Apple Music and the Future of the Music Industry

In the past few years, it has become glaringly obvious the economics of streaming music was not favorable toward artists. Interestingly, I recall the same thing being said when Apple first launched the iTunes Store, as the music industry pundits feared the move would make it easier for people to only buy the song(s) they wanted vs the whole album. They felt it was better for everyone to sell a $9.99 album vs. just one song for .99c.

In case you don’t know the economics of the music industry, it is generally pretty ugly for most artists. Unless you are a largely successful artist, your cut of sales can range between ten to twenty-five percent depending on how well you negotiated your contract (Those were the common percentages 15 years ago when I did work in the music industry. Doubtful much has changed). Labels simply act as investors. They generally offer artists money up front as part of the deal and then agree on a percentage of all sales. The label puts up the money to record the album, market it and, during the analog era, distribute it to retail. There is a science to this and it works. But the sales revenues are not just split between the label and the artist. Often there are licensing costs, costs to a songwriter, publisher, and a range of other costs built into revenue share. .99c spent on one song can often be split anywhere from five to seven ways. This is an intricate mess but ask any expert on the music business and they will tell you where artists really make their money is on performances/concerts. From getting discovered, signed, cutting an album, getting your album in retail, into circulation on the radio, promoted on TV, or the web, it all leads to one desired end goal for the artist’s financial interests-performing live.

We can scrutinize the economics, and often the politics, of the music industry all we want. However, if we are to take a truly pro-artist view of the situation, we need to think about how the structure, which now includes a streaming business model, will help artists build a large enough following they can go on tour and get paid for performing. Certainly, the business of music is evolving. Both free and paid streaming services are now part of the economic model. Understanding the economics of the business that doesn’t favor artists until they get large enough to tour and have multiple successful albums in order to negotiate better terms on future albums helps us frame how its evolution may impact the future of the music industry.

Curation/Discoverability

If I’m an up and coming artist newly signed by a label, my deal inevitably sucks. My hope is my song gets lots of air time and climbs the charts, generating awareness and a following. Historically, artists depended on tastemakers to like what they hear and want to expose it to listeners on their radio station. In the past, this was not been done by algorithms. If I’m an artist wanting to get discovered, I’m not sure I’d want to leave my fate in the hands of an algorithm. So radio DJs have played key roles in artists’ success. This is where Apple building DJ-run radio stations starts to get interesting. If Apple can build out a number of genre-specific radio stations run and curated by DJs to expose listeners to not only the best music of that genre but help them discover new music as well, it could wind up being huge for artists. Interestingly, there is a service that exists today which happened to be started by my friend DJ Skee called Dash Radio. Skee is a well known DJ and was the host of an XM radio station and branched off to start Dash Radio which offers DJ-run curated stations for every music genre. Bot approaches believe in the human as the ultimate curator over an algorithm and I tend to agree with them.

Minimizing the Need for “Labels”

Assuming you followed how I broke down labels above, then we can understand labels as basically the financing, marketing, and distribution. What is interesting to me is to think about the way things are changing and if labels are even relevant in the future. It is easier than ever for artists to record and self-publish their own music, solving the distribution need. While marketing is not inherent to most artists and they may need help, the internet and social media give artists great tools to market themselves. If tastemakers are continually hunting to discover and play new music for their listeners via their internet radio stations, this only helps their ability to attract an audience. In today’s digital era, you can make a case the traditional role labels play is becoming antiquated. While I don’t imagine labels actually going away anytime soon, it is interesting to see things Apple is doing to create a more artist-friendly environment both with discoverability and distribution. The last angle could be with concerts.

Festivals

Whenever Apple held their iTunes Music Festivals, I wasn’t entirely sure what they were doing. Now I’m wondering if they weren’t using those festivals to learn and refine this idea of regular global music festivals. I can imagine Apple Music Festivals happening all over the world. Widely attended and, more importantly, coveted by artists because of their global appeal. Remember, artists make the most money from performances and these music festivals could be lucrative for the artists, not only economically but also to be a great platform for newer, less well known artists to be discovered on a much larger stage. I’m speculating whether or not this will ever happen but I think it is an interesting idea, with an exceptionally pro artist angle.

As I think about the future of media in general many questions remain. Ten years ago, I know many pundits who thought change to the business of music would come much faster than it has. Whether the fundamentals for sweeping change are upon us or not, I think the next five years are going to be fascinating to watch.

Podcast: Connecting the Next Billion

This week Ben Bajarin has guest Benedict Evans on to discuss the newest updates to his mobile is eating the world slide deck and discuss the challenges of connecting the next billion people to the internet.

Episode Notes:
Mobile is Eating the World full presentation: Link

Connecting the Next Billion video of Digicel: Link

Click here to subscribe in iTunes.

If you happen to use a podcast aggregator or want to add it to iTunes manually the feed to our podcast is: techpinions.com/feed/podcast

Microsoft’s Re-Org and Their Future in Hardware

Microsoft announced some key, but not terribly surprising, changes to their management teams yesterday. The headline was Stephen Elop, former Nokia CEO, will be leaving Microsoft. Most public commentary has been viewing the moves in light of Microsoft’s role in the industry making their own branded hardware, namely smartphones through the acquisition of Nokia. There are some cloud and services organisation movements included in this re-org but I’m going to focus more on the hardware part of the discussion.

As a part of the new organization, Terry Myerson will now be running the Windows and Devices Group. Here is the exact statement from an internal email.

Terry Myerson will lead a new team, Windows and Devices Group (WDG), enabling our vision of a more personal computing experience powered by the Windows ecosystem. We will combine the engineering efforts of our current Operating Systems Group and Microsoft Devices Group (MDG) led by Stephen Elop. This new team brings together all the engineering capability required to drive breakthrough innovations that will propel the Windows ecosystem forward. WDG will drive Windows as a service across devices of all types and build all of our Microsoft devices including Surface, HoloLens, Lumia, Surface Hub, Band and Xbox. This enables us to create new categories while generating enthusiasm and demand for Windows broadly.

One of the most debated topics in my analyst circles is Microsoft’s efforts in hardware, particularly around Surface and smartphones. Many believe Microsoft should not be in hardware and both their Surface and Windows Phone efforts are counter-productive to their partner software licensing model. This argument is stronger with Surface than it is with Windows Phone since Nokia was the only major vendor committed to shipping them. Microsoft owning Nokia, in reality, was not a competitive move against other hardware partners since there were no other truly committed OEMs to Windows Phone. This is also why Microsoft felt they needed to buy Nokia. We now know Nokia was on the brink of shipping Android, which would have likely led them down a path to abandoning Windows Phone entirely. Microsoft, at the time, felt strongly about Windows Phone remaining in the marketplace and couldn’t risk their only true smartphone partner to drop them and move to Android.

Should Microsoft still be making Windows-based smartphones? One can argue their global smartphone market share is not only growing extremely slowly but is also quite small.

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Ben Thompson, in his daily subscriber($) email, wrote he believes this is the beginning of the end of Microsoft’s efforts in hardware. I’m not ready to go that far yet for a number of reasons.

There is still a lot of opportunity in hardware. Perhaps we can argue those opportunities are not in areas Microsoft is in yet, but this is where the last line of the quote I pulled from Nadella’s email comes into play. “This enables us to create new categories.” I think Microsoft still sees hardware opportunities on the horizon in both current hardware businesses and future ones.

You can make money in hardware. FitBit demonstrates a great example of monetizing hardware. FitBit currently makes quite a bit of money in hardware and in a space where Microsoft is looking to gain share with their own health and fitness band. FitBit’s margins are roughly 50% today and with their IPO going live today there has been solid commentary on their profitability. In regards to FitBit, I would be skeptical they can keep their hardware profits/margins going as history teaches us how, in many categories, hardware becomes commoditized. The bear narrative for FitBit is actually the bull narrative for Microsoft. Should Microsoft be able to grow their health band hardware business, they will be able to make money on hardware but, more importantly, they can tie that hardware business to their services. There is money in hardware, but I’ve frequently argued the best-positioned companies to succeed in hardware are services companies who don’t rely solely on the hardware margins to survive. I believe this will also work in favor of Microsoft even though it may not be immediately apparent.

Filling Existing Holes. If I was Microsoft, I’d be taking a hard look at the consumer PC market and asking myself how much longer my OEM partners will stay serious about consumer desktops, notebooks, and tablets. When you look at how Lenovo, Dell, and HP are positioning themselves, it is clear more of their resources and focus is consumed by the commercial segments of the industry rather than the consumer segments. While the Surface project started as a way to kickstart innovation in PCs and used as a showcase, it could likely become Microsoft’s best chance to serve the global consumer PC segment.

Similarly, I’m intrigued by a new feature called Continuum which will let owners of Windows Phones plug their phone into a monitor, keyboard, and mouse and use the device as a desktop computer. The idea your smartphone is your primary CPU and drives the intelligence of other displays is not a new one. Motorola tried this with their Atrix design. This idea struggled in developed markets, but I’m interested in this idea for emerging markets. Say someone in India buys a Windows Phone for $200 and that phone can also be docked with a big screen, keyboard, and mouse and function as their desktop as well. It becomes a 2-1 where it’s both a smartphone and a desktop PC. I’m intrigued to see how this plays out in emerging markets since we have data to suggest interest in PCs is high in these markets but price keeps them out of reach for rural India, Africa, China, and SE Asia. Viewing Microsoft through a software and services lens, this strategy is a way to bring software and services to brand new customers and empower them in the way Satya Nadella desires.

The point of the hardware is if Microsoft doesn’t do these things and fill these holes, who will? Others have conflicting interests since the business model is shifting from hardware to services. Other companies will want to get in on the services side and could cut Microsoft out. In this regard, both Microsoft and Google are in tricky positions when it comes to the next billion if that is indeed a segment they want to capture growth from.

While it may not be the popular position, I’m a bit more positive on Microsoft’s hardware initiatives. Even if some of them fail, I believe there will be new hardware categories which will need deep services integration that Microsoft can play in. Hopefully, what Microsoft is getting better at is identifying these areas early so they can participate before it is too late.

The Myth of a Tech Bubble and the Future of Investing

Benedict Evans and the team at A16Z got their hands on some detailed data on venture capital dating back to pre-2000 bubble days. There are clear indications shown in the data to deflate the current tech bubble narrative, but even further implications for both the public and private equity markets.

This Time is Different

There is a core economic theory, which I’ve used as the basis of my anti-bubble argument, called the “Boom, Bust, Buildout” theory. I wrote about it at more length here, but the argument uses history to show how many of the largest industry megatrends started with a bubble. Eventually, the bubble burst due to an influx of capital without a sustainable or mature market size to return the needed ROI on the capital. As the market matures and the large customer base required to sustain the economic growth models of businesses emerged, the bust is followed by a gradual, yet much larger, growth period which dwarfs the initial bubble in total size. This point is captured in two slides from Benedict’s charts.

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This slide shows the market sizes of actual internet users during the bubble times compared to where we will be by 2020 with nearly four billion people participating in the internet economy. This slide shows the unsustainable amount of capital per actual Internet user going back to the bubble days.

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There simply weren’t enough humans participating in the internet economy to justify the amount of capital being invested per user to be sustainable. The investment per user balanced with the total market size seems much more sustainable now. The market size is four times larger than in 2000 and heading to eight times larger by 2020. Bottom line, there wasn’t really a market ready for the amount of tech investment in 2000. There is today and it’s only getting larger by billions of users, not millions.

From Public to Private

Perhaps one of the most striking shifts has been the delay in public IPOs. Part of this has to do with the ease of acquiring large amounts of money from venture capital firms. However, I also believe it is in part due to the recognition of the pressure put on public companies for short-term growth by Wall Street. It seems the short quarter-to-quarter mindset is more prevalent than the long view now more than ever with many influential public equity funds. This I believe will have an impact on the companies who do or don’t IPO in the coming years.

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Assuming this trend continues, the world of private equity starts to get quite a bit more interesting. If growth is slowing and harder to come by for public companies, then I see two fascinating dynamics.

