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Google “Plays” With Android Activation Numbers

“…there are now 1.5 million Android devices being activated every day, Google Chairman Eric Schmidt said Tuesday. That’s led to more than 750 million Android phones currently in use.” ~ Erica Ogg, Gigaom

Google changed their methodology to only count user visits to the Google Play store when determining which versions of Android are in use. So exactly how many of those 1.5 million daily activations and 750 million overall activated units have actually connected to the Google play store?

Google isn’t saying.

Now why do you suppose that is?

Google’s New Android Math Doesn’t Add Up

According to Gartner, Android sold 144,720,300 units in the fourth quarter of 2012. But let me ask you this:

Who cares?

Does Samsung care how many “Android” units were sold? No, they do not. They only care about how many of their devices they sold.

Do the various Android manufacturers in China care how many “Android” units were sold? No, they do not. They only care about how many of their respective devices they sold.

Does Amazon care how many “Android” units were sold? No, they do not. They only care about how many Amazon devices are being used to direct traffic to their web site.

Do Android developers care how many “Android” units were sold? No, they do not. They only care about those Android units that their software can address and, even more specifically, they only care about that portion of the addressable market that is interested in purchasing their product or downloading their product and consuming their advertising.

Does the Google Play store care how many “Android” units were sold? No, they do not. They only care about how much is purchased from the store.

Why Do We Count Android As A Single Entity?

“Android” is not a single entity. So why do we add all of the “Android” numbers together? We do it because we assume that higher numbers mean a stronger platform. We use it as a proxy for the strength of the platform. But it just ain’t so. Total numbers mean nothing. The only numbers that matter are those that strengthen the platform.

And do you know who agrees with me? Google.

Android’s New Math

Google reported that the number of Android units using Android versions 4.1 to 4.2 jumped from 16 percent a month ago to 25 percent this month. Impressive, no?

No.

The reason for the big jump was that Google changed the way they count the numbers. Previously, devices were counted when they checked in to Google’s servers. But Google is now only counting user vistits to the Google Play Store. Google argues that the data more accurately reflects users “who are most engaged in the Android and Google Play ecosystem.”

I agree. This is a better way to count the meaningful numbers rather than just the gross number of Android activations. However, did you notice the inconsistency in Google’s new math?

One Of These Is Not Like The Other

Google hasn’t recalculated and lowered the total number of Android activations.

In other words, when it comes to telling you how many activations they have, Google uses devices that check in to their servers. But when Google wants to tell you which versions of their operating system are in use, they only count user visit’s to the Google Play store.

Hmm. So we now know that versions of the Android pie are divided into different sized slices but what we don’t know is just how big that pie is. Exactly how many of the 144,720,300 units sold in the fourth quarter of 2012 are actually accessing the Google Play store?

We don’t know. Because Google isn’t saying. And until they do, those total unit sales and activation numbers have little meaning in determining the overall strength of Google’s portion of the Android platform.

Android’s Total Numbers Conceal Rather Than Reveal

“Android” shouldn’t be counted as a single operating system any more than Europe should be counted as a single country. Heck, Android doesn’t even have a “common market“.

If we’re going to use numbers as a proxy for determining the strength of various operating systems, then we have to use meaningful numbers. Perhaps we should be comparing the units running the latest version of iOS with the latest version of Android. Perhaps we should be counting the Amazon, Google, and the various Chinese portions of Android as distinct and separate entities. Perhaps we should even be counting that portion of the Android phones that run Facebook Home separately too.

What we most certainly should NOT be doing is lumping all Android sales and activations together and pretending that they’re one and the same and that their total numbers are advantageous to all of Android’s separate participants, such as Samsung, HTC, Amazon, Google, developers, etc. If an activation or a unit sale doesn’t count towards the strength of the whole operating system, then it shouldn’t be totaled. Totaling Android’s numbers together doesn’t make sense because there isn’t a single, unified Android platform.

Numbers should be used to reveal, not conceal. And Android’s numbers aren’t revealing its strengths, they’re concealing its weakness.

Android’s Penetration Vs. Apple’s Skimming Marketing Strategies

Technology pundits and press, alike, seem obsessed with market share. But obtaining large market share is just one of many successful business strategies. Android follows a penetration pricing strategy. Apple uses a skimming strategy. Neither is inherently superior to the other. Like any strategy, each has advantages and disadvantages and their ultimate success often depends upon both circumstances and execution.

Penetration Pricing

Penetration pricing occurs when a company launches a low-priced product with the goal of securing market share. For example, a sponge manufacturer might use a penetration pricing strategy to lure customers from current competitors and to discourage new competitors from entering the industry. If the sponge’s price is low enough, consumers will flock to the new product. Competitors who can’t produce and promote sponges for such a small profit will avoid the market, freeing the sponge company to maximize brand recognition and goodwill. ~ Stan Mack, Demand Media

Price Skimming

A price skimming strategy focuses on maximizing profits by charging a high price for early adopters of a new product, then gradually lowering the price to attract thriftier consumers. For example, a cell phone company might launch a new product with an initial high price, capitalizing on some people’s willingness to pay a premium for cutting-edge technology. When sales to that group slow or competitors emerge, the company progressively lowers its price, skimming each layer of the market until the low price wins over even frugal buyers. ~ Stan Mack, Demand Media

Apple has added a twist to the skimming strategy. Rather than introducing their products at a high price and then lowering their prices later, Apple stakes out a price and then maintains and defends that price by significantly increasing the value of their products in future iterations.

For example, over the past six years, the average sales price of the iPhone has remained remarkably stable with the subsidized price remaining at ~$200 and the unsubsidized price hovering around $650.

Advantages and Disadvantages Of Price Skimming

Price skimming offers four major advantages…. It can offer insight into what consumers are willing to pay. It can create an aura of prestige around your product. If the initial price is too high, you can lower it easily. Finally, late adopters might be pleased to get your prestigious product at a bargain price, which creates goodwill for your company. A major disadvantage, however, is that large profits attract competitors, so this price strategy only works well for businesses that have a significant competitive advantage, such as proprietary technology.

The argument against Apple’s price skimming strategy is that the competition has caught up with the iPhone and Apple is no longer able to compete unless they lower their prices. But do the facts support this argument?

First, the iPhone has received 8 (EDIT: make that 9, as of March 21, 2013) straight J.D. Power and Associates awards for customer satisfaction and Apple reported that four times as many iPhone users switched from an Android phone than to an Android phone in the fourth quarter of 2012. Clearly Apple’s cachet is not on the wane, at least not in the minds of phone buying consumers.

Second, in 2012, Apple garnered 69% of all mobile phone profits. Further, they did it with only 8% of the total market share. That means that the remaining 92% of the market provided only 31% of the sector’s total profits. That’s price skimming at its finest.

Conclusion

The current meme is that Apple MUST abandon their skimming strategy and pursue a price penetration strategy instead. However, the facts simply do not support this contention. Apple could, of course, “buy” more market share simply by lowering their prices, but this has two major disadvantages. First, the market share that they would be buying is worth far less than the market share that they already own. Second, a lower price would lead to lower profits as well. It is obvious – or rather it SHOULD be obvious – that this could be counter-productive.

There’s nothing wrong with market share and I’m quite certain that Apple would be more than happy to expand their market share – but not at any price. For example, Apple has some 70% market share in iPods and around 50% market share in iPads. Yet they are doing this while still maintaining their price skimming strategy.

Price skimming is neither the only strategy nor is it the only superior strategy. It is just one of many marketing strategies. However, Apple is executing the strategy of price skimming brilliantly…even if Wall Street and the pundits stubbornly refuse to acknowledge it.

An Overview of How Google Glass Works… A Curse or a Blessing?

I loved Tim Bajaran’s piece on G-Glass – Mine simply expands on some basic facts, adding value for all of us who aren’t following the very Iron-Man creation of this latest Google Project. We’re losing Google Reader, but gaining hardware. Does anyone else see Apple’s “product” model being adopted here?

Yes, Alice, we’ve definitely fallen into the looking glass. Google’s most recent project, Google Glass, will delve far into the realm of science fiction, bringing Tony Stark, Iron Man-esque technology to the masses. The Google Glass project delivers a wearable computer system in the form of glasses, offering hands free messaging, photography, and video recording. Straight out of 007, this offers the ability to share everything you see, live, in real time: directions, reminders, the web – all seen through the lens, right in front of your face.

The glasses have a display in the top right corner of the frame, making endless information available at all times, and will reportedly connect with either your Android or iPhone implementing WiFi, 3g, and 4g coverage. These revolutionary specs won’t just be a piece of spectacular hardware; Google is negotiating with Warby Parker, a company which specializes in the sales of trendy glasses, in an attempt to bring infinite data while still looking fashionable.

The best part of Google’s Project Glass is that Google is currently allowing civilians, not developers, the opportunity to influence product development. Google declared, “We’re looking for bold, creative individuals who want to join us and be a part of shaping the future of Glass.” Applications are being accepted through the use of Google+ and Twitter, through the hashtag #ifihadglass.

While this idea of unlimited data being available even more easily than at your fingertips is revolutionary, it raises more than a few questions regarding privacy. The ability to record everything right in front of you, in real time, is a daunting thought, covering everything from being photographed at a cafe, to making videos in airports. Beyond the questionable “Glass etiquette” that will certainly develop over time, the prospect that Google and the government will be able to access users’ data is shattering.

If the Glass Project brings information right in front of your face, allowing you to communicate, to access the internet, contacts, etc., and share what you are seeing live, what will stop others from accessing your private information? Although a few decades late, Orwell’s 1984 has definitely caught up with us.

The issues that may arise from the mass production of Google Glass are met with equally impressive, revolutionary concepts around social networking and sharing. Glass would be the apex of social sharing, allowing people to be in constant contact, literally letting individuals step into other’s shoes, to view the world from a different point of view. You could be standing in New York’s Time Square and share and trade that experience with someone around the world, exploring the streets of Venice or Sydney, Australia. Such universal sharing would truly redefine the human experience.

At its best, this would also effect topics as broad as human rights and poverty – but the cost remains to be seen. Only time will tell if the Google Glass Project will be the vessel connecting mankind, Pandora’s box, or something in the middle.

A Killer App for Google Glass

There has been a lot of talk and excitement about Google Glass. This product has caught the imagination of the Technorati and has even garnered feedback from the mainstream media by way of reports that Google Glass would be barred in some restaurants and bars. Clearly this product and product concept is fascinating and who knows if it will catch on or even be successful beyond early adopters who love gadgets.

It is true that there could be some solid use cases that develop in vertical markets for something like Google Glass, possibly for use in medical, transportation, public safety, etc. However, at $1500 it is hardly a consumer device. The fact that it could take pictures, record video, deliver speech to text, and put you into hangouts or even get directions is interesting but it would have to do a lot more than that for consumers to even pop for it at this early stage.

I realize that this is the price of entry for these early versions of Google Glass and that over time they could get into more consumer friendly pricing. In fact, most major technology products start out quite expensive and then eventually come down in price over time. Part of getting the price down comes from the early adopters helping to pay for the early R&D costs of developing the product and with greater demand the vendors, in this case Google, will get better price breaks on components as well as help pay down initial equipment and manufacturing costs.

While I don’t think it can get down into consumer prices anytime soon, I do think there could be a consumer friendly app tied to these glasses that could have appeal for some vertical users as well as a group of consumers that could actually drive high demand for these glasses even if the glasses are a bit pricey.

By nature of my work, I am what you might call a reluctant world traveler. Over 35 years I have traveled close to 4 million miles and visited 55 different countries because of my work in the tech field. I was born in the US and my first language is English. I took Spanish in high school and on the side have tried to learn French very unsuccessfully. Ironically, my dad was Filipino and my mother was German and both spoke their respective languages fluently. But I grew up in a time when making sure your kids spoke English well was a priority and they did not see the need to teach us Filipino or German.

So, like any person that goes to another country where they speak a different language, getting around these cities and understanding the various directional signs and printed text is next to impossible to comprehend for people who don’t speak the native language. I have been to Europe so often that I have come to recognize key words and signs in the various languages spoken there, plus they use a Roman alphabet. However, when I am in Japan, China, or any other Asian country where they use pictographical images in their writing, I haven’t a clue what they mean or are trying to tell me. That is not completely true. I have learned to read the local signs for “the toilet” in just about every country I go to.

There is an amazing app on the iPhone that I use today to try and decipher words, sentences and even signs in German, French, Spanish or Italian when I am the country’s where these languages are spoken. It uses the iPhone’s camera and when in the Word Len’s app, it literally translates the local language into English in real time. But because of the size of the iPhones screen it only delivers a small portion of a sign or documents message and you have to hold the iPhone pretty steady over the words in order to get the true gist of the message.

Now imagine if I was wearing Google Glass and it is tied to my iPhone or Android phone and a special mobile app version of Google Translate. In theory, I could pick up the local paper in Paris and start reading it as the glasses scans the words and it instantly translates them into English for me. Or I may be walking down a street and see a sign on the wall of a building and I just look at that sign and it is translated on the spot. Or I go to the underground subway in Japan and look at the signs that give various directions and I get those signs translated for me as I scan them with my Google Glasses. Imagine how much it could help any world traveler get the most out of a trip abroad.

Perhaps the biggest adopters of this type of application though could be diplomats, politicians and anyone dealing with International relations, including the military. One of my assignments in the past was at the EU offices in Geneva, Switzerland and during my time there I was dealing with documents from dozens of countries that all had to be painstakingly translated for us to even work with them. Imagine if I had had Google Glass back then and could just take one of those documents and read it in real time. It would have changed my work-flow dramatically. However, I know a lot of world and business travelers who would gladly pay the price for a tool that can do this type of job for them also.

The big question is whether Google is even working on an app like this? It is hard for me to believe that they do not have this in the labs since marrying Google Glass and Google Translate makes for a perfect marriage. From what I know of the technology, it is also more than possible to deliver this type of application since the mobile processors are getting more powerful and so is the translation software.

