has been evident in subtle ways through Google Now and other products in the past.

Allo is a strange way for the Google assistant to be launched into the world though. For one thing, it’s a messaging app, ostensibly about communicating with other people and not an AI. And yet, it also seems doomed to have very few users, making it fairly useless for its core purpose. It’s almost as if Google wasn’t sure quite what to do with the assistant functionality and decided to put it into a messaging app as an afterthought. The debut of the Google Home hardware device, akin to Amazon’s Echo (likely to be announced in a couple of weeks), is a much more logical place for the assistant to make its bow, so this is a doubly odd decision. Perhaps Google felt pressure to rush Allo out on literally the last day of summer in order to meet its planned launch timeframe.

The app itself is nicely designed, though I’ve found it to be fairly buggy. I had issues getting it to use my personal Gmail account rather than my work Google Apps account and subsequently found that even using its suggested canned responses often generated weird replies from the AI. Literally, no one else I know is using the app right now, so it’s useless as a communication channel, not least of which because we’ve all already made investments in competing apps.

I’ve also been uneasy from the moment of the first demo at I/O about the idea of an AI cooking up responses for me in what’s supposed to be a personal communication app. That feels like a supremely Google-y idea but it’s not a very appealing one. It makes communication more efficient but also less personal. Some of the suggestions feel positively robotic and not at all what a real person would say.

I’m much more hopeful about the Home device and I’m a big believer that the Google assistant has promise that might well eclipse Amazon’s Echo and Alexa. This just feels like a very odd way to debut the functionality. The assistant would also make a lot more sense in settings like Gmail, where Google already has a billion users, or even as a core function on Android. I’m sure we’ll see it arrive there eventually and I think, at that point, it’s much more likely to fulfill its promise.

Rumored Pixel and Pixel XL signal a change in Google and HTC strategy by Carolina Milanesi

At the upcoming Google event on October 4th, the company is rumored to be unveiling Home – the Echo like product introduced at Google I/O – as well as two new phones: Pixel and Pixel XL.

The phones are rumored to be a departure from the Nexus program Google has been running for the past few years. While still aimed at showcasing the best of what Android has to offer, it seems Google is trying to put things more into its own hands by commissioning the products from HTC but then bringing them to market itself.

Adopting the Pixel name that so far has been used for their Chromebooks would signal a change in strategy for Google who has not really benefitted from the Nexus line in the past. That said, a change in name without a change in distribution would not necessarily deliver different results. In order to make a considerable impact on getting the most up to date OS flavor into the hands of consumers, Google would have to sell these devices through a broader channel than the Play Store. While fragmentation driven by vendor differentiation might be less a problem today as vendors like Motorola, HTC, and LG opt for a purer version of Android, fragmentation in software versions is still very much a reality. Making sure these Pixel device have the broadest addressable market would help change that and really have a greater set of consumers experience the latest and greatest of the operating system.

Rumors also has it HTC will be the vendor manufacturing the two Pixel devices but consumers might never know that from looking at the phones as the brand will not be present. This will regress HTC back to how they started in the market: being a whitebox. HTC has been struggling over the past couple of years to get back some of the traction they lost in the phone market while they embarked in other areas like wearables and cameras but only their VR headset Vive created any excitement in the market. Having HTC move back to a whitebox business in phones might be the beginning of the end for their brand in the smartphone market. While long term that might turn out to be fine, the timing might be a little premature as Vive is still a long way from becoming mass market. However, playing between white-labeling phones and re-establishing the brand as a leading name will not work in my opinion. White-labeling, of course, works for many vendors out there and HTC could use that business to sustain its VR endeavor.

We will know in a couple of weeks if the rumors were right and, if they turn out to be, we could then start speculating what will happen to Android next.

Microsoft and Google First Party Hardware

On October 4th, Google is having an event, likely to launch both the Home, their Amazon Alexa competitor, as well as their own branded smartphone. It is safe to assume at this point that Google is getting more and more serious about Google-branded hardware in a number of categories.