The first is how we can view venture capital as distributed R&D for larger public companies. If these private companies are not going to IPO, then investors get liquidity via acquisition. Therefore, there is a strand of thinking which must exist as VCs look to do investments from the POV of who may want to acquire the company. Similarly, big public companies may look to be aggressive with their venture arms to make strategic investments as well as strengthen their relationships with top performing VC firms.

The second is around public/private large-scale investors. If you are a large-scale investor, the public hedge funds are starting to look less interesting. There is slowing growth with many public investing hedge funds, but less risk. Many of these investors will be looking for slightly more risk but higher rewards and those investment opportunities have moved to venture capital. This risk balance is why so much money is being poured into later funding rounds in today’s venture capital economy. Once a company has proven itself by way of its business model, market position, growing customer base, or any range of metrics, the money starts pouring in. Which, as a function to itself, makes it unnecessary for a company to go public to raise money. It also fuels the shift for limited partner funds to be more aggressive with their investments in VC firms vs public hedge funds as a percentage of their investments.

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Large-scale investors who used to be aggressive with the capital they manage in public markets must now shift some or more of their focus from public investing hedge funds to VC funds. Which suggests VCs are very much the new hedge funds, at least for the time being. VCs are the gateway to the private companies where nearly all the growth, risk, and reward is happening.

This has the potential to impact the VC world both positively and negatively. I’m hearing of new VC funds popping up left and right with starting funds in the $60-150m range. This is likely not sustainable as these new VC funds are being entrusted with capital to return an ROI. This is hard and takes special skill sets. While times are good to raise VC rounds, the pressure will be higher to deliver.

The trend line is clear. We are not in a bubble but are in the midst of one of the largest global technology build out phases in history. What we are observing in size, scale, and economic upside may rival the industrial revolution. How public companies via M&A, as well as private and public investors, capitalize on this growth will be a fascinating dynamic to watch.

Messaging Apps and Platforms of Convenience

The potential for messaging apps to evolve from an app delivering messages between friends and family into a platform to deliver goods and services to consumers is talked about widely in many circles here in Silicon Valley. Anyone who has studied WeChat’s evolution from simple messaging app to powerful platform understands the massive potential but also the challenge to duplicate WeChat’s model in places other than China. Messaging apps or other social platforms, where consumers spend most of their time on mobile devices, make for extremely valuable and convenient places to bring capabilities beyond just sending messages.

When you look at WeChat, there is no question there is nothing like it in any market outside China. From WeChat, consumers can do more than just talk to friends and family. They can order taxis, food from local restaurants, do banking, pay bills, shop from vendors who have services accounts, and a host of other things. WeChat has built in the capabilities for business to build a storefront right into WeChat. There are even startups growing in China who only exist and are built entirely on WeChat. It is not that far of a stretch to suggest that WeChat is the mobile internet in China. This is why it is not surprising that WeChat’s average revenue per user is $7. Generally speaking, the ARPU of internet services in China is quite low. WeChat’s amazingly high revenue per user shows us just how valuable a messaging app platform can be. If a messaging app in China can have such a high revenue per user then imagine how valuable something like this can be if it comes to the US.

There are several examples I’ve come across recently which highlight a few reasons why I believe the US market is ripe for a messaging app platform to break out. The first example comes from MGM. When you stay in the MGM Luxury Suites, you are issued a phone number to text to which you treat as your own personal concierge. You can text this number anything you need and it will be taken care of. You can order room service, say you need a shirt dry cleaned, shoes polished, make reservations at a restaurant, get tickets to a show — whatever you need and it gets done for you. All without having to pick up the phone and talk to another person. I have heard from several folks who have used this and they raved about how convenient the whole experience was.

Another example comes from Home Depot. Home Depot’s mobile app lets you type or even speak into the search bar what you are looking for. It can then help you locate the product in the store or add it to your shopping list. Once a shopping list is made, the app will use the item locator and help you find what you are looking for. You can even order products ahead of time for store pickup or even while in the store and they will be waiting for you at customer service. I was talking to the CMO of Home Depot at a conference I spoke at a few weeks back and she made the point while discussing this app that 10% of Home Depot’s online commerce happens from the app and from within the store. For Pro account holders, there is also a chat service built in which offers assistance as needed.

These are two examples which highlight the extreme degree of convenience a business or service can provide that allows us to use a tool we are comfortable with, like the smartphone, and eliminates the need to verbally speak with a human. It is this last part I feel may offer the greatest value from these services.

How often can we recall horrible experiences we have had as consumers because we had to speak to another person on the phone? How many times have we ordered a pizza or take out just to encounter another person who is having a bad day or generally rude and it rubs us the wrong way? Think about this experience for people who are introverted or feel talking with someone they don’t know to be awkward or daunting? Human interactions can be awkward for many people. Eliminating them when they are not necessary would be delightful. And most human interactions with businesses are not necessary and can be automated or accomplished through a chat app or service.

The convenience of using a messaging platform for a wide variety of services is simply too high for it not to make its way to the US market. How is a different question. Arguably, Facebook Messenger is best positioned to be leveraged by businesses and service companies to interact with customers. iMessage is also well positioned, but it seems unlikely Apple will open it up for companies to build onto. Apple Pay and Android Pay can offer integrated payment solutions similar to WeChat’s Tenpay. Mobile payments are a key part of WeChat’s success and the same will be true for any messaging platform in the US.

What works with WeChat as a platform, not just for messaging friends and family but as a communications and commerce platforms for businesses to interact with customers, may not be replicated in the US the same way. But there is no question in my mind what WeChat delivers in concept will make its way to the West in some way, shape or form. Companies like Magic and Operator have aspirations in this area but neither have launched yet in any scalable form. It’s hard to know if they will succeed or not. This will be a hot space to watch as it may be a gold mine for whoever can pull it off.

The New Era of Visual Communication

One of the more interesting things I see happening is how communication is evolving to become increasingly more visual. With this evolution, I propose non-verbal communication is also becoming more intimate. This is being driven largely by younger generations but their initiative to use more visual tools to communicate is driving adoption across generations.

Communication Evolves with Technology

Technology has opened the door to many different communication options. With each new technological advance, communication has evolved in new ways as new options to communicate were invented. Visual communication is the most recent advancement. This is not just limited to static images or the wide world of Emoji which lets us express ourselves in visual ways. Snapchat has helped usher in a communication style based on self-expression via video.

More interesting examples come from messaging apps like WeChat and Line which offer unique stickers as a way to communicate. Building upon what makes Emoji a valuable communications tool, stickers bring a different style of graphic art to be used to express ourselves. But what all these things have in common are the additional options they present outside of verbal and text-based means of communicating. Where these additional expressions of self and alternate communication styles get interesting is when they become intimate in ways body language, facial expressions, and words with inside meaning do in the physical world.

Intimate

Within my inner circle, very close friends and family, my wife, and my children, our many years together have led to what may only be described as our own language. I may use a phrase like, “I’m in a pit of despair”, or “I need to go do the laundry”, or “I’m the dude”, or “SIE”, or a long list of other phrases. I assure you, their meaning has nothing to do with the phrase, but each means something to someone in my inner circle and often no one else knows its meaning. Our intimacy has led to the development of our own set of words and phrases that have deeper meaning in a uniquely intimate way.

The rise of visual communication has broadened our ability to expand this unique language created out of intimacy into the digital world. There are now stickers and emoji that exist between my wife and close friends that have deeper meaning beyond their visual representation. Often, the person on the other end of the conversation is the only person who understands the meaning. Visual communication now extends the options for this unique and intimate communication style by not limiting us to just words or phrases but also pictures and images. Taking this even further, the Apple Watch has extended visual communication options into physical sensations via digital touch and drawings.

For those in my inner circle who have Apple Watches, which includes my wife and 12-year-old daughter, we have already created our own secret language using digital touch and drawings. For my wife and daughter, this is particularly more advanced between us, but we have agreed upon a number of tap sequences which mean different things. We also have a range of drawings which we created to also mean certain things. A series of taps or a simple drawn image all have deeper context and meaning known only to a few of us.

Communication is, at our core, an essential human behavior. Technology continues to evolve and give us more ways to communicate and invoke emotion with words, text, audio, images, digital touch, real-time drawings, and whatever comes next.

Analyzing Microsoft’s and Apple’s Approach to Tablets

With Windows 10 on the horizon and Apple’s latest iOS 9 which will bring the iPad into much closer competition with PCs, it is worth looking at how the two platform companies are approaching tablets. As outlined in this report, my thesis for tablets has always been it is the true mass market computer. The traditional PC in its desktop and notebook form factor drove the initial wave of computing. I maintain tablets and smartphones will drive the next wave.

In terms of hard numbers, a clamshell desktop or notebook is used by 1.1-1.2 billion people actively but quite a bit less daily. Microsoft claims Office has around 1 billion active users and has frequently stated Windows is used by 1.5 billion people. This is a generous number in my opinion but, even if we accept it as true, there are a large number of people on the planet not using a fully capable PC.

I’d also argue consumers are tending to use their PCs less in favor of devices like smartphones and the iPad. We have data suggesting a direct correlation to a decline in overall PC usage by the mainstream consumer market with a rise in iPad sales globally. I make a distinction here by saying iPad, not tablets because, while Android tablets ship in higher volume, they do so in markets where PC penetration is low. We see a direct correlation in PC usage decline in markets where iPad shipments are higher than Android such as in the US and parts of Europe.

What this signals to me about the market is consumers still want and need their PC for certain tasks, but are ONLY using their PC for those specific tasks they deem it necessary. For everything else, they are shifting usage to smartphones and tablets.

Which brings us to the difference in approach between Microsoft and Apple with tablets. Federico Viticci writing for MacStories makes a key point:

iOS 9 is going to be a watershed moment for iPad users. For many, the iPad is about to graduate from utility to computer. Apple is envisioning a future where users can do more with iPad apps without the inherent complexities of OS X – and they’re largely relying on developers to help build this future.

Federico is articulating in the same vein I did in Tuesday’s analysis of WWDC, that the iPad is evolving to be more PC-like than smartphone-like. The iPad’s initial drive of adoption was based on it being similar to the iPhone in simplicity. Desktop operating systems like OS X and Windows are more sophisticated, have a steeper learning curve, and are necessary for power users. I’ve long argued PCs and operating systems like OS X and Windows vastly over-serve the needs of the mass market consumer. I hold this conviction still.

Federico rightly points out that, with iOS 9 for the iPad, powerful and sophisticated computing tasks are coming but not bringing the complexities associated with a desktop operating system. This is the polar opposite of what Microsoft is doing — bringing a desktop operating system, and the ecosystem that accompanies it, to tablets. Where Apple is bringing a mobile operating system and the ecosystem to the iPad. It is the simplicity of a mobile OS vs. the complexity of a desktop OS converging on the tablet form factor.

Maintaining the depth of a desktop OS is necessary to satisfy the market that still needs everything a power user needs, including being optimized for desktop or notebook form factors and mouse/keyboard efficient inputs. However, the number of people who need and can get the most out of such a product is much smaller than the masses whose needs are different. It is this area I still believe tablets have the most potential. I fear Microsoft’s approach to tablets leaves their Windows 10 tablet offerings appealing to the hardcore PC crowd, not the mass market. iPad’s emphasis on “sophisticated simplicity”, I believe, can appeal to a wider base of potential consumers.

All of this matters because an event is going to happen which will tell us how consumers vote with their dollars. The active base of PCs 5 years or older is in the range of 500-600 million with more than half being the consumer PC installed base. One has to believe at some point these consumers will need a new PC. I tend to believe these consumers will lean more toward a tablet form factor which means it will come down to the Windows tablet PC offerings and the iPad in its current or perhaps even larger form.

My gut sense is Apple’s evolving the iPad to be more capable of traditional PC tasks is well positioned. The iPad as a computer appeals to those who are mobile literate but have a desire to do more. I’d love to see Microsoft crack the simplified computer for the masses, but my sense is the offerings they currently have are still targeting those who are PC literate.

