Ben Bajarin – Page 34

Samsung’s Cautionary Tale

Yesterday, Samsung issued a Q3 2014 guidance update stating they will miss expectations. The report says profit is down nearly 60%. For many of us, this was entirely expected. If this estimate holds up, Samsung’s operating profit chart looks like this:

For me, the only surprise is so many people are surprised at Samsung’s troubles. Samsung themselves knew this was a possibility over two years ago. I had a long meeting with Samsung’s Chief Strategy Officer and his entire staff more than two years ago on this very subject. I outlined in detail what happens when you don’t have sustainable differentiation. Through the years I’ve written quite a bit and documented how I thought this would play out for Samsung. For this article I want to highlight the lessons learned and the key takeaways all hardware providers, but specifically those who ship someone else’s software like Windows, Windows Phone, Android, etc., must learn from Samsung’s cautionary tale.

The Root of the Problem

Ultimately, Samsung’s challenges occurred due to a lack of sustainable differentiation. Samsung has a number of differentiating factors like scale, time to market, marketing prowess and budget. However, none of them were sustainable. By shipping someone else’s software and relying on someone else’s services, Samsung is only a hardware company. What their struggles point out is companies looking to profit from hardware will only struggle when they ship someone else’s software and rely on someone else’s services.

There was a time not too long ago when a successful strategy could be found in hardware alone. This was true both of PCs and smartphones for example. Prior to a category getting crowded, and while there is still category defining innovation, value can still be found and profited from with hardware. But once innovation slows down and hardware gets “good enough”, competitors who can also ship the same software as you can now begin undercutting your pricing. This is what is happening to Samsung as companies like Xiaomi, Huawei in China, and Micromax in India are eating into Samsung’s smartphone market share.

Integrated vs. Modular

Those who did not see Samsung’s problems coming had a weak understanding of the dynamics of integrated and modular systems within the technology industry. At an even deeper level, many have a weak understanding of disruption within the dynamics of integrated and modular systems. In a modular ecosystem, a company like Samsung provides the hardware and Google provides the software. Apple is an integrated player. They make the hardware but also make the software. Apple does not depend on someone else to make the software for their hardware, nor do they give their software for others to use. As Ben Thompson says, “Apple has a monopoly on iOS.” This is a central point. Because Apple has a monopoly on iOS their product is differentiated. Apple’s iPhone stands out not just at a hardware level but at a software level. When consumers see iOS, they realize what they get with iOS they cannot get elsewhere. When consumers look at Samsung devices, they see an OS they can get on any other hardware. Therefore the purchasing decision nearly always comes down to price.

In modular ecosystems, the various hardware players all shipping the same software create what I like to call “the sea of sameness”. Outside of a few hardware differences everything looks the same. When everything looks the same, you are only as good as your lowest priced competitor.

Hardware companies, especially those who are modular and ship someone else’s software, have to learn that attempting to profit from hardware alone is not a sustainable strategy. This is true of PCs, tablets, and smartphones. This is why PC vendors like Dell, HP, and Lenovo focus on using the hardware as a means to a larger enterprise services strategy. In a modular world, hardware is a means to monetize services when all the dust settles.

Classic Disruption

What essentially is happening is Samsung is being disrupted in the classical sense according to the theory. I’d argue in certain markets, like pure consumer ones, disruption theory is more predictable and consistent in modular environments. I argued in this Insider post that Apple is immune to disruption thanks to their more integrated approach which is sustainable in large global consumer tech markets. Apple has yet to have to change their business model, whereas Samsung is actively shifting away from premium and changing their strategy to ensure the scale the fundamentals of their company require.

The lesson for all hardware OEMs making PCs and smartphones is to begin planning for a future where hardware becomes a means to an end and to sell a broader set of services. Competition is going to come from all angles and I expect even more “services first” companies, like telco’s or even TV services companies. Ultimately, companies like Xiaomi and Amazon who employ a services first strategy and hardware as a means to monetize those services, may be the future of the OEM model in modular markets.