Google’s efforts remind me of Microsoft’s as Microsoft has been making their own hardware like the Surface for a number of years now and is a serious contender and competitor in the PC and tablet category.

I feel it is worth taking a step back and making the observation that we have two companies whose very essence, from a computing platform viewpoint, was providing software for anyone to run on their hardware. For Microsoft, this was Windows and for Google it was Android. So why do two mostly software companies feel it is important to become a contender in hardware and compete with their customers and partners? The answer, in my opinion, is brand.

I believe, both Microsoft and Google believe their brand is strong enough to bring hardware to market and take share at a point in time when many markets are consolidating around hardware companies with strong global brands.

We are at a tipping point where PCs, tablets, and smartphones are seeing the percentage of white box, or no-name branded devices shrinking as a total of the segments sales. Consumers are less frequently buying the cheap, no-name brand and, instead, buying the brand that stands for quality and is worth investing in. This is as sure a sign as any of a market that is maturing and globally, we are seeing it take place, even in markets which we used to consider “developing.”

I’ve written frequently that I’m convinced brands will win the day in the global consumer electronics market. We are in the midst of a brand battle to see who is left standing. Many names we recognize making consumer hardware today may not be around in five years. Names like Xiaomi, Oppo, Asus, Acer, Micromax, etc. Or, if they are still around, they may pivot to be out of the large volume consumer categories and just operate in the fringe categories where they may be better suited to compete.

To see where we may be headed, just look around at any other non-tech consumer categories. Look at cars, fashion, consumer packed goods, even restaurants the masses frequent. The mainstream consumer buys from brands they recognize. Becoming a recognizable consumer brand is very difficult and out of many companies with a recognizable brand in tech, Microsoft and Google have a better brand than many of their partners and customers both globally and regionally.

For that reason, I am not going to write off either Google or Microsoft’s first party hardware efforts. It may be a rocky road and they may not get it right at first but, as they learn by shipping, they will remain well positioned as long as they are strategic about the categories they pick. For example, it makes sense tactically that Microsoft makes PCs but not smartphones that run Windows. Similarly, it makes sense that Google does not make PCs that run Windows or Android but instead, focuses on smartphones and perhaps the broader smart home. Being smart about which categories to enter and which ones to not enter, is key for any technology brand.

We will see what Google has up their sleeve and if we need to take them seriously. But I believe they have the type of brand which can make a go at hardware in a number of categories. Microsoft, similarly, is gaining share in the PC/Tablet category and, with another fall hardware event rumored, I firmly believe they are keeping their foot on the Surface gas pedal for good reason.

I can make a strong case that both these companies have a bright hardware future in front of them with brand being a strong contributor to the upside. While it is still early in many markets like AI, AR/VR, etc., I still maintain the stronger brands will win the day.

Unpacked: The Need for Ruggedized Smartphones

I’ve gotten a question quite a bit lately from tech industry folks about the need for more rugged devices. Smartphones that don’t break when you drop them or don’t stop working when you dump them in the pool or ocean, etc. How big of a feature is a water resistant, or even waterproof, phone in the future? Motorola pitched the Droid Turbo 2 as a shatterproof screen. How big of a selling point was this feature? How about something as simple as better battery life. How big of a deal would that be as a feature?

What is interesting to keep in mind is that features like the ones I listed above are infinitely more valuable once you have dropped/cracked your screen, or dropped your phone in water, or ran out of battery well before the end of the day. Consumers need to have felt the pain, if you will, in order to recognize the feature as valuable. This is not to say they won’t see a waterproof or shatterproof phone as something to invest in to be cautious but that it becomes infinitely more valuable as a selling point once you have experienced the pain.

With Apple and Samsung touting water resistance (and possibly some day waterproofing) and Motorola’s shatterproof screen along with future innovations from Corning that may offer the same feature on many phones, my curiosity got the better of me. I decided to poll consumers in our iOS panel to see if any of these smartphone mishaps have happened to them.