Apple’s WWDC: Three Big Things

As I digest Apple’s plentiful announcements at WWDC, I want to highlight a few I think have long range foundational impact. As our readers know, I look at the foundations platforms lay and then build upon. At the core, Microsoft, Apple, and Google all are continuing to evolve in directions that suit their strengths and align to their business models. This is why understanding the areas where they are incentivized to innovate based on their business model is a key part of the analysis. Three areas stood out to me as particularly noteworthy.

Siri Intelligence

Apple highlighted an interesting stat — Siri delivers a billion requests each week. While a large number, it still suggests relatively light regular usage from Apple’s installed base on a weekly basis. However, Apple did note Siri is “quietly” getting popular and I can believe the number of requests is trending upwards; I’m just not sure how quickly. However, by adding deeper intelligence with Proactive, Apple is looking to expand even further.

Ultimately, our smartphones are best positioned to be our true assistants. To understand and proactively think ahead for us on our behalf. I have call this an anticipation engine and I believe, in concept, there is great potential for these artificial intelligence assistants. But where Proactive added elements of interest was in the search API combined with recommendations. Both these moves are intentionally away from Google. When watching the demo of what can be done with the spotlight search API, it became clear Apple is grabbing more control of search away from Google. With search APIs and deep linking, consumers are now more easily able to search and get recommendations and suggestions without searching the web via Google and even having to go to a web browser. These small steps toward deeper search integration both with Siri machine learning, both native and cloud, as well as through apps is very interesting as a foundation for the future.

iPad is Evolving

What stood out to me about the iPad iOS 9 specific features was how iPad is slowly evolving to be more PC-like rather than smartphone-like. It is inching ever closer to the capabilities of a full PC. Tim Cook said the iPad is most people’s primary computer. I’d argue this is the smartphone, but I understand the point he wants to make. For most owners of both a traditional PC and an iPad, this person uses their iPad more frequently than their traditional computer, in very similar ways, and more often. I have strong data to suggest a healthy percentage of iPad owners have replaced the vast majority of their “PC” tasks with an iPad.

The iPad started and became the fastest consumer adopted device in the industry’s history because it was more closely related to the iPhone than the Mac. As an owner of an iPad matured, they started to want to do more “PC” like tasks with it but maintain the simplicity of the iPhone. This is where the new features for iOS 9 for iPad start to break free from more iPhone-like to more “PC” like.

Watch this closely as the value proposition of the iPad evolves. Consumers still associate a few critical tasks for “needing a PC.” While this is true in some cases and not in others, the sentiment exists regardless. If the iPad can build on iPhone simplicity yet increase its capabilities to get close to or actually replace a consumer’s PC, then it may be very well positioned to capitalize on the upside of consumer PC refresh we are expecting over the next few years. It could become the $499 entry level Apple PC which has never existed before.

Watch Growing Up Fast

Lastly, the Apple Watch is growing up fast. Perhaps many of the features released simply didn’t make the first cut but what matters is Apple iterated quickly, listened to feedback, and brought new features which will strengthen the Apple Watch value proposition for the Q4 and Q1 2016 holiday seasons.

Giving developers access to the sensors, complications, and “time travel” will all add new elements to the use cases which already are compelling for the Apple Watch. Native apps should help with some of the lag, but I feel, as apps integrate into other core features like complications, the apps value materializes even better in glances and complications — where I believe they are more useful than as a destination on the Watch.

The demo Apple Watch owners will be able to give to friends and family this fall is continuing to get more compelling.

Just like Google, Apple is building on the foundations which have been laid in operating systems past. I believe this trend will continue for many years to come. All platform companies are borrowing ideas from each other. This is a good thing as consumers in each ecosystem win by getting great features and experiences. What matters is consumers stay happy and their needs with technology are meaningfully advanced. We are in that stage of the industry cycle where meaningful advancements is what is to be expected.

Understanding Android to iPhone Switching

There are several dynamics I want to explore about Android-to-iPhone switchers. I’ve seen enough data to suggest double digit percentages of Apple’s iPhone sales the past few quarters came from consumers switching from Android. The bull case for Apple’s growth is driven by share gains from Android, not new/first time smartphone owners. Apple’s larger screen offerings, the iPhone 6 and 6 Plus, are the clear catalysts driving Android switching. I’ve been trying to gather research and insights with a goal to understanding more deeply this switching dynamic. For now, I’ve concluded a few things.

Upside Outside the US

From data models I’ve made and thanks to discussions with local analysts and carriers, it seems those switching from Android to the iPhone are largely coming from outside the United States. Research suggests two markets in particular are where the bulk of Android switching is happening–China and parts of Europe. In both these regions, the installed base of premium Android phones, ones from Samsung, HTC, and LG, are much higher than in the US. In China, Apple has always led the premium market in terms of sales but, until recently, this volume was relatively low. Premium Android in China is in the $300-$400 range and that price tier represented the largest volume of sales during the Chinese smartphone boom and is driven by local Chinese OEMs. In both these markets “premium” was more defined by specs than price. The Asian consumer viewed larger screen devices as more premium than smaller phones. This point underscores the significance of Apple making larger screen iPhones and why they are now selling in significant quantities in China.

Europe, also has a much larger Android installed base of upper mid-tier and premium smartphones. In both markets, the larger installed base of Android and market demand for larger screen smartphones creates the fertile ground for Apple to attempt to gain share. Where there is clear evidence this is happening is in China, with over 38% of Chinese saying they switched from an Android phone to an iPhone in the previous quarter. According to Kantar, a similar dynamic happened in Europe last quarter with 32% of iPhone buyers switching from Android. Similar data from our surveys shows the US switching rate was in the low 20% range. However, Apple is up against a dynamic which may slow sentiment to switch some of our behavioral research is uncovering.

Familiarity

In some recent research, I set out to understand what percentage of Android users in the US self-identify as Android users. Meaning, they have come to the conclusion Android, not iOS, is for them. I did a consumer insight panel and found 38% of Android users I interviewed specifically used the phrase (or something along the lines of) “I’m an Android user” as we were discussing preferences and decisions to keep buying Android phones vs the iPhone. This group was keenly aware of their self-identification as an Android user. Within this group, the sentiment was stronger to self-identify as an “Android user” for men than women. Another dynamic I uncovered in these interviews was 34% of those I spoke with were staying with Android because it did all the things they needed and felt no need to switch. For this group, Android was “good enough”. In nearly every discussion with Android users, the Android operating system was their entry into the smartphone world and they have built up a familiarity with it. To many, the idea of switching seemed overwhelming given how many years they had experience and invested in the Android platform. These interviews validated a great deal of larger survey work we did. It highlighted the first smartphone OS a consumer used tended to be the one they stuck with.

Through conversations from the carrier ecosystem, I learned the carriers themselves are weary of this familiarity angle and are hesitant to push consumers to switch operating systems, if they are undecided or on the fence, fearing it could lead to higher returns. Whether this is true or not it is a dynamic to keep in mind. In the US, Europe, and key parts of China, the smartphone market is mature. Mature markets have historically not seen platform share churn in significant quantities.

The case for switching from Android to iOS has indeed gotten stronger. However, those switching from Android are not the majority of iPhone buyers today. This dynamic is one worth continuing to study as it is extremely relevant to the global mobile discussion around smartphones. The majority of new customers for Apple already have a smartphone and it is most likely an Android phone. Apple’s iPhone installed base growth hinges on their ability to get consumers to switch platforms. While there are some share gains to be had in the US, it is the switching dynamic outside the US to keep an eye on.

The State of Streaming Music

With Apple’s World Wide Developer Conference approaching and the buzz of rumor they will release a much improved music streaming service, I thought it would be helpful to look at some of my US data on streaming music services. But first, an overall observation. If you recall, Steve Jobs criticized music streaming services, stating people wanted to own their music not rent it. What is happening is worth making the observation that some things, and in this case some statements by Steve Jobs, were true at a time but are no longer true. Markets are dynamic, not static. They evolve and do not stand still. As consumers needs mature, companies (and business models) need to do the same. The increasing popularity of streaming services is an indication of this change. Like the app industry, the music industry is filled with overwhelming amounts of choice. Radio has always been the bridge helping people discover and enjoy new music. This is why streaming services are relevant, in that they are digital evolutions of radio, with the built-in option to be specific on music choices, albums and artists on demand, and any new features the industry dreams up.

To shed light on this, our US survey data found the average time spent by US consumers on traditional radio is 1.32 hours. This number has remained relatively flat since 2013 in our studies. ((respondents were given a range of options to estimate their daily time listening to traditional radio ranging from less than 30 minutes to more 10 hours.)) This compares to .82 hours of listening to internet radio. The largest response in our survey related to daily hours using internet radio is Do Not Use which has dropped from 50% in 2013 to 47% as of Q1 2015. This data says traditional radio is still favored in the US and streaming is growing slowly in comparison.

Data we have on intent to purchase music to download and intent to subscribe to a streaming music services helps paint the picture even better. 22% of US respondents indicated a plan to purchase music to download and keep over the next six months vs. 3.2% indicating interest to purchase a subscription to an on-demand music service. Of course, all this can change if Apple releases something truly valuable in this space.

What streaming music services are used monthly for music? Well, in the US, there are two who hold the lion’s share — Pandora and Spotify. 25% of people in our US survey said they have used Pandora to listen to music in the past 30 days compared to 13% who said they used Spotify in the last 30 days. Pandora’s monthly active users are in the 80m range and, given it is largely a US service, that number likely is fairly US-based. Given Pandora is the largest in active user volume of music streaming/internet radio services in the US, it is a good measuring stick for the number of people who do this today in the US market.

I’ve been on record pointing out that, while talked about frequently in the mainstream media, small numbers of people subscribe to any given music service. If I was looking at both video subscription services like Netflix, or Amazon Instant Video, compared to internet music subscription services, I’d conclude video subscriptions have the edge by a large margin in terms of what US consumers spend real dollars on today. I’ve also been on record saying Apple has a unique advantage here in music. Not least the history iTunes has with consumers but also their integration advantage. However, just because Apple can deeply integrate a music service into their software doesn’t guarantee its success. iTunes Radio is a good example of this. Many original opinions, mine included, were Apple would hurt services like Pandora with iTunes Radio because they could integrate it better into the OS, yet this did not happen. Lessons to be learned for sure but, in this case, looking at what people spend money on today with subscription media and Apple’s ecosystem advantage, it feels like the Music side is both an opportunity but also still a challenge.

There may very well be new dynamics around music today. Perhaps consumers are content. Perhaps everything out there fits their needs. Maybe music is less a priority than it was in years past and just the lure of listening to a genre and not having to do any work is trumping personal curation. However this plays out, when I look at the numbers, it appears the radio model, meaning curated music of a certain genre, free with ads, is the predominant model in the US. There are certainly internet radio parallels but those paying for music subscriptions are quite few. Estimates for premium Pandora is in the 4-5 million range and similar ranges have been estimated for those paying for Spotify. All of this to say perhaps nothing changes, or maybe everything changes. We will see when we know more next week.

The Battle for the Living Room Then and Now

When I joined Creative Strategies 14 years ago, one of my research areas was the digital home. This era of my life is filled with fond memories of hacking together Windows-based home theatre PCs, connected storage networks to host all my media, various brands of digital media adapters, and running ethernet cables all over my house simply so I could get the movies and pictures I had on my PC to my television. Much to the chagrin of my wife, my house was a working lab trying everything under the sun which promised to move media around the house. I’m confident I had cobbled together as networked a home as anyone but it was not pretty. For the nostalgic of this era, I put together a collage of some of my favorite digital living room solutions that passed through my home lab.

nostalgia

It is interesting to look at the past decade of digital home solutions and compare them with today. As it turns out, video game consoles proved to be the best gateway to connect the living room to the Internet. More people access the internet on their TV through game consoles than any other piece of hardware to date. Streaming media players from Apple, Amazon, Roku, and many in the Google TV ecosystem spanning NVIDIA, Razer, Google with their Nexus Player, and Sony integrating Android TV into their TVs, offer consumers broader choice beyond dedicated hardcore gaming consoles to access online services like Netflix and Hulu. But these products are still waiting for their breakthrough. Which leads us to ask the question, what is it that will break the battle for the living room wide open and liberate our TV experience from the hands of monopolistic cable and satellite companies?