First Half 2014 Tablet Report

The tablet market is easily the most fascinatingly diverse consumer electronics category I have ever studied. If you have read my commentary on tablets, it is the unique form and function of the product that allows it to be so nuanced. Both the smartphone and the tablet are relatively small pieces of glass. Both are brought to life by their software. However ,with smartphones, we see more clear consistency in application. We don’t see the rich segmentation in smartphones we are seeing in tablets. The tablet is a blank piece of glass that can take on many general computing use cases and unlike the smartphone which has a focus, the tablet can be many things to many people. This, at a root level, is why I believe so many people misunderstand the tablet category.

Without question, the tablet saw explosive initial growth. This was driven primarily by Apple and benefited from a latent PC refresh cycle. Looking back, there are certain market dynamics which contributed to the tablet category allowing it to be rapidly adopted. I would argue those dynamics have changed and, if the tablet was released for the first time in 2014, the product would not have the same initial ramp up. That in no way means the tablet category is dead or, more importantly, not a viable category. It simply highlights the tablet market is still not fully mature.

Coming Back Down to Earth

Many of the charts I’ll be showing are a part of a much larger and in depth PC/Tablet Report I’m publishing through my industry analyst firm Creative Strategies. I’ve broken a few of these charts out to give a high level view of the tablet market.

As you can see, YoY growth of tablets has come back down to earth. For nearly a year, the tablet was experiencing anywhere from 120%-220% growth YoY in certain markets. YoY growth prior to Q1 2013 remained high — 70% up to 135% depending on the quarter. But after Q1 2013, the growth normalized and as you can see, the tablet category is now performing similar to desktops and notebooks.

I’ve included in this chart my estimates for the next few quarters and into 2015. These of course are still subject to revision should we see any major trends which cause us to revise. But as of now, we believe the tablet will still remain in slightly positive, but low, growth territory, where notebooks and desktops remain slightly off going forward. The one caveat to the tablet line could be the effect of large phones on tablet growth. This is the one factor that could cause the tablet line to move closer to the notebook and desktop line.

Another interesting way to slice the same chart is to add Apple’s YoY growth of iPads. I’ve done that in this chart and you can see the impact iPad sales have on the tablet market as a whole.

Tablets vs. Notebooks

A key discussion point for those of us who analyze both the tablet and PC market is what impact tablets are having on PCs? There is little evidence to suggest tablets are replacing PCs but that they are more of an extension to them. Perhaps a good way to understand the tablet vs. the notebook is to think in terms of computer literacy. To use a notebook one has to be PC literate. Users need to know their way around a desktop OS, mouse, and keyboard. Not every person on the planet is computer literate. However, thanks to smartphones, many are touch computing and touch OS literate. This is why the tablet running a mobile OS provides greater upside in our view.

The notebook form factor has taken the mobile PC as far as it can go. At this point, if you need a notebook for your day job, student life, or any other use case, you know it. Therefore, we believe the notebook addressable market is tapped out. However, the tablet represents a form and function of a device that can bring a “computer” to those who did not use one before either in their life or work place. For example, corporate field workers are being given tablets to replace walking around with clip boards on the job site. Tablets, as a work opportunity, bring computing to field workers who did not use a computer in their day job. For these workers, the notebook was simply not mobile enough. Tablets are filling those holes.

We also believe the tablet represents an opportunity for first time PC owners. Those who are not computer literate but looking for more capabilities than their smartphone offers. It is within this view we continue to watch tablets as a category.

The last point to make on this topic is not all tablets are created equal. If we count tablets that are not branded and being sold sub-$80 in many emerging markets, we can probably argue the tablet market may be larger than the PC market. But when we only look at branded tablets from PC or mobile companies, we see the tablet market may be shaped more like the notebook market than the entire PC category.

Here I charted only branded tablets from companies like Apple, Samsung, Lenovo, Asus, etc. You can see the tablet category is comparable to the notebook category when we attempt, as best we can, to compare apples to apples.

Seasonality

While I try to point out there is some comparison to be made to the notebook and branded tablet market, there is one area the tablet category is quite different than the PC market. Tablets, including branded tablets by the vendors I mentioned above, are more seasonal purchases. Part of this has to do with the more consumer focused play of tablets for now, but also their pricing. PCs maintained a fairly high ASP for most of their life. Even now the ASP of PCs is still over $600 while the ASP of the tablet category is just over $300.