As it turns out, consumers are more clumsy than I thought.

Cracked Screen
Overall, 61% of consumers have cracked their screen in some way. 33% of those who cracked their screen didn’t crack it bad enough to necessitate a replacement screen and they indicated they continued to use it until they upgraded their smartphone. 28% said they cracked their screen and paid for a replacement for that device.

Even though my poll covered just over 400 consumers and iPhones only, for this demographic with a +/- of 4%, I’d suggest the data tells us a good portion of the market has been impacted by a cracked screen in some way and would see the value/benefit of a shatterproof smartphone.

Water Resistance
Not surprisingly, fewer consumers have been impacted by their phones being dropped in water than having their screen cracked. Altogether, only 41% of iPhone owners indicated dropping (and fully submerging their iPhone as a result) in water. 28% of those affected by a water hazard indicated they could and did continue to use their phone even after dropping it in water. 13%, however, were not so lucky and needed to purchase or acquire another smartphone to use.

No question, this is a great feature and safety precaution but, in terms of pain points, it seems screen damage has happened to more people than water damage. Now, waterproofing may be a different value proposition. While I’m sure Apple doesn’t recommend it and while the iPhone isn’t touted as being “waterproof”, which I interpret to mean OK to use in water and not just drop in water, I have been taking pictures and video underwater of my kids with the iPhone 7 Plus in our pool. I could see how a fully waterproof phone could be more attractive than just a water resistant one and hope Apple goes in this direction. Personally, I’d love to not need my GoPro. Perhaps that is just me.

Better Battery
In a surprise to no one, battery life is a more broad consumer pain point. While most of the market has had battery life issues of some kind, kids in particular (no kid at my daughters Jr. High go anywhere without a battery pack), I snuck a very distinct question into this poll on batteries. I asked specifically how many consumers have fully run out of battery by 5pm and not had a charger with them and thus were without a phone for a period of time. I appreciate that, with this question, I’m being extremely specific with the scenario. However, 58% of iPhone owners in our poll said they have experienced this exact scenario.

Year after year of battery life gains may be one of the most significant initiatives that manufacturers continue to make progress on. How, you may ask? The answer is silicon. I remember in the 2005/2006 time frame, Intel had an initiative called “eight hours in 2008”. Their goal was to get eight hours of battery life by 2008. If memory serves, this particular benchmark was not achieved until 2010 and still many PCs in the market don’t get 8 hours (but a great many do). Intel solved this through Moore’s Law as their processors became more efficient while still being powerful.

Apple is on a similar course, designing their silicon with efficiency while still being extremely powerful. This, plus lower power display innovations, are how we achieve even better than “all day” battery life in our smartphones and other gadgets. That and when we can officially get rid of old network technology like CDMA, GPRS, 1xrtt, Edge, etc, and move to full LTE. LTE, 4g and even more so with 5g, are extremely efficient on power when it comes to data.

We are a few years away from all the pieces to be in place for battery experiences to feel like a breakthrough. But when it happens, it will be a bold new world.

The Benchmark iPhone 7 Plus

Tim Cook said, “The iPhone is the industry gold standard. The phone by which all other phones are compared.” I articulated for subscribers yesterday how this is true of Apple at an industry level, not just with the iPhone, but any reasonable person understands Tim Cook is right. Apple sets the bar and brings cutting edge technology to the masses like no other technology brand.

I’ve spent some time with the Jet Black iPhone 7 Plus and I’d like to share some thoughts from that experience.

Thinking about Design
I said of the iPhone 5 upon seeing and using it that it felt as though it were a piece of jewelry. I still feel that way of that design. It was iconic in many ways. With the new Jet Black and Matte Black designs of the iPhone 7 Plus, I’m reminded of sports cars. The Jet Black color is the reason I’ve been telling folks that I’ve never loved a piece of electronics this much before.