I see Google Glass as a great product, but using it for real time translation would make it revolutionary. And the technology is here now that could make this a reality quite soon. If so, I will be one of the first to buy it with this specific app in mind.

Andy Rubin And The Curious Failure Of The Nexus Tablet

On Wednesday, Andy Rubin suddenly stepped down as the head of Android. The reason for this move is obscure. The most telling statement I’ve read on this, so far, comes from Ina Fried, at AllThingsD:

It was certainly a sudden move. Rubin had been confirmed to speak at our D11 conference in May; you don’t do that when you’re easing your way out. In the time between giving wide-ranging comments on Google’s plans two weeks ago and dropping out of a speaking slot at SXSW this past weekend, something changed.

The Trouble With Tablets

I do not know what suddenly changed, but one contributing factor in the change may have been Andy Rubin’s inability to translate Google’s success with handsets into an equivalent success with tablets. This must be particularly painful to Google since studies have conclusively shown that it is tablets, not phones, that best support Google’s advertising business model.

This past summer, I predicted that the introduction of the Google Nexus tablet would eviscerate the market for all other Android tablets. After all, the Nexus tablet was made by Google itself, was sold at cost, and would be competing on the basis of the sale of content, app and advertising revenue that was not available to the likes of Samsung and other Android manufacturers.

So far, my prediction has not come to pass, as Samsung has made modest gains in tablet sales over the past six months. But my failure to accurately foresee the future may have been more due to a failure on the part of the Google Nexus tablets, than it was of my analysis.

Low Tablet Sales

Google does not reveal their Nexus tablet sales numbers which is revealing in and of itself. However, Google cannot hide entirely behind a cloak of secrecy.

Source: The Yankee Group

The Yankee Group recently surveyed consumers, asking them which brand of tablet they intended to buy. The iPad dominated the discussion but the Google Nexus tablets garnered only 1% interest from the survey participants. ONE PERCENT.

How is that even possible? Remember, this is a tablet that is being given away for COST. And it is being given away for cost by the largest, most successful advertising company in the world. One percent interest in future sales is not just bad, it’s dreadful.

And it must be all the more galling to Google that Amazon – which is using a forked version of Android and an almost identical business model – has 7% interest. To put it in colloquial terms, “that just ain’t right.”

Low Tablet Usage

Source: Chitika

And if the unreported sales numbers weren’t bad enough, the usage numbers – 1.7% for all Google Nexus Tablets combined – are equally depressing. That’s just barely better than the rapidly failing Barnes & Noble Nook. It’s less than a quarter of the usage enjoyed by all Amazon tablets. And it’s barely 2% of the usage garnered by Apple’s iPads.

Remember, Google makes no income from the sale of their tablets. If Google tablets are not used, then they are useless to Google.

Conclusion

I doubt that tablet sales were THE factor that made Google suddenly change the head of their Android program. I think that the merger with Chrome was far more significant. However, I also have no doubt that Android’s lack of progress in tablets was A factor in the change…and a significant one at that.

Google and Amazon: Doing It All Wrong

By the conventional standards of business, it would be hard to find two companies with a greater tendency to do things wrong than Google and Amazon. Yet both are regarded as outstanding success story. What is going on here, and what does it tell us about how corporations ought to be run.

Each company violates a fundamental rule of business. In the case of Google, it’s a failure to diversify its sources of revenue and profits while at the same time displaying a woeful lack of discipline in how it enters new businesses. For Amazon it’s a persistent, almost stubborn refusal to maximize profits.

A glimpse at Google’s income statement reveals just how narrow the company’s success is. Google took in $50.2 billion in the year ended Dec. 31. Of that revenue, $31 billion came from advertising on Google Web sites and another $12.5 billion from ads on Google Network affiliate sites. This means that Google’s original revenue-producing activities, AdWords and AdSense, accounted for 87% of its gross. Motorola brought in another $4.1 billion Everything else–the Google Play Android store, sales of Google Nexus branded Android devices, paid Google Apps, whatever else the company does to produce revenue–generated a mere $2.4 billion. Considering that Motorola suffered a heft net loss from continuing operations, it’s safe to say that search-based advertising was responsible for well over 100% of Google’s revenues.

The unprofitability of everything Google has tried does not seem to discourage the company. Under CEO Larry Page, Google has purged a number of its least successful products. But it continues to add efforts that have little hope of generating profit in the near-term, or perhaps ever. It is spending a good bit of money developing self-driving cars, though the technology seems years away from commercialization. It’s from from clear that many people away from such hotbeds of geekdom as the Googleplex or the MIT campus will ever be willing to wear, let along pay for, Google Glasses (above.) Who but a Google engineer is going to put down $1,299 for a Chromebook Pixel, a laptop that cannot run any programs other than a Chrome browser? And why is it messing around with same-day-delivery retail, a business that seems far outside its core competency–and a logistical and business challenge that no one has cracked?[pullquote]Classical economic theory says corporations try to maximize profits. Amazon and Google prove there are exceptions.[/pullquote]

Of course, the ad business is so profitable that Google doesn’t have to worry in the near term. It’s net margin was 21%, down from recent years but still very healthy. And investors seem happy. It’s stock is trading just a bit below its 52-week high of 844 and the price is 26 times 12-month trailing earnings, a sign that investors believe growth will be healthy into the future.

So while Google’s attention deficit approach to new projects may defy business school wisdom, it isn’t hurting the company. And it is certainly benefiting consumers. We get goodies like Google Maps and Gmail for free, while Google funds the sort of research–self-driving cars–that once was the province of the government and that could have a big payoff for society, if not for Google.

If Google’s problem is a flurry of innovation that has produced little revenue and no profit, Amazon is a tale of profitless growth. Classical economic theory says the purpose of a corporation is to maximize profits, and while the research of scholars like A.A. Berle and and Herbert Simon long ago dismissed taking that notion too literally, profit motivation is still supposed to have something to do with business decisions.

Not, it would seem, at Amazon. The company’s revenues in the fourth quarter of 2012 grew 21%, and that was the worst performance in three and a half years. But profits are another story. In its best year, 2010, it netted just over 4% of sales while it actually recorded a loss last year. Amazon has relentlessly pursued growth with little regard to profitability. It has disrupted one market after another by undercutting the prices and business models of competitors.

And its investors love it. Like Google, it is trading near a 52-week high. Its trailing EPS can’t be calculated because of the loss, but Amazon is trading at a staggering 76 times expected 2013 earnings.

And customers love it too. Unless you are in a retail business that Amazon has demolished, you are most likely the beneficiary of Amazon’s predatory nature. Amazon has not only saved me money, it has saved me countless hours I would have wasted shopping. (Once you get Amazon Prime, the tendency to order stuff online rather than pick it up at the store become overwhelming. It’s a rare day we don’t get at least one Amazon package.) And while Amazon’s impact on retailing has been the most obvious, Amazon Web Services has drastically lowered the cost of starting any sort of online business.

So let’s hear it for Amazon and Google and their impossible business models. Eventually, Google will to find a moneymaking business to supplement search ads, whose growth is slowing. And Amazon investors’ patience with tiny or nonexistent profits won’t last forever. But for the rest of us, let’s enjoy it while we can.

Anyone But Google

Carriers are understandably unhappy with today’s mobile platform duopoly. Apple and Google generate demand for data services, and carriers can’t live without them (as T-Mobile USA admitted about Apple late last year). However, Apple extracts enormous subsidies, mandates high minimum orders, has complete control over the customer experience, and maintains its own direct billing relationship with the subscriber. In some ways, Google is worse, as it competes directly with carriers. Google bids on spectrum, owns fiber in the U.S., runs a broadband network (currently limited to a single U.S. city), and has this annoying habit of offering services for free that carriers like to charge for. Carriers have long been searching for alternative operating systems that give them more control over the user experience. MeeGo, Maemo, and LiMo have all been promoted by various carriers in the past, and the latest carrier OS hopes center around Tizen, Mozilla’s Firefox, Jolla’s Sailfish, and Canonical’s Ubuntu.
Mozilla and the Tizen Association recently held press conferences that included realistic commitments from hardware vendors and carriers – 17 carriers backing Firefox, if I read the press release correctly. It certainly looks like Tizen and Firefox phones will actually reach the market, but once they do, why will consumers buy them?

“Open” Is Not a Reason a Consumer Buys Anything

None of these devices are all that innovative, none have apps or service ecosystems that are remotely competitive with Apple or Google today, and the vendors kept talking about how “open” they are as if that’s a feature that matters to anyone. Openness does resonate with carriers looking for alternatives to Google and Apple, and I understand why OEMs are building these phones – because carriers say that they’ll sell them. However, the opportunity costs for doing, say, Firefox, instead of trying to deliver a better Android product, are extremely high. And I have yet to see a compelling reason why consumers will give up the Android or iOS ecosystems and buy one of these phones.

Tizen and Jolla basically ignore the question – their presentations have focused on carriers and distributors. Canonical’s execs told me that consumers and enterprises want a system that can span phones to desktops. Do they? And even if they do, since when has Ubuntu been successful on the desktop? Mozilla came closest to describing an actual consumer value proposition, claiming that Firefox smartphones will offer a better user experience than the lowest priced Android 2.3 phones. I’m skeptical. The Firefox mobile user interface is certainly simple enough, resembling a first generation iPhone with a single centered home button and a grid of icons for apps. However, even if consumers prefer a UI without home pages and widgets, Android still has a richer selection of localized apps than Firefox. Google’s services are also a draw, although those are often omitted on low cost Chinese phones. Of course, the whole question of how well Firefox compares to a $100 Android phone in China may be moot: many of the operators signed on to sell Firefox phones are targeting prepaid markets in Europe, where the entry point is slightly higher.

Where Do Google, Microsoft, BlackBerry, and Samsung Fit In?

Google’s launch of the Chromebook Pixel proves that there’s a big faction at the company that views web standards, not native apps, as the future of computing. If Mozilla does have success with Firefox, I would expect to see a ChromeOS phone. Actually, I expect to see a ChromeOS phone regardless.

The focus on Firefox and Tizen seems to indicate that carriers have given up somewhat on Microsoft. Windows Phone has not been terribly successful so far, and Microsoft does not offer operators full control over the services that are eroding their margins. Still, in terms of leverage against Google and Apple, Microsoft is certainly a better bet than any of the alternatives. Microsoft has a real OS in the market today and hardware from Nokia, HTC, ZTE, and Samsung at multiple price points. Microsoft also has the resources and the strategic imperative to keep pouring money into Windows phones and tablets no matter how well (or poorly) they do. Microsoft is a computing software company. Computing is going mobile. Microsoft needs to become a mobile computing company.

Carriers are supporting BlackBerry, at least for now, by helping the company launch the Z10 in over 100 markets. However, few expect it to grow into a real counterweight to Google or Apple, and if the Z10 does not perform well after its initial launch, carrier support will disappear entirely.

Samsung is the largest and most profitable Android vendor, and yet it is also one of the biggest backers of Tizen. Clearly this means [insert hysterical argument here]. The truth is simple: Samsung has always hedged its OS bets. Samsung’s smartphone strategy has always been to bet on every horse (e.g., Symbian, Palm, LiMo, and Windows Phone), and enter its own horse in the race as well (Bada and now TouchWiz). However, when it saw success with Android, it doubled down in that area. For most of Samsung’s competitors, investing in alternate OSs comes with high opportunity costs – allocating time, talent, and management attention to an unproven OS means falling farther behind Samsung in Android. Samsung can afford to follow blind OS alleys just to see if they lead anywhere.

Still, most of Samsung’s device profits come from Android, and Google’s native apps and services add tremendous value to Samsung’s hardware. It would be foolish for Samsung to make any big changes in strategy unless Google forces its hand. Samsung is not foolish. Then again, Google is not entirely predictable – with Motorola, the Nexus program, and the Play Store, Google competes directly with its licensees and carrier partners. Hence the need for Samsung to have a Plan B. Samsung certainly could move away from Android, or create its own Android flavor (the approach taken by Amazon, Barnes & Noble, and many Chinese vendors). However, Samsung mostly wants to use the threat of alternatives to negotiate better mobile ad revenue share with Google, and to keep Google’s Motorola division in check.

The App Developer Dilemma

A lot of great data came out yesterday that I believe is worthy of a deeper look. In my opinion, this data begins to shed light on some of the key questions I have had around platform engagement.

Flurry released some very insightful data that dug into the vast platform fragmentation across platforms. This data helps us draw clean conclusions around why it is very difficult for small to mid-size developers to survive if their goal is to have an app on as many devices as possible. To highlight this, Flurry makes the following point:

(for a developer) to ensure that your app is optimized to function well on 80% of the individual connected devices currently in use. How many different device models (e.g., Kindle Fire HD 8.9″ Wi-Fi, Galaxy S III) do you think you need to support? (the answer is) 156.

A developer would need to index and code for the different variables for 156 different devices just to cover 80% of the current connected devices in use. That sounds like a lot of work.

The Flurry data goes on to focus on more reasonable device coverage and estimated that if a developer simply wants their app to run on 50% of connected devices in use, it means supporting 18 devices. If you know anything about how app development, testing, troubleshooting, etc., works then you know this is a problem.

From the get-go my analysis has highlighted that developers would continue to commit the bulk of their resources to support iOS due to the minimal screen size and OS generation discrepancy that exists in Apple’s model. From the many startup briefings I am having with software companies in Silicon Valley, the iOS first mantra still rings true.

The next bit of data worth highlighting is around application engagement in iOS and Android. Flurry’s data highlights that even though Android has a greater number of people using the platform, iOS has a significantly greater application engagement level. iOS users engage an application 14 times more frequently than a user on Android.