As you can see from this chart, the seasonality of tablets is more dramatic than any other class of PC.

Note, the chart looking forward includes my estimates subject to revision depending on the trends we see.

Tablets, in essence, operate similarly to both the notebook and the smartphone. The smartphone category also experiences dramatic seasonality purchases in the calendar Q4, although we are seeing smartphone seasonality slow down as the global audience comes online.

The seasonality of tablets is also visualized when we look at QoQ growth since Q1 2013. While YoY growth, charted earlier, smoothes the tablet line, QoQ growth highlights the seasonality of that growth.

From a marketing standpoint, this chart tells us tablet marketing is best spent in calendar Q4. Bottom line, I don’t see the seasonality of the tablet category going away any time soon.

ASP

I talk a lot about the the white box tablet market. These are non-branded tablets coming from the China tech manufacturing ecosystem and selling for less than $80 on average. Knowing that, when we plot the ASP YoY growth of tablets, it shows how dramatic both the low cost Android push and the white box tablet market have had on tablet ASPs.

As you can see, the tablet market as a whole has been a troublesome one to really make money at for nearly all but Apple. Vendors like Samsung would move many as a promotion through the carrier channel with the purchase of another Samsung smartphone. Other than those two, no one really sells tablets in any meaningful volume.

As we look at ASPs going forward, the line is still trending down. One caveat on tablets would be if we see fewer branded tablets on the market as certain companies get out of the market due to lack of volume or monetization. In which case, the tablet market would be driven by Apple and white-box as far as volume goes.

Conclusion

As many of my charts highlight, much of the key growth in tablets appears to have slowed and, in some cases, disappeared entirely. Revisiting the question of whether or not the tablet category is as large as the PC category seems like a re-kindled debate. From what I see right now the answer is both yes and no. If we combine all tablet sales, including those low cost white box tablets from the China tech manufacturers, then I can see how we sell more tablets than PCs worldwide annually (not necessarily quarterly). However, since not all tablets are created equal, this may not be a metric worth spending more time on.

Comparing branded tablets like the iPad for example, and tracking them against notebook sales does seem like a valid metric worth tracking. But, as a few of my charts point out, it is questionable whether the branded tablet category is bigger than that of PCs. Rather, it seems it is more similar in terms of volume to notebooks than the entire PC category. Given its form factor and use case, this makes sense.

As we track tablet sales and try to articulate the bigger picture of how they fit into computing as well as the broader consumer electronics picture, we strive to look at ways the tablet is extending computing in meaningful ways to those who were not true “computer users” before. We know nearly everyone on the planet will have a smartphone. We have reasonable assumptions the smartphone is not the only computing product they will own. We have strong doubts, based on the point of computer literacy, that the notebook or desktop will be the first computer of choice for current smartphone-only customer. We believe, for this market, the tablet represents the most interesting opportunity as the first large screen computer of choice.

What cannot be overstated in this discussion is the meaningful impact of bringing computers to the masses. It should not matter the shape or manner, only that we deliver on that promise. Each form factor — the desktop, notebook, tablet, and smartphone — will play a role in bringing computing and the internet to the masses. Some form factors will be more affordable than others. Some more capable. Some more portable. No matter their size, shape, or capabilities, we are seeing computing advance in ways we never could have before thanks to the many shapes a personal computer can take in the 21st century.

Windows 10 and the PC’s Tablet Complex

Yesterday, Microsoft showed the world the first glimpse of the new version of Windows. Oddly, Microsoft skipped a version number in the naming scheme. Rather than name it Windows 9, they choose the name Windows 10. While it is hard to form a fully fleshed out analysis of Windows 10 from the minor details given, there are still some key observations that can be made.

Firstly, from what I saw from Windows 10, it appears Microsoft recognizes some of the many issues that faced Windows 8. On Microsoft’s official blog post they made the following points about Windows 10:

Windows 10 will:

Build on our commitment to provide a common Windows platform and give you one consistent API layer with consistent UX design surfaces and flexible tools.
Enable Windows Store apps to run in a windowed environment on the desktop so that they perform better on a wider range of hardware.
Deliver one Store for all devices, making it easier for you to reach customers in consistent and compelling ways no matter what type of device they’re using. We’re also planning to make the Store more useful for corporations with volume app purchasing, more flexible distribution mechanisms, and the ability to create a custom or curated Store experience (note that the Windows 10 Preview contains the existing Windows 8.1 Store).