Reading the tea leaves about Apple’s design strategy around colors and materials, a few things stand out. First, a high level observation is the colors are not staying entirely the same. First, it was gold, then rose gold, and now two entirely new blacks. Things will get very interesting if this is a continuing pattern. We have already heard rumors Apple is looking into ceramics for future versions, maybe doing new things with glass, etc., which makes for an interesting design point with each passing year. The key here is we can expect new colors, materials, or variations to deliver some dramatic new finishes each year. Yet, they remain grounded in high-end or luxury coatings like high-end cars strategically span certain colors and materials. The idea that, each buying cycle, consumers may be confronted with new types of innovative colors and materials is an interesting idea. Again, it reminds me quite a bit of how car manufacturers use color innovation and new types of materials (carbon fiber, mesh, or types of metals) to add design flair to their cars each year.

Similarly, sports car designs are iconic. You know a Porsche 911 when you see one, for example, no matter what year it was made. I feel similarly about Apple sticking with certain design language and thus establishing it as iconic. Iconic car designs have slight variations year to year but never dramatic departures from the iconic look. I feel Apple is on a similar design path.

I was curious about the car choosing parallels with where Apple is going in color and design materials. I quickly polled iPhone owners in our panel and found only 2% say they always buy the exact same color car. 65% said they generally lead toward buying the same color as their last car but they like to look around at new colors/materials in case something stands out. 33% of the market tends to switch colors in order to use something new or have variety.

It is possible I’m reading too much into the car/luxury car parallels but I tend to do that from time to time.

Thinking About the Camera
What happens when everyone can take professional looking photos? This goes far beyond the resolution of the pictures to the ability to take a simple photo of a sunset or your kids and have the camera do all the hard work.

In early research with consumers who have no photography background whatsoever, we looked at motivations and drivers for their purchase of a DSLR. It came back to the quality of the photo. We often heard the remark, “It lets me take so much better pictures of my kids or family.” Which makes sense. DSLR camera technology is great at taking professional looking photos on the Auto setting. Which is the only setting most consumers use to take pictures with on their DSLR. Bottom line is, they bought the DSLR because the camera did all the hard work of taking great pictures. I jokingly nicnamed these point and shoot DSLRs because that is basically what they were for the mainstream, non-photography, consumers who purchased them.

This has always been the clear value proposition of smartphones and the quality of smartphone photos has undoubtedly gotten better over the years. But this time around, it feels like even professional photographers are making bold claims about the iPhone 7 camera. Emphasizing my point about the value perception of a DSLR. In consumers’ minds, “professional” is now achievable in a smartphone and will continue on this path for years to come. I’m not saying this is a total DSLR replacement. I’m saying the core value of a DSLR for the mainstream can now fully apply to the smartphone.

Certainly, there is more to my statement with the iPhone 7 Plus dual lens camera, which many professionals have remarked are best in class when it comes to a smartphone camera. This is where Apple’s tight integration of hardware, software, and custom silicon gives them an advantage. The combination of the hardware and the software designed to focus on a single thing, better pictures, is exactly why DSLRs helped the average consumer take a better-looking photograph. Just point and shoot and get near professional photo pictures in terms of exposure and focus. This is what the mainstream values.

One of the best values of the dual lens approach that Apple is taking is with the 2x optical telephoto. Having taken many photography classes in my life, you learn that, when taking portrait photos, you want the subject to “fill the frame”. Basically, get as close as you can to fill the subject in the entire frame, or close to it. In the past, doing this with a smartphone meant getting right up in your subject’s face. With the 2x zoom, you can now be standing at the distance most normal people do from their subject yet use the 2x zoom and fill the frame. This is a subtle yet powerful change in how people can use the dual-lens feature to get better photographs. Smartphone cameras were about as good as point and shoot cameras. Now, I’d argue we are seeing the path for them to take on DSLRs. Key point for me is that all the best photos of my family, the ones in frames and on the walls, were taken on DSLRs. I’m certain this will no longer be the case going forward.