Flurry even analyzed the data further and decided to look at application engagement not just of Android but by specific device brands running Android. The bit that stood out to me was the data around Samsung devices running Android. Flurry’s data returned that iOS (iPhone and iPad) users engage applications 7.7 times more than users on all of Samsung’s Android installed base.

This one has always been a puzzler for many of us because we constantly see the data (from many sources both public and private) telling us that iOS users are far more engaged with software on their smart devices. So with all the data pointing in this direction, we are faced with the question of why? I attempted to shed light on this with my column on iOS and sophisticated simplicity. My core conclusion is that iOS makes it easier to engage more with the software, but this point is subjective so let’s look at more data.

The Flurry data should shed some critical light on the development challenges facing many developers. The bottom line is for developers this is an issue of massive strategic proportions. comScore also shared some of their data, also targeted at developers, with the goal of highlighting some core differences between Android and iOS customers.

The main point I found interesting in the comScore data was their findings that the extremely high satisfaction rate of the iPhone leads to much higher device loyalty. Something I believe many in the media who write their famed “I’m switching” articles fail to realize is that the mass market simply doesn’t change for change sake. If they are happy and satisfied, then churn is rare.

Another bit of interesting data is related to the average income of consumers of both platforms.

As you look at the chart above, you may be tempted to look at the lower part of the Android graph. That isn’t the one I want to focus on. I want to focus on the bottom part of the Apple graph. If you would have seen data going back a few years that looked at average income per platform, you would have seen that most Apple users skewed higher overall on the average income level. What we are now seeing is the iPhone growth, which led to 3.5% gains this last quarter, and caused Android to lose 1.3% market share, being a result of Apple growing their share of the lower end of the market. So what do you think will happen when a new iPhone comes out and the iPhone 5 becomes $99?

The Flurry article brings up an important point facing small to mid-size developers. Where should the focus their time and financial resources? This group is where true software innovation often comes from. Rather than spread themselves thin supporting a fragmented device universe, it seems wise that they focus on the customer base and platform which will reward them financially so they can keep innovating. This decision is of monumental strategic importance.

Comparing The Profits of The Five Titans Of Tech

Introduction

Today’s five Titans of personal computing are Google, Microsoft, Apple, Samsung and Amazon. Horace Dediu of ASYMCO has created a side-by-side comparison of their respective revenues and profits.

Google is a money making machine, but I think that many overestimate its profitability. As the graph clearly shows, Google doesn’t make nearly as much profit as does Microsoft, Apple or Samsung.

Further, we know that the vast majority of Google’s profits are still derived from its desktop advertising business. Android, for all its success in the marketplace, has not yet proven to be profitable to Google.

In a reversal of Microsoft’s business model over the past twenty years, all of the Android profits currently reside with the hardware makers rather than the software provider. Perhaps this is why Google is moving more and more towards making their own hardware. (Google currently owns Motorola and makes Nexus phones, Nexus tablets, Chromebooks and the newly minted Google Chromebook Pixel.)

Microsoft

Microsoft has been making ungodly profits for almost two decades. Microsoft’s problem isn’t profitability, it’s growth. Despite making money hand over fist, Microsoft has been unable to grow its base for much of the past ten years.

And Microsoft is facing serious challenges to even maintain the profits that it now has. In the above graph, the red portion of Microsoft’s profits come from Microsoft Office and the blue portion comes from Microsoft Windows. Both currently reside primarily on desktop and notebook machines. With those devices declining in sales and with phones and tablets rapidly growing in sales, Microsoft needs to make the transition to mobile and they need to make it fast or their two cash cows are going to be isolated and start to dry up.

Apple

As you can see from looking at the graph, Apple’s profits are not just good, they’re spectacular. They far outdistance the other four titans of tech. At yesterday’s shareholder meeting, Tim Cook reputedly said that Apple grew revenue by about $48 billion, more than Google, Microsoft, Dell, HP, RIM, and Nokia combined.

Apple’s problem is the perception that they are the next Microsoft – that they will continue to make great profits but that their growth will stagnate. The graph, above, does not seem to support that view, but past performance is not a guarantee of future profitability.

Samsung

Samsung is an amazing story in oh so many ways. By all rights, Samsung shouldn’t even be on this list of Tech Titans. For the past two decades, the PC manufacturers – the Dells, HPs, Lenovos, Samsungs, etc – were at the bottom of the tech totem pole. Always trapped in a race to the bottom, Microsoft and Intel took all the profits while the hardware manufacturers were relegated to fighting for the scraps.

No more. Samsung has turned that business model on its head. Android – like all licensed operating systems – was supposed to encourage a wide variety of hardware providers. But Samsung has swallowed the Android market share and the Android profit share whole.

Amazon

What can one saying about the amazing Amazon. Their revenues go up but their profits do not. And the less profit they make, the more successful they are perceived to be.

John Gruber once described Amazon as the crazy guy at the poker game. You simply don’t know how to play your cards against Amazon because they don’t play by any of the known rules. And you sure as shooting don’t want Amazon to come after you because they will sacrifice profits in order to win your market. And they are relentless.

Summary

So long as Apple is profitable and their ecosystem healthy, they’re not going anywhere. Microsoft is in it for the long run too. They have the money to sustain their efforts and they well know that they need to be in mobile or they will be locked out of the future of computing. Amazon appears determined to be part of the mix too.

The two titans that seem the most unstable to me are Google and Samsung. Google controls the Android operating system and the ecosystem but they make little profit from either. Samsung makes almost all the profit from Android, but they have little control over the operating system and they make little to no money from the sale of advertising, apps or content sales. That seems like an unsustainable relationship to me. Something has got to give and it’s clear that each side is weighing their options. Google is moving more and more towards making their own hardware and Samsung is flirting with a variety of different operating systems. The future is always uncertain but it seems clear that the relationship between Google and Samsung is certain to change.

Google or Microsoft? That is the Question

If you are a technology company—not named Apple—then the answer to this question is vital to your future. The fact of the matter is that all technology companies, other than Apple, do not solely control their own future. Samsung, HP, Acer, Dell, Lenovo, LG, HTC, Nokia, etc., must rely on either Google or Microsoft for their operating system for the smartphones, tablets, and or PCs they choose to make. So the answer to the question, Google or Microsoft, is as strategic as it gets. Making a wrong decision could mean the end of your company.

Google

Right now Google’s platforms are the hot ticket item. But they come with a price, or a lack of a price for that matter. Google would prefer that all hardware that runs their software be virtually free. That may seem counter to the logic of them releasing a ChromeBook for $1200 but that is simply a strategy to take advantage of a particular market and get early adopters to pay them for their own market research. It is actually quite brilliant.

The long game, however, for Google is one where their services are running on every device and getting there requires the hardware be practically free. This is the world I firmly believe Google wants to see happen. So if I am one of the aforementioned brands trying to make money in the hardware game, I should be mindful of betting my future on a company who would rather me not make any money on my hardware. Also, Google gets almost all of the ad revenue that comes through Android devices. In Samsung’s case, they get 10% but the rest goes to Google. Who really makes money in this case? If you say Google, you are correct; this is part of their end game. How do others make money?

Microsoft

Microsoft on the other hand genuinely wants their hardware partners to make money. This is why they offer a healthy premium on the license of their software. The assumption is that Microsoft software adds value and is therefore valuable. That value should translate into a reasonable price willing to be paid by the mass market in order to capture that value. This was how it worked for nearly two decades in the peak of the PC era so is there reason to believe it will not work again with devices in the post-PC era?

The challenge with Microsoft is that their ecosystem, mainly in apps, is well behind that of Google. To put all your eggs, or even most your eggs, in Microsoft’s basket brings with it the assumption that they will yet again get it right someday, after many tries. Maybe they will.

The Universal Downside

There is a downside to licensing someone else’s software as the main software interface your customers will be using. Actually there are several. First the hardware manufacturer does not actually own the end consumer. This creates platform loyalty but not hardware loyalty. In this scenario, the next time a consumer needs to by a new PC, smartphone, or tablet, they may stay loyal to Microsoft or Google, but said hardware manufacturer must now compete for that customer each time they go back to buy new hardware.

Building out the downside of platform loyalty for the hardware manufacturer comes with it the other challenge of licensing someone else’s software. Your competitors may also license that software which makes standing out or differentiating much more difficult. It is this differentiation, which must go beyond hardware, that can begin to create customer loyalty. But when all your competitors, not named Apple, are running the same software as you, it makes it difficult to stand out in a crowd. I call this the sea of sameness and its getting bigger and deeper every year. Standing out in the sea of sameness is the biggest downside of licensing someone else’s software.

This is why there must be and there will be consolidation in the hardware side of this industry. The current players can not keep going the route they are going forever. Companies may make a go at building their own OS, but they risk losing time and resources to the dominant players. The platform providers like Microsoft and Google, may also start making more of their own hardware, which will complicate matters even further and cause consolidation to happen even faster.

These are certainly tricky waters to navigate and for those who have done this before they are in uncharted territory. The companies that survive the turbulent waters of the sea of sameness will either sail through or sink with the flag of Google or Microsoft mounted high on their mast.

Live the Future Now

By nature of what I do for a living, I spend a lot of time thinking about the future. As a part of that exercise I like to employ a tactic I call live the future now. I’ll explain. Part of how I attempt to create a vision for the future and analyze opportunities and weaknesses of solutions is to try to use existing technology to do things I believe we will do in the future. This is why I am currently using tablets in and around my house in ways that seem unorthodox, or “crazy” as some have told me. I’m trying to get a sense of how these devices may evolve. For example I believe someday a tablet computer will exist in every room. They may also be communal and thus may be mounted on walls, refrigerators, in bathrooms, etc. This is why I literally have 15 tablets in some use around my house (or perhaps that is simply how I justify it).

In the early 2000’s, quite a bit of my research focus was the digital home. I spent a lot of time piecing together solutions in an attempt to stream HD videos wirelessly to all my displays in my house (which was 4 at the time) because I knew wireless whole home video would someday be a reality. I used any and all technologies I could get my hands on as I attempted to build the most connected and automated digital home possible. I basically used my own house as a lab. Interestingly, 10 years later and we still aren’t close to mass market commercialization of the digital home I envisioned and tried to create. It was a painful experience trying to create this digital home back then and many man hours were spent connecting DMAs (digital media adapters as they were called), home theatre PCs, 5ghz proprietary line of sight video points, beam antennas, and many more technologies.

This exercise was valuable and it was all based in an attempt to live the future now so I could learn and observe the potential of certain experiences. The point, however, was an attempt at technological ethnography of the mass market of tomorrow.

Understanding the Mass Market of Tomorrow

One of the most critical things any company can do is seek to understand the needs, wants, and desires of their customers of tomorrow. This is generally why RND labs exist. A key component of any RND lab are individuals with a vision of how the mass market may use their innovations based on tomorrow’s customers needs, wants, and desires. This is often done very poorly by many technology companies.

Understanding what the current mass market needs is important for the short term. Understanding the mass market of tomorrow is important for the long term. This practice is at the core of what we do at Creative Strategies, and it is why I engage in the practice of attempting to live our technological future in the present as much as possible.

Different Approaches

There are two approaches a company can take to understand the mass market of tomorrow. One is to do it solely inside the companies walls. Apple does this for example but so does Microsoft and many other technology companies. This model is traditional but as I pointed out above, requires incredible insight and understanding about the future market in order to know what to commercialize and what to scrap. Apple is perhaps one of the only companies who has continually done this well. Some companies may actually test their products with large groups of employees in order to broaden their sample size as well. Palm used to do this, and I am sure many others do this as well.

The other approach, and the one I think is extremely interesting, is Google’s approach. Google does their RND out in public. ChromeBooks and Google Glass are two prime examples of this. These products may have mass market potential, or they may not, but a great way to find out is to test it with people and observe their behaviors and translate that into learnings. Call it market research with the help of the broad public. Things the market likes, keep. Things the market doesn’t like, don’t keep. Testing future products on actual future consumers and learning from their observations is an extremely interesting way to do future use case research. I appreciate that Google does their RND in public. I also applaud their ability to get people to pay for the privilege of doing their homework for them.

Most consumers don’t know what they want until the see it or experience it. It’s extremely hard in internal RND labs to truly understand mass market sentiment. This is why I think Google’s approach is so interesting. Competitors can learn from this and adapt, which is a risk. But I like the direction they are taking. Regardless of your opinion of the products themselves or Google, I like the idea that Google is getting back to its roots.

Apple iWatch vs Google Glasses and the Next UI Battle

Rumors of the Apple iWatch continue to sprout. Google Glasses will soon be for sale. The “Internet of Things” and wearable computers are quickly transitioning from the realm of science fiction into our everyday reality. Very soon, sensors throughout our homes, on our pets and possibly inside our bodies, all monitored or even controlled by our smartphone, will be the norm. Imagine now if these were ad-subsidized devices, like Android or Kindle, offering no escape from the latest marketing pitch or sponsored social media update. Is this a tolerable future?

While many analysts doubt the ability of Apple to maintain its margins in the face of stiff competition from the likes of Google and Amazon, companies that sell hardware at cost and make it up on advertising and ‘content’, I think the opposite is true: We are on the cusp of a world where personal computing hardware will become increasingly more important and more profitable. This favors Apple. Moreover, as hardware and computing become increasingly smaller and more personal, the Google business model, which fully relies upon advertising, may simply become too intrusive to tolerate.

Tim Cook recently said Apple is not a hardware company. With iTunes and iCloud, retail, services and accessories revenue, Cook is technically correct. Nonetheless, Apple makes most of its revenues directly from hardware. Google CEO Larry Page prefers talking about “moonshots” and driving “10X” changes in our thinking. He doubtless understands, however, that his company makes nearly all its money – and has from the beginning – on advertising. Following the money helps us not only to properly value these companies, but serves as a lens into their future. I suspect we will quickly witness fundamental differences in the design philosophy and user experience from the new wearable computing products coming out of Apple and Google.

