Unpacked: Minimal Headphone Jack Impact and Interest in Wireless Headphones

I’m certain many of our readers will agree that the media is blowing the perceived negative consumer sentiment about Apple’s removal of the headphone jack way out of proportion. In reality, this move will have very little to no impact. Consumers who buy either of the new iPhone 7’s will naturally use the headphones provided in the box or the supplied adapter.

We polled our panel, using our rapid response technique, to ask iPhone owners about this issue. I’ll start with some key metrics we quantified then we will look at the prospect wireless headphones hold going forward.

Overall, 59% of iPhone owners in our panel said they use the Apple provided headphones as their primary headphones. 41% said they had purchased the headphones they use as their primary ones. Interestingly, after Apple’s provided headphones, the second largest brand owned was Beats followed by Bose to round out the top three brands owned and used as primary by iPhone owners. By quantifying such a large percentage of consumers who are content to use what is provided in the box, it assures us this is a non-story. In fact, I would argue the switch away from “swipe to unlock” to “press to unlock” in iOS 10 will be noticed by more consumers than the removal of the headphone jack.

Looking at where we go from here, a central question many are proposing is if and when the market may adopt wireless as the new normal. Today, wireless headphones make up roughly 30% of sales, according to Piper Jaffrey internal research, with a market size of around 310-320 million units sold globally each year according to GFK. Apple’s AirPods may very well be the future but, as we all well know, the future may be here but it is not evenly distributed (love that William Gibson quote).

If I was to poll the owners of wireless headphones today, as well as the main purchase motivations, I’d put them largely into two buckets — fitness/athletes and travel. Looking at the wireless headphones that sell most today, those are the clear targets of the products. Which makes sense — for an active lifestyle, wireless is more convenient. Similarly, many of the best-selling over-ear headphones have noise cancelling and, design-wise, cater largely to business travelers, one of Bose’s biggest audiences. The mainstream has not yet caught onto the value and, while optimistic, the question is when that may change. We added to our poll some questions around sentiment for wireless. We asked our panel how interested they are to have their next set of headphones be wireless.

We found 32% of consumers outright state they are not interested in wireless. Slightly more encouragingly, 24% said they may become more interested once the price drops. 18% said they were very interested. Those round out the top three responses from our poll.

What Apple is doing is beyond just wireless headphones. In fact, we believe you should think about this product as a form of smart wearable technology. There is quite a bit more that can be done with technology in the ear, think health in particular, than anywhere else on the body. An always on, smart connected computer in your ear opens up many possibilities. Especially when that smart computer is tied into the more powerful computer in your pocket, purse or on your wrist. This is the angle I would keep in mind if you try Apple’s AirPods, or see how people write/review them.

More on this topic in future analyses.

Apple Event Recap and Key Insights

Today, Carolina Milanesi and I will both be sharing our key insights from Apple’s fall launch event. Some of the topics here will be bigger picture points, as we intend to develop many of them deeper as individual articles.

Notes By Ben Bajarin

The Silicon Advantage
The single biggest thing I observed are not the external designs of the new iPhones, Watch, and Airpods but their internal designs. All have something incredibly significant in common — an Apple designed CPU and GPU (yes, a little known point is they customized their own GPU). In some cases, like with the camera ISP (Image Signal Processor) other components, beyond the CPU/GPU, are designed by Apple as well. All of this in an attempt (which they succeed at) to keep the experiential bar of their products at a level much higher than that of their competition. Bottom line, Apple’s products would be differentiated, thanks to iOS, more than their competitors even if they used off the shelf processors from someone like Qualcomm. But their differentiation in terms of what the software can accomplish would not be as far ahead of their competition if they didn’t design their own processors. To top it off, their chip designs rank among the best in the industry and Apple saves these best in class designs for themselves. This advantage can not be underestimated and is one of the main reasons the gap between them and their competition will remain large.

Tim Cook said the iPhone is the smartphone by which all other phones are measured. We don’t attend a single major smartphone manufacturer meeting or launch event where the vendor is not comparing their product to the iPhone. Apple’s initiatives in designing their own custom silicon to power and differentiate their hardware is a key reason Tim’s statement will remain true for some time.

We Will Miss you Headphone Jack. No We Won’t.
I understand why Apple felt they needed to take the time to justify their decision to remove a long copper hole from their smartphones. John Paczkowski got an exclusive interview with Apple execs to help frame the decision. Apple designs for the 80% of the market, the mainstream, not the 20% who are early tech adopters. Mainstream consumers will not be impacted by this move and we will hardly be talking about it in a few months. What matters here is what Apple was able to do with the additional space they got back from that long copper hole. One is space for a larger battery, which we will address in a moment, and second is the new and improved home button and Taptic engine.

There appears to be a mix of opinions on this new solid state home button (it is necessary for water and dust proofing) but it paves the way for future screen designs and potentially smaller bezels. Not pressing the home screen will take a slight second to get used to but personally, I immediately felt it was a superior experience. The new and improved functionality of the Taptic engine and the new developer APIs which will let developers do new things with it, will yield positive experiences. I’m certain consumers will find the trade-off worth it.

Better Battery Life
Let’s call this the potential sleeper feature. Apple is saying roughly two hours more battery life with iPhone 7 and one hour more battery with iPhone 7 Plus. I have a feeling these are conservative estimates as Apple tends to do that and real world results will be much better. Also, their new A10 Fusion architecture (which includes four cores, two high-performance ones and two lower performance efficiency cores) will also help in attaining better battery life overall. The low power cores can run simple tasks, likely even power the display at times and more, all while keeping the two higher performance cores turned off. The result will be much better battery life as more tasks can be run on the low power cores. I expect this architectural concept to continue as Apple increases the performance of the cores in future designs.

Those of you who follow technical semiconductor details will note this concept is similar to ARM’s big.little architecture approach. It is not exactly the same, since Apple designs this architecture not ARM, but it is similar in concept to how it works with a few notable differences I will dive into at a later time.

The Big Question
I saved the big question on everyone’s mind until last. Will these products help Apple return to YoY revenue growth or not? Much of this depends on a big portion of the north of 600 million iPhone base to be convinced to purchase a new phone. So, to help explore this question here is what we know. In both of Apple’s largest markets, China and the US, roughly 40% of iPhone owners in each market respectively are currently on a phone about two years old. Apple’s true super cycle, which was an anomaly, was when the 6 and 6 Plus were launched. With sales of the 6s and 6s Plus being soft, we see a larger portion of the base on 6 and 6 plus, resulting in a large number now on two-year-old phones. Granted, many of those phones are perfectly good and do not need to upgraded, except that consumer study after consumer study yields similar results that nearly half of that installed base intends to keep their ~24 month, or roughly two-year, replacement cycle.

It is true replacement cycles are lengthening but only by a few months. We are seeing the average move from 26 to 28 months (but shorter in several markets like China). But the idea everyone is now holding onto their smartphones for three years is not correct. We still see predictable cycles among many in the smartphone market. So there is a strong base of two-year-old iPhones in the market and many customers indicate they intend to keep to the two year pattern. Now, all those upgrades will not come at once but between the annual buyers (roughly 11% of the market) and the bi-annual buyers (38% of the market) we should expect another strong season of iPhones sales.

Notes By Carolina Milanesi

It is All about the Experience

As often it is the case with Apple events, the full impact of what was announced will become clear over the next few weeks. For some features, the ultimate goal might only become clear in a few years. What continues to be overwhelmingly obvious to me is the overall experience in what Apple offers is how ultimately it retains customers and gains new one. While dubbed by many as a boring recap, Apple starting points of these events is always a reminder of how the ecosystem is doing. Today was no different and adding Super Mario to iOS and Pokemon Go to Watch were two examples of how developers continue to go iOS first.

Differentiating to Cater to a Broader Audience

One of the key takeaways related to both Apple Watch and iPhone launch was how Apple is catering to a wider audience.

With Apple Watch Series 2, Apple is providing a solid upgrade to current owners as well as a good solution to users who have been waiting for GPS integration and or “swim proof” design.

Doubling down on fitness makes sure Apple reaches the widest possible audience as it remains the biggest hook for consumers. Other features such as notifications are discovered as one uses the device and adds to overall satisfaction but fitness remains, without a doubt, the biggest purchase driver. The partnership with Nike for an exclusive Watch design and set of workouts speaks to the many who continue to use the Nike Plus app but have not yet invested on a wearable.

Because fitness is an underlying factor having a Sport edition makes less sense. So, while the original Watch is replaced by Watch Series 1, it will get a bump in CPU and GPU equal to what Series 2 models get but drops in price to $269. This is an attractive proposition for those consumers who, while interested in trying out an Apple Watch, might not have been convinced by the return on investment. Updating the CPU and GPU is not just a nice touch by Apple. It is a necessary step to assure buyers have the best experience when running apps. Not everybody needs integrated GPS but everybody needs to experience apps that do not lag.

Similarly to the Watch, the iPhone portfolio now needs to cater to a much wider and diverse audience and it seems Apple is well aware of that. We have had the iPhone SE as a step into the ecosystem as well as a step up from older devices. Yesterday, Apple added more differentiation to the Plus family, recognizing the higher end of the iPhone base is also not as homogeneous as people think. While the key selling feature for the Plus model was the screen size, it seems Apple created a Pro-like experience without wanting to change the name.

For many consumers, the dual-lens camera will be a good enough reason to upgrade from the iPhone 6s Plus while, for some iPhone 6s owners, the camera of the 7 Plus will outweigh the fact they are not fans of the larger screen. The drop in price and the added storage of the iPhone 6s and iPhone 6s Plus will also guarantee, as in previous years, sales of the new models are not the only revenue driver Apple can count on for the next twelve months.

The Value of the Apple Upgrade Program Starts to Sink In

The Apple Upgrade Program in the US will help Apple in two ways. There will be consumers who signed up to it last year that will take advantage of it for the 7 and 7 Plus as well as consumers who will want to sign up now so they do not have to sit out the 7 to wait for the tenth anniversary iPhone in 2017. Adding China and the UK to the Upgrade Program is clearly a strong added benefit to Apple and, while this is happening now due to the logistics of setting up the agreement in the different countries, it does seem to make more sense to stagger the impact the Program could have on overall sales.

AirPods Could Turn Into Siri Best Friend

With AirPods, Apple stressed the portfolio of products that more and more consumers are owning. Right now, the new AirPods will pair with your iPhone, Watch, Mac associated with your iCloud account. Yet, over time, it is easy to see how these could be used in conjunction with any products, including Apple TV, when I interact with Siri.

Unpacked for Friday September 2nd, 2016

Huawei launches Nova, a new mid-range smartphone family – Carolina Milanesi

Yesterday at IFA in Berlin, Huawei launched two new colors for the P9 – red and blue – along with a new MediaPad M3 running Android and focused on music and two new smartphones — the Nova and the Nova Plus.

It is these last two devices that are particularly interesting. They are priced at 399 and 499 Euros respectively and they are a change in direction from Huawei who had been focusing on the high-end. Adding these products to the existing Honor line, which was meant to be more affordable, shows an increasing pressure on the number one Chinese brand (to get to the second leading smartphone spot fast) but also pressure in the home market to become more price competitive as vendors such as Vivo and Oppo are growing share.

While going back into the mid-tier is not necessarily a bad move, I feel Huawei might risk competing with its Honor products. While the Honor brand is online only and the Nova brand is for carrier and retail channel, consumers will still compare the two. This might end up not actually adding to the bottom line.

Some of the messaging at the press conference as well made me think there was overlap between the two brands, given the strong focus on selfies which is a key thing for the millennials the Honor 8 is aimed at addressing.

Huawei also needs to be careful balancing price and features across the portfolio to not undervalue the high-end that has brought Huawei to be seen by consumers as a leading brand.