Some are cord cutting, most are not

I believe the battle of the living room hinges on a “less is more” tactic. When it comes to our smart devices, I can argue more is better. I don’t just want one smart device but many. I have a PC, tablet, smartphone, and a smartwatch and all play critical roles in my life. However, in the living room, less is more. Time and time again the saying proves true “consumers don’t want another box”. This is why the “one box to rule them all” philosophy applies for the mainstream consumer audience. For those who don’t need to watch all the live sports and news offerings still unique to a subscription TV service, they have a plethora of choice. Based on our US research, 75% of people surveyed say they currently pay for a cable or satellite service. While our surveys indicate the masses are not quite ready to cut the chord, we do see an increase in intent to subscribe to On Demand services like Netflix, Hulu, Amazon Prime Video, and HBO Now. How do those services stack up in terms of usage in the US market today? Here is what our surveys tell us: When it comes strictly to services used to access on demand TV shows Netflix is the clear leader with 45%. Hulu is in second with 16.8%, and Amazon Prime Instant Video is third at 15%. Netflix and Hulu were the prime combination subscriptions for those in our survey who have cut the chord.

When it comes to age groups dominating usage of on demand TV services, 56% of 15-25 year olds said they watched a full length TV show via an on demand service in the past month and 49% of 25-35 year olds indicated the same. These were the two most active age groups for on demand TV services. The 35-45 year old demographic is at 37% and it drops off steeply from there for those older than 45. This makes it pretty clear who the demographic is for streaming services. But what I find interesting about that data point is how the younger demographic is consuming more of that media on other devices than the TV and in locations other than the living room. Which brings even more fascinating dynamics to the battle for the living room discussion. However, that does not mean the battle for the large screen in the living room is not relevant. The question is, for what age group is it relevant? Answering this question is key. But what we know is the 35 year old age group and older were much more likely to pay for subscription cable and satellite services than those younger. This may have everything to do with life stage where older demographics have kids, like to stay home more, and may generally desire content on the large screen more than the small screen. Whether this younger demographic follows a similar path will be interesting to watch as their life stage changes.

The Battle for The Big Screen

The big screen is not dead. Liberating our TV content from the TV is absolutely key in every ecosystem. Any time, any place, is how consumers want their content. However, the battle for the big screen is really the battle of the set-top box. The set-top box is the gateway to the TV, which is the gateway to customer eyeballs. Whether pay TV or pay on-demand services, the box remains the gateway. This is why cable and satellite providers will do everything they can to maintain control of that box and will pay massive amounts of money to make sure certain content, primarily sports, remains exclusive to the box they provide you. Those competing in the set-top box space must, at least for the time being, focus on areas unique to their set-top boxes.

Apple, for example, may go big with an SDK and give developers a playground to create new and exclusive applications for the big screen. Apple can use this strategy to drive demand to exclusive experiences the same way cable and satellite companies will with their content. Google may emphasize gaming with partners like NVIDIA and cater to those who want a more dedicated gaming experience along with all the on demand services they use. My biggest beef with most streaming set-top boxes has been around the lack of exclusive offerings. Most, if not all, of what I get content-wise from boxes the Apple TV, Google/Android TV, Roku, Amazon, etc, are all mostly the same. There is very little I can’t get elsewhere. This has to change if those providing hardware solutions want to differentiate against other set-top boxes. This is one area that makes NVIDIA’s Shield console unique. You can use it to access all the same apps and services as other platforms, but if you are a PC gamer you can also stream many of the most popular PC games using NVIDIA’s Grid Gaming service. This feature makes the Shield Android TV box attractive as a on demand streaming box to PC gamers, who are usually a completely different audience than console gamers. This is one example of many showing how this market can segment in order to differentiate.

This is essentially what I’m looking for. Things I can do with something like Apple TV or an Android TV offering that I can not do with other hardware. This is where the battle for the big screen could start to diverge as both the ecosystems of Apple and Google look to differentiate from each other and the cable/satellite companies.

Google I/O: Optimism and Skepticism

The wise understand Google’s predicament. Google’s growth is slowing as the customers who matter the most monetarily to Google are now online in some form via a PC, tablet, or smartphone. Monetizing this customer base is how they will grow meaningful revenue. Adding another billion people using their services is not the short term answer to Google’s revenue problems. So what do they do? This was the question underlying the I/O Conference for many of us who study the industry. After watching the keynote and then having the luxury of being at an event with many smart analyst colleagues to kick around ideas, I’m both skeptical and optimistic for Google.

My skepticism has always been tied to their business model. My conviction is free-with-ad-supported business models can only take you so far. I feel Google has reached the limit of that model. Google may sense this also, even though they may still believe the free-with-ads model can take them farther in the consumer space. In an interview with Adam Lashinsky of Fortune Sundar Pichai noted Google can afford to be patient. My interpretation of this statement and other parts of this interview is he says it because Google has a growing business, cloud platform, and enterprise apps segment. This business is not free — using their enterprise apps and cloud platforms are solutions businesses pay for. Similarly, Pichai made this point in his interview:

“First, if we help users get information, a lot of which is inherently commercial, monetization opportunities arise. Second, history always shows that if you build something millions or billions of people end up using, that builds a lot value too.”

The underlying tone of this statement is essentially where the bull case for Google can be made. They are ultimately a machine learning company, arguably the best in the world. Leveraging their machine learning capabilities and monetizing data in many different ways for both commercial and consumer customers is key. Much of the focus on Google has been on their consumer facing stuff like Android. While Android is not a money making platform for Google as an endpoint, it has helped them feed their machine learning engine. However, more emphasis on Google analysis must move toward the commercial side of their big data story.

How this story manifests itself is the tricky balance. You can see the strategic imperatives all over Google’s moves with Android. A good example is their newest feature which gets users out of the app and into the browser when clicking a web page link. Google is essentially trying to un-bundle the web from the app with this tactic. Google is not collecting data so long as people are in non-Google apps. This is why they want to do everything they can to get you out of the app and back to their browser. Their business model incentives are all over this move. Arguably, this is also not a bad move, user experience wise, but it does showcase how their model drives endpoint experiences in things like Android. But there are times when this can and will hurt the user experience as well. Which is where my skepticism in free-but-ad-supported business models lie. They are simply not always aligned with the best interests of the customer in mind.

With a basis of Google more effectively leveraging their machine learning expertise, optimism can be found in their willingness to be more horizontal than they previously were. Bringing their new Photos app to iOS is a good example of this as is bringing their updates of Google Now with Now on Tap to iOS via their Google search app. But these moves may ultimately be a challenge on iOS since tight OS integration is the key to a better experience. The vast majority of consumers will use what is integrated more times than not over what they have to install and set up themselves.

Google Now on Tap was perhaps the most interesting thing I took away from Google I/O. I’m extremely bullish on artificial intelligence engines (I call them “anticipation engines”) and what they bring in terms of a much deeper “assistant” experience to our smart devices. However, I also believe Apple’s and Microsoft’s ability to develop an anticipation engine are being underestimated. A number of use cases Google pointed out for Google Now on Tap are being done on iOS now. For example, iOS will already keep track of where you parked your car and help navigate you back. It also pro-actively shows you your boarding pass the moment you reach the airport. I experienced this for the first time yesterday while traveling home from Austin, Texas — my boarding pass showed up on my lock screen the moment I got to the airport. Now on Tap certainly goes deeper than this, but my point is building a comprehensive anticipation engine will not be exclusive to Google.

But the greater point is Google Now and the new On Tap features are a step closer to the future of smart devices. Underlying artificial intelligence, residing on both the local hardware and the cloud, will help predict, anticipate, and surface value for us before we realize we even need something. Perhaps a good example of this is where Google Photos can go. While no explicit advertising or data collection is specified from Google at the I/O conference, you can imagine in the future Google may notice a picture I took with my car in the background, see my tire is low on air, and recommend I get it fixed or looked at by a professional — even offer local tire shops who have available deals. To many, this will sound or seem creepy, but it is also convenient. There are certainly many security conscious people out there who will hate this but, for the mass market, I’d argue usefulness trumps creepiness in many cases. This may also be one of those things were we need to opt-in to if we want these predictive features or not.

The IoT platform is one I’m very skeptical about. Google does not have the influence over customers the way SoC companies do to drive IoT standards. Apple is truly in the driver’s seat here since they have the customers to drive connected IoT products while the market is still immature. In 3-5 years, we will see where these IoT standards are but it is still early days.

After WWDC, I’ll do a greater ecosystem contrast between what Google and Apple are building as foundations for the future. But the consumer facing stuff from Google I/O was not particularly earth shattering and even the things they are doing with Now are way off from being mass market. But the moves Google is making in deepening their machine learning and monetizing that in commercial segments is a source for optimism.

Foundations for Apple and Google

For the time being, there are two developer and ecosystem events which set the tone for the consumer tech industry at large — Google I/O and Apple’s World Wide Developer Conference. For the much of the past 4-5 years as these events have gained steam, Apple and Google seemed to be on similar paths. On the surface, it looks as though Google and Apple are laying the same foundations. They seem to both be laying the groundwork — offering solutions in similar areas like mobile OS, TV, automotive, health, payments, and the smart home. However, now I believe their paths will diverge. Whether by choice or force, only time will tell.

At a high level, we recognize both Google and Apple have entirely different business models. It is within a business model analysis framework where I am more optimistic of Apple’s success than Google’s, at least from a revenue perspective. Ideally, both foundations being laid create value and revenue for others as well. If it does not, then its chances for success are slim. Whatever Apple is building in TV, automotive, smart home, payments and anything else, must add value to third parties and the same is true for Google. This is why the framework of recognizing Apple has a near monopoly, greater than 65% share of the most profitable customers of computing products (smartphones, PCs, tablets, cars, etc.) makes it easier to believe Apple’s customers are the ones who can and will spend more money on TV content services, automotive features, smart home technology, health and fitness services, and using Apple Pay to buy online and offline. However, because Android runs on over a billion and a half devices, ((smartphones and tablets, and Google’s Android on 1.2-1.3 billion devices and Open Source Android in 500-600m devices)) it is important Google offer these basic and similar foundations to the market place for areas where Android is the dominant mobile and tablet OS — the greater Asia market, LatAm, and Europe. If this foundation battle was limited only to the US market, I’d be even more skeptical of Google’s efforts. But Android is a global enabler and is deeply relevant in this regard.

However, the issue and concern for Google is I sense they are taking a very US-centric view to their foundation. On the surface, this makes sense since the US is by far the most valuable market Google competes in. China is arguably more valuable but moot since Google doesn’t, and will not, be able to compete in China. What I’m watching for, as both Google and Apple lay their foundations, is how they both cater to regional differences and nuances while still adding proprietary ecosystem value. As I have been articulating, the global playing field is actually more regional than global and both companies need their foundations to be flexible to cater to local needs. This is particularly true of payments where, if both Apple and Google try to compete, it will be fascinating to watch, due to their difference in customer base.

How both companies begin to diverge based on the difference of customers, regional needs, and even new experiences and products based on those regional differences and customer bases is one of the core things I watch as both companies do their groundwork for the years to come.

Uber and Humans as a Service

The “On Demand Economy” is a developing trend with no shortage of opinions, pro and con. There are many ways we can look at the opportunities but I think a more fundamental framework is important. While this post will focus on Uber, I’ll also highlight some of the ways I’m thinking about this space as well.

For Uber, there is a developed market story and an emerging market story. In both cases, the question for Uber is how big is their potential user base? The bull or bear case must be developed with this in mind. Many investors I’ve spoken to about Uber, including many who have invested in the company, look more at their TAM in terms of dollars — which is plausible. But, to get a % of dollars, Uber needs to address a customer base of sufficient size. By just trying to be a taxi service, Uber will likely not fulfill expectations. If all Uber wants to be is a cab company then I’m not terribly optimistic. They have a decent business but their potential goes well beyond driving humans from point A to point B. Fred Wilson, an investor at AVC, wrote a great piece capturing the big picture thinking in this piece called What Can it Be Worth? The salient point is to look at Uber at what it can be worth and how many people it can serve in the future. This is where I believe the long view of Uber requires understanding them as a logistics software company, not a taxi company.