The first point may be the most important, although all three are related. Windows 8 had a two part problem. The first was developers were not taking advantage of creating new modern applications that embraced and extended computing to touch the same way developers were on the iPad. This led to the second issue — a schizophrenic user experience between legacy desktop mode and more touch/tablet friendly use cases. Microsoft converged a PC and tablet experience when they should have separated them. What should have been converged were the tools to create Windows apps for all screens in one environment, not the PC and tablet use cases. Microsoft is looking to fix this with their consistent API layer.

This developer point is why Microsoft threw the statistic out that there are 1.5 billion people using Windows every day. That is a little generous of a statistic given it includes IT workstations, Internet cafe’s, point of service workstations, and likely even server-based solutions. There may be 1.5 billion PCs in use but there are not 1.5 billion unique PC users. That number is somewhere in the 1.3 billion range and SHRINKING. This is what Microsoft, Intel, and the entire PC ecosystem is hoping to change. To do this, Microsoft hoped bringing tablet like functionality would spur growth to the PC industry. This, however, was a failure to understand why the tablet was successful and the role it played in the advancement of computing.

The Tablet Complex

From a platform standpoint, I still maintain Microsoft needs a phone/tablet OS and a desktop/notebook OS. Perhaps there are ways Windows 10 can be a dedicated OS for all these platforms. Time will tell. However, it is my conviction Microsoft, and Intel for that matter, suffered from a premature tablet complex. Meaning, they saw the iPad and its rapid success and created a number of flawed assumptions about the product that led them to create the schizophrenic Windows 8 and 2-in-1 PC category.

The tablet was never poised to be a replacement for someone who sits at a desk, needs a big screen, and does deep work. My belief was always there are simply a smaller number of people in the world for whom a large portion of their work use cases necessitate a desktop or notebook PC. What we saw the tablet (the iPad) do is enable more rich computing for those who were either intimated by computers and were less “computer literate” than others AND it brought computing to new customers who were not computer users before either in work or play. A good example of this was what I learned by being on a panel with the CTO of Chevron. He explained Chevron deploys over 30,000 iOS devices to field workers, and 20% of those were tablets. The primary use for these tablets people who used a clipboard to do security checks and other field work documentation. They replaced those paper tasks with iPads and deployed custom software which gave these field workers better tools to do their job. These field workers were not using computers in their jobs when in the field and would only use them for small portions of the day when they go to their desk to input data. Now all of it is done in the field in real time. I hear countless stories like this from field workers in construction, public safety, etc. The point is, tablets have enabled people who did not use computers before, for a wide variety of reasons, to use a computer regularly in a meaningful way.

This same philosophy is characterized again in this incredibly well written piece thanking Mr. Jobs for the iPad that brought the writer’s 83 yr old father meaningfully into the computer age. I particularly liked this part of the article.

His big, thick fingers found just the right touch. They found a groove and slid intuitively across the screen; soaring and gliding up and down and across. It was as if someone from the other side had taken over and was guiding his old mans’ fingers.

Then he discovered Facetime. He immediately dialed his oldest daughter, my sister. And that’s when he really came to life. He entered a new generation.

‘I can’t believe this is happening.’ He exclaimed.

The desktop and notebook form factor took computing as far as it could go with those designs. Those dedicated form factors, and the software they run, have a purpose and are not going away. The tablet, however, is extending computing to places it could not go before because of its unique form factor and software. As in the story above, the elderly who are connecting with their kids and grandkids in new ways are empowered. Kids can pick a tablet up and learn and play the instant they use it with no prior education or computer literacy training. Workers around the world who spend their day on their feet now have a tool practically custom designed for them as the ideal digital tool. This understanding is what companies with a PC bias missed. This is what Microsoft must solve for them to be a relevant platform player in the future of computing. However, as I will dive into in the near future, Microsoft’s upside does not depend on them being a relevant platform player, but rather resides in them becoming a platform agnostic software and services company.