Google’s Hardware Ambitions – Ben Bajarin
Two Google hardware related news items appeared yesterday. The first was this report that they are shelving their attempt to make a modular smartphone named Project Ara. It was hopefully obvious to most this was a bad idea and not something mainstream consumers would ever latch onto. From a research standpoint, it was not a bad idea. Trying things like this in labs often lead to new learning and potential new ideas. Many companies do research like this and understand that what they take to market in the end may be nothing like what they started out to accomplish. Somewhere along the way, they may learn something key to a future product.

The shutting down of this project seems to be a part of the broader ambitions of the first party hardware group inside Google. This group makes the Home hub and router, Pixel, Chromecast, and other hardware, both present and future. This group is reportedly planning an event on October 4th to unveil a range of new hardware products.

Google’s hardware ambitions are still unclear to me. I certainly understand what they are doing but I don’t understand why. Having had discussions with folks in their hardware group during briefings and one-on-one meetings, I’ve yet to even hear them articulate why they believe they have a role to play in first party hardware. These devices don’t appear to be reference designs for other to copy but rather, look to be attempts at an end-point Google wants to control. While I’ve yet to do research to quantify the lack of interest in the mainstream consumer market on Google-branded products, my sense at the moment is it is not high and Google’s credibility is weak in this area. However, you have start somewhere. We said the same things about Microsoft when they first made the Surface and now I feel it is a pivotal strategy for them to maintain relevance in key parts of the consumer market.

Google has yet to truly crack the consumer market with their own first party hardware but we will see if anything they launch this fall does. I remain highly skeptical.

The Artifical Intelligence Consortium – Ben Bajarin
Interesting article in the New York Times on a gathering of folks from Amazon, Google, IBM, Facebook, and Microsoft who are seeking to put together ethics standards when it comes to Artifical Intelligence. According to the article:

The specifics of what the industry group will do or say — even its name — have yet to be hashed out. But the basic intention is clear: to ensure that A.I. research is focused on benefiting people, not hurting them, according to four people involved in the creation of the industry partnership who are not authorized to speak about it publicly.

This reminds me of the early days of robots where the so-called “Asimov’s Three Laws of Robototics” were discussed. We have still yet to see robots go mainstream but those laws, created some time ago, were well thought out principles. One of my biggest frustrations with many tech companies releasing new technology is their lack of ability to truly think through all the logical conclusions. With regards to VR, AI, self-driving cars, etc., we need forums where the tough questions can be asked and the unthinkable discussed. Forward thinking companies and individuals need to be involved in these discussions and debates so we can make positive strides and put our best foot forward, not our most foolish foot forward.

Samsung Recalls Galaxy Note 7 Devices – Ben Bajarin
Samsung is recalling all devices of the Galaxy Note 7 due to some devices catching on fire because of battery issues. Here is part of their official statement:

To date (as of September 1) there have been 35 cases that have been reported globally and we are currently conducting a thorough inspection with our suppliers to identify possible affected batteries in the market. However, because our customers’ safety is an absolute priority at Samsung, we have stopped sales of the Galaxy Note 7.

Early estimates peg US and Korea sales at around 1.2 million units. From digging deeper into analyst reports on this, the estimate was the potential phone catching on fire issue is related to 24 units per 1 million. Samsung is recalling them all in both markets. The big problem here for Samsung is the financial impact, both in cost to replace the device (which BOM cost estimates to be around $300 USD) as well as the potential loss of sales which, based on historical trends for this model, could be anywhere from 2-4 million units during the second half of 2016.

One other thing I’m watching for is how the media covers the story, particularly big TV news outlets. A recall of a flagship smartphone has never happened before at this scale and it is a big deal from a consumer sentiment standpoint. The big question will be if it impacts their brand or the perception of the device enough to hurt future sales. That is why the media’s coverage of this is interesting to watch to see how it is spun.

If the recall of cars by manufacturers is any guide, the brand is not completely tarnished when this happens, as long as the customer is not the one impacted and gets their replacement in a well handled manner. For context, second half projections of the Note 7 are about 12 million units worldwide. It is worth remembering, high end devices like the Note 7 and Galaxy S series only represent ~13-15% of Samsungs total annual worldwide smartphone sales. This is why investors will not panic but will be cautious looking at the stock over the next six months as these devices, while the smallest percentage of sales, are the largest contributors of operating margin.

Intel and the Last Foundry Standing Theory

Coming out of the Intel Developer Forum (IDF), I thought I would share more on what I believe is Intel’s long-term thesis about themselves. Quite simply, I believe they feel they will be the last foundry standing with their leading edge process technology. If you follow this as closely I do, you will note Intel and other foundries like TSMC and Samsung are in a race to get to the next process node. Today, these foundries manufacture at many different nodes but 14 nanometer and 16 nanometer are the leading edge processes of today. With each jump to new process nodes (10nm being next and 7nm after that), designers can pack more processing power onto a single chip while still keeping a low power profile. The industry calls this “performance per watt” and the amount of performance increases with each new process while still maintaining a lower power voltage.

Companies who own factories that make chipsets care about this from a competition standpoint. By getting to the next process node, it makes your factory more attractive to potential customers. It is also important to point out that getting to the next process node is not only expensive but extremely difficult. We are talking about advanced quantum physics and, at this point in time, the industry is not sure of the science to get their foundries past 10nm. 7nm remains mostly a theoretical goal, with some technologies in the works being tested out which may make it possible. The two biggest things impacting this, and Moore’s Law in general, is economics and science. It is getting more costly and more difficult scientifically to keep pursuing leading-edge process technology.

This is what makes part of this analysis so fascinating from an economics perspective. If it continues to get more costly to pursue leading-edge process technology then, unless you have customers who will pay a premium for those advancements, it is not worth pursuing. There are only a few name companies who will pay for this and one of them is Apple but Intel is also in the mix since they still sell somewhere north of 350 million chipsets annually when you add servers. While costly, Intel is still well positioned to pursue leading-edge process technology — perhaps Samsung is as well. For TSMC, it is a little more tricky as their largest customer willing to pay and utilize the latest node and ship SoCs in volume at that node is Apple. Should they lose Apple, getting beyond 10nm would be very tricky economically.

I emphasize the difficulty getting beyond 10nm will present. There is a saying of many industry vets: “The harder it is for Intel, the better it is for Intel.” This is ultimately the root of what makes up my last foundry standing theory. It may genuinely come down to them and Samsung and, while I certainly will not write off Samsung, you certainly can’t write off Intel either.

Now, let’s address the “Then what?” scenario. Let’s assume this theory is correct and Intel is the only one to get to 7nm or less. Either way, they are the only one who can manufacture at that node. Then things get interesting because time wise, we are talking about the 2022-2025 time frame, which is where we have to believe, as an industry, the semiconductor segment is shipping more semiconductors than they are today. Including chipsets and digital sensors, over a trillion semiconductors are shipped annually in 2016 and that number will grow as we connect more things. Intel has a lot of capacity in their foundries but they don’t have enough to meet the needs of the global semiconductor industry on their own existing capacity today. So they either need to acquire more capacity or license their process technology to other foundries like Samsung, Global Foundries, TSMC, and accrue revenue on the chipsets they make for others on Intel’s process. In this scenario, Intel gets licensing revenue from licensees and high margins from their own first party manufacturing. Not a bad business at the end of the day if it pans out.

There is, of course, the scenario where Intel is wrong and others do keep pace with them on process technology. Part of their manufacturing business plan to compete in manufacturing ARM chips for others is a segment of this backup plan I think. While we can argue they should have done this sooner, if we look back in 10 years and others have kept pace or beat them, then it could be said their lack of willingness to compete for ARM manufacturing earlier and more vigorously was financially irresponsible for shareholders.

We will see if and how this pans out. For me, it is a central theory for how I analyze Intel and others in this space. At the end of the day, right or wrong, hopefully, you find this theory to be interesting at the very least.

Unpacked: The Time Shift from Linear to Online TV

The writing is on the wall for online TV to be the predominant way humans consume video content. It truly is only a matter of time. Some countries, like parts of Asia and Europe, are much farther along in this transition as content providers there increasingly offer their full suite of content options to be streamed over the internet to the hardware of choice by their subscribers. That will eventually be the reality here in the US as well as generations of consumers demand content on their schedule. It will not happen overnight but it will happen. And, as the following charts will show you, it will be driven by the younger generations.

When you look at the percentage of consumers, by age, who say they consume some form of linear TV and some form of online TV daily, we see the following pattern.

Screen Shot 2016-08-28 at 7.20.27 PM

This chart represents a visualizaiton of my concept of behavioural debt. Some demographics are simply comfortable doing things the way they have always done them, where other generations, with fewer years of behavioral debt stored up, are more open to change as this change more accurately fits thier lifestyle. There are so many different data points I could show that would have the similar pattern as in this chart. Younger demographics’ openness and willingness to adapt and adopt new technologies is creating a gap between themselves and the generations that precede them. What needs to be pointed out in this data is how Gen X seems to fill the gap in this transition. However, Gen X is only estimated to be around 50 million people in the US, where as millenials are well over 90m, depending on whose estimates you like. Either way, while Gen X has some traits of boomers and some traits of millenials, the size difference is signifant and shows us where the balance of power lies. As Mark Lowenstein pointed out, boomers are no slouch in size (roughly 80m in the US) and they still maintain a large financial power as they have much more disposable income than millenials on average. This is one reason we see such a high disparity still today in the ad spend on traditional TV — the most valuable baby boomer generation still consumes their content via TV. As I said, that will someday change, but we have to understand the real habits of these demographics during this shift.

Similarly, the pattern holds when we look at time spent per day on each medium broken out by demographic.

Screen Shot 2016-08-28 at 7.33.07 PM

Here we still see the behavioural divide of the young and old demographics as the trend line continues away from linear TV to streaming/online TV and video content. To be clear, linear TV today still has the edge in time and overall consumption. However, that is because many of the Pay-TV services have not yet fully embraced over the top delivery of that content. It seems every year, providers get closer to allowing their subscription content to be consumed on any hardware the consumer wants. If we look back on YoY trends in linear TV, we see the trendline slowly climbing upward. As the Pay-TV providers offer their subscription services holistically, including live sports and other live content, I’m certain we will see that line go up more quickly. Again, it is only a matter of time. When, not if, is the central question.

The Looming Brand Battles in Consumer Electronics

The consumer market boils down, plain and simply, to brand. Brand matters and is arguably the single most important thing when it comes to consumers. Yes, making great products must accompany this, but the brand plays a huge role in perception, consumers self-identity, aspiration, and a host of other things which may be more psychological than physical.

I jokingly tweeted this chart with the remark “the global battle to be a consumer electronics brand disguised as a smart phone sales race.”

Screen Shot 2016-08-15 at 9.29.50 AM

While there are five companies on this list, at the moment, the only three I believe have a shot–from a global viewpoint–are Samsung, Apple, and Huawei. However, as Under Armor has shown us, if the recipe is concocted correctly, new entrants can rise and challenge the dominant brands in any segment. In fact, there are quite a number of parallels between consumer packaged goods brands, sports brands, fashion brands, and other categories when you dig into them. First, it is never a winner take all market. Second, there are only a handful of truly global brands in each category.