The next design battle will almost certainly not be about “skeuomorphism” versus “flat design”. Rather, monetizing hardware, the Apple way, versus monetizing data and advertising, the Google way, will set the stage for this next great battle.

Advertising

As hardware becomes ever-more integrated with our physical self, will we dare rely on lesser hardware that is subsidized by advertising? Maybe. While many may reflexively assume that advertising is always bad, this need not be the case. The promise of Google is that it will provide us with the right information at the right time in the right format for the right device. In some cases, this may be an ad. The problem, of course, is that to succeed with such a mission, every user must hand over to Google an exponentially larger set of personal data, more personal than ever before: where we are, who we are with, what we are doing, how high is our blood pressure, how sad is our mood, how many calories in that muffin we weren’t supposed to eat. When will this become too much?

Intrusion

Advertising is not merely built upon data collection. It also requires interruption – what I call the “intrusive business model”. I think the most potentially intractable problem that Google faces in its quest to create connected, personal hardware devices, one that Apple is liberated from, is the fundamentally intrusive nature of its business model. We may all “search” for information, but that does not necessarily mean we want to be bombarded with ads. Ads are already everywhere, it seems; within our (free) apps and games, on Google maps, scattered across web pages, inside YouTube videos, and more and more on the Google search page. Where does this end?

I don’t want my Google Glasses, for example, to pop up ads right in my eye, nor have a commercial play some catchy jingle into the sensor I keep in my ear. I don’t want my iWatch clone, for example, to vibrate every time it thinks I might be interested in some deal or datapoint – when in fact, it’s really because the sender – the intruder – is making money off stealing my attention. As computing becomes increasingly more personal, there is a very real chance that Google’s business model becomes increasingly more intrusive.

Apple is almost the exact opposite of intrusive. What is iPad but a beautiful pane of glass that we operate with the touch of a finger. Complexity vanishes. We are free from intrusion. This is the case for Apple software as well. Consider that both iOS and Mac OS place the focus squarely on, well, focus – and not on multitasking, alerts, notifications and other intrusive messaging forms.

Presentation

There is an obvious tension here, and it may favor Google. With Apple products, when you want data, you swipe the screen, for example, or beckon Siri. Consider Android versus iPhone differences. Notifications, reminders, alerts, home screen messages and the like are all much more readily presented and visible with Android. Apple’s model favors waiting for the user to seek and request data. For advertising, I absolutely favor the Apple way. But not all data is advertising. In many instances, we want immediate ‘glanceability’ for real-time information. Sometimes, when the data is truly what we need, we want to be intruded upon. I want my maps app to tell me that the road ahead is jammed – even if I am on the telephone. Or, as in the case of a Fitbit bracelet, for example, I may ultimately want to be reminded over and over again to do my exercise for the day. This form of data intrusion favors Google.

The question for Google, though, is can they truly intrude upon our personal space only when we really want or need the intrusion? For a company that has made all its money over the years by flashing advertisement upon advertisement across every one of our screens, I have serious doubts.

Through patent filings, we know that Apple has been working on wearable computing devices for at least several years. Such devices can continuously record our heart rate, monitor our environment, potentially know us better than our friends and doctors. As our devices learn more and more about us, know more of our likes, habits – and needs – there will be a great debate on when and why to ‘intrude’ upon the user. Google plasters extraneous information across all their products and services because their business model demands this. Crossing that ‘intrusive’ line will likely become too enticing for them, I suspect, pushing more and more users to Apple and its “expensive” hardware. Apple, however, needs to understand that sometimes, in some cases, intrusion is good.

The Galaxy Note 2: One Giant Step for Android Phones

If you have read much of what I have written here or at TIME, then you may be surprised at some of the conclusions my analysis of the Samsung Galaxy Note 2 have yielded. I have not been shy about my affection for the iPhone. The iPhone is by far the most elegant, the most simple, and the most sophisticated mobile phone I have ever used. However, to keep a keen eye on the mobile landscape, I try and use all the flagship Android phones for a period of time as my primary smart phone. Up until the Note 2, I have never felt that Android, or larger phones for that matter, every really presented any significant value to me over the iPhone. That is until the Note 2.

I wrote a somewhat detailed analysis of Apple’s 4” iPhone vs. Android 4.7” phones last year. My conclusion from that analysis was that an Android phone in the 4.5-4.7” range did not present enough value for the tradeoff of one handed navigation. My conclusion is different since using the Note 2.

In that analysis I did with the 4” iPhone vs. a 4.7” Android phone I looked mostly at how information was presented. I looked at the web, email, twitter, FB, etc., and found that in most cases the amount of information displayed between the two OSes and screen sizes was roughly the same. The only major difference was that on the 4.7” screen the information was slightly larger. Again my takeaway was that although most information was larger, I didn’t see the value in the tradeoff of one handed navigation and or the robustness of iOS. It simply wasn’t a big enough difference in my opinion. That analysis led me to the conclusion that Android devices between the range of 4.5-4.7 inches were not worth the trade-off of one handed navigation.

Size Does Matter

This realization became clear to me in comparing the Samsung Galaxy GSIII to the iPhone. I used the GSIII for a few weeks but had the same feeling as I did when I compared the iPhone 5 to the Galaxy Nexus. Conclusion being the value of the larger 4.7″ screen was lost on me and it wasn’t worth the trade-offs. However, the Galaxy Note 2 is a different story.

After a few days of using the Note 2, I was struck by how good the experience of Android was on a phone over 5 inches. Oddly enough, it was a similar feeling to how I felt with the Nexus 7. Then these two experiences collided in my mind and I made a realization. I genuinely dislike Android on devices smaller than 5-inches and larger than 10-inches. Yet I like it a great deal on it on devices between 5-7 inches. It is an anomaly I know but that is exactly how I feel. It is almost if Android’s clearest differentiated value over the competition is in the 5-7 range. Both size ranges where iOS is not. Granted the iPad Mini comes close to the Nexus 7 in size, and the iPad Mini is significantly better than the Nexus 7 in my opinion, but I can see why people like and choose the Nexus 7. It is a good value and good experience for the price. Not the best, but for the price, good enough.

The Note 2 size range, however, feels to me like the area where Android really has a clear and distinct differentiated advantage. Again, part of this has to do with the fact that Apple does not offer an iOS device in this range so it is hard to compare. But its still a significant point from a competitive analysis standpoint.

The One Handed Mode Tradeoff

The strongest argument against these size phones is the one-handed operational trade-off and it is a very strong point. If one handed operation is important to you then stay away from devices 4.5-inches and above unless you have Lebron James size hands. But the key conclusion I made is that the trade-off of one-handed operation feels like less of a trade-off with the Note 2 than with any other 4.5-4.7” Android phone I have used. Any phone larger than 4.5” is going to require a trade-off of one-handed operation anyway so why not just go larger and get more value.

Interestingly, I had discussions with folks who owned the Note 2 and specifically many women. They told me that since they have smaller hands, most phones were already hard to use with one hand and therefore they simply wanted the biggest screen possible because they found that valuable. Many were overwhelmingly pleased with the Note 2. This makes my point that if one handed navigation is not that important to you then the value of the screen size experience of the Note 2 is significant.

Although much of my analysis of the 4.7” screen holds true with the Note 2 about information displayed, it is with the Note 2’s size range where bigger actually does feel better. Take Facebook for example. Comparing the Facebook app experience on the iPhone 5 vs. a 4.7” Android phone yields only slightly larger photos and media making the size difference moot in my opinion. However comparing the Facebook experience on the iPhone 5 vs. the Galaxy Note 2 yields much larger photos and media which resulted in quite a different experience. An experience that was definitely more tablet like than phone like.

Web browsing is another good example. I pointed out in my screen size analysis the web experience was nearly moot with the iPhone 5 and other Android 4.5-4.7” devices. However, with the Note 2 the difference in web browsing was significant. Not only were mobile sites larger and easier to read but so were full desktop sites. In fact with the Note 2, I set it to always bring up the desktop site. Never before have I done this on any non-iOS devices. Here is a side-by-side screen shot to scale of the Note 2 and the iPhone 5.

It was examples like these where the bigger screen truly brought value. What really struck me is that the experience with the Galaxy Note 2 is more tablet like than phone like. This is probably a key point in why I think this form factor is so interesting. It is also one that makes it very hard, for the first time, to actually compare an Android phone with the iPhone.

Samsung has also done some interesting things in software to enable more ease of one hand use which led me to the conclusion that larger phones present the most opportunity for new hardware and software innovation.

Conclusion

In all the cases where I found the value of the Note 2 clearly differentiated was with regards to media. Photos, videos, games, social media apps, and other places were media was a key part of the experience. This is a key point because the use cases I identified where value is clear in a giant phone are exactly the ones that matter the most to the mass market.

My personal conviction is that the value of the 5” plus phones are worth some of the trade-offs of one handed navigation where 4.5-4.7″ devices are not. The primary point being that for devices where one-hand navigation is already difficult like ones above 4.5”, consumers are better off going larger in my opinion.

5″ smart phones are an are where a lot of innovation in hardware and software exists. Perhaps more so than any other smart phone form factor. Particularly around voice automation, smart sensors, gestures, and software.

So am I leaving the iPhone? No, for reasons I finally believe I can articulate and will share in a column soon. However, after using the Note 2, I can honestly say it is the best Android phone I have ever used and the only one I could identify tangible differentiated value.

For some deeper audio context to this column, click the play button below to listen to my interview on the Galaxy Note 2 and whether Apple should make a larger phone.

Android, China, and the Wild Wild West

Last week, I talked about the importance for us industry observers, analysts, media, etc., to have a more informed discussion when it comes to Android. I think it is important when we analyze, from an industry and market viewpoint, that we do so with a holistic viewpoint.

My key point in last weeks column was to address the issue of Android platform forking. Android in its purist definition only refers to the AOSP or Android open source platform. Something anyone on the planet can take for their own and fork it, thus differentiating their Android platform and in many cases using the core Android source and making their own platform. Therefore, as it currently stands we have Google with a platform based on Android, we have Amazon with a platform based on Android and we have Barnes and Noble with a platform based on Android. Each of these platforms is their own unique ecosystem.

I make this point because when we say Android has X% market share we are talking about the total including all the forks. This is a key point, because when many make the claim that Android is winning the market share game, they often make the mistake of assuming that Android equals Google, therefore assuming that Google’s version of Android has the total Android market share. This is of course false, as Google’s version of Android, the one that benefits Google in a monetary or data gathering way (a.k.a a business model), has only a fraction of the overall Android market share numbers being referred to. Exactly how much we are not sure because even Google refers to Android falsely making it sound like the total installed base of Android devices on the market have some business benefit to Google and of course that is not true. My gut tells me that if Google did release the numbers of the global install base of Android devices tied to their services, thus qualifying as a Google Android device, the picture would not be as rosy as many make it out to be. No where is that more the case than in China.

The Wild Wild West

As I have been studying the Chinese Android market, the only way I can describe it is the wild wild West. Android is fragmented, un-unified, inconsistent, and otherwise fundamentally fractured in as many ways a platform can possibly be. In fact it is hard to even call Android a platform in China, and there is certainly no Android ecosystem there. There are dozens of app stores, tightly controlled ISP and heavily differentiated experiences and services bundled on the vast majority of Android devices, half a dozen different payment mechanisms, and a general lack of standardization.

The top app stores come from the likes of Tencent, 360, 91, UCWeb (which is a browser) app store and a number of other tier two heavily localized app stores. If I was an Android developer focused on China, I would have my work cut out for me making sure I was present in all the various app stores, or try to go direct to consumers (as many are trying to do), or working as close as possible with the ISP and carriers themselves. This model is somewhat feasible by the larger developers but very difficult for the upstarts and other smaller developers.

What is also very interesting about the Chinese market for Android devices is that the vast majority of the 38 million Android devices sold in China last quarter were extremely low-cost entry level devices. Now, in most cases, this is exactly the kind of scenario that Google would hope for. Google’s mobile business model depends on install base and the best way to do that is to have a plethora of cheap devices so hundreds of millions of people can jump on your platform and you can make some mobile search and ad revenue. The only problem is Google is not benefitting from Android’s success in China in even the slightest way.

The challenges of Google with China are well documented. Over the past few years Google has continually been closing offices in China and largely abandoning the region. Android has not helped relations or Google’s strategy–or lack of strategy–in that region and it doesn’t appear that it will anytime soon. The vast majority of Android devices sold in China have been stripped of all services tied to Google in any way. Here are some key points.

– Local browsers dominate the web browsing landscape
– Google search engine market share is less than 5%
– 90% of new Android devices sold in China do not have the Google Play store on them.
– Many developers are choosing local in app advertising solutions over Google’s

China, and in particular the low-end Android segment, is one of the fastest growing segments in mobile. Every day China is accounting for more and more of the Android activations. Android in China has simply become such a customized and regionalized OS that I’d argue the point that Android in China should be considered its own fork. And due to the extremely fragmented and lack of standards around app distribution, I’m not that confident that Android has a sustainable position in the region outside that the devices are cheap. The vast majority of low-end Android consumers in that region are not investing into any specific ecosystem other than the likes of someone like Baidu, for example, which offers their services on a range of platforms, Apple’s included.

Other than Android devices being extremely low-cost, I’m not convinced, based on the data I have on the region, that Chinese consumers are loyal to the regional Android fork. A point, that offers more hope for standardized and unified platforms from competitors like Apple and Microsoft or even some platform not yet released.

The bottom line is, for now, Android is alive and well in China. It represents one of the fastest and the largest growth sectors for not just Android but the mobile market at large growing at about 300% year-over-year. Android is being taken by the natives and customized / implemented to benefit themselves and their heavily regional services. The vast majority of these devices have little to no benefit to Google. Android is doing well in China, Google is not. Something I find fascinating.