Profitable Niches

As of late, I have been speaking with management of many different companies. Oftentimes I’m asked for my recommendations in these engagements and I have noticed a certain theme that remains constant in my answer. That theme is to focus on profitable niches.

Way too many companies, in their internal strategic planning, make the mistake of doing zero sum game analysis. Having done a review of these analysis for Fortune 500 companies, it becomes clear that many bring an old world view to the competitive landscape. What I mean by “old world” is the thinking that, for someone to win, others have to lose. This may have been true at a time when the industry was small and the total addressable market of computing products was less than 500 million. It was in this environment Microsoft ruled computing and Apple was nearly bankrupt. Not long after that narrative, another emerged, also including Microsoft, with Internet Explorer vs Netscape. The online population was also only in the hundred millions and the narrative was only one of these browsers could win. Eventually, Internet Explorer did. The same was true when Palm entered the scene. Against Microsoft’s Pocket PC platform, most analysis looked at this as a zero sum game in a winner-take-all market. That world is gone and has been for some time. In a world being drive by computing’s S-Curve (pictured below), there is market share to go around.

Market Share vs. Market Shares

“Enough market share to go around” seems to be lost on many companies. Which is why I hammer home the theme of profitable niches as a sustainable business in such a large market. Perhaps the best modern day example is Nvidia. A company thriving by continuing to advance high end gaming graphics cards with incredible margins. They sell these to an enthusiast market which, while small, spends a tremendous amount of money. Gamers are a profitable niche. In fact, you could probably argue any enthusiast market is a profitable niche. Every market has these. In the automobile world, there are cars designed specifically for car enthusiasts. In the consumer packaged goods space, health enthusiasts enable premium prices for more quality food and goods. Fashion, jewelry, and more all have their commodity products but these markets also have profitable niches.

In essence, this is what Blackberry is hoping to accomplish with their Passport. They hope there is a business “enthusiast” who values the hardware, software, and services they create and are willing to pay more for them. If successful, Blackberry will have found a profitable niche.

While it is hard to predict which niches will be profitable, I do believe the computing markets globally will continue to splinter. As the broader commodity smartphone, tablet, and PC categories grow, there will be some splintering off to these profitable niches. Nvidia again has a great example with their Shield gaming tablet. Nvidia knows the makeup of core PC gamers and built them a tablet to compliment and extent their PC gaming experience. Kids’ tablets are another great example. Nabi is moving millions of these products at decent margins by focusing on parents but delivering a kid-friendly tablet solution. Ruggedized PCs, tablets, and smartphones are profitable niches. GoPro is another great example of a profitable niche. There are already many examples and more will come.

The key is to be looking out for them or being an innovator and creating them. As computing grows, so will a large base of those underserved by commodity computing products and looking for things more reflective of their unique needs, wants, and desires. This will be true of everything around hardware, software, and services. Some profitable niches will be bigger than others in terms of their slice of the pie. However, these profitable niches are in essence zero sum games. These are the areas where first mover advantage is real and apparent. So the key to is see them early or create them.

Know your customers, and look to fill an underserved need in the market and the profitable niche will emerge.

The Future of Retail

Physical retail and the world of technology have yet to combine in any meaningful way. I believe that is all about to change. Having spent more time speaking with retailers recently, it is clear they are about to make a technological leap. All of them have a deep fear of Amazon. Showrooming is a trend spoken about often internally at large brick and mortar locations. Yet one of the more interesting trends of late is called “Webrooming”. I outlined this trend in this insider report but, at a high level, webrooming is when consumers research online but then purchase the product in store. Our research on consumers who do this revealed the primary reason for webrooming was to read customer reviews of products they were interested in. 78% said they use Amazon reviews as their primary source for getting reviews of things they plan to purchase in store. Perhaps more interestingly, 42% said they read reviews on Amazon about products they were considering while at the store where they eventually made the purchase.

What I find intriguing about this environment is Amazon has been playing the game with an unfair advantage. Amazon has been using technology to gain competitive advantage. The playing field is not yet equal since most retailers have not been using technology to their advantage. I believe the groundwork is being set to level the field.