When it comes to being a global consumer technology brand, it is likely we need to conclude such a company must play in many categories in consumer tech. However, the smart ones to play in may not be the most obvious ones today. For example, TVs may become a thing of the past. So a major question for any new brand entrant could be if they should make a TV or focus on what’s ahead which may disrupt TV. This question is tricky because a company looking to establish themselves as a brand must do so within the categories of the day, while established brands can focus more resources toward the future. For example, Huawei is not in a number of consumer electronics categories Apple and Samsung play in. So they have more work to do in the areas where Apple and Samsung are established which will take away from their focus/efforts/resources in preparing for the categories of tomorrow. LeEco, Xiaomi, etc., will all face similar challenges as their first priority remains establishing credibility and consumer trust in the categories of today. This is a leading factor in remaining optimistic about the future ability of Apple and Samsung to remain relevant and competitive in the areas of consumer technology. Brands are both very hard to build and very hard to compete with. Brands are also much more difficult to disrupt than a product or a category.

The appeal of being a global CE brand makes sense. After all, the consumer electronics industry is an approximately 220 billion dollars in revenue per year in the United States alone and nearly 400 billion worldwide. These numbers only reflect the current landscape of consumer tech and don’t include the size of the market once technology invades nearly every type of consumer product (including cars) and household appliances (IoT).

The global consumer market is a complicated one and it will be a tempting mountain for many to climb only to find the journey too tumultuous before they give up or die.

Unpacked: The Health/Tech Market Opportunity

When looking forward to big future market opportunities, the health and technology intersection is one that is commonly brought up. The health/medical industry is, broadly, ripe for continued integration of new technologies. However, from what I see at the moment, it may be wise to separate consumer driven health tech from technologies deployed by the medical community and given to consumers with a health condition. The latter market is likely much greater in terms of size than the former.

Right now, when we look at consumer-driven health tech products, we look at things like health and fitness wearables, sports tech and gear, and other products targeting those with an affinity for health and fitness. The challenge is that is not a large market in reality. Looking at data we have both at a global and local level, we only find pockets of consumers who self-identify as having a health and fitness focus representing between 14-18% of the market.

Data from one of our research partners revealed that globally, those with a fitness-focused lifestyle (those who exercise in some capacity four times a week) only make up 14% of global consumers. Similarly, in our own health and technology focused research study, we found 17% of the US consumers say they are obsessed with their health, eat right, and exercise several times a week. Similarly, only 19% indicated they consider their current health level “very healthy.”

What our data suggests is that any product with a specific health and fitness focus and value proposition has a limited global addressable market that is likely only in the 100-200 million range. Not small, but also not super large. Given other data points we have, it would suggest this market is roughly only 20% penetrated if we add the percentage of consumers in each market who say they have a fitness band or smart watch, so there is still headroom. The key takeaway is the market size is not massive for dedicated health and fitness technology products being sold direct to consumers.

A larger segment of consumers indicated they were not health-obsessed but also not suffering from major illnesses. While this is a big part of the market, I’m not convinced the health and fitness tech is poised to penetrate this group. So the current crop of wearables and smartwatches need to have greater appeal outside of health and fitness if they want to grow their market size. Smartwatches are better positioned here, given they add a lot more utility overall than fitness bands but today, the largest part of the smart watch consumer pull is coming from a health and fitness angle.

At the other end of the spectrum are those who say they have a chronic illness they are treating. This represents less than 20% of the market. This is the market for which a medically-focused technology product would be suited, such as one prescribed by a doctor to a patient to help monitor health. This is also not a large market but still represents an important one as we look at the integration of health and technology.

Not surprisingly, the biggest segment of the market is more nominal in their health awareness. There is certainly overall value technology can bring to this market but the pull, at the moment, is coming largely from those with a fitness focus or someone dealing with a health issue. Wearables may be on the cusp of going mainstream and we will see how close we are when we do our dedicated wearable/smart watch study this fall.

Post Intel Developer Forum Thoughts

This week, many on our team have been attending Intel’s annual Developer Forum. Intel looked to tell a bold and ambitious story but also one that, under the hood, gave some key indicators of how Intel is positioning itself for growth.

The first thing you can spot in the last few years of the Intel Developer Forum is the lack of PC content at the show. Intel had a much more expansive story — virtual reality, augmented reality, connected cars, connected cities, cloud computing infrastructure, 5G, and more. While relevant, the PC, which was once Intel’s cornerstone, is now on the backburner and not even mentioned as a part of the future.

Building Complete Solutions

Intel’s announcement and demonstration of their Project Alloy VR/AR headset is an example of the way Intel sees itself deploying new platforms as complete solutions. Project Alloy is designed to help drive standards for the industry to build AR/VR headsets around the Windows Holographic platform. This headset and all the components and sensors are mostly Intel IP but can be designed in multiple ways by partners to fit the use case. Standards and quick time to market will be a key part of driving this solution and Intel appears to be the farthest along at the moment.

This complete solution is also embodied in Intel’s Real Sense Camera solution, Galileo, and Joule solutions that are turnkeys for applications for computer vision, the maker community, and wearables/embedded applications. In this rush to create IoT, wearables, and a host of other new technologies, companies are looking for a one-stop shop for technological solutions. Intel seems finally in a place to offer this across a range of hardware designs.

Manufacturing ARM Chips

One of the more interesting announcements, which has already inevitably led to speculation, was Intel announcing they are upping their capabilities as an ARM Foundry by acquiring the IP licenses necessary to start making ARM chips for mobile devices. Several key points from ARM’s press release on the news stood out:

I’m excited about our collaboration with Intel Custom Foundry for several reasons including:

  1. The benefits to our partners by expanding the ARM ecosystem to offer more manufacturing choices for premium mobile and consumer SoCs.
  2. Intel Custom Foundry will give its customers access to world-class physical IP and ARM implementation solutions.

  3. All the major foundries now offer Artisan platforms, further confirming it as the industry standard for physical IP.

One of the strengths and differentiators of the Artisan platform is the availability of ARM core-optimized IP—what we call ARM POP™ technology. The value of POP technology for an ARM core on the Intel 10nm process is tremendous, as it will allow for quicker knowledge transfer, enabling customers to lower their risk in implementing the most advanced ARM cores on Intel’s leading-edge process technology. Additionally, POP technology enables silicon partners to accelerate the implementation and tape-outs of their ARM-based designs.

The top bullet is an expansion of the ecosystem. I’ve long made the point that Intel believes only a few manufacturers will be able to get past 10nm process technology. If that is true, then current semiconductor companies will need as many options as they can in order to get the silicon designs they need. If we believe we are heading toward a world with greater than 50 billion connected objects and sensors in nearly every gadget sold, the industry needs Intel’s capacity to help make the silicon of the future.

The second part of the point of “choices for premium mobile and consumer SoCs” is telling of the type of customers Intel wants. Intel doesn’t seem as interested in making commodity SoCs, even though they will take whatever they can get at this point. An emphasis on premium SoCs really only means two customers–Apple and Qualcomm.

While the big emphasis of this announcement was Intel’s foundry which will provide access to ARM’s Artisan IP and allow for very quick and very basic system designs. Companies like Apple and Qualcomm create their own customer architectures and have their own custom libraries which make the ARM Artisan IP points here irrelevant for those customers. Someone like Spreadtrum or LG, even TI, Mediatek, and others are ones who use generic ARM cores and would need this technology at their manufacturer to move forward.

Now this does not mean Intel could still not win Apple or Qualcomm. In fact, I think it is becoming increasingly more likely Intel could win Apple in some form. Similar to the way they have likely won some bit of Apple’s modem business in the new iPhones. My gut says we could likely see Apple-designed ARM chips on Intel process technology in the iPad before anything else. Even ARM acknowledges the superiority of Intel’s process technology and it would be fascinating to see what Apple could do with their designs on a leading edge process of Intel’s at 10nm or even 7nm in the future.

Finally, it will be interesting to see how Intel showcases ARM cores running on their process technology. While I don’t believe LG or Spreadtrum make the best market proof points for ARM + Intel process designs, they are at least market proof points. I would not be surprised, assuming Intel doesn’t win a showcase customer anytime soon, to see Intel actually design a reference chip of their own, based on the ARM architecture, to showcase what a premium ARM chip running on 10nm could really do. While pure game theory on my part, if this happened it would really signal a truly different Intel has arrived.

Unpacked for Friday, August 12th, 2016

Why I Hope the Rumors of a Surface All-in-One Come True – by Carolina Milanesi

The Verge this week published an article suggesting Microsoft is prepping to launch three Surface-branded all-in-ones (AiO) as well as an update to the Surface Book.

Launching Surface-branded AiOs now might seem out of place, considering everybody is talking about mobility and, in notebooks, thinner and lighter has been the anthem for years. Yet, when we look at what Surface devices usually deliver in terms of experience and specs, a Surface AIO device would have a role to play in both the enterprise and consumer segments.

In the enterprise market, these new additions would do two things. First, they would address some specific business verticals or locations where all-in-ones seem to be the preferred form factor: business receptions, higher-end kiosk locations, hospitality, etc. Most importantly, however, it will continue to add credibility to Microsoft as a committed hardware and solution supplier for enterprises as it builds a fuller portfolio of products.

It is, however, in the consumer segment where I see more opportunity. As mobility continues to take over, we see users replacing existing desktops with notebooks and, less so for now, two-in-ones. Some add to their current desktops with lighter and smaller notebooks and tablets. With these devices, users often put mobility over performance and screen real estate, making these devices not ideal for more serious gaming and content consumption.

With on-demand TV consumption growing, an AiO would function as an additional screen in the home. More importantly though, the current need for VR headsets to have a powerful PC to control them might also help drive AiOs. For Microsoft, a Surface AiO in the family or living room will also add another entry point for Cortana so she can become the family assistant of choice.

If Microsoft remains serious about hardware, the Surface family can only grow so users who appreciate the attention to detail in both design and specs can start building a portfolio of products that delivers on the Microsoft services and experience side in a similar way users do in the Apple camp. This is usually easier to do when the offering falls in the high-end of the market which is exactly where Surface has been playing thus far.

Kantar: iOS Returns to growth in the US and EU5 – by Carolina Milanesi
On Wednesday. Kantar released their OS market share for 2Q16 and, while the report focused on the return to growth of iOS in the US and EU, I think the interesting dataset is how well the iPhone SE is performing.

We heard during the latest Apple earnings call how they had initially underestimated demand but now production has caught up and they are able to fulfill orders. If you look at the numbers Kantar released, you can see how strong the SE is performing, even in the US:

“The iPhone SE became the third best-selling phone at 5.1%, contributing to the overall growth of iOS during the period.”

More evidence of the iPhone SE success is to be found in Europe — specifically GB where Apple accounted for 37% of sales in 2Q16:

“In Great Britain, the iPhone SE was the top selling device in the quarter at 9.2%, followed by the iPhone 6s at 9.1%.”

Let’s be clear. This is not just for the love of the smaller screen. Yes, many are upgrading from previous models with smaller screens but only some of these did not want to give up that particular feature. Many, however, have been holding on to what they had because they did not want to spend more money on the new models. 49% of US iPhone owners, according to Kantar, still own an iPhone 5s or older. The second source of buyers, and one Apple was eager to highlight during earnings, is represented by brand new iOS buyers.

They are clearly not early adopters. Some of them are upgrading from feature phones but most are switching from Android where larger screens have been available for much longer than on iOS. It would be safe to conclude that, while screen size may play a role in the buying decision, it is more likely the real driver was price.

As the iPhone SE base grows, Kantar should be able to share more data on the split between upgraders and new buyers. Ultimately, both groups are good for Apple as they serve different purposes. The upgrade to the SE guarantees the installed base of users is more future proof when it comes to services such as Apple Pay, while new buyers expand the installed base, keeping it appealing to developers as well as content and service providers.

Intel Purchases AI Chip Vendor – By Bob O’Donnell
The quest for influence and control in the burgeoning fields of artificial intelligence, machine learning and deep learning took another turn this past week as semiconductor giant Intel purchased Nervana Systems. Started by ex-Qualcomm employees, Nervana Systems has been working on a dedicated deep learning accelerator chip, along with software and development tools, to enable the creation of software that will run on their unique architecture.