I paint this broad picture of Android in China for the hopes that we can have a more informed discussion when we discuss Android. Too many people associate Android’s holistic global success with Google and that is a disingenuous analysis. I’d love to be able to break out the individual Android fork market share, including the regional forks like China, India, and now Africa, but when the handset OEMs–and Google–are not sharing specifics. A situation I find entirely suspect. Although, the more I learn the truths about Android holistically across the forks and the regions, I am getting a sense of why the details are not being shared with us.

Google’s Directionless Map Strategy

Marco Arment on Google Maps:

What this timing (of Google Maps) really shows is how much Google needs to be on iOS. They’re primarily in the business of reaching as many people as possible so they can build up as much data and advertise to as many bodies as possible. Android is an insurance policy against their profitable businesses being locked out of other platforms, not an important profit center itself.

Google’s Android strategy is inconsistent and incomprehensible. Apple never would have created its own mapping program at all if Google hadn’t denied Apple audible turn-by-turn directions. Now – after Apple has integrated their own maps into their iOS operating system – Google gives Apple everything they ever wanted. How does that make any sense?

If Google wanted to deny Apple access to features that were on Android, then they shouldn’t have created Google Maps for iOS. If they wanted iOS eyeballs, then they should have given Apple turn-by-turn directions BEFORE Apple effectively un-integrated Google maps. The whole affair was completely counter-productive for all involved.

You can’t have it both ways. Either Google should be in the business of being on every mobile platform or Google should be in the business of Android. Trying to pursue both strategies is like trying to keep one foot on the dock and the other on the boat. You can’t get anywhere and it’s going to sink you sooner or later.

Why Android’s Market Share Is No Threat To Apple’s iOS Platform

iOS Is Winning The Profit Battles

Everyone concedes that Apple’s iOS is currently winning the mobile profit battles. However, many pundits still contend that Apple is losing the mobile wars because Apple does not have the most market share. How can this be? In almost every industry in the world it is profits – not market share – that matters and profits – not market share – that matters most.

Tiffany’s does not care how much costume jewelry their competitor’s sell. Nor do we judge the sales of cars, blue jeans, steaks or any other good or service soley by its market share. Companies like Best Buy, Radio Shack and K-Mart stand as stark testaments to the fact that the one with the most stores or the one that sells the most low cost items is seldom the one with the best prospects.

Does Platform Matter More Than Profits?

Ah, but apparently in a platform war it is platform – not profits – that matters most because it is platform – not profits – that inevitably leads to profits. And it is market share – not profits – that matters most because it is market share – not profits – that inevitably leads to platform victory.

John Koestier of Venturebeat puts it this way:

“As Android hits 75% market share, can anyone tell me why this is not Mac vs PC all over again?”

Dan Lyons, writing for ReadWrite, goes even further:

If this sounds familiar, it’s because we’ve seen this movie before, only in the original version Apple was losing out to Microsoft in personal computers. Now Google is using the same game plan in smartphones: Come in late with an alternative product and gobble up market share by licensing the OS to loads of hardware makers instead of trying to do everything yourself.

Look, when three out of four phones sold worldwide run your operating system, I think it’s safe to declare victory.

And Henry Blodget attempts to spell it all out:

The reason market share is important is that mobile is a “platform market.” In platform markets, third-party companies build products and services on top of other companies’ platforms. As they do, the underlying platforms become more valuable and have greater customer lock-in.

Building products and services for multiple platforms is expensive, so platform markets tend to standardize around a single leading platform. As they do so, the power and value of the leading platform increases, and the value of the smaller platforms collapses.

iOS Is Winning The Platform Battles Too

Only there’s one little problem with the theory that market share matters most in a platform war. By every imaginable measure and in every way that conceivably matters, it is iOS – not Android – that is winning the platform wars. And it isn’t even close.

A computing platform is made up of any number of attributes. Some examples of those attributes are:

adoption of operating system updates; accessories; advertising revenue; app primacy, quantity, quality and profitability; business adoption, BYOD, commerce; consumer assurance, entrustment and confidence; content revenue; control of the platform; credit card numbers; culture; demographics; developers; ease of use; eCommerce; ecosystem; education adoption; engagement; enterprise adoption; government adoption; in-app commerce; integration; lock-in; loyalty; monetization; profits to developers, content providers and publishers; popularity with teens; re-sale value; reliability; repeat customers, retention; safety; satisfaction; security; shopping; stability; stickiness; store quality; switching costs; trust; usage; video views; web traffic.

In every platform attribute listed, it is iOS – not Android – that is leading and in many cases it is iOS that is dominating.

Market Share Does Not Equal Platform

The pundits got it halfway right. Platform matters. But market share does not equal platform. Not by a long shot.

How can this be? The equation of “market share equals platform” is the foundation of the Network Effect – the idea that the value of a product or service is dependent on the number of others using it. Only here’s the thing. In computing platforms, it’s developers and dollars – not units and users – that count towards market share.

This just isn’t that hard. The two basic realities that matter most to a platform are that developers get paid to develop more and better apps and that consumers get incentivized to buy more apps and pay more for those self-same apps.

When the facts do not fit the theory, you either question the facts or you question the theory. The theory that “market share is all that matters” is flawed because the opposing facts are incontrovertible:

1) Developers are deveoping for iOS first;
2) Developers are making more money via iOS;
3) Consumers are downloading more content and apps, engaging in more eCommerce and consuming more advertising via iOS; and
4) Consumers are spending more on the content, apps and items they buy and the advertising they consume on iOS.

The Network Effect that John Koestier, Dan Lyons and Henry Blodget are banking on is alive and well. But it is iOS – not Android – that is reaping all of its benefits and rewards.

Why Android’s Market Share Is No Threat To Apple’s iOS Platform

Again, from Henry Blodget:

The biggest and most important difference between the PC market of the 1990s and the mobile market today is that many of the most common smartphone “apps” are available on all phones, regardless of platform. These include:

Phone
Email
Web
Texting
Popular games and apps

What this means is that you’re going to get most of your smartphone functionality regardless of which platform you use.

Ironically, spot on.

The pundits – including Henry Blodget – have it exactly backwards. You don’t HAVE to have a great platform to be successful in mobile. Android is living proof of that. Remember, when Android first emerged, it was iOS that had a 200,000 app head start. If platform was all that mattered – if we were re-living the PC v. Mac wars – then Android would have played the role of the Mac – or worse, the Amiga – and never have emerged from its nascency.

The bottom line is that there are really two smartphone markets. Android is an excellent smartphone. iOS is an excellent platform. Both can, and do, co-exist. And therein lies the answer to the seeming paradox.

The Right Diagnosis But The Wrong Prescription

Let’s re-review Henry Blodget’s argument:

The reason market share is important is that mobile is a “platform market.” In platform markets, third-party companies build products and services on top of other companies’ platforms. As they do, the underlying platforms become more valuable and have greater customer lock-in.

Building products and services for multiple platforms is expensive, so platform markets tend to standardize around a single leading platform. As they do so, the power and value of the leading platform increases, and the value of the smaller platforms collapses.

Henry Blodgett’s diagnosis – that platform matters – is entirely right. His prescription – that market share cures all ills – is entirely wrong. Android can continue its unit and user market share dominance without impinging on iOS’ platform dominance because it is developers and dollars that are the only market shares that really matter.

— It is iOS – not Android – that is attracting the third party companies to build products and services on top of their platform.
— It is iOS – not Android – that is becoming more valuable with greater customer lock-in.
— It is iOS – not Android – that developers, content providers, advertisers and eCommerce sites are standardizing around.
— And it is Android – not iOS – that is in danger of having the value of their smaller platform collapse.

Conclusion

Don’t get me wrong, Apple has plenty of things to worry about. But a flawed theory regarding platform and the Network Effect isn’t one of them.

Let’s stop focusing on market share without context and let’s start focusing on what matters. Market share does not necessarily equal profits. Market share does not necessarily equal platform. And in the long run (and in the short run too), market share that doesn’t ultimately lead to profits is meaningless.

Anyone can get market share. All you have to do is give away your product at cost or, better yet, for free. But you can’t beat Apple’s iOS just by losing money. Somewhere, somehow, sometime you’ve got to make a profit. Let’s stop pretending that market share is the bottom line or the only thing that matters. Profit and platform matter. Let’s focus on them, instead.

It’s Going To Be A Very Apple-y Holiday Quarter

Tightwads, Value Buyers and Spendthrifts

Oscar Wilde once said that cynics know the price of everything and the value of nothing. Similarly, tech pundits are often obsessed with price to the detriment of value. Despite all evidence to the contrary, pundits think that price is the number one consideration of consumers. In fact, some pundits seem to think that price is the ONLY consideration of consumers. But for most consumers, value is what matters most and price is only one component of that value.

There are three types of consumers: Tightwads, Value Buyers and Spendthrifts. There are two things you should know about these three types of consumers.

First, there are far more value buyers than there are of any other type.

Second, you not only want to ignore the tightwad customers, you want to actively avoid them. They’re a plague on your house.

Pundits seem to think that all consumers are tightwads and all of their analysis reflects that conviction. Smart companies know better.

Reality matters

Remember, reality matters. It doesn’t matter what the pundits think. It doesn’t matter what I think. It doesn’t matter what you think. What matters is what the market thinks. If our thoughts don’t reflect market realities, then we, not the market, are in the wrong.

Naysayers v. Reality

For the past month I’ve read and listened to every imaginable reason why Apple is going to fail. Well, Apple may fail eventually, but not this holiday quarter they won’t. Not by a long shot.

Here are a couple of miscellaneous reasons why I think Apple is just going to crush it this upcoming quarter

1) Mac Sales Continue to Grow

Sales of Mac hardware to U.S. businesses grew by 49.4 percent year over year in the September quarter, posting continued growth while PC sales shrank.

Charlie Wolf of Needham & Company highlighted Apple’s success in the enterprise as the “big story” regarding Mac sales in the September quarter. With PC sales to U.S. businesses declining 13.3 percent year over year, Apple had a 62.7 percentage point difference.

Yeah, yeah, yeah, I know. No one thinks that Macs are important because they’re still such a minority player. But they’re not so niche as you think.

Overall, the Mac’s unit share of the U.S. business market was 9.3 percent in the September quarter. That was up from 5.9 percent of total sales in June, and 5.4 percent in September of 2011.

Apple had an even bigger share of revenue of PC sales to U.S. businesses, accounting for 17.4 percent. That was also up from an 11.5 percent share in June, and 10.7 percent share a year prior. ~ AppleInsider

Overall Mac sales may even shrink this quarter, but their overall importance in the Enterprise will grow. Remember, phones are already outselling Windows machines and tablets are rapidly headed that way too. (EDIT: NPD: Tablets to Outsell Laptops in Q4, Beyond.) Windows is not nearly as monolithic as people think. And Macs are not so nearly as unimportant or niche as people think either.

2) China

Apple’s iPad shipments for China nearly doubled in the third quarter after Apple settled a lengthy dispute over the iPad trademark name.

People forget that over 60% of Apple’s sales come from overseas and that Apple’s overseas sales numbers are rapidly growing. Yes, it will be a big holiday quarter for Apple in the Western world. But it will be a big quarter for Apple in the rest of the world too.

3) Nielson’s Most Wanted Gift Survey

Have you seen the Nielson most-wanted gifts survey? I mean seriously, it is out of sight. What do American kids aged 6 to 12 want this holiday season? Four out of the top five items on the list are made by Apple.

Let’s take a quick look at the top six items on the list:

48% want iPads
39% want Nintendo Wii U’s
36% want iPod Touches
36% want iPad Minis
33% want iPhones
31% want computers

Now there’s a couple of observations that I take from that list.

First, Apple continues to maintain high consumer mindshare. People think Apple first.

Second, Apple’s popularity is growing. Despite a plethora of competing tablet, smartphone and gaming devices, kid’s attraction to the Apple brand in general and iOS in particular has grown steadily over the past three years.

Third, the iPad Mini is fourth on the list. Yet I strongly suspect that an awful lot of parents are going to walk into an Apple store looking for iPads and iPod Touches and they’re going to end up walking out of that store with an iPad Mini.

Fourth, as an aside, that list ain’t good for Microsoft. Microsoft has lost an entire generation of users – kids who will be growing up using Apple products, not Microsoft products.

It’s Going To Be A Long Harsh Winter For Some Of Apple’s Competitors

Why PC manufacturers Should Fear Apple

The tipping point for tablets has come and gone.

It seems like just yesterday that I was writing articles arguing that tablets were the next big thing. It seems like just yesterday because it WAS just yesterday.

But suddenly, it feels like that battle is over and and done with. If you look through the Nielson survey for whatever age, you see that tablets dominate. Not only are Apple tablets popular, non-Apple devices are on the rise too. Yesterday I was arguing with people who insisted that the tablet was a toy or a fad. As is usual with new ideas, we’ve suddenly moved from the “that will never happen” phase to the “of course that happened and I knew it would all along” phase. True, not everyone is convinced but for the most part the naysayers have learned to remain silent lest they be thought of as quaint, at best, or out-of-touch with reality, at worst.

The age of the tablets is upon us – (just as we all knew it would be, all along.)

Why Microsoft Should Fear Apple

Yesterday, Ben Bajarin wrote an excellent article entitled: “Why Competitors Should Fear the iPad Mini“. A couple of his key takeaways were that families expected to own more than one iPad Mini, that with an iPad Mini consumers feel they pay more but they get more and that “the tablet is taking the place in the hearts of many consumers as the new personal computer.” He couldn’t be more right.

The final word on Microsoft’s tablet efforts has not yet been written, but the preliminary reports do not look good. Not only has Microsoft missed a generation of phone users but now they are missing a generation of tablet users too.