I’ve been doing some research for a number of Silicon Valley VCs of the On Demand economy. This is a fascinating global trend that, in many ways, is more advanced outside of the US than inside. China is a great example where, in many densely populated cities like Beijing, you can have almost anything delivered to your front door within an hour. There are unique circumstances that have allowed China to beat the US to this punch, including a few that may never exist at mass in this country, a point relevant to any full On Demand economy analysis. But, like Uber, there are services that exist in China to let you track your package in real time, via a car or bike courier, letting you see exactly how long until your noodle soup or fresh groceries arrive at your house.

I believe Uber’s real upside in software is to provide this turnkey logistics platform to others who can use it in the On Demand economy. For example, UPS or FedEx could license this from Uber so I get a message the second the delivery truck is on the way to my house with my package, allowing me to keep track of the truck so I will know exactly when it arrives. There are many current applications for this but perhaps another big upside is how Uber can take advantage of their growing driver work force. I’ll use my small rural town’s single Uber driver as an example.

IMG_1621

As of a few months ago, my small rural area, well outside of Silicon Valley, had no Uber driver. Every now and then, I’d check Uber to see if an Uber driver showed up in my area. Sure enough, last month I spotted one. As I stalked this Uber driver through the app, I noticed he mostly just drives around town all day. I’m honestly not sure how he stays busy, given how small my town is, but he gets up to South San Jose at times to pick up business. While I personally have no need for an Uber driver to get me from point A to point B, I could easily utilize this service for On Demand economy stuff. Say I need feed for my hogs. I can use the Uber app to find a willing driver who will make a run to get me food for my farm animals. Or I need groceries or a burrito or anything — there are no real On Demand services in my area because we are small and spread out. The current On Demand economy services are focused in areas like San Francisco or New York. I can’t use the benefits of On Demand services because they aren’t any in my area and likely will not be any time soon. Yet, I’m willing to bet there are a fair number of people in my region who are willing to be drivers for the On Demand economy.

This line of thinking makes the idea of job creation, via willing delivery agents in nearly every city, interesting. Think about this as the new pizza delivery job. Many of my friends’ first job in high school was delivering pizza. Perhaps the modern age equivalent is to drive for Uber and deliver whatever the customer needs, not just pizza.

We can argue our grocery chains, delivery services, pet food chains, etc., should all, or could all, just develop their own logistics software. That may very well be true. However, time to market is essential and, in many other emerging markets, licensing may be easier than developing their own infrastructure. But ultimately, if Uber can screen and qualify willing and able drivers for the On Demand economy, then that is where their real assets lie. It is the ultimate hardware and software as a service, only in this case, it is humans as a service. This is desperately needed if the On Demand economy is going to go mainstream.

Jony Ive and the Future of Apple

There is something related to the future of Apple I’ve been thinking about for some time. Perhaps the recent Jony Ive promotion is a good opportunity to talk about it.

I’m firm in my conviction Apple is building a company to last 100 plus years. Someone once said Steve Jobs’ greatest legacy is not any single Apple product but Apple itself. Apple is actually a product, although many don’t view it this way. Apple is unique in many regards from every other tech company. The people, culture, process, priorities, etc., are unique to Apple. These are all elements many management schools and books will outline as core and emphasize as required for healthy and continually successful companies to thrive. The hard part for many companies is to make these core company traits proprietary. This is something Apple has done extremely well.

This is why I believe many notable execs who leave Apple, having accomplished a great deal at Apple, find it hard to have similar success at other companies. Tony Fadell and Ron Johnson are just a couple who come to mind. The reason I believe is because the secret sauce at Apple plays a huge role in the success of many of these individuals. A sports parallel comes to mind. If you follow sports, and in particular any sports team, you realize star players are sometimes stars for reasons outside of their talent. Certainly, talent plays a role but so does the stadium, dynamics of a particular division, opposing competition, coaching staff, and locker room/team camaraderie can and do play a role in a player’s success. This is why you sometimes see very talented athletes sign with a new team and don’t find the same success in another organization and location. Similarly, a player who may struggle to reach their potential on one team will get traded or sign with a new team only to find a great deal of success. My point is, there are more variables at play than just pure talent in the success or failures of many individuals both in the sports and the business world.

I bring this up to underscore a point. Apple is unique. The culture, the people, the dynamic, the process, all unique to the company. Again, thinking about Apple itself as a product, a key long term question remains. Can Apple continue to be Apple in 20, 30, 50, or 100 years? And how will Apple accomplish this when the current management and leadership is no longer there? If Apple is the true product of Steve Jobs’ legacy, then ensuring it lives well beyond not just its founder but also many generations of leadership should also be top of mind.

Perhaps this is what we are witnessing in Jony Ive’s transition. It is certainly one spotlight I personally have as an analyst as I think about where Apple will be in 50 years. While Jony is obviously not leaving the company, it seems he, and I assume many others at Apple, are thinking about how to home grow future leaders of Apple who can keep the product intact for many generations to come. This is the result of a many year process to identify, train, and transition leadership roles to those who are the future of Apple. This is the true test for the company. Tim Cook will need a successor, as will Phil Schiller, and certainly Jony. Obviously in 50 years, Apple will be filled with fresh faces looking to make the world’s best products for the global consumer audience. How this happens, and is the process duplicatable for future leaders is a key question I’ll continue to be fascinated by.

Waxing Philosophical about the Apple Watch

I’ve had the Apple Watch for nearly 45 days and thought I’d offer some updated thinking. Consider this a brain dump for the time being. Be warned this post is also a little lengthy.

I’d like to talk more in a philosophical sense about the product and use that as a framework to see how a wrist-based computer can add value to everyday life.

What is a Watch?

A common strand among many sharing their experiences publicly about the Apple Watch is, at its core, it’s “just a watch”. I believe this thread is being highlighted because, on a philosophical level, this statement is exactly true. The evolution of keeping time was wrapped contextually in information, not just time. The display of “time” was simply the front end. “What time is it?” is a question with deeper context. Time is needed because it is relevant to someone for a specific reason. The entire philosophy behind time at a glance was for efficiency in the context. I need the time because I have to be somewhere. I need the date/time because I need to plant or harvest crops. The information time provides is relative.

Philosophically, the Apple Watch accomplishes this same feat. The information it displays at a glance is relative. “I need to know this because of this.” I need to know who is emailing me because some emails are more timely than others. I need to know the weather so I can dress accordingly. I need to know who is calling or texting me so I know if I need to drop what I am doing and respond. I could name many other uses for the information provided at a glance based on context but you get the point.

The most common response of the naysayers is you can do all of this with your smartphone. Absolutely true. However, it is faster, more convenient, and eliminates the friction of having to pull your phone out of your pocket, bag, purse, or hunt it down from where it sits in the other room of your house. All the little friction points the Apple Watch eliminates add up over time and, as the product evolves, it will eliminate even more friction points. Payments, security, unlocking my home or a car door, and a host of other things are possible.

Ben Thompson mentioned a similar point on his podcast about keyless entry. His story includes a car he purchased that had keyless entry. You can just walk up to the car with your key in your pocket or purse and, without having to push a button, the car unlocks. While it is perfectly possible to use the key, you walk away from that experience wondering why you ever had to use a key in the first place. Similarly with my August smart lock. Yes it is pricey, for now, but my house now automatically locks and unlocks with my presence or lack thereof. You walk away wondering why it hasn’t been like this forever since having to put a key in the door and turn it seems so antiquated after your first experience. These are the kinds of things that mount up with the Apple Watch. I’m washing dishes and having a text conversation with my friend. There are funny emoji and odd words being exchanged. He is typing on his smartphone and I am using Siri to dictate messages. I was not going to stop washing dishes, wash soap off my hands, and then dry them just to have this conversation, as entertaining as it was. Yet, you experience this and wonder where this feature has been all your life. It is all these little short interactions that use to only exist on your smartphone and the burden of having to operate, hold, and even just be in the presence of it to get value. Now many of those interactions move to the wrist and many small friction points get erased.

Philosophically the Apple Watch is a watch. It displays contextually relevant information at a glance.

Apple Watch and Options

Another critical point that stood out to me is how the Apple Watch presents another option to interact and engage with the digital world. If you recall your first iPhone, it likely altered your behavior from your PC which, up to this point, was your primary interaction point with the internet and the digital world. As you settled into the value of a pocket computer, you began to realize you had more options available to you than just your PC. Now, you can leave the confines of your PC and go out into the world and still get email! Profound. The smartphone opened up more possibilities. You can browse and search the web from anywhere, not just your PC. Very similarly, the Apple Watch has given me another option to interact with the digital world via a computer. This is the untethering from my iPhone experience I mentioned in my initial article on the Apple Watch.

A call comes in and my phone is in the other room. Rather than rush downstairs or to the other room, I can look at the Apple Watch and answer or ignore. I have a new option available that didn’t exist before thanks to this smart piece of glass on my wrist.. I need to call or text my wife. Now I just raise my wrist and say, “Siri text Jen” or “Siri call Jen”. Another option is now available thanks to my wrist computer. Oddly, I even prefer notifications on my wrist than on any other screen I’m looking at, including my PC. I’ve turned off all notifications on my Mac. I’ve simply moved the notifications from the upper right of my Mac screen to my wrist. For whatever reason, I prefer this option and feel it lets me focus more on what I’m doing on the PC. Seems odd but I like it.

With each new screen we add to our lives, we also add another way to engage with the digital world. Each screen may shine at certain things. Our TVs are great for long form content and communal viewing because they have large screens. Our PCs are good, and designed for, long form engagements and heavy computing tasks. Our smartphones are good at being the most portable and capable computer we have with us at all times. The smartwatch is good at contextually relevant information at a glance. The more screens we let into our lives, the more options to interact and engage we have.

Apps

Many have pointed out some things I’ve been addressing since the beginning of my Apple Watch experience. Most apps have not been re-invisioned for the small screen. Apps add a great deal of value and there are certainly experiences from Yelp, Uber, CityMapper, Bloomberg News, and others where they did focus on the “seconds of interaction” paradigm. Many developers rushed to get an app out to capitalize on the initial Apple Watch app gold rush and didn’t have time to live with the Watch and see how it integrated into their lives and their app experience. I expect this to get better but I’m also intrigued by the outcome of this developer exercise.

To make a solid Apple Watch app, developers will need to trim the fat. Narrow their app down to the very basics. Chipotle did this with their burrito button for fast ordering of your pre-set favorite burrito. Uber similarly did it with the one button press to request a car. These apps narrowed their small screen experience to the basic essentials to get value from their service. What is interesting to think about is, as developers go through this exercise, might it impact their iPhone apps as well? Will this exercise perhaps make their iPhone apps even better and more efficient? Perhaps these minimal, yet useful, interactions, which the Watch shines at, will have positive impacts on the efficiency of iPhone apps making them better and the overall experience even more delightful and useful. Furthermore, as these developers focus on the interactions that matter, and perhaps maximize efficiency, we may waste less time in the app. Less time in the app is not good for adverting supported models which means there is a possibility these improved apps may not extend to the Android ecosystem where many make money on built-in ads. Perhaps the wedge driving further between the app models of iOS and Android. This is pure speculation but an interesting reality to think through.

Living with the Watch

What strikes me about the Apple Watch is what I feel many public reviewers got wrong. My friend Benedict Evans and I were discussing this and he made the point that, to truly grasp the value of the Watch, you have to stop trying to review it and let it blend into your life. Ben Thompson made a similar point on his podcast and I fully agree with both of them. It isn’t until you stop trying to think through every part of the Watch but let it integrate into your everyday life that you start to grasp the value. What this points out, however, is how this process takes time. The challenge that lies within is how difficult it is to experience in a short demo at an Apple Store. You need a week or more to truly grasp its value and this is not accomplished in 15 min. The sharpest comments coming out from folks with the Watch are the ones who share their experience after many weeks of use.