Intel’s purchase of the company reflects their interest in dramatically speeding up their efforts in deep learning, no doubt in part from the near-term competitive threat from nVidia. Longer term, this looks to be a very strategic purchase for Intel as it gives them access to some key IP and expertise around these AI-driven technologies.

Deep learning, and convolutional neural networks in particular, are expected to have an important and long-term impact on overall computing trends, so most major vendors have made efforts to increase their relevance and capabilities in these areas. It’s particularly valuable for Intel because the company has the scale and manufacturing expertise to leverage this IP for both standalone chips initially and eventually, as a core computing block they could embed into future processors and other chips. This will allow Intel to bring deep learning capabilities to servers in the short term and client devices longer term.

In addition, Intel can manufacture the chips themselves and, if they prove to be popular enough, this could help keep their production lines running closer to capacity, which helps them keep their overall manufacturing costs down.

Of course, it remains to be seen how well Intel can integrate the Nervana Systems’ personnel and technology into their own. In particular, there are questions about whether or not the Nervana Systems IP can (or should) be implemented alongside x86 IP but the promise and potential of the deal makes it look very appealing at first glance.

A number of other startups are also working on deep learning accelerators, so there are also questions from a competitive technology basis about how the Nervana Systems IP will stack up longer term. However, given Intel’s financial strength and their desire to continue driving computing platforms in the data center and for client devices, it’s a safe bet to say Intel will work hard to remain relevant.

Walmart acquires Jet.com – by Jan Dawson
Arguably, the biggest tech news this week was Walmart’s proposed acquisition of startup online retailer Jet.com for $3 billion in cash and around $300 million in stock. This is the first really sizable e-commerce deal since Amazon acquired Zappos in 2009 for what ended up being around $1.2 billion. It goes somewhat against a recent trend of smaller online retailers either going out of business or being sold off at downgraded valuations.

The logic behind the deal is fairly obvious. Walmart, the world’s largest retailer, has nevertheless struggled to grow its e-commerce business at anything more than a fairly anemic rate and badly needs help. Jet.com, meanwhile, has grown rapidly but is likely not yet profitable and needs a financial cushion while it scales its operations. Walmart’s scale, distribution, and, perhaps most importantly, pricing leverage can all help Jet significantly. Amazon is the obvious target here, as the largest pure-play online retailer and the company that’s capturing the vast majority of the overall growth in e-commerce in the US. And yet, it will likely take some time for Walmart and Jet to make any kind of meaningful impact on Amazon.

Amazon’s shadow looms over the entire e-commerce marketplace. In essence, Amazon has cracked the e-commerce model for the US and a number of other markets by building a massive distribution infrastructure and selling Prime subscriptions, which create strong incentives for people to concentrate their online spending on Amazon. Jet and others have tried to innovate in their own ways (Jet’s focus has been on bulk buying) but none of these alternative models really seems to have worked. Scale continues to be enormously important and this is where Walmart might well help Jet quite a bit. I wouldn’t be surprised if the more unique elements of Jet’s business model fade away over time in favor of a purer e-commerce play.

While Jet’s technology and user interface are clearly a large part of what Walmart is paying for, I suspect it will also benefit from having an innovative startup culture somewhat separate from the rest of the company. Walmart would do well to give the Jet team considerable independence and space to keep doing what they’re doing, as this team is more likely than the core online team at Walmart to be truly innovative and drive real change in e-commerce. That could end up being very valuable in its own right.

Should Amazon be worried? Not yet, certainly. But I’m very curious to see if Walmart can marry its massive scale and distribution operations with Jet’s user interface, technology, and innovation without squashing it. If it can, this deal might just pay off.

The Big Ad Shift

My article on Netflix from Monday fits into a much larger theme I have been looking into about who is best positioned in the paradigm shifts of media/online media we are witnessing. If you have ever dove into the advertising business of late, you know the slow shift from traditional advertising to more online/digital advertising is happening. Estimates are online advertising could take over the majority share from TV advertising around the 2019 time frame. Obviously, this could accelerate as forecasts are far from perfect, but traditional advertising is still king for the time being. Facebook and Google remain the talk of the town as this shift happens largely due to the nature of the value of the western markets from an ad standpoint. Knowing there is still huge advertising dollars moving from traditional to online is the main reason it is hard not to be bullish on Facebook (and Facebook family of apps like Instagram) and Google and to some degree Twitter and Snapchat. Many analyst notes on the matter refer to this coming dynamic as a winner take most (not all) market, and this may certainly be the case.

Recently, I’ve had some discussions with execs in the advertising space, and what I found interesting from these discussions was how advertisers were taking what is considered more “off peak” seasonal time frames to start to dabble more aggressively in online advertising strategies. We know all forms of advertising see a big spike around the holiday time frame and that time frame is also when advertisers stick to their tried and true methods. Once I understood this, it made sense to see this chart from Morgan Stanley’s online advertising analysis note on estimate vs. actual YoY advertising growth of the major US networks.

Screen Shot 2016-08-11 at 8.13.20 AM

Looking back at similar data from years past, we had not seen such an impact of online in off peak times as we are today. Which, to me, suggests this shift could happen sooner than 2019 if these off-peak ad spends with the online incumbents like Facebook and Google pay off or lead to new learnings which influence the shift in spend in the coming years. To my point about Netflix, and even some of the recent data suggesting the big increase in online streaming of the Olympics vs. watching it through cable, perhaps consumers are making the shift to streaming video much faster than anticipated. Should this shift happen sooner, as I suspect it could, then advertisers are currently planning to spend in the wrong places when it comes to video. 2016 online video advertising spends look to be in the $6-9 billion dollar range in the US depending on whose estimates you look at. Compared to $70 billion spent in the US on traditional TV advertising. The spending trends simply seem out of whack with consumer behavior and the question is when advertisers will catch on.

Timing is the central discussion taking place with investors looking to gauge when a hyper growth cycle to the advertising business to the likes of Facebook and Google could happen. Obviously, as online video plays a much more central role in taking advertising dollars, Netflix, Amazon, Snapchat and others could stand to benefit by taking large chunks of these ad dollars which will be up for grabs during this shift.

Offline advertising spends signal the shift which will likely come to TV if consumer behaviour continues over the long haul. Both Newspaper and Magazine YoY spends continue their downward decline, with estimates of 11% combined spending declines in both those categories in 2016. Only TV and Online ad spending are on track to see a YoY increase in 2016. But all eyes will be watching this big ad shift, and when it happens, it is likely to inject more growth to the Googles and Facebook of the world.

Unpacked: Smart Home Product Ownership and Awareness

We are still clearly in the early days of the smart home. I’m reminded of this reality time and time again with many smart home research projects we are currently engaged in. I came across a private report which had a few interesting statistics on ownership and awareness of specific smart home technology.

Screen Shot 2016-08-07 at 2.50.40 PM

With similar findings to our own internal research, smart lighting remains the most owned piece of the smart home. The report points out that ownership of smart lighting products jumped 40% YoY as of March 2016, the highest of any smart home technology tracked. For reference, the study defined a smart home product as one which had a supported app or website allowing control of the product or appliance.

The gap between ownership of a smart home product and awareness is significant. We at Creative Strategies wrestle with the how and when this gap will close but, many smart home products still remain either expensive or hard to setup/install for normal consumers so we don’t see the gap closing anytime soon. We have, however, noticed a trend that consumers do not generally stop at one smart home product. Indeed, they tend to add multiple new smart home products in rapid succession after acquiring their first smart home/smart control product.

Our thesis here is consumers recognize the value and convenience of smart home control only after acquiring their first product. Once they see the value/convenience of remote or automated control of appliances, they look to connect other things. We see this as a positive trend for the smart home. It means we simply need the mainstream to acquire the gateway product. The problem is, we aren’t sure what that gateway product to the smart home will be. The data suggests it is lighting of some form which serves as the gateway to the smart home for the mainstream consumer. While I can see this being the case, I could see something else being the gateway as well. Maybe a smart speaker like the Amazon Echo or even something as simple as smart TV cable boxes like the Apple TV or Roku which begin supporting smart control features and serve as a gateway. Or there may simply not be one gateway product to the smart home.

Regardless, the point remains. Once consumers buy one smart home product, they do not usually stop there. This is the trend line we feel is positive and, as we solve some technical issues around installation for many of these products (it doesn’t require you to be contractor/electrician/plumber/etc.), then we will be confident we will close the gap between the early techies who make up the smart home market today and see the smart home capture the masses.

Netflix and the Future of Entertainment

I spent last Thursday night watching all eight episodes of Stranger Things, a new Netflix Original series. When Netflix releases a full season of episodes of a show, I tend to watch them all in fairly quick succession. I have had long debates with myself as to whether I prefer having a season’s episodes released all at once or weekly over the span of many months. I’m still not sure which I prefer but I do think Netflix is onto something which may give us a glimpse into the future model for entertainment.

The Future is Story as a Service
What made Stranger Things interesting was it felt like a story which could have been a two-hour movie but was made better from a storytelling perspective by being made into an 8-hour series vs. a movie. The story and overall entertainment value was better with it being the former. Stranger Things could end now or go another year but, either way, it had a satisfying end.

The full episode release of the season gave the impression of it being a great movie broken up into episodes that could be consumed in my own time — all at once or over time. This model allows writers to do more than they could in a movie given the time constraint. I’d even offer the viewpoint that this model allows for better storytelling overall. Which is why the glimpse we are seeing from Netflix is the future of entertainment — storytelling as a service.

Interestingly, in a recent cloud services study we did, 47% percent of consumers said they were more likely to pay for an internet service which was entertainment-based than any other kind of internet service category. Consumers like to be entertained and they are OK paying for it. This is not surprising.

But the model Netflix, and even HBO and Amazon Prime video, are using with their approach of original content investment is the beginning of this shift to storytelling as a service. Which means, their investment in original content and even the hiring of full-time story writers is essential to their futures. But it also positions them as the best versus network TV brands who are stuck in the “show a week” model.

Over the weekend, using our Survey Hound research technique, I took a quick sample of our panel and found 83% of consumers say they have binge-watched entire series or seasons and 40% said they do so monthly. Even more interestingly, 75% of consumers said they prefer the shows series/season to be released all at once vs. one per week.

TV networks are, in my opinion and analysis, not well positioned for this shift given their business model. Due to their advertising focus, they are incentivized to release content over long periods of time due to how they structure ad deals. Netflix, HBO, and Amazon are not subsidizing these shows by ads but by my consumer dollars, so I’m paying for these stories as a service. Which allows for this favorable model consumers prefer of releasing all at once. The challenge, as I see it, is their need to keep the stories coming. If I’m paying for it then I always want something to be on. The thing I dislike the most about binge-watching a series is when it is over. After you finish a series or season in a weekend, we need/want something else and, if we are paying for these stories as a service, we will demand it. Netflix, Amazon, HBO and any others wanting to compete here for consumer dollars need to be extremely aggressive in how much original content they release regularly. Again, the demand, if this future comes to fruition, is that we will always want a fresh story. That will be expensive.

I often emphasize a point that consumer markets are not generally “winner take all” markets. However, this may be one of those areas where it could be, simply on the point of economics to invest and create original stories at a frequent pace. The capital intensive nature of this business model means those who pull it off will acquire the most customers and can turn that revenue scale into investments in new content. Storytelling is not a commodity and quality production of content is not cheap. Even in the neutralizing era of the internet, not everyone can do this well. So it will continue to be an area less open for disruption.

This shift is just starting to happen but I do believe we are nearing a tipping point in the way consumers consume their content. This will have a major impact in incumbents today and could put companies like Netflix in dominant positions in the future of entertainment.