PC sales continue to decline and there are reports that a staggering 42% of Windows users say that they plan to buy an Apple product – either a Mac or an iPad – rather than a Window’s 8 device. I take such claims with a huge grain of salt, but as I said in my article: “Windows 8′s Greatest Sin“, consumer’s now have choices that they didn’t have before. Microsoft is making their long-standing customers choose between Windows 8 and other options. And many are choosing to opt out.

Why Google and Amazon Should Fear Apple

Apple may dominate tablet sales, but there are going to be a ton of Google Nexus 7’s, Amazon Kindle Fire’s and even Barnes & Noble Nook tablets sold this holiday quarter. But the people buying those tablets are buying media tablets that run stretched phone apps. The people who are buying the iPad and the iPad Mini are buying a tablet that runs tablet apps and that can also act as a Media tablet. That’s my opinion. But I think that’s also the opinion of the market and I think we’re going to see that opinion expressed in hard sales numbers come this January.

Remember, there are three types of consumers: tightwads, value buyers and spendthrifts. Tightwads are going to be drawn to the Amazon Kindle and the Nexus 7 because of their subsidized prices. The Nook, at least, is trying to make money on the sale of its hardware. Kindle Fire’s and Nexus 7’s sales are empty sales. Neither Amazon nor Google makes a penny of profit until they sell additional goods, services or advertising. And their chances of doing that when selling to tightwads is not good. Not good at all.

You Can Hang Your Hat On It

I actually think Apple’s margins may be lower this quarter. They’ve introduced, re-newed or refreshed almost their entire line and some of their products – the iPad Mini in particular – will make them less than normal margins. But Apple’s margins are absurdly high to begin with. And since many of Apple’s products are supply constrained, the high margins truly reflect the high value that consumer’s place in Apple’s products.

The last time I paid attention to such things, Apple – a hardware seller – had higher margins than Microsoft – a software seller. That just shouldn’t happen. And in any case, I can guarantee you that Apple’s less than usual hardware margins are going to be far, far, greater than the virtually non-existant hardware margins of either Google or Amazon.

The future is uncertain and predictions are always perilous. But if Apple doesn’t have a banner quarter, I’ll eat my hat. Then I’ll go out, buy another hat, and eat that one too.

It’s going to be a very Apple-y holiday quarter. You can hang your hat on it.

Why Android Is Winning The Battles But Google Is Losing The War: Part 5

A Pyrrhic victory (/ˈpɪrɪk/) is a victory with such a devastating cost that it carries the implication that another such victory will ultimately lead to defeat. The phrase “Pyrrhic Victory” is named after King Pyrrhus of Epirus, whose army suffered irreplaceable casualties in defeating the Romans at Heraclea in 280 BC and Asculum in 279 BC during the Pyrrhic War. Someone who wins a Pyrrhic victory has been victorious in some way; however, the heavy toll negates any sense of achievement or profit. The term “Pyrrhic victory” is used as an analogy in fields such as business, politics, and sports to describe struggles that end up ruining the victor. ~ via Wikipedia

Series Schedule:

Mon: The Battle for the PC

Tue: The Battle for Mobile Phones Won

Wed: The War for Mobile Phones Lost

Thu: The Battle for Tablets

Fri: Picking Your Battles Is As Important as Winning Them

5) Picking Your Battles Is As Important as Winning Them

Recap

“If we are victorious in one more (such) battle…we shall be utterly ruined.” ~ Pyrrhus

Google, inarguably, won the war for the desktop. Their search strategy was brilliant, brilliantly executed and brilliantly successful. But they knew that mobile was the future and they knew that they needed to find a way to extend their business model to embrace mobile or they would eventually be isolated on the desktop with ever decreasing customers and ever decreasing revenues.

Android was Google’s answer to how to monetize mobile. It would serve two purposes. It would transfer Google’s successful desktop search paradigm to mobile devices and it would disrupt the incumbent mobile operators.

DISRUPTION

In the latter, Android was entirely successful. The one-two punch of Apple’s iOS and Google’s Android demolished the then crown princes of mobile computing. Palm is gone. RIM is on its last legs. Nokia is no more than a vassal of Microsoft. Windows Mobile was utterly destroyed, its replacement, Windows Phone 7, has come and gone, and Microsoft is now rebooting the franchise for a third time with Windows Phone 8. Seldom, if ever, has an industry been turned on its head quite so thoroughly and quite so fast.

PROFITS

However, with regard to transferring Google’s desktop search model to mobile, Android has utterly failed. Google search on the desktop is one of the most profitable businesses in the world. Android on mobile is not only virtually profitless but, if your subtract the extraordinary expenditures involved in creating and supporting it, it is almost certainly a net loss for Google.

SEARCH, APPS AND PLATFORM

There are at least three reasons why Android is failing to serve Google’s purposes: search, apps, and platform.

When Google created Android, they didn’t know, and probably couldn’t have known, how ineffective search would be on mobile devices. For a variety of reasons – but mostly due to the small screen size – search simply does not work on mobile devices the way it does on desktop devices.

The popularity – and the peril – of apps was probably another unforeseeable development. In 2006, and long afterwards one could have, and many did, make the argument that web apps were the future. It just didn’t work out that way. Apps have proven to be far more successful than anyone could have predicted. And apps are a direct threat to Google’s search model since they can’t be “crawled” by Google’s search engines and since they entirely bypass Google’s advertising business model.

Yes, search and apps were threats that Google may not have been able to previse, but their real failure was a failure to understand what platform was all about. To be fair, most industry analysts and pundits still, to this day, seem blinded as to what truly makes a platform successful.

Units and Users vs. Dollars and Developers

When it comes to platform everyone is focused on units and users. What they should be focused on is dollars and developers.

A consumer who is willing to spend $100 is 100 times more important to developers, retailers, content providers and advertisers than is a consumer who is only willing to spend $1. More importantly, a consumer who is willing to spend $1 is infinitely more valuable than the consumer who spends nothing. Unit sales and users are important to hardware manufacturers like Samsung and Apple because hardware manufacturers get paid up front when the purchase of the hardware is made. But so far as a platform goes, the consumer who consumes nothing is a non-entity – they might as well not exist.

All that market share that Android has? Toss it out. Start counting again and this time, instead of counting units and users, count the dollars that those users spend. If you do that, suddenly all of Android’s seeming paradoxes quickly dissipate.

— Users who don’t spend money don’t attract developers, retailers, content providers or advertisers.

— Users who don’t buy into the platform have no loyalty to the platform. They’re not customers for life. They’re customers until they get their next mobile device.

— Users who don’t spend money have no network effect. Non-using users are not a boon to a network, they’re the bane of a network.

Why Don’t Android Users Spend More Money?

This all begs the question: “Why don’t Android users spend more money?” I know this is going to be dismaying to read, but I simply don’t know.

I find all the current theories unsatisfying. Many of them are undoubtedly true. And some of them explain some of why Android owners spend less. But none of them – even in concert – fully explain to my satisfaction why Android users spend so very much less.

I think that I could make a pretty good case that Google’s inattentiveness to their platform is the biggest culprit. And even Google seems to be waking up to this fact. Last month they initiated new guidelines for creating tablet optimized apps. Yesterday they modified their legal agreement with developers working on Android apps to specifically prohibit them from any action that could contribute to further fragmentation of the mobile platform.

Will this be enough to increase user spending and purchasing? Who knows. For now we simply have to live with the fact that Android owners do not spend money and the consequences of that fact. The rationale for why it is so will have to wait upon further analysis.

The Trojan Horse

As I discussed, above, Android was terribly disrupting to the mobile device industry. Industry stalwarts such as Palm, RIM, Nokia and Microsoft Windows are either gone or are on the ropes. But Android may have been disruptive to at least one other company too – Google.

There’s no evidence that Android is contributing to Google’s success. On the contrary, Android appears to be cannibalizing Google’s profitable businesses without generating any profits of its own. Android thoroughly destroyed the business models of the previous mobile moguls but it did not stop there. Android has now turned on its creator and it is destroying the value in Google’s advertising business, virtually eating the company up from the inside out.

Picking Your Battles Is As Important as Winning Them

The story of Android is still being written but the story being told by most pundits and industry observers is very different from the one that is actually occurring. Android has won the battle for market share but it is a Pyrrhic victory because it is coming at the expense of Google’s current profits and future prospects.

Like Pyrrhus of old, Google, needs to learn that winning isn’t everything. Picking your battles is as important as winning them because each battle has a cost and some victories come at too high a price. In spite of its perceived success, Android is not serving Google’s interests. Its march needs to be altered else its victories will ultimately prove ruinous to the victor.

Why Android Is Winning The Battles But Google Is Losing The War: Part 4

Series Schedule:

Mon: The Battle for the PC
Tue: The Battle for Mobile Phones Won
Wed: The War for Mobile Phones Lost
Thu: The Battle for Tablets
Fri: Picking Your Battles Is As Important as Winning Them

4) The Battle For Tablets

If Android’s battle for phones is a Pyrrhic victory, Android’s battle for tablets is a flat-out ignominious defeat.

Android’s Strategic Tablet Blunder

The tablet’s larger screen size demands that developers create apps optimized just for its form factor. This makes tablets a seperate platform all its own. Google’s big mistake in tablets was that they either didn’t recognize or refused to acknowledge that fact.

Google just saw tablets as big phones and acted accordingly. Rather than focusing on the creation of tablet optimized apps, Google encouraged their developers to create one-size-fits-all apps. Developers were encouraged to focus on scalability rather than optimization.

Google made their mind set clear by refusing to even establish a separate tablet-optimized classification for their store. While their nearest competitor highlighted the fact that they had 250,000 tablet optimized apps, Google categorically denied that there was any difference at all between phone and tablet apps. The result has mostly been a lot of Android phone apps awkwardly stretched to fit the larger tablet screen. Even big name apps like Twitter and Rdio looked unwieldy on Android tablets.

As recently as June 2012, when the Nexus 7 was introduced, Google Senior Vice President Andy Rubin reaffirmed that Google was sticking with its strategy of encouraging developers to write a single app for both phones and tablets.

“I don’t think there should be apps specific to a tablet…if someone makes an ICS app it’s going to run on phones and it’s going to run on tablets.” ~ Andy Rubin

Google’s policy was focused on the developer, not the consumer. It allowed developers to create apps that worked on more devices, but it did so at the expense of the user experience.

Andy Rubin went on to admit that he was upset that Android tablets weren’t selling. After looking into the reasons, Rubin declared that Google had discovered the reason for the lack of sales. While hardware really mattered on phones, consumers bought into content ecosystems with tablets. Rubin said that Google had lacked some of the ecosystem pieces that were necessary – such as TV shows, movies, magazines, etc. – to make people want to consume on a tablet.

“I think that was the missing piece,” Rubin said.

Do you hear what Rubin was saying? In his mind – and presumably in the mind of all of Google – the reason that Android tablets weren’t selling was because of a lack of compelling CONTENT. Tablet optimized apps never entered into the proposed “solution” to Android’s tablet woes. The Nexus 7 was all about content delivery since – in their minds – it was content, not apps, that was the missing piece.

Finally Google reversed course. On October 18, 2012, Google published a “tablet app quality checklist” on its Android Developer website and began to seriously urge developers to build tablet-optimized apps.Two and a half-years late and 250,000 iOS tablet optimized apps later, Google finally gets it – tablet optimized apps DO matter.

Or do they get it? Google STILL isn’t asking developers to make separate phone and tablet versios of their apps. And they STILL don’t separate phone apps from tablet apps in their store. And when asked why there still aren’t many tablet-sized apps for Android, Director for Android Partnerships, John Lagerling, said:

But before, I’ll be honest and say, yes, there was a lack of tablet apps that supported bigger screen real estate. But I’ll add that, I know we talked about the Cupertino guys, but obviously people who have smartphones are a huge target for us. If you look globally that’s something we worry more about, not so much about competing with other smartphones, but more about, how can we get more people onto the Internet on mobile phones? And that’s a big deal. That’s why low cost is so important.

Translation: Smartphones are more important to us than tablets and market share is more important to us than anything.

No wonder Android’s tablet efforts continue to languish.

Android Tablet Sales

So how is that one-size-fits-all, let’s-not-optimize-apps-to-the-tablet strategy working out for Android? The results speak for themselves.

At last report, tablets were just 5.38% of Android’s daily activations. And Nexus 7 sales – although constantly referred to as a “success” in the tech media – have been humble, to say the least.

Mark Mahaney, who follows Google for Citi Research … thinks Google sold about a million units of their tablet (that is made by Asus) and that accounts for about $200 million in revenue.

Ben Schachter of McQuarie Securities agrees and estimates that Nexus 7 sales accounted for probably $150 million to $200 million…in… revenue.

Piper Jaffray’s Gene Muster estimates that Google sold between 800,000 to a million units, while Doug Anmuth of JP Morgan says Google sold about 700,000 units of Nexus 7 tablets.

Asustek CFO David Chang told the WSJ that the company was selling—not just shipping—500,000 units a month initially, when the Nexus 7 launched in July. Figures bumped up to 600,000-700,000 in the following months, and in “this latest month,” Google and Asus have sold close to one million units, said Chang.

Let me put those numbers in perspective.

REVENUES

The Nexus 7 may have made as little as 200 million – in revenue, not profit – in an entire quarter. That’s pathetic.

PROFITS

And we know that Google didn’t make any profits from the sales of the Nexus 7 because they told us so.

“When it gets sold through the Play store, there’s no margin,” Rubin said. “It just basically gets (sold) through.”

UNITS

But revenue and profits really don’t matter in a subsidized model. The concept is to get as many units on the market as possible in order to enhance the opportunities to sell content and advertising. So let’s look at the Nexus 7’s sales numbers.

The Nexus 7’s sales are either as high as 1 million units a month or as low as 1 million, 800,000 or 700,000 units a quarter. And the reason we’re relying on estimates is because Google refuses to release actual sales numbers – which is telling all in itself.