Thinking About Silicon
I maintain one of the most underappreciated things about the “new Apple” is their custom designed silicon. They design their own processors and even many of the sensors in all of their products now and the number of Apple designed chipsets in every product seems to be increasing every year. I expect this to continue. We know Apple’s iPhone and iPad stand out from their competitors because they have iOS, an operating system no competitor can use. Much of Apple’s objective differentiation is tied to the fact they run an operating system no one else has. I’d argue their efforts in custom silicon designs are as important as their work in custom operating systems as a differentiating factor. Both are best in class and both are exclusive to Apple products.

Apple’s software plays a key role in making their products stand out. Their custom silicon makes the experience of that software stand out even more. While this experience can come in the way of more quality apps, graphics, or other visuals, perhaps the best example of this advantage is the increase of battery life of the new iPhones.

Having tested many devices and being among the top 1% of heavy mobile users, I routinely run out of battery life on every smartphone I try. For most of the past two years, I was on an iPhone 6s and, near the end of every day, my battery life was in the 10-20% range. Since June, I’ve been on the iPhone SE and was routinely under 10% at the end of each day. With the iPhone 7 Plus, I have yet to get below 30% by the end of day on heavy usage days and, on light days, my battery life stays in the 40% range by the end of day.

Apple’s custom designed A10 chip, and their ability to tune their software for better battey life, is a key reason for these gains. The A 10 Fusion processor uses a mix of two low power efficient cores which can handle most tasks by most users and keep the higher performance cores from turning on. When users need it, the higher performance cores kick into gear and power the more intense graphics and visual elements of iOS. By not having to run these larger, more powerful cores all the time, the new iPhones are getting much better battery life than other devices in my initial testing. While there are many other objective benchmarks we can point to which highlight Apple’s silicon advantage, battery life is one of the many consumers will latch onto because it is a known pain point.

When we polled consumers on certain features and pain points regarding both waterproofing and better battery life, we discovered 51% of iPhone owners say they have run out of battery by 5pm on their smartphone before and had no way to charge it and had to go some time without a working smartphone. 45% of consumers have, at some point, dropped their phone in the water and, of those, 16% had to get a new phone because of the water damage.

Similarly, of existing iPhone owners planning to upgrade to the new devices and those strongly tempted to upgrade now they have seen them, the better battery life story resonates the strongest with the improved camera the second biggest motivating factor.

These are practical improvements which hit a key pain point in the market today, and these features alone, could move the needle for Apple the next few quarters.

While pundits may look at the current iPhones and claim it doesn’t meet their expectations, the bottom line is both the new designs and even more so, the improvements to the fundamental experience like camera, battery, performance, etc., is what will speak most powerfully to the mainstream consumer. This market represents the 80% and it is worth remembering Apple makes products for the mainstream, not the tech elite, even though the tech elite can find many things innovative about the new iPhones should they only try.

After Thoughts
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Observation on live photos. I think it is incredibly significant that there are APIs Apple has made available for Live Photos. I can’t wait to see what developers do to integrate Live Photo support into their apps. Primarily because I discovered something interesting about Live Photos. As nice as they are for your photos, they become incredibly interesting with other people’s photos. I discovered this with my 13-year-old daughter as she was taking many pictures on our recent family vacation. With my Live Photos, I took the shot so I know all the little secrets behind the picture. Going and looking at her Live Photos is an entirely different experience because I get to discover the moments behind the photo for the first time. This is surprisingly delightful and will add a dimension to friends and family posts on Facebook, Snapchat, Instagram, or elsewhere that people will really love.

People have asked if the Jet Black is slippery. The answer is no. To give you a sense of the feel of the Jet Black version just feel your iPhone’s screen. The feel of the screen is very similar to the feel of the back of the Jet Black design.

People also wondered if the Jet Black easily scraches. I’ll echo what others have said about the Jet Black getting small micro-abresions but not scratches. Mine has very little micro abrasions which you have to try really hard to see. Doesn’t seem to scratch easy as I’ve bonked it on hard objects on accident.