Unpacked for Friday, August 5th, 2016

The Human Family – Apple’s New “Shot on an iPhone” Ad – by Carolina Milanesi
Apple just released a new “shot on iPhone” ad and, as usual, it is simple, elegant and will probably strike a chord with many who will watch it.

What I love about these ads is they advertise the product, the iPhone, and position it as the camera millions of people use every day. It shows beautiful pictures people are empowered to take, thanks to the iPhone. Yes, these “oh ah” videos are ads — Apple is not a moviemaking business after all — they sell hardware as their core business.

This is the second time this year Apple delivers more than pictures though. In its earlier Mother’s Day ad, Apple included a picture of a mom with a headscarf and an oxygen tube and one of a same-sex couple. No message was really needed and including those pictures was deliberate. So was excluding the same-sex couple picture from the ad in specific countries where the unspoken statement could have easily been seen as offensive by many.

This latest ad is loaded with a message beautifully delivered by Maya Angelou’s poem “Human Family”, “e are more alike than we are unalike.” The ad will be aired during the Olympic Opening Ceremony on Friday, August 5. If you think getting a Super Bowl slot is great, multiply that by the 207 nations that will be taking part in the Olympics in Rio. The ad is ideal for the Olympics — all people from the different corners of the world coming together. It is also a perfect reminder of human value for the US that has seen a lot of ugliness recently, both inside and outside of the Presidential race. Tech companies have been called to be more vocal about social issues as their leaders are seen as having a lot of influence, both in politics and as role models.

Tech companies have also been called to do more within their own businesses. This week, women and minorities inside Apple can also say “we are more alike than unalike” as Apple published its “Inclusion & Diversity Report” showing women and minorities now have equal pay. Back in February, Tim Cook had said an internal study had found women made 99.6 cents on the dollar compared to men, while underrepresented minorities made 99.7 cents to the dollar compared with white employees. Hiring practices are moving more slowly, however. Apple increased the percentage of female new hires from 31% in 2014 to 37% so far this year, while the figure for underrepresented minorities has increased from 21% of new hires to 27%.

Apple Announces Security Bounty Program – by Ben Bajarin
Late yesterday, Apple announced a new program where they are inviting the research community to spend more time digging into and looking for security vulnerabilities in their software and services. In 2014, Techcrunch encouraged Apple, at the request of security researchers reporter Matt Panzarino spoke with, to be more transparent about security. A bug bounty program was one suggestion in moving forward with that transparency. By bringing the research community more broadly into the security effort with this bounty program, Apple is doing just that.

The big question is, why now? As I’ve always said, Apple is the master of timing. Looking back on how the foundation for Apple’s security has been laid, a key piece came with the jump to 64-bit processor architectures and the creation of the secure enclave processor design. Both of these manifested themselves in the iPhone 5s and subsequent products. Meaning, in reality, we are only a few years into the hardware designs from a security standpoint. Built from those hardware bits are all the new layers of iOS security and iCloud server side security as well. So the foundation has been being laid the past few years and is now ready.

I had the opportunity to speak with Apple about this program and one point that stood out to me was their mention that security bugs are becoming harder to find. This tells me they had been aggressively poking holes at their security solution (as they should be, given their priority here) and, for the past few years, they were finding enough on their own. Now that security vulnerabilities are becoming harder to find, they are inviting more experts beyond Apple’s walls to start digging deeper into their security solutions and to help them make more secure products.

What we have to keep reminding ourselves is the security discussion is not a static one. Hackers get better and so companies like Apple with a security/privacy priority must keep advancing. Apple’s products will never be “secure enough” as there is no such thing. This security bounty program will motivate experts in the community to help Apple continue to be aggressive in making the security of their products best in class.

Instagram Clones Snapchat’s Stories Feature – by Jan Dawson
This week, Instagram launched what is effectively a clone of Snapchat’s Stories feature, in which users collect a series of photos and videos into a daily Story which is viewable for 24 hours and then disappears. I’ve already discussed the merits of the act of copying on my Beyond Devices blog, so I won’t rehash that argument here. Suffice it to say, I’m not impressed with how precisely Instagram has copied Snapchat’s feature, right down to the name and unintuitive user interface.

However, the logic behind this move is sound and that’s what I’ll focus on instead. The reality is virtually all services competing in the same space almost inevitably end up with very similar feature sets. We’ve seen fairly predictable transitions from photos to videos to live video and beyond in dozens of apps already and many of the details also end up being the same. But one of the things that has always set Snapchat apart is the ephemeral nature of the content posted there and the rawness that goes hand in hand with the fleeting nature of Snapchat sharing. Instagram, by contrast, is a far more curated and cultured experience, with individual posts being carefully crafted in order to get the most likes (and with some teenagers deleting posts that don’t measure up in order to curate their feed even more carefully).

Enter Instagram Stories, which is clearly designed to foster that same kind of fleeting sharing within Instagram. Facebook famously tried and failed to acquire Snapchat itself and has also failed with several organic attempts to build competitors, so it’s interesting to see Instagram as the home of the latest move in this direction. Two factors make this a sensible move, though. First, Instagram is enormously popular already among the same demographics that use Snapchat, especially teenagers. Second, Instagram is already focused on the kind of visual content Stories is built around. As such, Instagram’s Stories gets to tap into both existing habits and a very large base of users in the target age group.

I don’t think the intention here is to kill Snapchat – the app and service has evolved significantly from its early days as a somewhat shady messenger and there’s a lot more to it now than the original version of Stories. But I do think Instagram’s version is intended to steal away usage and to keep its users in the Instagram app longer. If a key reason for using Snapchat is to post Story-type content, then allowing users to do the same on Instagram should keep more of them there and give them one less reason to go to Snapchat. Precisely because Instagram has a similar penetration among teenagers to Snapchat, it has most of the necessary social graph in place to make the transition fairly seamless. That’s smart and arguably the closeness of the Instagram version to the Snapchat original will only help with that, even if I find the morality of such cloning questionable.

The only possible downside is more clutter in the Instagram user interface for those who have no interest in Stories. The concept is deliberately different from (and arguably even utterly foreign to) the core Instagram experience and I worry some users might be put off by the inclusion of Stories in such a nice clean setting. But I suspect Instagram will benefit far more from its addition to the app than it will be hurt by it.

Looking at AAPL, FB, and AMZN Going Forward

As I think about the future, I think Apple, Facebook, and Amazon are going to be categorical leaders in their respective fields. While some put the big four (non-Chinese) tech companies as Google, Facebook, Apple, and Amazon, I’m leaving Google out. This is not because I think Google is not doing interesting things and is not influential going forward. But, in some ways, I think Google will be an ingredient in the worlds of the categorical leaders like Apple, Facebook, and Amazon. I also think Google missed both social and messaging in a way that is likely going to hurt them going forward.

Looking at Apple

iOS and Android are now clearly on separate paths. While Android will have the largest user base, Apple will have the best and most profitable one. In nearly every market study we conduct, when we filter what we are seeing from the study by those who own an iPhone and those who own an Android phone, we see distinctly different patterns of behaviors. This is simply the reality of the market. You can clearly segment iOS users from Android users and see very different patterns. These patterns are already influencing what software and services providers offer to customers on each platform and even the business model approach of many companies for each platform. This is no longer a thesis or a hunch or an anecdote. It is the hard market reality and understanding customers segments as those with an iPhone and those with an Android phone, and understanding how different they are, is now essential if you are to understand the consumer market.

Per many of the things I have been writing lately, we are moving out of a hardware cycle. Which is why for some time I have been looking at Apple with less hardware specific eyes in our analysis. We have known the dirty little secret about high ASP hardware for some time. Devices that have an average ASP of over $500 do not sell more than 300 million or so units a year. This was always true of PCs (300m per year), it is true of TVs (300-350m per year), tablets (200-300m per year), and smartphones over $500 (300-350 million per year–mostly Apple and Samsung). The iPhone has not changed this dynamic, selling well in line with other high ASP devices at max annual sales. Even with the iPhone SE pricing, we don’t see a world, given Apple’s current strategy, where they change this high ASP hardware sales dynamic. Furthermore, there is no hardware category, in the short or long term horizon, which will even come close to smartphones in annual sales. Hardware pricing tiers have always dictated their max volumes and this has remained steady and true for quite some time.

This is not to say Apple does not still have new customers ahead for them. I’m simply stating they will not come in droves anymore like they have past years. I do believe there are pockets of the global consumer market which will come to Apple as their needs, wants, interests, etc., mature. I call these “Apple customers in waiting”. They are future Apple customers; they just don’t know it yet. However, adding big chunks of tens of millions of new users per year has likely come to an end. If Apple’s unique customer base is in the 600 million range today, there is still some room to grow, just not as much as when their unique user base was 300 million.

So we turn our eyes to services. Again, this industry has been remarkably predictable as it follows a value path which starts in hardware, moves to software, then moves to services. We are seeing some unique dynamics of this today with a new and large global consumer market but the fundamentals of why this value evolution occurs remain the same. After hardware innovation slows, the focus of the industry moves to software and then services. With Apple, they have a chance to be the first to truly have all three legs as a contribution to their business at a global scale. Services are the key. Apple is in a position to benefit the most from the unique behaviors of their customer base. This translates into their services strategy and it won’t happen overnight. But, as we look at the next decade plus, we have to recognize all three pillars (hardware, software, and services) of the Apple business as integrated parts of the whole long-term strategy for growth.

Looking at Facebook

At the moment it is genuinely difficult to be anything but bullish on Facebook. They are benefiting from the onboarding of the global consumer base right now as much as Google did during the first birth phase of the internet. Facebook, and the Facebook family of apps, is well positioned to achieve user scale like no company before it and provide quantified ROI to their advertising customers in a way Google never could.

This chart from Jan Dawson shows it all. It is the one I look at every quarter and the growth curves keep continuing.

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Their strong growth in developing and emerging markets remains remarkable. It seems they are doing well to monetize every region and they are on their way to reaching two billion users as this trend line continues. The key for Facebook is to continue to get ad spend. Google, Snapchat, and even Twitter are going after this but the analog advertising age has not yet fully shifted to online. As it does, the debate as to who gets the bulk of it remains. Consensus is it is either Facebook or Google. But watching a company like Snapchat to see if they have an impact on Facebook is key for 2016 and 2017. Note my chart from our panel of consumers who say they have used Snapchat in the last month:

Screen Shot 2016-08-03 at 12.40.42 PM

2016 is the year Snapchat is going mainstream and we will see how their growth impacts the potential ad dollars both Facebook and Google can get. Currently, many who analyze Facebook view this last quarter as one that shows they do not need to worry about Snapchat as much as previously thought. Even in a quarter when Snapchat grew significantly, Facebook user engagement was up QoQ and YoY. That being said, Snapchat is really just getting started. I think we need a full year of Snapchat’s presence in the mainstream to see what the impact is on Facebook from both a user engagement perspective and an advertising spend perspective.

Looking at Amazon

Amazon fits into a broader trend for me to analyze. The shift in retail dollars from offline to online is real, it’s happening, and we are getting very close to what I feel is a tipping point for e-commerce to begin to grow quickly and robustly. Even though analyzing Amazon means looking beyond just commerce and into digital media as well as AWS, there is going to come a time where the commerce business hits a hyper growth cycle. AWS remains a big money maker for Amazon and, as they ramp up investments in digital media, they are well positioned there as well for the shift from standard TV packages to digital ones during the TV paradigm shift we will encounter soon. By and large, Amazon still has some spending left and it seems the second half of this year is when they will increase R&D and turn profits they have been taking the last few quarters into investments in growth areas. India and further spending to secure digital media assets are primary areas they will focus on.