What this observation signals to me is how the adoption cycle of the Apple Watch will simply be slower. I have written about this here, but the basic point is this product will likely ramp slower than the iPad, which took off like a rocket. More like a slow steady growth curve. Perhaps it will look more like this.

IMG_0039

A slower adoption cycle also fits my initial thesis about the Apple Watch. Traditionally when brand new, I mean really brand new, experiences come to market they take a while to trickle down the adoption curve. There is debate about the viability of the adoption cycle logic. Sometimes it applies and others times, it doesn’t. However, something truly new does take time for consumers to grasp its value. This is why I feel it may apply to the Apple Watch and the cycle may be more of a slow burn than a fast one like iPad.

The argument about tech and gadget reviewers and their influence on the mass market is a sound debate. My wife, a traditional late adopter, and many of her friends never read gadget blogs. They do however, influence each other. The interest of our close friends in the Apple Watch is already more than I anticipated. But their interest is due to her sharing her experience and what she likes about it. Many of them can relate to her stories and hence they see the value, since they can see themselves in her use cases. This is how this product will move into the mass market. Word of mouth is the primary source of network effects.

While this post was a bit long I still, surprisingly, have a lot to say about the Apple Watch. Particularly around how social and familial groups integrate it into their lives. More Apple Watch philosophy for another time.

When The Easy Growth is Over

Growth cycles come in waves, some bigger than others. A wave swells and subsides. Companies who ride these waves risk being caught in calm waters if they do not or can not catch the next wave. Interestingly, we are watching this play out in real time with many public tech companies. We can run with the “peak” narrative for many different companies. When someone implies a company has peaked, they are saying that the first growth cycle, that first wave, may be subsiding. While no growth is easy, companies who catch these growth cycle waves benefit from the momentum. That is what I allude to when I say easy growth. For many public companies, the easy growth and the momentum is subsiding. These companies will now enter the phase where growing gets much more difficult.

Look at a number of public companies who are reporting less than stellar profits: Twitter, LinkedIn, Yelp, Google, to name a few. I view what is happening with many companies as a saturation of user bases. The products of these companies simply are not attracting new users at the rate they once were. Perhaps they have reached the maximum number of people for their service? In any case, for many of these companies their user growth has slowed and it’s showing in their quarterly earnings. The other observation I make is how the most profitable customer segments are already on the internet with a smartphone, PC, and/or a tablet. Google’s revenue growth for some time had a direct correlation with net new users getting on the internet each year. While that number is slowing, those coming online now have less disposable income than many present internet users. With the most profitable internet population already online, and humans having a limit on the amount of time they have and services they can consume, you can see why the market fundamentals are causing slowing growth for many companies. For these companies, there are a few strategies.

Milk Their Existing User Base

The most common strategy is to focus more on monetizing their existing base than on growth. Since many of these companies offer free services which are supported by advertising, it likely means more ads. Twitter is exploring more ways to incorporate more targeted ads into their timeline. Facebook is pushing the limits of advertising already but will continue to be aggressive in order to monetize their existing base of customers more efficiently. Google recently started putting ads in the Play Store as a means to increase advertising revenue from existing customers. These are a few examples where companies are trying to milk more value from their existing customer base.

For companies which offer a free service supported by ads this is a bit tricky. If the adverting is not deeply contextual and relevant, they risk annoying users and driving them to use the service less or in some cases not at all. I’ve written in depth about why I’m skeptical about the long term viability of free with ads and, while I question just how far that business model can truly take a company, it is certainly not going away. But as consumers mature and become more savvy, I do feel there are challenges to this business model due to the incentives it assumes and the potential impact on customer’s experiences. Time and time again, as markets mature, we see strong evidence of value being placed on consumer experience in ways that did not exist when the market was first maturing.

Monetizing an existing base will be a complex balance for many companies with free-but-ad supported models. More people use Facebook and Google on a regular basis than any other service which puts them in a strong position in terms of gathering the most data. Ultimately, both these companies, and many others, will have to walk a fine line as to not alienate customers due to extreme advertising initiatives.

Mergers and Acquisitions

The other telltale sign of a growth cycle slowing is the increase of mergers and acquisitions. Something we have clearly seen accelerate over the past few years. Smart companies acquire to get ahead of the slowing momentum, while others may just be waking up to the fact their growth wave is subsiding and are now looking for complementary assets to add to their revenue lines. Some companies may wait too long and end up as the ones who get acquired.

Given a number of market fundamentals which are becoming quite clear around this first initial internet growth cycle, I believe we will see an even more dramatic increase in mergers and acquisitions over the next 3-5 years. We can speculate all day on who needs to acquire who, but the general philosophy I like to use is to think through which companies will be stronger together than apart. The other is to look at who has the most cash, or valued/growth stock, to use.

My post last Monday articulated how difficult it will be for companies to go global. As companies like the ones I mentioned and the plethora of those in other markets like China and India hit their max customer base in their region, going global is a way to grow. However, I maintain they will need to buy their way in. e look at who has the biggest cash hoards and Apple, Google, and Microsoft fit the bill. But the ones to watch here in my opinion are Google and Microsoft. I believe some big acquisitions and industry consolidation are coming over the next five years.

All of this driven by the slowing growth cycle for many public companies. There is still a great deal of growth and momentum happening in the private company sector, but these are the types of companies primed to be acquired by the larger public companies who are, or should be, seeking growth in order to catch the next wave, whatever it may be.

There is another wave out there somewhere. It may take a while to arrive but there are certainly many “mini-waves” taking place within this industry as it continues to more deeply segment. We may not see another wave as big as the internet and mobile, and while growth is slowing, there is no question there is still a vast sea of opportunity.

Questioning China and India’s Smartphone Growth

There is an interesting narrative forming regarding certain markets, ones nowhere near saturated with smartphones, that they are slowing down in YoY shipments. Fresh off Q1 2015 numbers, the Wall St. Journal published an article on how China’s smartphone market growth is slowing. There was a particular statement that caught my attention:

Experts say the slowdown is largely driven by the disappearance of China’s first-time buyers. About three-quarters of China’s mobile phones in use are smartphones, and they make up 90% of cellphone sales, said Tom Kang, research director with market-research firm Counterpoint, meaning just about everybody in China who wants a smartphone already has one. “China is now a replacement market,” Mr. Kang said.

China (greater PRC) is not 90% saturated with smartphones. The actual smartphone penetration in PRC is 46-48% approximately. I discussed this stat with the Counterpoint folks and they said that they were misquoted. What their statistics state is 90% of quarterly sales in urban China are smartphones. Now, while this is a simplified understanding of urban sales in China, we typically break China out into tiers. Tiers 1-3 are more developed areas like Beijing, Guangdong, Shanghai, etc. Other regions make up the less developed and more rural parts of China. What Counterpoint is saying is the areas of Tier 1-3 are saturated with smartphones and 90% of sales in those regions are a replacement market. This is likely true. But their view, as well as IDC’s, that expectations are for smartphone growth to be flat in 2015 is an interesting narrative.

Significantly, reports are that overall in 2014 China smartphone shipments actually declined. It may have been close to decline or slightly positive but the main viewpoint stands out — China is not adding new smartphone users at the rate it once was.

Another observation is the same thing is happening in India. India is similarly nowhere near saturated; however, the more developed parts of India are rapidly saturating.

To view this, I use this chart:

Screen Shot 2015-05-11 at 10.51.35 AM

As you can see, there is significant headroom for growth in China and India, both areas I spend considerable time studying the local market with the same focus I study the US market. What is interesting is why markets with such headroom for smartphone growth are slowing. As I described earlier, when we segment China into developed and undeveloped tiers, we do the same in India. The tier 1-3 segments of India are cities like Delhi, Bangalore, and Mumbai. The difference between the developed parts of China and the developed parts of India are there are significantly more people in developed China than in developed India. If we just use the current computer installed base to measure this, we see it in a few numbers. In China, PC penetration is nearly 40%. In India, it is less than 10% as a percent of total population. Similarly, smartphone penetration is 46-48% in China. In India, it is closer to 20% penetration of total population. The key observation is in developed China (consumers with more disposable income, higher wages, etc.), penetration is more than two times what it is in India.

Here is another way to look at this from an economic/GDP standpoint:

screen shot 2015-02-25 at 12.20.47 pm

Many of our readers know I break out the mobile market into two segments. The approximately two billion existing smartphone owners and the next billion plus. My friend Benedict Evans, a VC at a16z is fond of saying, “The next billion are not anything like the first”. I fully agree.

The next two billion smartphone owners have needs that are very different. They have distinctive underlying economics in terms of how much money they can spend on a phone, a data plan, and even the cost to charge their phone. This last point gets misunderstood. In very rural and village parts of developing areas, people buy car batteries to power their homes. While it is true power is not free in the US, it is a small part of many people’s budget. Whereas, in these markets, the cost of power could often be more than half their disposable income.

As I observe the notion that smartphone sales are slowing in very large markets like China and India, it seems it has more to do with infrastructure issues like cost of data, and even power, than it does desire. Just to help our readers see this from a different perspective, a company called Digicel is doing some interesting things in heavily rural and village areas. I encourage you to read this article on what they are doing in Papa New Guinea to solve some problems many of us take for granted.

Samsung’s Future is in Competing with Intel not Apple

Now that many major silicon fabs are embarking on 14nm, things are starting to get very interesting with relation to the future of the semiconductor industry. Both Intel and Samsung are pushing forward on the 14nm process technology while others are struggling to get to 14nm with a quality process. In light of this, I have a few new observations about the future of the semiconductor industry.

A new dynamic has come into play about future nanometer process nodes and whether or not certain companies can achieve greater than 14nm, 10nm, and beyond. Intel is going to get to 10nm and there is a high likelihood they get to 7nm. Whether Intel can get to 5nm we will have to wait and see. Samsung is on 14nm now with a very high quality process and this is why companies like Apple and others are looking to Samsung to make their chips using Samsung’s 14nm process technology. Interestingly, Global Foundries has entered into an agreement to license Samsung’s 14nm process technology and use their manufacturing capacity to make chips on Samsung’s 14nm FinFET process for their customers. Making things even more interesting, there are reports Qualcomm will also look to use Samsung’s 14nm process technology for a line of Snapdragon processors.

What this is signalling is the difficulty fabs like Global Foundries and TSMC have had in getting to 14nm with a quality and reliable process technology and how important getting to future technologies is in general. Samsung seems to understand this as they are reportedly building a massive facility to manufacture chips. This is relevant, and telling, because it indicates Samsung may be looking to take on Intel rather than Apple in the future.

Most people know Intel makes chips, but they may or may not know they have a proprietary architecture called x86. This architecture is different from the ARM architecture which Qualcomm, Samsung, Apple, and others use. Intel’s belief is they may be the last company standing when it comes to cutting edge process technology. There may be some truth to this. David Kanter is a well know semiconductor analyst and he had a very insightful tweet last week.

Screen Shot 2015-05-11 at 2.58.55 PM

What he is insinuating is the difficulty getting to new process nodes is proving to be a stumbling block and thus narrowing the field. Using this logic we can ask an interesting question — what if Intel is the only company who can get to 7nm or even 5nm? Will every other fab then have to license Intel’s process to make cutting edge future generation chips? I ask this question to make a point. It seems we can make an argument that not everyone is going to get past 10nm and therefore, if only a few do it, options are limited. Perhaps one, two, and possibly only three companies will bear the load of making chips for the whole of the industry. Whoever is in this position has quite the upside. I believe Intel will get there and Samsung appears to be gearing up to take them on. However, this winnowing of the field when it comes to process technology is a fascinating way to look at who may be relevant to making semiconductors in a few years.

Samsung seems willing to license their process technology to other foundries and the question is whether Intel will or will not some day. Assuming Intel is the last company standing when it comes to 5nm or beyond, they don’t have enough physical space to make everyone’s chips. It is likely licensing their process technology is a viable option. The other fascinating element to the Intel story is whether they will license their process out for others to make ARM chips. I don’t believe they should force x86 on the world if their process technology is the last man standing, which is why, by the time Intel is at 10nm and certainly by 7nm, if they are not making ARM chips for someone on their process or have licensed their process out for ARM chips, we are going to need to start asking very difficult questions of the company.