Low Light Photos. Here are two pictures I took on my porch last night. This is a tough photo because it is only using the ambient light from my porch lights. One is from the iPhone 7 Plus and the other from the iPhone 6s Plus. You can see they are both great, but the 7 Plus has more light on my siding and cushions, less noise, more dynamic range, and overall less darkness.

iPhone 6s Plus
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iPhone 7 Plus
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Here is the 2x portrait technique in action. Both photos are shot from the same distance from our dog Nutmeg. I can’t emhasize enough how different of an opportunity this presents for smartphone photography. Many subjects, like little kids, animals, etc., are less coopoerative and thus taking a true portrait, due to how physically close you have to be, is an frequently an aweful and frustrating exprience.

Photo at 1x
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Photo at 2x
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Apple and the Bar By Which All Tech is Measured

During Apple’s iPhone 7 unveiling, executives made a statement that got me thinking. They said from the stage that the iPhone is the device by which all others are measured. It is not hard to quantify this statement while Apple competitors butt themselves up against the iPhone. The iPhone has become the gold standard — if you can’t even draw a comparison to your product you are nothing. It is a desire to be in “the iPhone Class”. Some smartphones are, the vast majority are not. However, it is the North Star nearly everyone shoots for.

The more I thought about this, the more I reasoned it applies to all of Apple products and Apple as a whole, not just the iPhone. The Mac, the iPad, the Apple Watch, etc., are the north stars for all other competing companies. Why does Microsoft keep bringing Macs up in their commercials? It is because the product they are comparing themselves to is the king of the hill and they want to challenge that position.

Interestingly, if you recall, Apple used this tactic against Microsoft. The entire Mac vs. PC ads were, at their roots, this exact point. Microsoft was the default, the standard (we can argue whether gold or not but that’s moot). Apple, while touting the benefits of the Mac’s ease of use and other features, was positioning against Windows because it was the standard.

As you can see this works both ways but, in the end, I feel this is good for all involved.

Good for Apple
This is good for Apple in many ways. First, it helps keep them motivated. I’ve made the point many times that Apple believes their only true competition is themselves. More specifically, the last product they released. The new iPhones, Macs, iPads, Apple Watch, Apple TV, and anything else they dream up, are the gold standard for not just the industry but to Apple. This is the product which they will seek to pass in the next version. However, what great incentive for employees to also know everyone else considers your product the best. So long as that keeps them from resting on their laurels, it should act as a motivator to keep setting the bar higher with each new product release.

You will also hear me talking more about the importance of brand, globally, as consumer technology markets mature. I have been compiling quite a bit of evidence to showcase the strength of position those technology companies with a strong brand are in. Apple is one of those the data overwhelmingly points to. By having others compare themselves to Apple products, it only helps to strengthen the belief Apple’s products are the standard. I know it sounds counterintuitive but when Microsoft, Samsung, Huawei, etc., and others compare themselves to Apple, it only strengthens and affirms what the market already knows to be true.

Good for Competitors
This should be obvious but, competition is good. And honestly, competition is only just getting started. Think about where we are going with wearable technology (on wrists, in ears, on the head, in shoes, etc.). AR/VR have fascinating futures ahead. Artificial intelligence and machine learning practices to increase customer experience is just now seeing ground broken in mass market ways. We need competition in this industry and, if others are adamantly chasing Apple in all these areas, it is good for consumers.

Where my take on this may differ with others who have strong feelings about other brands is that I feel it is good Apple is the benchmark. Especially since Apple can teach them all a lesson on how to do customer service. Just take the Samsung Galaxy Note 7 debacle as an example. Samsung is probably the next closest consumer electronics brand to Apple at the moment and the customer experience they are providing is a disaster.

Apple as the standard across the board is a good bar for others to try and reach. Like Apple or not, they are good this for industry. No reasonable person could argue otherwise.