By way of contrast, Apple sold a total of 3 million iPad Minis and iPad 4’s in their first three days of availaility. At its current pace, the Nexus 7 would take between 3 months to 3 quarters to even match, let alone exceed, the number of tablets sold by Apple’s first 3 days of sales.

SUBSIDIZED BUSINESS MODELS THRIVE ON VOLUME

Those sales numbers are bad enough, but for a subsidized product, they’re gawdawful. Remember, the Nexus 7 is being given away at cost. Can you imgagine how many more cars or televisions would be sold if they were being sold at cost? The Nexus 7’s should be selling like crazy, not badly trailing competitive offerings that cost $300 more.

This is a give-away-the-razor, sell-the-blade business model. (See my article entitled: “Selling The Amazon Kindle Fire and Google Nexus 7 Is As Silly As Selling Razor Blades To Men Who Love Beards“). Giving away the razor does not guarantee the sale of the blade but NOT giving away the razor DOES guarantee that the blades won’t be sold. Simiarly, volume sales of Nexus tablets do not guarantee that Google will profit from the sale of content and ads but low volume sales DO guarantee that they will not.

FUTURE SALES

Pundits are opining that the Nexus 7’s lower price will make it a hot selling item for the holiday quarter. And I have no doubt that sales will increase. But if Google was having trouble selling the Nexus 7 when its only competition was the 7 inch Kindle Fire and the 10 inch Apple iPad, then why does anyone seriously think it will do significantly better now that it also has to compete with the Apple iPad Mini and the Microsoft Surface?

Android Irony: Tablets Are Where The Ad Revenue Is

The irony in all of this is that tablets are where the ad revenue is. Android has fought and won the battle for phones but phones don’t produce much ad revenue. Meanwhile, Android has ignored tablets and tablets hold the prize that they were so desperately seeking all along. Like a General who is a great tactician but a poor strategist, Android has won all of the battles that they’ve fought, but they’ve fought all of their battles in the wrong places.

TABLETS ARE MORE VALUABLE

Studies have shown that tablet users are the more valuable consumers for advertisers to reach compared with PC and phone users. Tablet users spend 30 percent more time on sites and have 20 percent higher engagement.

“We found it interesting that tablets also had a smaller percentage of users who adopted ‘do not track’ settings compared to PC users,” Mr. Barnette said. “Mobile had the highest percentage of users who adopt do not track at 60 percent.”

APPLE IS DOMINATING TABLETS

And while tablets are dominating mobile revenues, Apple is dominating tablets.

The iPad accounts for between 91% and 98% of web traffic for all tablets. That only leaves 2% to 9% total web traffic for every other type of tablet combined.

And Apple dominates tablet downloads too.

“We estimate in the first half of this year the iPad saw over five times more app downloads than all Android tablets combined.”

TABLETS AD SPENDING OUTWEIGHS SMARTPHONE AD SPENDING

And in the absolute kicker, it is anticipated that tablet ad spending will outweigh smartphone ad spending this holiday season.

Think for a moment just how crazy that is. The ads for all the Android, iOS, Windows Phone 7 and every other smartphone combined will be outsold by the ads sold on tablets this holiday season. Wow.

Google has won the battle for the desktop. Android has won the battle for the phone. But Google’s prospects are possibly worse today than they were when they embarked on their Android strategy. Tomorrow we sum it all up and look to the future in the final article of the series entitled:

“Picking Your Battles Is As Important as Winning Them”

Why Android Is Winning The Battles But Google Is Losing The War: Part 3

Series Schedule:

Mon: The Battle for the PC

Tue: The Battle for Mobile Phones Won

Wed: The War for Mobile Phones Lost

Thu: The Battle for Tablets

Fri: Picking Your Battles Is As Important as Winning Them

3) The War For Mobile Phones Lost

Mobile Search Is Not The Same As Desktop Search

THE PLAN

Google’s plan was to transport their highly successful desktop search strategy to the phone. This only made sense. Search worked on the desktop. Mobile was the future. Therefore, Google’s future would be search on mobile.

MARKET SHARE

Google’s problem is not a lack of market share. eMarketer notes that Google’s share of mobile ad revenue is 55% and it controls 95% of mobile search ads. No, Google’s problem is that search doesn’t work the same on mobile as it does on the PC. In fact, it barely works at all. On the PC, search rules. On the phone, apps rule and search is the court jester.

SIZE MATTERS

When it comes to ads, size really do matter. One of Google’s strenghts when advertising on the desktop was that they would unobtrusively place relevant ads next to and above their search results. On a phone, this was not possible. There simply wasn’t enough screen real estate to display both search results and advertisments.

“Size absolutely does matter,” says Christine Chen, director of communication strategy at Goodby Silverstein & Partners, an ad agency in San Francisco. “If you look at the real estate available on a smartphone, it’s really sad compared to not just banner ads on the Web, but also to TV, print and outdoor advertising.”

“The evidence is telling: advertisers are willing to pay much more to reach a thousand pairs of eyes gazing upon a computer or tablet than a thousand pairs looking at a smartphone screen.

INVISIBLE OR IGNORED OR INVASIVE

Mobile ads are relegated to a tiny portion of the screen and are often invisible or ignored by consumers.

It’s a double-edged sword that cuts against advertisers both ways. It the ads aren’t big, they’re invisible. If they’re bigger, they’re seen as intrusive.

Phones are seen as very personal. Users to not want to be tracked. Interestingly, while 60 percent smartphone users do not allow themselves to be tracked only 7 percent of tablet users and 18 percent of PC users reject tracking on their devices.

NO OPTIMIZATION

For both technical and privacy reasons, advertisers lost the ability to know who they were advertising to. On the desktop, cookies were the standard. On the phone, such technology was either unavailable or seen and intrusive or even offensive.

“What makes Web ads so attractive to advertisers is the ability to track actions and optimize accordingly,” . Because a smartphone cannot use the same technology “your ability to track and optimize is much more blunt, or in some cases nonexistent.”

This makes phone advertisments much less valuable that desktop advertisments. A banner ad on a Web page that costs $3 to $5 for every thousand impressions may cost only 75 cents or $1 for a thousand impressions on a smartphone.

CONTEXT

Context is important too. People surf the web for long periods of time on their tablets and on the desktop. They use their phones in bursts. Trying to promote ads when the user is attempting to grab a quick bite of information is annoying and counter-productive.

ENGAGEMENT

Finally, the engagement levels for smartphone users are lower, reflecting the slower speeds and smaller screens on smartphones.

Android Doesn’t Monetize Ads Well

How much of a problem is all this for Google? Huge. Android is so bad at monetizing ads that a study done on Opera placed Android in third plce behind BlackBerry on value for the money.

Let me say that again. Android’s ads were in third place. Behind Blackberry.

Apps Rule

Google didn’t know that search on the phone wasn’t going to work the same as search on the desktop. Another thing they didn’t know was how important a role apps would play in both search and advertising.

Smartphones were made for apps. People love to use apps on their smartphones. If they want the time for the next train, they use an app to tell them rather than doing a search. If they want to find a restaurant, they might do a search but they’re even more likely to use an app.

Google’s problem is that apps are not searchable by web crawlers. If Google can’t search it, they can’t sell ads against it. For Google, apps are like a large and ever expanding black hole in their advertising universe. And as that hole gets bigger and bigger Android’s advertising opportunities get smaller and smaller.

Android App Apathy

But Android has apps. 700,000 of them. As many or more than any other operating system. So why isn’t Google making money from the sale of apps and app advertising?

Take the University Co-op Society, which sells University of Texas merchandise via stores, the web, an m-commerce site, an iPhone app and an Android app. When it comes to m-commerce, Apple rules.

“IPhone app sales are about 25% of our total mobile business and Android app sales are less than 10%,” says Brian Jewell, vice president of marketing. “That leaves a big chunk of sales that come directly from the mobile site. People entering our address directly or coming to us via a search engine or also possibly clicking through from an e-mail blast.”

And on the mobile site, Apple dominates. Today, 50% of mobile traffic to the University Co-op Society’s web site stems from iPhones, 25% from iPads, 20% from Android devices and 5% from devices running other mobile operating systems.

Retailers of all stripes tell similar stories, which is why retailers building mobile apps invariably have started with an iPhone app. Android is an afterthought.

“Android users do not buy. IPhone users buy,” says David Sasson, president and founder of overstockArt.com.

Android advocates bristle when confronted with the suggestion that Android owners do not buy content or consume advertising on their mobile phones. They say it is insulting.

First, I’m not insulting anyone. If anyone is insulting Android owners, it is the facts, not I.

Second, Android owners are not required to buy aps and content or consume advertising. It doesn’t make them bad people. It just makes them bad customers.

We can argue all day as to exactly why Android owners aren’t buying. There’s lots of theories. The one thing we can’t argue with is the facts. Android owners aren’t buying. And that single fact turns all the market share numbers and the arguments for Android’s dominance on its head.

‘Cause you see – and this is the key point missed by most pundits – developers, advertisers, retailers and others don’t follow unit sales – and they don’t follow customers – they follow the money. And until Android owners are induced to part with more of their money, their overwhelming market share numbers mean little.

The Future

The future of mobile advertising doesn’t look any brighter for Google either. Voice search poses a huge threat as voice activated searches, like Siri, simply bypass Google search altogether.

And then there’s always the ultimate threat that Apple will simply purge Google from its system by making Bing or some other brand the default search engine. It is reported that Google pays Apple $1 billion to be its default search, and earns about $1.3B from searches on Apple mobile devices. In the near-term, it seems unlikely that Apple will remove Google search. But there’s no love lost between the two companies and the long-term remains uncertain. Apple made the difficult and painful decision to remove Google from their Map application. Changing the default search carrier sometime in the future seems like a very real possibility.

It’s A Trap

All of Android’s mobile activations don’t add up to a hill of beans if they can’t be monetized. And Android simply isn’t doing the job it was born to do.

It’s a classic tech trap. Google provides a rapidly growing service that is popular with non-paying users while it constantly becoming less and less valuable to Google’s paying customers – the advertisers.

The result is pernicious. More and more time, money, energy, attention and resources are devoted to Android while the return – a 15% decline in the price advertisers paid per click on a Google ad – continually becomes less and less.

Android is struggling to monetize phones, but there is more to mobile than phones.

Tomorrow: “The Battle for Tablets”

Why Android Is Winning The Battles But Google Is Losing The War: Part 2

Series Schedule:

Mon: The Battle for the PC

Tue: The Battle for Mobile Phones Won

Wed: The War for Mobile Phones Lost

Thu: The Battle for Tablets

Fri: Picking Your Battles Is As Important as Winning Them

2) The Battle For Mobile Phones

The Battle Plan

Tech insiders have been predicting that peak search would happen for some time, as people shifted from using websites – where search is a natural activity – to using mobile apps.

Google was far from unprepared. They knew that mobile was the future of search and they carefully crafted a plan:

Step 1: Create a (putatively) open source mobile operating system called Android.

Step 2: Give the Android operating system away for free.

Step 3: Sell mobile ads and other mobile services on those mobile devices running Android in much the same way that they were currently selling ads and services on the PC.

A Glorious Tactical Success

Parts 1 and 2 of Google’s plan worked to perfection. In fact, Android was more succesful than anyone, including Google, could have anticipated or even imagined. Internal Google documents revealed at the Oracle v. Google trial show that Android’s growth far exceeded even what Google had projected or expected.

Just five years after its debut, Google‘s Android mobile operating software now claims 75% of smart phones shipped, according to a new report from market researcher IDC. A simply stunning overall achievment.

A Glorious Public Relations Success

And don’t think that Android’s spectacular rise has gone unnoticed:

CNet:

“Android’s ascension to glory has been incredible to behold.”

Dan Lyons:

“Look, when three out of four phones sold worldwide run your operating system, I think it’s safe to declare victory.”

CoolSmartphone:

“Why Android has won”

CEO Nathan Eagle

“Why Android Has Already Won the Global Smartphone Race”

Joe Wilcox

“Android wins the smartphone wars”

Chris Pirillo

Android is the New Windows (I mean that in the most polite way, too)

Venturebeat

“As Android hits 75% market share, can anyone tell me why this is not Mac vs PC all over again?”

An Inglorious Strategic Failure

“Another such victory and I am undone.” ~ Pyrrhus

Every report, every study shows that Google got it right. More and more ad revenue is moving to mobile. An analysis of the mobile traffic from a cross section of advertisers reveals up to 25-30% of all paid search traffic is now mobile. And more and more mobile phones are powered by the Android operating system. It’s only logical to assume that the more people buy and use Android phones, the more money Google will make from the sale of search, content and other services.

Only that’s not happening. That’s not happening at all. Android appears to be an overwhelming success in every way. But it turns out that it is only an overwhelming success in one way – market share. In every way that matters – and especially in profits – Android has been a dismal failure.

Unexpected, exponential user growth is usually accompanied by a dramatic positive improvement in the finances of a company and a higher return to shareholders. The curious aspect of Android’s success is that it has not had an impact on either. ~ Horace Dediu

Yearning For Earnings

During the Q3 2012 Earnings call, Google announced that it had a run rate of $8 billion from its mobile business consisting of revenue from ads, apps and content. That was contrasted with a $2.5 billion run rate of a year ago. CFO Patrick Pichette added “Ads continue to be the bulk of [the $8 billion], the vast majority of it.” Sounds like good news, right?

The problem with the $8 billlion number is two-fold. First, the increased revenues appear to represent more of an reshuffling of assets than actual growth. Second, despite the presumably large increase in the run rate, Google declined to disclose Nexus 7 sales, app sales, content sales or ad sales and they stoutly refused to address mobile margins and profits.

What we do know for sure is:

— Cost-per-click (CPC) was down
— Traffic Acquisition Costs (TAC) were up
— Profit from Android was un-reported and possibly non-existant

Upon revealing the numbers, Google’s stock tanked. With Google’s stock falling a shocking $68 or 9% in a matter of hours, Google was desperate for good news to give to its shareholders. If there was ever a time to reveal Android’s profits, that would have been the time. Instead, managment adamantly refused all requests for specifics on mobile sales, margins or profits.