Amazon feels it is being calculating in its market timing. We have not seen the tipping point in e-commerce or in digital media away from traditional media consumption channels yet. Now is the time for them to continue to invest and prepare to reap the rewards as these shifts happen.

From a commerce perspective, retailers are in a fight with Amazon and soon will be adding new technological tools to their arsenal to compete. This will be an interesting battle. Even today, it seems a rumor/scoop broke that Walmart.com is looking at acquiring Jet.com. Walmart, and many other retailers, are scared for good reason and I expect acquisitions and a range of other moves/partnerships to happen in order to compete. This shift in spending from offline to online is going to be a fascinating transition and mobile/mobile wallets will help make this happen quickly at some point. This is another one of those areas where there are sparks which will soon turn into an all out fire. Out of all the global players, it seems Amazon will be the one to watch to really see when this fire starts and then they are likely to see hyper growth as well.

Unpacked: Consumer Preferences with Bots and AI

We are starting to study how the market will react to AI in general and business/services bots in particular. There is no question we will see more and more digital agents act as front ends to services. Businesses will build these bots to capture leads or offer a first engagement point with their business. Many interactions with services agents rarely require a human. The shift is from automation to conversation with bots and AI. Automated responses are generally pre-scripted and are the primary digital interactions today but, going forward, these will become more diverse and free-flowing, allowing us have more natural engagements with whatever digital agents we are interacting. To that end, I have a few data points to share.

Simply looking at preferred interfaces for a digital agent, 52% of consumers in our panel said their preference is to type/text as their main interaction point. 46% said using their voice/talking to a digital agent is their preferred interface. This tells me bots/AI agents are going to need to support both voice and text driven conversational interfaces. This is one reason why I think it makes a great deal of sense for Apple’s Siri to also be a chat agent, perhaps integrated into iMessage. While preference is helpful to understand here, there are many times we are not in a position to start talking to our AI assistant, in public for example. The conversational AI/bot experience needs to have options for voice and text interfaces and businesses will be wise to use tools that let them do both.

The most interesting question I asked was if the individual wanted to be notified they were not talking with a human chat agent in this conversational interface. Quite interestingly, 78% said they would like to know up front if the digital agent they are talking/texting with is a human or a bot. This was quite a bit higher than I expected, as my sense was, as long as it was being helpful, who cares? Certainly, there are demographic elements at play here, where younger people are not as concerned about the agent being a bot or a human. But we are also in a technological transition when it comes to artificial intelligence. Meaning, some cultural and demographic nuances are to be expected. 21% stated they did not care if it was a human or a bot as long as it was being helpful. Five years from now, I doubt this human/bot agent divide will even be in the public consciousness.

Lastly, when looking at industries the conversational bot/AI interface was desired, the top one was banking with 29% of consumers saying they would most use an AI/bot and the conversational chat interface for banking-related matters. The second was retail-related (product questions, ordering issues/returns, etc.), and third was medical-related inquiries.

In most of the cases in industries where this type of interface is preferred, it was the same ones consumers said they interacted with most on a monthly basis. Meaning, at first, these digital AI agents will likely be an extension of customer support of some kind. The big question is how and when we can extend these services to be more than front end interfaces for customer support and perhaps encourage and generate new behaviors and value propositions.

Searching for What’s Next

I’ve recently presented at a number of venture capital firms about the next cycle or wave of innovation. An important fundamental observation is to understand that hardware innovations drive software innovations. That software can be local or cloud-based but, the bottom line is, hardware innovation is necessary to move software industries forward. With that in mind, it seems we are nearing the end of the mobile hardware cycle. There are several observations I want to make about this chart.

Screen Shot 2016-07-20 at 12.52.41 PM

The chart is depicting the PC, tablet, and smartphone computing cycle we have just gone through. You’ll notice a few things. First, it was big. That should be the obvious one. Second, you notice the smartphone is the largest part of this wave. The smartphone drove an internet-connected computing device into the global mainstream in a way no piece of hardware before it could. You may also notice the S-curve is slowing, which is why it seems we are nearing the end of this particular hardware cycle. But the most interesting observation is how short the wave is. Notice this wave grew inside the span of less than ten years, compared to the early cycle driven largely by desktops and notebooks that steadily grew over 20 years. The large global rollout of computing is a recent phenomena. We still have much to learn as many of the lessons in the first 25 years of computing are no longer applicable in an age where computing has gone where is had not been before.

There are still a few hardware innovations in smartphones to come, like dual lens cameras, which will continue to drive new software innovations. But largely, we are moving from a hardware cycle to a software cycle. This hardware cycle adds roughly another billion consumers to the computing landscape and, between PCs, smartphones, and tablets, we now have roughly two billion people with an internet-connected computing device. During the PC era, our software scale was measured in hundreds of millions but now, thanks to the smartphone, the software industry scale is two billion global consumers and growing.

Companies who can leverage this scale are the ones getting the most attention. Key in that discussion are Facebook and Google. But the hunt is on for other companies who can create a software experience that appeals to billions, not just millions. The list of companies who can achieve software scale in the billions like Facebook may be short but the largest computing base in the history of the industry now exists so anything is possible.

Looking at the type of category which has the best chance at scale, I can narrow it down to a few. From survey data we have, we know the top categories with the most active users are: Social networks, chat/messaging apps, games, maps, photo apps, and music/video. It is likely any app looking for a hundred million user scale and beyond should focus on these categories in order to achieve orders of magnitude of scale greater than other categories offer.

Chasing scale will be one driven by business models. Those apps which are free and make money off of ads or other services will easily acquire the most customers. However, as this new global consumer market for technology software begins to segment, as we are seeing happen right now, there will be lucrative pockets of opportunity where money can be made without achieving massive scale. The temptation for many companies will be to chase active users instead of focusing on their segment and serve it well. Perhaps no better current example exists than Snapchat.

Snapchat is at a crossroads where they can focus on their current base of users under the age of 30, which will get them in the 200m user range but not much more. To get beyond that number, Snapchat will need to adapt their service to appeal to a larger demographic. From the outside looking in, it seems Snapchat is attempting to do this right now. However, there is a risk this will come at the expense of their current users. They may alienate their younger audience as the older demographics get on the service. This is what happened with Facebook as engagement declined significantly with the younger demographic once their parents started using it. They didn’t leave — they just used it less. They moved to apps like Instagram, which Facebook then bought to help retain some engagement with that audience. This is also why Facebook would buy Snapchat if they had the chance.

Owning a profitable segment of the market is valuable but often, due to investment or growth pressure, companies will look to serve a broader demographic and thus begin to underserve the one which helped them get where they are. Whether or not this pursuit will pay off will be the key story line to watch as companies attempt to grow beyond the segments they begin in.

Understanding segmentation is the key to understanding the market. There is no single “market”. There are many markets which make up larger markets. If you don’t understand each pocket or segment of the global consumer market, you don’t actually understand the market beyond the surface. This is why, while difficult, I try to see the forest and the trees at the same time.

So what’s next? Is it VR? Is it further advancements in artificial intelligence? Smart home? Self-driving cars? Or it could be something entirely different and unknown. Whatever it is, it’s likely to come from the foundation of global mobile computing because it is hard to think of any product, one almost every adult on the planet will some day own, that has the scale of the smartphone.

Unpacked for Friday, July 22nd, 2016

Don’t Freak Out About Latest IDC Smartwatch Numbers, Readjust Your Expectations – by Carolina Milanesi

This week, IDC reported its smartwatch sales figures and the news was that the segment has already registered a decline in sales. You can find the full release here.

The commentary I have seen around these numbers centered on the fact that the segment is clearly doomed because it is showing a year over year decline so early in the cycle. Such an analysis, however, fails to consider a few key points:

1) This is a very different market from smartphones. As I’ve said time and time again, smartwatches remain a “nice to have, not a must have” item. Because of this, we are still in an early adopter phase of the market which, by and large, has bought into it. While we wait for the mainstream consumer to come on board, sales will dip as the current installed base is waiting to replace and no significant amount of new buyers are added.

2) While the smartphone market saw a lot of development in the early stages, both of operating systems and apps, smartwatches have been moving slowly. While we have seen some OS improvements, mainly on watchOS, hardware has not changed much from where it kicked off and useful and dedicated apps have been hard to come by. This last point adds to smartwatches not being seen as a must have, as their role is mainly seen as a duplication of what one can do with a phone.

3) With Apple representing the vast majority of the installed base and so much expected to come out in the fall with the new version of watchOS and new hardware, it is natural people are waiting. The comparison with the iPhone would be a wrong one to make, as the Watch is not necessary and has no subsidy so people can and will wait for longer.

If you consider all of the above, the decline could have been expected. Long term, I still believe in this segment especially considering how much improvement will come with the next watchOS update. I also do not see any vendor threatening Apple’s lead in the market at least over the next year.

Entering the “Meh” Earnings Season – by Ben Bajarin
I find it apt to remember that stocks trade with a strong investor sentiment of future earnings. If a stock is down or investors are bearish, it means consensus is there is not a lot of future earnings potential in their view. This mindset tells us quite a bit. Look no further than Nintendo. Their stock is up thanks to Pokemon Go, even though revenues from this will be relatively limited given the revenue share agreements in place. However, investors are looking at the long-term potential for Nintendo to have an “a ha” moment and start moving from the Gameboy/Nintendo hardware generation to the mobile era. The stock is being traded on the future potential of earnings on IP like Mario Brothers, Donkey Kong, Legend of Zelda, etc., and Nintendo bringing those games in some new and unique ways to iOS and Android. One has to believe the time is close for Nintendo so it makes sense and could reap serious revenue for them.

Similarly, we see investor sentiment with Intel. Intel reported a beat yet their stock was down afterward. The Street does not feel there is much earnings potential ahead and thus the stock is viewed as a moderate to flat growth opportunity. Qualcomm on the other hand, despite their challenges, posted a beat and was trading up. As they solve their problems with IP licenses in China, they are still poised to see revenue gains from licensing even if the chipset business stays relatively flat. Investors clearly believe they will resolve the IP license issue and gain more revenue from their patents. Investors feel there is profit still to be had for the company.

Overall, this is a tough quarter, as summer is usually not the best time to be analyzing stock earnings. Summer is a bit of a lull from both an IT and consumer spending standpoint. But looking ahead, the fall will be quite interesting as it will help answer many questions in the world of the consumers.

Will Apple stay on track for negative or flat growth as many predict? If so, it implies a much slower upgrade cycle in their base overall which is going to be viewed as negative by investors. AT&T’s earnings seemed to hint in this direction — upgrade cycles are lengthening and this will have impact on many.

Will retail sales be down again this year as they were last year? US holiday retail sales were off more than a billion dollars YoY. Without any hot category to help drive sales, it may be more of the same this year.

Will tablet or PC sales rebound? Both of these categories remain in systemic decline as consumers remain content with the technology they have. I’m learning to accept this reality of the mainstream whenever we ask consumers if they plan to buy a PC, smartphone, or tablet in the next twelve months. The second most popular answer after “No” is “It depends”. If consumers are not inspired to get a new tablet or PC or their device lasts and is not broken, they largely choose to not upgrade. This is the hard and shocking reality of the mainstream most companies struggle to address.

From a hardware standpoint, I’m not sure I see anything on the horizon for 2016 that changes things and causes a big stir in the market. Which means companies like Facebook, Amazon, and others in the software and services side will continue to be the bright spots from a stock/future-looking perspective.

We never fully know until we see the hardware for the fall, but my analysis of many consumer tech hardware players is closely aligned with our studies who respond with “it depends” on what is released in the fall.

I’ve Seen the Future of E-Commerce – Buying Things through Facebook

I’m aware I’m being a little click baity with the title but bear with me. I had an interesting and thought-provoking experience buying something through Facebook I have to share.