Payments

If you didn’t understand why the timing was right for Apple to get into payments and embrace NFC, then I encourage you to look into the EMV Migration and the accompanied credit issuers liability shift which has a deadline of October 2015. EMV is essential a “chip and pin” solution which enables credit card issuers to put a secure chip into their credit cards. The process for payment will be pin-based — meaning consumers will have to enter a Personal Information Number to authenticate the transaction. This shift will require all new payment terminals at physical retail locations. Merchants are incentivized to embrace this shift because as of October 2015, if they have not meet the deadline for the EMV transition, either they or the issuing bank becomes liable for any fraudulent charges. This shift in liability from the credit card companies to the merchant or the bank is the mechanism driving the investment in infrastructure change that makes not just chip and pin but NFC viable now in the US market.

Apple will sit right in the middle of this, playing a key role in helping limit fraud, thus limiting the risk to banks and merchants. This is just step one of brick and mortar retail stores embracing technology. The next will be Beacons.

Contextual Shopping

Beacons can help bring retail into the technological age. As our research on commerce highlighted, consumers are increasingly using the internet to make purchasing decisions. After the Christmas season last year, I spoke with several IT managers for major retailers and all of them were surprised at the high level of usage in store of their mobile app. This was everything from coupons, to product information, and sometimes just a map of the store to find a certain section. Thanks to our mobile devices, the in-store experience stands to get significantly better and low power proximity beacons can play a role.

If you have never seen this video from Estimote, I encourage you to take a look as it presents a vision of how beacons can transform retail.

Things like QR codes, and RFID tags are used today to give customers relevant product information. But the experience still needs to get much better and more interactive. This is what the promise of Beacons can deliver.

When we dive into the trends in markets like US and Europe behind webrooming and showrooming, it becomes clear in both cases technology is what has enabled them. This is why it will be interesting to see what happens once technology comes to physical retail in a meaningful way.

E-Commerce is growing but is still less than 10% of all retail sales. Clothes, shoes, gifts, books, and snack foods are the top five items purchased online out of 50 product options and categories. Automobiles, flat screen TVs, laptops, and mobile phones are the most researched online and purchased offline.

While still early, I have a hunch that, when technology is deployed strategically at retail, it could have an impact on Amazon. As I mentioned earlier, Amazon has been playing with an unfair technological advantage. Convenience and reviews are at the core of their value and both can be replicated and advanced by physical retail through the use of technology.

The Communication Possibilities of Digital Touch

It is not hard to look back at technology innovation cycles and see how technology has advanced and impacted how we communicate. From the pencil, to the printing press, to computers, to the internet, and more recently our smartphones, all have evolved communication in some way. Each innovation has brought with it the ability to communicate both verbally and non-verbally in new forms. The telephone itself made verbal communication possible from a distance. Computers brought non-verbal communication into the digital era, evolving physical written letters into digital form to travel at near real time speeds. The cell phone made long distance verbal communication possible from any location. Smartphones further made the full spectrum of verbal and non-verbal communication possible from any location. However, what we learn when we study these technological advancements and how they have evolved our communication methods and patterns, is that ultimately, we have enabled new context in which to express and communicate digitally. In essence, technology has brought more communication options.

For example, prior to cell phones, many of us had pagers. The pager was basically an extension of the fixed landline. Someone could page you with a number and you would go to a fixed line phone and call the person back. As teenagers, we created numeric codes to send messages. 43770 was “Hello” for example. 143 was “I love you”. Effectively, every number or number combination had an alphabetical letter combination. Looking back, this was essentially an early form of text messaging, which, in and of itself, was a new option for communication. Not all conversation requires a lengthy voice dialogue. More often than not, short messages can suffice. It is the options that technology brings us that allow us to use them to communicate in different ways depending on the context of the conversation.

Many of you will also remember your first experiences with a BlackBerry. There was something profound about being able to see your email from a device other than your personal computer. We learned very quickly that, for some emails, quick responses would suffice and the BlackBerry was great for this. But for other emails, a more lengthy written response was necessary. For these tasks, we would return to the PC. The context of the response dictates which device we use in a multi-device world. This is what I mean by technology giving us options. Prior to the BlackBerry (or Palm Pilot, etc.), the PC was our only option for both long and short form email communication. As innovations like the BlackBerry were created, we were presented with more options.