With their stock plummeting, you can bet your bottom dollar that if Google had garnered any profits from Android, they not only would have revealed them, they would trumpeted them as loudly as possible. After all, it’s not like Google doesn’t like to brag about Android. They tout their Android activation numbers all the time. The fact that Google did not reveal any good news regarding Android can mean only one thing – there was no good news to reveal.

After all, there is simply no good reason NOT to reveal Android’s numbers and associated profits. You could argue that Google is being coy and hiding numbers for competitve advantage but what possible competitive advantage could there be?

Further, there is every reason TO reveal profits. If the numbers are rising at an appreciable rate, that would be an exciting development that Google would want to reveal. It woud prove that their strategy was correct and that Android was winning. It would put to rest any lingering doubts, questions or suspicious that things with Android might not actuallly be as they seem. It would be a demoralizing blow to their competitors and a shot in the arm to their stockholders. And perhaps, best of all, it would be an incentive for their customers to increase their ad spending and hop on board the Android gravy train

It is, in fact, almost a certainty that Android DOES make Google a profit. But that profit must be so embarrassingly small that it would be counter-productive for Google to announce it. Doing so would not help Google’s stock, it would hurt it as the revelation would expose exactly how little Android has actually accomplished.

Pyrrhic Victory

Android has overwhelmingly won the battle for marketshare. But the purpose of market share is to get more developers, more apps, more advertising eyeballs, more content, to deliver more revenue – and most importantly – more profit for all involved. Android isn’t delivering any of that.

This is a classic Pyrrhic Victory. Android is winning the market share battles but Google is losing the profit war.

The irony here is poignant. In a reversal of the famous Rolling Stones song, Android got what it wanted – market share – but not what it needed – profits.

How could this be? How could there be such a disconnect between the number of Android users and their value to Google?

Tomorrow: “The War for Mobile Phones Lost.”

Why Android Is Winning The Battles But Google Is Losing The War: Part 1

Series Schedule:

Mon: The Battle for the PC

Tue: The Battle for Mobile Phones Won

Wed: The War for Mobile Phones Lost

Thu: The Battle for Tablets

Fri: Picking Your Battles Is As Important as Winning Them

1) The Battle For The PC

A Glorious Victory

Google began in January 1996 as a research project by Larry Page and Sergey Brin. While conventional search engines ranked results by counting how many times the search terms appeared on the page, they theorized about a better system that analyzed the relationships between websites. They called this new technology PageRank, where a website’s relevance was determined by the number of pages, and the importance of those pages, that linked back to the original site. via Wikipedia

The Battle for search on the PC (notebooks and desktops) was a glorious victory for Google. Seldom has a company come so far, so fast, made so much money and so utterly anihilated their competition. By 2006, Google dominated search and was one of the largest, fastest growing companies on the planet. Their PC search strategy had proven to be brilliant and they were virtually printing money.

I can give Google no greater compliment than this: They make their money by distributing ADVERTISING, yet they are liked by most and even loved by many. The words “amazing” and “awe-inspiring” don’t even begin to cover that achievment.

All Glory Is Fleeting

Sic transit gloria mundi

But Google had two problems, which were really one and the same problem: “peak” and “mobile”.

Many of us are familiar with the concept of “peak oil”. It’s a term used to describe the fact that oil production had to, at some point in time, peak because there was only a finite amount of oil in the ground and once that peak was reached there must inevitably be a steady, albeit gradual, decline in oil production.

An equivelent peak is occuring in computing. In fact, two peaks: “peak PC” and “peak search”, both of which raise serious issues for Google.

For eight straight quarters, search was growing. Then for three straight quarters, that growth deaccelerated. Then last quarter, something happened that had never happened before. People searched less. We have reached peak search.

Ben Schachter of Macquarie Securities noted this in a research note:

Notably, total core organic searches declined 4 percent y/y, representing the first decline in total search volume since we began tracking the data in 2006. While this month marks the first y/y decline in total search volume, growth rates have been decelerating since February’s recent peak at 14 percent y/y growth (for the prior two years, growth rates were largely stable in the high single-digit to low double-digit range).

Not only is search declining, the proft from search is declining too. “Cost-per-click” – how much advertisers pay on average when someone clicks on an ad – is down. Way down. In its third quarter 2012 earnings, Google reported that its cost per click was down 15 percent.

Cost-per-click” – how much advertisers pay on average when someone clicks on an ad – has been dropping for the past four quarters, after rising for eight previous quarters. Surrounding circumstances make it clear that there is no reason to expect it to rise again.

Why is peak search happening and why now?

First, there are fewer and fewer PCs. Like peak oil, we’ve reached peak PC. The PC market is in permanent decline. In fact, the PC market is not only declining, it may be headed for a cliff. (See Tim Bajarin’s fine article on “How the iPad Mini Could Impact Future PC Sales.”)

Second, the search market is maturing. The places where people are going online just don’t pay as much as they used to.

Third, less and less people are doing their searches on their desktops and more and more peole are doing them on their mobile devices. When it comes to search, the portability of the mobile device trumps the power of the PC.

Smartphones have been outselling PCs (notebooks and desktops) since the end of 2010 and by the end of 2012, tablets will make up over 25% of all PC sales. Further, well respected mobile analyst, Mary Meeker believes the global smartphone plus tablet install base will surpass the install base of the PC by the end of Q2 2013.

Fourth, and finally, try this thought experiment. You’re standing by your PC. You want to know the weather, the score of the big game, where a movie is playing or a local place to eat and how to get there (GPS). Do you perform the search on your PC or on your phone? For more and more people, this is an activity that you do on your mobile device, even when your PC is readily available.

AUTHOR’S ASIDE: Ya gotta love Microsoft’s play in the desktop search industry. They are losing BILLIONS on Bing, buying into the desktop search market just as it has peaked and started its decline. What a company.

Now it’s not such a bad thing to be dominating a market that is just past its peak. It means that you’ll be getting great income – nearly as much as you’re getting today – for a long while yet to come. But it also means that your’ve got no longterm future. Unless you plan for one. Which Google did.

Tomorrow: “The Battle for Mobile Phones Won.”

Selling The Amazon Kindle Fire and Google Nexus 7 Is As Silly As Selling Razor Blades To Men Who Love Beards

Gillette, Amazon, Google and Apple

— The Gillette business model is to give away the razor in anticipation of making profits from the sale of the blades.

— The Amazon business model is to give away the Kindle Fire for cost in anticipation of making profits from the sale of content and ads.

— The Google business model is to give away the Nexus 7 for cost in anticipation of making profits from the sale of ads and content.

— The Apple business model is to sell the iPad Mini for a profit…AND in anticipation of making additional profits from the sale of content and ads.

The razor blades business model

“(T)he razor and blades business model, is a business model wherein one item is sold at a low price (or given away for free) in order to increase sales of a complementary good, such as supplies (inkjet printers and ink cartridges, “Swiffers” and cleaning fluid, mobile phones and service contracts) or software (game consoles and games).

Though the concept and its proverbial example “Give ’em the razor; sell ’em the blades” are widely credited to King Camp Gillette, the inventor of the disposable safety razor and founder of Gillette Safety Razor Company, in fact Gillette did not originate this model.

The (razor and blades) marketing model may be threatened if the price of the high margin consumables in question falls due to competition. For the (razor and blades) market to be successful the company must have an effective monopoly on the corresponding goods.”

~ via Wikipedia

Three Flaws

There are (at least) three flaws in the Amazon Kindle Fire and the Google Nexus 7 business models:

1) No proof of sales;
2) No proof of profits;
3) No monopoly (proprietary) pricing available.

1) No proof of sales

The razor and blades business model works, in part, because when the razors are given away at cost or for free, they become ubiquitous, thus making it convenient for razor owning customers to purchase the company’s proprietary blades. There is no evidence to indicate that either the Amazon Kindle Fire or the Google Nexus 7 are selling well despite their subsidized sales prices.

It’s been estimated that the original Amazon Kindle Fire sold 4.7 million Kindle Fires over a 9 month span and that the Google Nexus 7 sold 3 million units last quarter. These numbers are estimates because neither Amazon nor Google are willing to release the actual sales numbers.

When you consider the fact that these are both subsidized products being sold at cost, those numbers are remarkably low.

2) No proof of profits

The razor and blades business model works, in part, because when the razors are given away at cost or for free, the profit is made from the blades. There is no evidence to indicate that either the Amazon Kindle Fire or the Google Nexus 7 are making substantial profits from the sale of content or ads. In fact, when you look at the company’s recent quarterly earnings reports, there is evidence suggesting that they are NOT making significant revenues or profits from tablet related content and ad sales.

3) No monopoly (proprietary) pricing available

The razor and blades business model works, in part, because the blades are proprietary and command the premium price neccessary to offset the lack of profit from the giveaway of the razors.

For the (razor and blades) market to be successful the company must have an effective monopoly on the corresponding goods.” ~ via Wikipedia

The Printer Example

Computer printer manufacturers have gone through extensive efforts to make sure that their printers are incompatible with lower cost after-market ink cartridges and refilled cartridges. This is because the printers are often sold at or below cost to generate sales of proprietary cartridges which will generate profits for the company over the life of the equipment.

The Game Console Example

(V)ideo game consoles have often been sold at a loss while software and accessory sales are highly profitable to the console manufacturer. For this reason, console manufacturers aggressively protect their profit margin against piracy by pursuing legal action against carriers of modchips and jailbreaks.

Atari had a…problem in the 1980s with Atari 2600 games. Atari was initially the only developer and publisher of games for the 2600; it sold the 2600 itself at cost and relied on the games for profit. When several programmers left to found Activision and began publishing cheaper games of comparable quality, Atari was left without a source of profit.

~ via Wikipedia

Neither the Amazon Kindle Fire nor the Google Nexus 7 have a monopoly on the content or the ads that they sell. They cannot command a premium price. In fact, if anyone can command a premium price on the sale of content, it is Apple because of their extensive distribution channels. While Apple is able to sell content in over 90 countries, the content sales channels for both Amazon and Google are extremely limited.

Cheaper is not necessarily better

There are rumors that Google may announce a $99 Nexus tablet next week. But in a subsidized model, cheaper is not necessarily better. In fact, it could be counter-productive.

The razor and blades business model works, in part, because when the blades are given away at cost or for free, they become ubiquitous, but there is no point in giving away the razors to men who love having beards. Similarly, there is no point in selling low-cost Amazon or Google tablets to customers who don’t buy their content or consume their advertising. Subsidized products attract bargain hunting customers and bargain hunters are as useless to Amazon and Google as bearded men are to Gillette.

The non-existent “Price Umbrella”

Apple is being criticized for selling the iPad Mini at $329 and leaving a “price umbrella” under which the likes of Amazon and Google tablets can grow and prosper.

There is no price umbrella. The Amazon Kindle Fire and the Google Nexus 7 are zero-margin products.

Let me say that again. Amazon and Google make zero profit from tablet sales.

No matter how much Apple lowers its sales price (and its margins) it won’t be taking any profits away from the Amazon Kindle Fire and the Google Nexus 7 because they already make no profits.

Now there is an argument to be made that lower Apple iPad Mini prices might reduce Amazon’s and Google’s tablet sales and therefore lower Amazon’s and Google’s tablet related content and ad sales. This presumes that lower iPad Mini prices would spur higher iPad Mini sales. If the iPad is supply constrained, (i.e,, Apple can’t make enough of them) this argument fails.

Further, both the Amazon and Google tablets are already selling poorly. And there is absolutely no evidence that Amazon or Google are making more than, or even as much as, Apple is in content and ad sales. Lower iPad Mini prices would have a negligible effect on Amazon’s and Google’s ethereal profits but it would have a significantly negative affect on the iPad Mini’s margins.

Giving razors to men with beards

“Never interrupt your enemy when he is making a mistake.” ~ Napoleon Bonaparte

Apple doesn’t need to lower its pricing to deliver “the tablet death blow” to its competitors. Apple’s competitors are doing a fine job of starving themselves of profits as it is.

When your competition is giving razors to men with beards and hoping to make their profits on the sale of blades, you don’t attack them – you ignore them.

7 Inch Tablets Employ An Odd Definition of “Success”

TROY WOLVERTON at the San Jose Mercury News, talks 7 inch tablets:

Just two years ago, Apple’s late co-founder and CEO Steve Jobs mocked small-screened tablets as “tweeners” that were too little to compete with the larger iPad but too big to compete with smartphones.

But after the success that Amazon and Google have had with small-screen tablets…

Whoa, whoa, whoa! Stop right there.

Success? What success?

Success is defined as: “the accomplishment of an aim or purpose.”

— Research in Motion, Samsung and other manufacturers introduced tablets with seven inch screens that flopped.

— It’s been estimated that Amazon sold 4.7 million seven inch tablets over a 9 month span.

— It’s been estimated that Google sold 3 million Nexus 7, seven inch tablets over the last quarter.

That’s not a “success”. That’s anything but a “success”.

Notice that the numbers for Amazon and Google are estimates. Their respective companies have not released sales figures. There’s a reason for that.

Also note that the Amazon and Google products are subsidized, which means that they are being sold at cost. What product wouldn’t sell well if it was sold at cost? Apparently, 7 inch tablets.

By way of comparison, Apple sells more that 5 million 9.7 inch tablets every month – at full price – and Apple is conservatively expected to sell 25 million iPads this upcoming holiday quarter. Again, at full price.

I have no doubt that the 7 inch tablet category is viable and I’m guessing that – starting on October 23rd – Apple is going to prove that in a big way. However, we need to stop talking about “the success that Amazon and Google have had with small-screen tablets” or we need to get a new definition for the word “success”. I’m leaning towards the former.