A brand I like promoted a new set of products on Facebook. I’ve liked this company’s page and have their app installed (which supports Apple Pay for quick checkout). So they know I’m a fan of their brand and products and that is key to this story. This company recently released some summer items and made sure I saw them via my Facebook feed. I liked what I saw and clicked on the product ad to get more details. What happened next was the interesting bit. I was then taken to FB Messenger where their bot (or a human — I’m not sure which) gave me more details on the product and asked what size I wanted. I made my pick and it then asked me which shipping method I wanted and calculated an invoice. In Messenger, their bot then gave me a direct link to check out via their app which I used, paid with Apple Pay, and was done. The bot I was interacting with on FB Messenger then contacted me with a receipt and tracking number within the next hour. This whole process happened in a matter of minutes and the Messenger bot acted as a concierge while the Apple Pay integration removed all friction for checkout. It was pretty remarkable when all was said and done.

Now, granted, there were a few steps which can be eliminated in the future. For example, Facebook has said they fully intend to support and integrate Apple Pay and Android Pay into their system so people can buy products on Facebook using whatever seamless methods they choose. So, in the future, I can do what I did without having to use the company’s app and do it all through Messenger. What really stood out to me in this experience was how this company was using Facebook Messenger as a conduit for customer service to help convert leads to transactions. We have talked about the conversational interface, conversational commerce, and a host of other buzzwords but this was the first time I experienced it in such a seamless way. More importantly, this felt like something “normal” people would do. I can see my wife doing this and using a company’s agent through Facebook Messenger as a concierge. It was like talking to a person at a store getting what you need to make a decision and then completing the transaction. The Facebook ad made me a captive audience and a qualified lead and the bot via Messenger helped close the deal. Concierge services via a messaging app may be the big missing part of e-commerce. It is interesting that Facebook may actually be sitting in the middle of this reality.

All of this comes on the back of Facebook announcing they have one billion active users on Messenger. I challenge the idea Facebook Messenger is the primary messaging app for the masses but it is certainly one they use in certain ways with their social graph. Regardless, a billion person user base is the strongest reason for companies to start using Messenger in ways I described to engage with consumers, conversationally, to help them with their products or service.

While I certainly don’t think everyone will be comfortable doing this through Facebook for security and privacy reasons, I do think this experience convinced me of the conversational commerce interface via messaging apps. Specifically from a business angle, to capture a potential customer and provide them with relevant customer service through the messaging/conversational interface. This is where bots and AI become interesting because, as e-commerce grows globally, we simply don’t have the scale to have a human help every person with an inquiry via a conversational interface. Bots/AI can become a businesses front line interface to assist customers, complete transactions, and get customer support. This one foundational change may be the thing that moves e-commerce from less than 10% of global retail sales well into the upper double digits.

Unpacked: Smart Watch Ownership US/UK as of Q2 2016

Time for an update on the smart watch market.

Our Q2 2016 data is in and among the data set is smart watch ownership at large and by brand. It has been interesting to watch how fast (or not so fast) the smartwatch category is growing. It is growing but only roughly 1.2-1.3% each quarter of net new additions to the smart watch owner family. It is clear this is still largely an early adopter or health/fitness-focused consumer who is still driving the market forward. With ownership in these two countries hovering around the 10-11% of the market, it is safe to assume the smart watch has not yet gone mass market.

With just shy of 11% of consumers in our US and UK panel saying they currently own a smart watch, my estimate puts the total smart watch installed base at 38.4 million units approximately in the US and UK markets combined. When we look at ownership by model, it should come as no surprise Apple is the market share leader with 51% of all smartwatch owners in the US and UK saying they own an Apple Watch. Based on my model, that puts Apple’s Watch installed base at 19m units in just the US and UK. Both of these represent significant sales of Apple Watches from a market perspective.

Samsung came in at a healthy number two with 33% share of the smart watch installed base in the US and UK market. The next closest vendor at number three was LG with 4%.

The mix should not surprise anyone as it is quite similar to the duopoly Apple and Samsung have in smartphones in both the US and the UK. This also aligns with the lack of maturity in smart watches today. Consumers will buy from the brands they trust, who have proven themselves, like Apple and Samsung.

Getting the Smart Watch Mainstream

Looking at the wearable space broadly, I get asked the question of how smart watches go mainstream. I suppose there are still two sides to this debate. Those who don’t believe a smart watch is a mass market product and those who do. I’m personally still convinced smart watches will go mainstream but how far into the mainstream they go is still a big question. I certainly see smart watches hitting 20% penetration in many markets (20% of a market is what many of us consider the tipping point for mainstreaming an innovation). Whether it gets to 50% of a market is a still a debate. I can actually see the combined smart watch and smart fitness band categories getting closer to 50% but I’m not sure how much farther it can penetrate. All of this is to say, I believe there is still plenty of headroom for the category. I’m becoming more convinced this market is like the tablet market in that only a few brands will win. Apple still is the majority share leader in tablet share and I believe that will be the likely case for smart watches as well.

I’m optimistic that version two of the Apple Watch will be a catalyst to lead the charge in smart watches going mainstream. WatchOS 3.0 brings many features that are baseline expectations for the mainstream but I’ll also be watching for Apple to innovate on the hardware of version 2.0, perhaps bringing new designs and new price points. If Apple can get this product into the $200 range then we will see some significant volume upticks.

I’m still optimistic on this space and the value a wearable computer can bring in new data sets and add to the big data sets on ourselves we are amassing with our usage of personal computers. Wrist/ear based sensors can simply capture more unique data than our smartphones and there will be value in translating this learning into health-based insights.

All eyes will be on Apple in September, but I have a hunch 2017 will be the year smart watches go mainstream.

SoftBank Buying ARM – Good or Bad?

In what was to be a quiet Sunday, news came about an apparent deal for Softbank to buy ARM Holdings. This is completely out of the blue. It is a bit difficult to find any “synergies” between the two companies.

There is some speculation on Twitter by smart people I follow that suggest this is more of an investment play, the kinds of things Softbank likes to do. That is certainly possible. Some speculated Softbank could break the parts up and auction them off. However, the valuation of this deal is quite the head scratcher for me.

ARM is roughly a $600m a year in revenue business. Yet the deal is for $32 billion dollars — 70 times ARM’s 2015 net income. Oddly, licensing businesses are not generally that big. For some additional perspective, Qualcomm’s licensing business is in the $1.3-1.5 billion range and they have one of the largest licensing businesses out there. It is possible to read into the valuation there is more going on here and it is not just an investment play.

What Could Change?
The answer here is, hopefully nothing. Ideally, Softbank will let ARM continue to operate as its own company and won’t look to rock the boat or make any significant changes. Very big companies depend on ARM — Apple, Qualcomm, Nvidia, Huawei, Broadcom/Avago, to name a few. If I was one of these companies, I’d be slightly concerned by the chance things may change. For one, those companies are architectural licensees — they have the license to develop their own custom SoCs based on ARM instruction sets. If Softbank raises the price of this type of license, for example, it will have an impact on those who depend on it for differentiation of their silicon offerings.

The other concern would be talent leaving ARM. I’m not concerned about this yet but, if Softbank tries to make too many changes, some great silicon designers may be looking for work elsewhere. If that happens, we run the risk of the quality of ARM designs, designs many depend on, to possibly go downhill. I don’t view this as a likely scenario but certainly one to keep an eye on.

If the auction theory plays out, that could potentially have negative impact. Who acquires certain IP would be of the utmost importance if bits of ARM are auction off. Many major industry players are deeply vested in ARM technologies.

Part of me is wondering what Intel is going to do in all of this. Perhaps it was disclosed that Intel was, in fact, looking to be more aggressive with ARM-based tech and that is one reason the valuation is so high. Or, should this deal impact the core ARM licensees too much, does Intel create a licensing business for x86 and allow Apple, Qualcomm, etc., to start designing x86 cores on leading edge process technology?

There are still many semiconductor industry acquisitions ahead and this deal may be one that sparks a string of others in the very near future. I’m sure more game theory and scenario theories will come out in the coming days but this is an interesting story line, with potentially large impact, to follow.

Unpacked for Friday, July 15th, 2016

Apple’s iPhone users are not defecting to Samsung – by Carolina Milanesi

On Wednesday Kantar Wolrdpanel (KWP) ComTech published its Quarterly Smartphone OB Barometer for the three months ending in May 2016, confirming what we have been saying for a while: Samsung’s current success has nothing to do with stealing users from Apple. As a matter of fact, Apple’s sales are more impacted by users that churn from Samsung to the iPhone than vice versa.

“Starting with the US, in the three months ending May 2016, Samsung accounted for 37% of smartphone sales and Apple 29%. However, sales of their respective flagship models reveal a much closer competition, with the Galaxy S7/S7 Edge accounting for 16% of sales and the iPhone 6s/6s Plus at 14.6%. What’s more, when we look at where these purchases are coming from, just 5% of Samsung purchases came from those switching away from Apple, while 14% of Apple purchasers came from those switching away from Samsung.”

As both Ben and I have been saying, Samsung is benefitting from the large base that decided to sit out the Galaxy S6 update. Despite a considerable improvement in the look and feel, the Galaxy S6 did not bring enough new features to justify an upgrade for many users. For others, the lack of removable storage and the relatively poor battery performance were a showstopper. The Galaxy S7, built on the look and feel of its predecessor, addressed those primary complaints. However, as the majority of sales are coming from upgrades, it would be wrong to assume the current success could be sustained with the next flagship as the upgrade pool will be smaller and Samsung is not capturing from Apple. Considering that KWP ComTech’s data shows 88% of current Apple users and 86% of current Samsung users intend to stay loyal, there is little reason to believe the situation will change.

KWP ComTech also said in the three months ending in May in the US, the Galaxy S7 outsold the iPhone 6s. This point got some Samsung’s fans very excited but we should remember when the two devices were launched: March 2016 vs September 2015. Aside from the new vs old argument, we are also a couple of months away from the launch of the next iPhone, which has traditionally been in September. This is certainly delaying some purchases especially of the current flagship — users know it will likely be discounted as soon as the new model is announced.

Outside the US, Samsung has been feeling the pressure. Huawei and local smaller players in Europe, China and India are impacting volumes – still accounting for the majority of sales – that come from the non-Galaxy S products. This, coupled with the smaller upgrade pull will make for a challenging 2017 when Samsung will certainly try and take advantage of its early move into VR.

Facebook and Twitter live video strategies go in opposite directions – Jan Dawson

The last couple of weeks have highlighted major differences in the strategies and uses of Twitter and Facebook’s live video platforms. Facebook Live Video has demonstrated its usefulness and reach as a platform for sharing raw footage in the moment by ordinary users in recent days as not one but several shootings were captured using the technology. That’s ironic because it was Twitter that first launched a live video platform for its users through its Periscope acquisition. Meanwhile, Twitter is focusing on doing deals for professionally produced TV-style content, having apparently de-emphasized Periscope.

Facebook has seen a variety of unconventional videos bring attention to its platform over recent months, from Buzzfeed’s watermelon experiment to “Chewbacca Mom” to the recent shootings. Some of that attention has been positive, while the shootings have been more problematic and it seems Facebook has been of two minds about hosting some of this content, though it has eventually come down on the side of openness. This role in sharing videos is a double-edged sword – on the one hand, it’s a fantastic advertisement for the platform and Facebook’s massive audience is the perfect tool for making the content go viral. On the other, such dramatic videos could give the impression Facebook’s Live Video isn’t designed for the simpler, more humdrum moments ordinary users might otherwise share. Facebook has to walk a careful line and must also be careful not to be seen trying to benefit from tragic events.