Ultimately, the super bear case for Intel is that they do not or can not maintain a process technology lead. Which is why this article stating Samsung has already demoed a 10nm FinFET chip ahead of Intel is interesting at a high level.

How this plays out will be fascinating but, in the case of Intel, Samsung, and others, my focus is on their ability to manufacture at future process nodes or not. This, not architectural debates, seems where the real competition for the future of the semiconductor industry lies.

In Consumer Tech, the World is Round

A friend recently returned from a trip with his wife to Seoul, South Korea, where she was traveling for business. During a sightseeing adventure, they visited an area heavily trafficked by tourists. He was astounded that nearly every person at this picturesque location was using a selfie stick. My friend decided it would be fun to take a picture with some young Chinese tourists using their selfie stick. Once they snapped the shot, he asked if they could send him the picture. He asked if they used Facebook. They said no. He asked if they used Instagram. They said no. He asked if they could email it to him. To that, they said yes. As he recounted this story, what stood out to him was not that these young Chinese tourists didn’t use Facebook or Instagram, but that they clearly had no idea what they were.

The World of Consumer Tech is Round

In 2005, New York Times columnist Thomas Friedman published an excellent thought-provoking book called “The World is Flat”. In the book, he articulated the new era of globalization, where technology had lowered the barrier to entry for not just companies but small and even individual businesses to go global. Many of his points are still relevant today, but I’d like to throw some recent global consumer tech observations into the picture.

One of the more clear global consumer tech market trends I’m observing is the reverse of globalization. In nearly every category I study, I see the regionalization of consumer tech, not its globalization. This view of the market is showing how regional technology players in many segments of consumer tech are becoming more entrenched by catering deeply to local market needs, making it difficult for global players to enter and succeed. This is happening in consumer tech hardware, software, and services.

Hardware

Using the smartphone industry as a case study, local smartphone manufacturers in China, the world’s largest smartphone market, combined for over 60% of total smartphone volume in Q1 of 2015. A similar story is happening in India, although not at the scale it is in China yet. In India, local smartphone brands made up over 35% of sales in the region during the first quarter of 2015. Local brand Micromax is continuing to battle with Samsung for the number one smartphone vendor by volume in the region.

China and India have the largest number of local smartphone brands but new ones in other countries keeping popping up all the time. Blu Mobile in Latin America, Cherry Mobile in the Philippines, Wiko in Europe, and Smartfren in Indonesia are a few examples of this locally branded smartphone trend.

This is all happening because the barrier to take a smartphone to market has lowered. Any upstart hardware brand can go to China, use their massive manufacturing scale to white label a smartphone and go to market selling online at very low cost. This is how Xiaomi started in hardware and many others have since followed suit. These brands are using local market insight to deliver solutions unique to the market. They have what I like to call a home field advantage and a competitive edge to deliver localized offerings better and faster than global players.

Software and Services

While we can point to a number of different application categories where local apps dominate the landscape, I’ll focus on one of the most glaring — messaging apps. There is a great deal of talk about WhatsApp, WeChat, LINE, Kakao Talk, and a host of other messaging apps in the marketplace. What is missing from this narrative is how these apps are largely regional and, more specifically, the dominant messaging apps in their region. WhatsApp is dominant in India, Africa, and some parts of Latin America. LINE dominates Japan. WeChat is dominant in China. Kakao Talk is dominant in Korea. Each dominates a region and has had trouble expanding into others.

Globally, the story is the same with e-commerce. In the US and parts of Europe, Amazon is the largest e-commerce service. In China, it is Alibaba and JD.com. In India it is Flipkart, in Japan, Rakuten and, in other parts of the Middle East and Africa, Rocket Internet is driving leading e-commerce services. Similar to hardware, in each case the local offering is capitalizing on the needs of local consumers. These companies understand the local market and develop unique solutions to solve regional pain points.

Overwhelmingly, the story of global consumer tech is becoming one driven by local not global players in every market I study. What is fascinating is how this is normal in the non-digital consumer tech world. Consumer markets for products like packaged goods are often highly tuned to local needs. Consumer packaged goods companies often have local brands, marketing, and solutions because they understand how drastically different each market is. Luxury/aspirational brands tend to rise above the localized trend, but few companies succeed with a true aspirational local brand.

With consumer tech becoming increasingly more regional due to the unique consumer segments in each region, it seems we may be observing the beginnings of a land grab. Some areas already have dominant local players but there are also green fields where no leader has yet established itself. Companies with global ambitions are likely to focus on these areas for growth and may do so by acquiring rising local players as to get to market quickly. Going global is more tricky then ever and it’s creating many fascinating competitive dynamics that give analysts like myself lots of work on the road ahead.

Friedman’s view that technology has lowered the barrier to entry is valid in many cases. However with consumer tech products, it is likely to be harder to globalize and more dominated by local solutions. For a company to succeed globally, they have to focus on local insight to drive their strategy. They have to know the customs and be highly cognizant of the needs of a local market and can’t assume a one-size-fits-all solution like many do today with Facebook and Twitter.

It is my convictions that, in this sense, the world of consumer tech may be more local than global. In this sense, the world of consumer tech is round.

What Snapchat May Tell us About the Future

Snapchat is an interesting app to discuss on many levels. Silicon Valley seems to be in love with it when in reality, certain truths about the company and service stand in the way of its long term future. I’ll discuss several of those issues, however, I believe Snapchat highlights a number of trends which serve as great case studies for the future.

Niche Social Networks

You may or may not know Snapchat is a niche social network. It has roughly 100m active users. 70% of them are female and under the age of 25, mostly well under the age of 25. I’m fond of saying Snapchat is a social network for teenage girls and the boys who want to flirt with them. Perhaps it is everything Facebook wanted to be but for High Schoolers. From a range of data points I have research on social network usage, there is little evidence Snapchat has meaningfully expanded their active user base this group.

The problem for Snapchat is they don’t realize they are a niche social network. They want to be a big social network that plays a significant role in the future of media. They are creating discovery channels where you can see short videos from brands. However, those brands are telling many of us, behind the scenes, that what they are doing on Snapchat is not working. This is due largely to the behaviors and motivations behind Snapchat. Teenage girls and boys are not using the service to stay in touch with brands or discover products and consume advertising. In fact, should Snapchat get desperate and push this in extreme ways and aggravate these users, I bet they find an alternative medium and quickly.

There is nothing wrong with Snapchat only being a social network for teenagers and primary US-based ones. There may or may not be a business model but, in my opinion, by chasing the broader audience, they may end up hurting their service in the long run and alienating their user base.

I believe there is a future for niche social networks and I believe they can be extremely valuable businesses. The first step, however, is to recognize this is the case and chase a smaller number of more profitable users with your service. Smart companies will chase high engagement and high ARPU over high user bases. This is ultimately something I believe Twitter should focus more on as well.

Social Networks May Be Regionally Specific

Outside of a rare few services like Facebook that are global (except in China which makes it questionable as to how global it is or not) I believe we will see a trend towards more regionally specific social networks. This is absolutely true of messaging apps where WeChat dominates China, Kakao talk dominates South Korea, and WhatsApp dominates parts of Europe, India, and many countries in Africa and the Middle East. There is really no such thing as “global” messaging apps nor are there “global” social networks

As I said, Snapchat is predominantly a US teenager phenomenon. Again, there is nothing wrong with this, except to game play a scenario where that is all it is in the end. I believe we will see many social networks which are not just niche but also regional only. There are dozens of these in the US, but I see this happening in China, India, and Indonesia.

Social Networks May Be Generational

This one may fascinate me the most. I’m beginning to believe that some social networks may have very short life spans — like MySpace. We learned a great deal from MySpace about Millennials and Gen-Xers and a primary take away for me is how fast the flock can move. MySpace played a role in a point in time and that was it. We can consider it a fad. But it played a role in the adoption cycle of social networks. Similarly, Snapchat may only appeal largely to a specific generation and perhaps even only for a time. I’m beginning to think this current generation may outgrow Snapchat during their next life phase.

As I have further traveled down this rabbit hole, I’ve been wondering to what extent technology is generational. Some technology will span generations, like the iPhone, where others like Snapchat may only appeal to a segment for a period of time in a particular life stage. This has a great many implications to tease out if it proves true.

Ultimately those are three areas I’m exploring using Snapchat as a baseline for this thinking.

The State of Global E-Commerce

I’m likely to publish a larger global e-commerce report but wanted to share with our subscribers some big picture views on the e-commerce market. I’ve been doing quantitive research on the state of global e-commerce and have discovered some fascinating dynamics.

Stats

Worldwide, E-commerce is reaching an inflection point. In nearly every major market I’m studying (the larger, more developed countries and the more developed regions in emerging markets like China, India, and parts of Latin America), those who said they purchased a product online in the past six months is over 70%. Globally, e-commerce is just over 10% when we include every market. However, the direction global e-commerce’s share of the retail market is heading could reach 20% by 2017-2018. The way I look at e-commerce in markets is to examine spending on a prior six month, prior three month and prior one month basis. I do this to study the frequency of online purchasing, not just who has done it in the past six months. Within that framework, I’m seeing distinct increases in the amount of growth from respondents who are now purchasing more frequently (at least once a month). In developed markets, 70% of respondents said they had made an online purchase in the last six months. In 2012, this number was 58%. 45% said they purchased a product in the past 30 days, up from 34% in 2012. While e-commerce penetration overall is growing, so is the frequency of online purchasing.

Another point from my research is the increase in mobile e-commerce as a percent of online spending. For those who understand that we live in a mobile world, this should not come as a surprise. However, there is a stark difference between emerging market mobile commerce and developed market mobile commerce. In nearly every market where consumers leapfrogged the PC and went straight to mobile, m-commerce is the dominant digital purchasing platform. For example in China, mobile share of e-commerce is 41% and in India, 34%. To contrast with developed markets, m-commerce is 15% share of e-commerce in the US and throughout European countries it is 18%. Interestingly, Japan is again an outlier of global tech trends — mobile commerce represents only 6% of e-commerce where e-commerce from PCs in Japan is among the highest of any market. 70% of Japanese consumers say they shopped online in the last 30 days.

Popular Categories

Not much is changing in terms of the most popular categories of online shopping since last year when I did similar research. The most popular global categories are:

  1. Clothes
  2. Shoes
  3. Books
  4. Gift
  5. Snack Food
  6. Chocolate
  7. Mobile Phone
  8. Packaged Food/Ready Meals
  9. Travel
  10. Non-food Household Products
  11. Beauty Products

I categorize since we list many products in detail for respondents so I can get even more granular with the data. These lists are global but, as expected, the list changes once we drill down on a region. For example, mobile phone jumps to number four on the list when we look deeper at China and Brazil. In India, “mobile phone” becomes the number three most purchased product online. I survey over 30 global markets and, with regards to purchasing online, each is slightly different.

As an additional part of my global e-commerce research, I seek out where consumers are planning to increase their online purchasing over the next year. Two categories stood out. Groceries (fresh items) and Pet Supplies were the two categories with the greatest intent to increase frequency via online purchasing.

No Global Winner or Winner Take All Market

The main observation I want to leave with you is I see no clear global winner in sight. In fact, the regionalization of consumer tech is, by far, one of the most interesting occurrences I have seen recently. This is true of hardware, software via apps, and now services like payments, financial, and e-ecommerce.

Here is how each market breaks down right now by e-commerce leaders by region.

China
#1 Alibaba
#2 JD.com

US & UK
Amazon

South Korea
eBay

Japan
Rakuten

India
Flipkart

Latin America, Africa, and Middle East
Rocket Internet

While these are the leaders overall, there are slight changes to the leaderboard by category in many areas. Once we investigate who the leaders are in certain categories, the scenery changes but remains largely localized.