In doing all this, Facebook appears to have usurped Twitter’s original plan for live video and Periscope but Twitter has moved on. With its recent deals to broadcast Wimbledon, live stream content from the political conventions, and its Bloomberg deal, Twitter has clearly pivoted its live video strategy in a significant way. This is a fairly low-risk strategy for Twitter, as the content it’s secured is all non-exclusive and therefore comes cheap. Any ads Twitter is able to sell will provide some upside but I suspect the strategy is more about driving usage than it is about direct monetization. The big question is whether it will drive user growth or merely increase engagement of existing users (or neither). But given the low risk, it’s likely worth the gamble. What is clear is Twitter’s interface for live video requires work – the tweets that appeared under the Wimbledon video were a mess and significantly more curation is required to make that a better experience. Twitter has a few months to tweak the interface before its big NFL debut later this year.

Apple’s Content Strategy – Ben Bajarin
Whenever Apple execs talk publicly, I like to try and read between the lines. That is why, when the Hollywood Reporter ran this interview with Eddie Cue, a few things about Apple’s strategy stood out.

Just how deep Apple wants to own content has been a key discussion. Beats was an interesting deal and a bit out of character for Apple. So the question has been if that is a template to watch or just a one off activity. From this interview with Cue, I get the sense it was a one off.

Apple seems content to continue to play the platform game. Make their hardware and software platforms the best place for services companies to meet the needs of their customers. Telling was Cue’s response the question of if Apple is building their own TV subscription service (AKA “skinny bundle”). Here is his answer:

Whether we’re providing it or somebody else is, it really doesn’t matter to us. What we’re trying to do is build the platform that allows anybody to get content to consumers. If a Time Warner [Cable] or a DirecTV wants to offer a bundle themselves, they should do it through Apple TV and iPad and iPhone. As a matter of fact, I’m not a big fan of the skinny bundle.

Now, this answer doesn’t entirely leave out the idea Apple would still create this service but it does enforce the platform concept Apple seems content to pursue. Let others create value on top of what they have built in all vectors of software and services.

Cue addressed what they do with first party experiences vs. letting others create value by what fits with Apple’s core values. This is why they are so focused on first party music services since they feel it is ingrained into the Apple experience and culture. Perhaps the same is not as true of movies and TV. Cue basically said they don’t intend to compete with Netflix.

I think this is the right move for Apple to focus on the platform and not go vertical in media services or services in general. The challenge, however, is this tactic allows others to creep into the core engagement with Apple’s customers. For example, if I fully bought into a third party services world from Spotify, Google Drive/cloud, Netflix, Comcast’s bundle, etc., then all I need Apple for is hardware. That, again, is not the worst thing in the world but my concern is it could be limiting.

What Apple risks in the platform-only approach is other companies grabbing the bulk of engagement and developing deeper relationships with their customers. Theoretically, in a cloud-based world, hardware could become commoditized and less valuable. I don’t fully think it plays out this way but it is something to keep in mind.

US PC Market Shows Improvement – by Bob O’Donnell

After years of bad news and sales declines, PC shipment growth in the US finally turned positive in second calendar quarter, as both Gartner and IDC reported modest increases in US PC shipments. Worldwide shipments were still down for the quarter in the 4.5% range, primarily because of ongoing challenges in many emerging markets, but the return to positive growth in the US is highly welcome news for the often maligned PC business. Credit has been given to strong Chromebook shipments to the US education markets as a key factor, but I believe we’re also starting to see the impact of Windows 10-driven PC upgrades for commercial PC customers. Many organizations (and consumers) chose to do in-place, software only upgrades to Windows 10—a phenomena that never really happened with previous Windows releases—and that muted the originally higher expectations for the new OS. However, Microsoft’s free upgrade policy for Win10, combined with essentially no new hardware requirements from either Windows 7 or Windows 8-based PCs, made it much easier to do than before. Nevertheless, many commercial organizations who want to take advantage of Windows Hello’s biometric authentication support, as well as other traditional speeds-and-feeds hardware improvements, are now starting to make the kinds of large-scale fleet upgrades that many in the industry had expected (or at least hoped) would happen earlier.

The good news is, this provides credibility to the thought that PCs would bottom out and then turn around, unlike their tablet brethren, which continue to decline. Worldwide sales improvement is still elusive, primarily due to the economic challenges that many nations are still facing, but at least there now seems to be both hope and light at the end of the PC sales tunnel.

Big Picture Lessons from Pokemon Go

It is hard to think of another app that has reached such high levels of awareness only one week after its release. Pokemon Go is all the rage and, literally, all you need to do is spend any time in a public location to see herds of people walking around hunting for Pokemon. Whether this is a fad or not is hard to predict. One can make a strong argument the decades-old brand and large global following will keep this game around for a while. However, the idea behind this game is where we can spend time looking for trends. So here are my big picture lessons from Pokemon Go.

Not AR but Location Data
AR (Augmented Reality) plays a very minimal role in this game. The only time you use the camera for an AR experience is when you go to catch a virtual Pokemon. However, most gamers I talked to have turned this feature off to save battery life and make it easier to catch the Pokemon. This is not to downplay the AR part of the game and it is true it is giving many millions of people their first taste of AR. However, the big nugget to understand is how the geolocation data is the driver that makes this game interesting.

The game was built on many years of geocached data of real world objects and locations from a game called Ingress, built by Pokemon Go developer Niantic Labs. This game uses Google Maps data and is extremely accurate for hyper-location and has a huge database of real world objects submitted by players to make up the Pokestops in Pokemon Go where players collect objects. Many of these objects are very close to each other in densely populated areas so the idea is you walk from Pokestop to Pokestop with the game open using the mapping data to navigate to each stop and, hopefully, find and collect Pokemon on the way.

Without this massive database of user generation location data, this game would not be what it is. Understanding this point is fundamental to this bigger idea. It’s interesting to think about how locations or destinations use this concept. Think about Disneyland, for example, having a mini-game inside their park and allowing people to collect Disney brand characters, battle for locations, or anything else they dream up as a virtual and augmented experience of physically being at one of their parks.

We have talked about location-based games for nearly a decade and to see it suddenly go mainstream is fascinating. There are lots of ways this can be used now that people really understand it in ways they did not before.

Brand Matters
The other thing that sticks out is how much a good brand means. A good brand may be one of the most valuable things any company builds and, in this case, the Pokemon brand and intellectual property is what is causing this game to do what it is doing.

My takeaway from this observation is two-fold. First, watch companies with solid brands and IP to start thinking about location-based games in new ways. I mentioned Disney as a prime candidate, especially since they also own Marvel. Here again, Nintendo seems oddly irresponsible to not be re-inventing their IP around Mario and other franchises in new ways to create new entertainment experiences for their brands. If this Pokemon Go phenomenon does anything to help Nintendo move out of the fixed console era then I’m all for it.

My hope, however, is these companies get creative. I do not want to simply see a Marvel character knockoff of Pokemon Go. I hope they come up with fresh thinking and new ideas that blend the physical and the virtual in new ways.

Blending the Physical and the Virtual
If this takes off, I think the interesting angle is when we weave these two worlds together. Specifically, when local cities, towns, destinations, markets, shops, food establishments, etc, get involved.

There are already examples of stores using a Lure (a virtual object that lures Pokemon to a specific location) in order to get people to their retail locations. Now, cross this thinking with how stores may battle something like Amazon which does not have more than a couple of physical locations. I’ve said all along, physical retail’s best tactic against Amazon is technology. Most retailers simply don’t use it effectively. This is the start of something interesting when local businesses can start taking advantage of blending the physical and digital in ways online-only players can not.

This is augmented reality perhaps in a way we had not considered before. Think about it as digital overlaying the physical with graphics and adding location and geodata in new and creative ways.

It’s hard to predict where this goes but we are clearly seeing a social movement here in ways we had not before. Once familiar with this type of location-based blend of the physical and virtual, many new opportunities will arise with software and hardware.

Toward a Smarter Software Future

The more I think about the recent breakthroughs in machine learning and deep learning algorithms, the more I think we are finally heading toward a smarter software future.

For years I had been writing about the need for better predictive intelligence in our software. It seems ridiculous that my smartphone does not know more about my context and take relevant actions on my behalf. If I’m in a meeting, send all calls to VM or send a text message. If I’m running late to a meeting, offer to send an email or text to those I’m meeting with to let them know I’m running late and an ETA of when I’ll be there (since it knows where I am on the road, the traffic situation, and my time to destination). Our smartphones are really not that smart when it comes to the intelligence equation. That is about to change.

Most modern software platforms like iOS and Android are increasingly adding elements of machine learning and beginning to extend more of the core platform intelligence to developers. The software community can now, in more ways, take advantage of platform APIs and start taking advantage of many of these advancements in deep learning to provide new and more valuable customer experiences.

For a while now, my friend Benedict Evans has been referencing a saying from Eric Raymond that, “A computer should never ask the user for any information that it can auto-detect, copy, or deduce”. Yet, for the longest time, that is exactly what computers have been doing when it comes to machine learning and AI. My smartphone need never to ask where I am. It has that data via the built-in GPS. My smartphone also has my full calendar so it should be able to deduce what I am doing and where I am. The key point is, with the advancements in machine/deep learning, we are on the cusp of computers having to ask us significantly fewer questions going forward as they will increasingly be able to auto-detect, copy, and deduce more relevant information for us on their own. This is what has changed and will open the door to a much more intelligence based era of computing.

Communal vs. Personal Intelligence
One area of this discussion I’m very interested in is the difference between “communal machine learning” and “individual machine learning”. Most people discussing AI/machine/deep learning have not made a division between the two. Admittedly, communal machine learning, or big data being collected from a massive number of users for things like maps, visual recognition of general image knowledge, etc., has been the primary ways machine learning has been taking place. We have yet to crack the AI/machine/deep learning that will take place as a computer begins to study its user in more intimate ways.

The companies who will focus on communal vs. personal AI/machine/deep learning seem clear. Google wants to be the deepest domain expert in communal knowledge. They seem less focused on going deep on the specific and intimate details of the user and trying to gather just enough information to be able to relevantly answer any query. This is one reason why I believe Google is not building something with a name like Siri/Cortana/Alexa which would encourage a user to build a relationship. Rather Google seems content to let others focus on the personal AI and simply let their big communal data sets feed the personal AI chosen/hired by the consumer to be their personal assistant.

On the other hand, Apple, Amazon, and Microsoft seem to be looking to go deeper with the individual user and build tools that let them have deeper relationships and thus, reveal more intimate details about themselves to their personal agents. Trust about privacy is the key here and it’s something the companies I mentioned seem to have a better “trust-centered relationship” than Google. Again, perhaps Google knows this and that is why their focus is elsewhere, at least for the moment.

As I talk with those in the industry thinking and building products in this area, I encourage people to understand this is likely not a one size fits all solution. Nor is it a winner take all market. Just because I may hire Siri as my personal assistant and allow Apple’s AI to learn more intimate details of my life, it does not mean I can’t use Google’s, Amazon’s, Microsoft’s, or a host of other “bots” or “agents”. In fact, it seems unwise of any company to wall off their agent from the rest of them. Ideally, some kind of generic standard will be created so all these agents can talk to each other. But at the end of the day, I do believe consumers will cling to one as their primary agent. That is a battle only a few companies can realistically engage in.

I’m currently of the mind that companies in the AI/machine/deep learning space need to focus on being domain experts. For example, Amazon may ultimately be the commerce domain expert, Google for queries, Microsoft for business, and Apple/Siri the expert for my personal life. Similarly in China, Baidu would be the search domain expert, Alibaba for commerce, etc. All these AI engines need to work together to be able to ask the user fewer questions and return more value as a result.

We don’t want to spend increasingly longer portions of our day with machines. The less we have to tell them what we want, the better. This allows us to have more time to be better at the things humans will be better at than machines. That’s where we are headed.