Due to retail itself being very local, I believe this will remain the case for some time. Once a leader establishes itself in an area, it will be very difficult for others to move in and compete. This point, I believe, can not be emphasized enough.

It is clear local insight is driving more trends in consumer tech than anything else. This is true in hardware where, in many markets, local smartphone companies control the dominant share of sales in the region. Apps are also localizing where local insight is driving new innovation and solving pain points unique to the region. Similarly, payments and payment preferences differ by region. Preferences of security and privacy differ by region. Purchase drivers for e-commerce differ by region. Products preferences differ by region. I can not escape the observation that consumer tech is shaping up very similarly to the market for consumer packaged goods. Where local products, brands, and marketing rule the day. There is a great deal more to tease out here, but e-commerce is one area where the distinct fragmentation by region is exceptionally clear.

Tablet Market Trends and Observations

It is hard to argue with the narrative — larger phones are impacting tablet sales. This absolutely seems to be the case:

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Two points from the chart. Including 4″ smartphones certainly helps the line look impressive. But I don’t have screen size breakdown sales any more granularly than this. Tablet sales don’t appear to be in as much as a decline as it is a flat-ish line. One can say there is no corollary to large screens impacting tablets because the line is flat. However, there is a direct correlation to the tablet market “slow down” and larger screen smartphones gaining in sales.

Charts from Flurry illustrate this.

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The growth in the larger “phablet” form factor impacted tablets by decreasing active usage of large tablets and kept smaller tablet usage flat. During the 2011-2014 period, there was steady growth within the tablet industry. As larger phones began to gain steam, we see different tablet market dynamics.

Flurry also breaks out device form factor by smartphone and tablet usage out by operating system as well. From this we can glean some additional insights.

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I have a number of observations/interpretations from this particular chart. I’ll break them out by platform.

Android Tablet Land

Flurry’s data regarding Android tablets re-affirms the many Android tablet observations myself and others have been making based on our research of the segment. Consistently, we find tablet usage and engagement is weak in Android land. Android tablet sales, going back to the beginning of 2013, have an estimated total of 340 million units. Tracking that against my Android installed base estimates, it puts active Android tablets via Flurry’s data at roughly 120 million units if we just focus on the past few years worth of sales. Meaning, approximately 220 million Android tablets are no longer in use or not accessing the internet via apps. The latter is not surprising. We know low end Android tablets do not drive heavy app or internet engagement and are mostly used, globally, for entertainment media like video. What is surprising to me from this estimate is what appears to be a very short life for Android tablets. If my estimates are correct, or even in the ballpark, it suggests a much shorter average life cycle for Android tablets vs iPads. Perhaps chalk that up to the bulk of Android tablets being sold cost less than $150 and are relatively poor quality, or that there is little value found from the end users, therefore they are bought for cheap and then discarded when value was not captured or the hardware failed.

iPad Land

Large tablets remain the bulk of iPad usage according to Flurry. This is interesting, particularly as I have tried to track the mix of iPads sold and have believed for some time large iPads were still a healthy part of the mix despite other reports. However, what we are keen to watch is what impact the larger iPhones have on the iPad usage data. Flurry’s data toward the end of the year or this time next year will perhaps give us the most clear indications, but iPad sales as well throughout the year will shed light.

At this point, I’m not expecting iPads to grow much even if a new larger iPad Pro is released. It seems, at least for now from data we see, that the iPad may have penetrated as far as it can into the Apple unique user base. My estimates are that the iPad penetrated about 40% of Apple’s unique individual user base (different from installed base). The other dynamic playing into the iPad is the evolving nature of the device to be more shared than individual. Many consumers said they share the tablet with one person or more. This represents over 50% of users in our study indicated a shared dynamic with their iPad.

We agree the iPad, and tablets in general, have an interesting role to play with businesses but the realization of that growth may represent more a slow burn in momentum than quick bursts like we saw right out of the gate. Going back to some of my thesis for tablets, that they are ideal computers for people who do not sit a desk all day for their jobs but work in the field, I came across this graphic from 2013. I don’t think a great deal has changed.

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Note the number of workers who likely don’t sit much during their work schedule. Industrial workers, services workers, perhaps even agriculture workers, are all jobs where being mobile is the norm. These jobs are areas I still feel tablets have a great deal of upside. As I am fond of stating, the tablet has a role to play in disrupting clipboards in the commercial segment more than they do traditional PCs.

The narrative for tablets is not over. The segment is changing, not dead. This is why we evolve our thinking as we learn how the market and user needs/behaviors change. We are still in the midst of the largest global roll out of consumer technology ever seen. We are bringing millions of new consumers onto the internet every day. Many computing devices will exist to serve different user’s needs and be there for new ones as those needs develop and evolve. The dynamic analysis of this industry is what makes it fun but also what challenges the perspective of most observers.

Apple’s Growing User Base

One major thing stood out to me as I listened to Apple’s earnings report and earnings conference call on Monday. Apple is continuing to grow their base of users against all odds and this question will remain central for many: “Can Apple continue to see record growth quarter after quarter?”

There seems to be little question it will happen for a little while but, as the narrative goes, Apple will run out of new customers and the company will just be selling products to existing customers. Personally, I land here every now and then. After all, there are only so many people on the planet who can afford a $700 smartphone. Yet Apple’s base does continue to grow and, given how very few come into the Apple ecosystem only to leave at some point, this is a key storyline to track.

Several points stood out to me to indicate headroom for Apple to continue to grow.

  1. Android Switching. Apple made a point to call out Android switching as a key quarterly item of interest. Tim Cook stated:

    “We’re seeing a higher rate of people switching to iPhone than we’ve experienced in previous cycles…”

    I have survey data from China in Q4 that asked those who bought an iPhone what device they replaced. 26% said they replaced an Android phone. That was higher than any other response, including other versions of iPhones. Globally, the same survey data indicated 16% of iPhone buyers switched from an Android phone.

    Interestingly, there is also strong data suggesting that the iPhone gained share in the US as a percentage of quarterly upgrades. While over 30% of buyers in Q4 indicated they upgraded early, there was still some expectation that holiday quarter demand would trend into Q1. However, both AT&T and Verizon posted weaker upgrade figures than expected. Both were essentially flat YoY. This could have meant that the US would be weak in quarterly numbers and jeopardize iPhone sales getting to the 60m mark. With Apple hitting 61m iPhones in the quarter, it suggests that, not only was iPhone growth huge outside of the US, but that Apple also likely took the vast majority of share in US upgrades.

  2. First Time Buyers. While I can’t imagine this was a huge percentage of quarterly iPhones, Tim Cook mentioned that some iPhones were sold to first time buyers. From survey data, I saw that 5% of iPhone buyers in Q4 2014 were buying their first smartphone. Even if this number is 2-4m, it is a significant data point. Apple still has some opportunity with the ~10 of US mobile subscribers who don’t yet have a smartphone. A similar story exists in parts of Europe. Other markets may be tougher to get first time buyers, given most of the new user growth will come from the low end of the smartphone market.

China

Another key part of Apple’s big picture narrative is China. I made mention of the China Android switching statistic but Tim Cook also said Apple seems to be getting out of just the high end and into the mid-tier in China as well. To give you a picture of the iPhones in use in China, I’ve updated my usage data from Baidu, but added two changes for perspective.

With the 5s and 5c, and iPhone 6 and 6 Plus, Apple has been releasing two current generation phones. So rather than break each out in this China data, I added the iPhone 5s and 5c together and 6 and 6 Plus together. I did this to show how the narrative that Apple needed a lower-cost smartphone to penetrate China played out. In fact, they launched a more expensive iPhone and saw a greater trajectory in China.

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As you can see, not a lower cost iPhone but a more expensive one is yielding unprecedented trajectory for iPhones in China.

To cap this point off, Apple sold more iPhones in China than in the US for the first time. I thought this may happen in Q4 2014 and it was quite close but, on the back of the Chinese New Year, we modeled this to happen in the March quarter with near certainty. Here is the chart from my model on iPhone sales by volume in China and the US.

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China continues to be a growth area for Apple. They are gaining switchers from Android and trending along with the rising middle class. There are ~100m iPhones in use in China and ~500m Android phones. As the size of the Chinese middle class trends upwards, so will Apple’s upside as more consumers in the 500m Android user base grow in economic status and aspire to the iPhone.

These are some of the key points of Apple’s continued momentum in 2015. Tim Cook also highlighted that only 20% of the iPhone installed base has upgraded to iPhone 6 and 6 Plus. Interestingly, he gave a “low teens” number last earnings call. Many of us assumed 13% is low teens. So this quarter, only 7% of the base upgraded. There is a great deal to unpack with this statistic in the future but the larger point is a large percentage of the iPhone base is still poised to upgrade. This number, combined with new user growth via first time smartphone owners and Android switchers, makes the core global bull case for Apple in 2015.

We still need to dive into iPad’s struggles, the iPhone’s prospects in other emerging markets, Macs growing in China, and Apple Watch data over the next quarter. Stay tuned.

Apple Watch and Hands Free Computing

After approximately a month using the Apple Watch, a few things have stood out to me that have me thinking about the role of wearable computers. I’d like to make a broader point about wrist worn computers and use my month with the Apple Watch to do so. I had a sense the Apple Watch would deliver on few particular use cases, even prior to using it. Here is an excerpt from my “Smart Watch Opportunity Report”.

A popular saying surrounding smart devices is: the most convenient screen is the one we have with us at all times. The screen we have with us at all times is the smart phone. However, perhaps the smart watch evolves this to say: the most convenient screen is the one we can see at all times. Cracking this value proposition is key for the categories upside.

As I suspected, this use case in particular has been delivered by the Apple Watch. This is why I pointed out in my first week with the Apple Watch article that, essentially, the Apple Watch has untethered me from my iPhone–in a good way. Perhaps even in a behavior changing way. What has stood out to me the most about this experience is how the Apple Watch allows me to be “hands free” but still get value from the digital world.

On this point, I believe an important framework is worth establishing. To get value from the digital computing world with devices like a PC, tablet, or smartphone, you have to be looking at and engaged with the device. In the case of the smartphone and tablet, you are likely to be holding the device in at least one hand but frequently both. This means your hands and full attention are on that screen. There are absolutely times for these experiences. But if the average person spends about 2 hours using their smartphone daily, how does one get value from the digital world in all the other hours of the day? This is where I think a wearable screen begins to establish its value proposition.

For me at least, the hands-free freedom of the Apple Watch is one of the more compelling areas. It is one I think signifies the potential of all wearable screen-type devices. I can set my phone anywhere in the house, and not have the fear of missing out on something important that would compel me to keep it near me at all times. I can play tennis, work in the garden, cook, do the dishes, shave, drive, and a host of other things which require my hands not hold a smartphone and not miss what I have deemed is the important stuff. The value of curated wrist based notifications allow me to interact with the digital world, or maybe even better stated, allow the digital world to interact with me, without having to be captive to a screen in my hands. Of course, you still need to use your hands to operate the watch, but the interactions are designed to be short and quick.

Interestingly, I got my wife an Apple Watch which arrived on Friday. After a weekend of using it, her value placed on notifications may be even higher than mine. She runs a side business buying and selling goods on Facebook so messages from potential buyers are essential that she doesn’t miss since they are timely. But she can’t always be staring at or captive to her phone since she is also busy as a part-time teacher and full-time mom. She is also a runner and loves the health features but, to my surprise, the notifications are what makes the Apple Watch indispensable to her. She is able to spend her time being truly free from her iPhone yet still get value from the digital world. I suspect this will be common with women who keep their phones in their purses or bags and likely set the bag down when they get home and leave their phone in their purse. There is value here in not having to worry about where your phone is and still not miss the important stuff.

The most convenient computer screen is the one you can see at all times. If one thing my month with the Apple Watch has demonstrated to me it is this point. Of course, I still need my Mac and my smartphone. But thanks to the Apple Watch, I no longer need to be captive to it to still get information that matters to me when I need it or want it. I can let my eyes and hands be free to do other things, yet still yield value from the digital world. This, in my opinion, will be the area where wrist-worn computers of all shapes, types, and sizes, will compete and move computing another step forward.