Digital Touch

There are plenty more examples I can dig into but I wanted to frame the points above to turn our attention to smartwatches in general and the Apple Watch in particular. While dozens of questions remain about the Apple Watch, it is perhaps its potential to add a new communication element I find most intriguing at this point. What I mentioned above about humans communicating through verbal and written forms, I left out another vital communication tactic — the physical one. As part of my continuing study of humans, I became aware of some of the modern research on the science of touch in human communication. This article in particular from Berkeley is a good starter on the subject and this line is one of the most interesting:

In recent years, a wave of studies has documented some incredible emotional and physical health benefits that come from touch. This research is suggesting that touch is truly fundamental to human communication, bonding, and health.

The physical connection has been proven time and time again to be essential to healthy relationships. A series of studies highlighted in the report showed how people, even strangers, can communicate emotion through touch. Touch is an essential part of how we communicate. It is very personal and very intimate, yet is foreign to the digital world. In a way, I think Apple understands this. This block of text on the Apple Watch website explains the value of digital touch.

What Apple is presenting with the Apple Watch appears like it may be the start of bringing digital touch as a communication method to the digital age. And if we think about the type of device that makes this type of digital touch communication possible, it makes sense it is done through a device we wear rather than one we keep in our pockets or bags.

While Apple may lead this effort initially, this is something that could expand even wider as the idea expands. A leading company in haptics named Immersion has been working on similar haptic communication as a language for years and could bring that solution to any wearable device.

In the same way technology has expanded our communication options, it has still not replaced many of our existing communication methods. In a way, communication has been extended through technology but not all prior forms have been made obsolete. Similarly, digital touch will not replace human contact but when we are away from our loved ones, friends and family, digital touch has the potential to extend that unique and intimate communication method in ways not possible before.

2015: The Battle For Our Body Begins

Much of the battleground of computing throughout tech history has been for our desks, our laps, and our pockets. In 2015, the battleground for our body will begin. It can be argued that battle had already begun but my firm belief is a true market for wearable computing has not yet emerged. Companies were playing in the space but the vast majority of consumers were not yet interested or, if they were, they were left disappointed. Apple’s smartwatch entrance will change this. Every company I spoke with who had already been in the market with a wearable of some type openly admitted to me that when Apple enters the space there will truly be a market. Even Apple’s hardware competitors acknowledge while Apple is not always early to a category they are pivotal in establishing those categories.

Any sound analysis of adoption cycles will reveal timing is the key to mass consumer adoption of a technology. Some companies get into product categories long before the surrounding technologies are ready and even before the market is ready. I recall several years at the Consumer Electronics Show going to the wearable technology pavilion. It always showed interesting stuff, but none of it was mass market ready. Microsoft is exceptional at being too early. They had a vision for the tablet but were too early. They seemed to know wearable technologies would be big and developed the Smart Personal Object Technology. Microsoft, with those two examples, were early and the technology along with the market was not ready for such products. I’ve heard executives say time and time again, being too early is just as bad as being too late. Timing is everything. Thanks to Moore’s Law, the timing is about right to enable a true wearable computing landscape.

Invasion of the Microchips

Ultimately, the continued advancement of Moore’s Law is enabling smaller, more powerful, and more battery efficient processors. Thanks to this advancement, we will be able to bring more computing power, with better battery efficiency, to extremely small objects. But wearable computing is unlikely to be advanced unless computing systems are designed specifically for wearable computing applications. This is what Intel is looking to accomplish with their Edison module and Qualcomm is doing with their Toq platform. Similarly, Apple built their own integrated system for the Apple Watch called the S1, which is essentially a full computer architecture on a single chip. Designing specific microprocessors, not just using off the shelf solutions geared at other applications, is the way to meaningfully move this category forward.

Interestingly to me, Apple is actually accelerating Moore’s Law for their own benefit. They have this luxury because they design processor architecture just for themselves. Moore’s Law states transistors roughly double every two years. Apple, with the A8 has nearly doubled the transistor count in one year. Apple has packed 2 billion transistors into the A8. Which begs the question, what can Apple do with the Apple Watch when they can pack 2 billion transistors into it? Which is inevitable at some point in the future.

Advancements like these are what set the stage for the battle for our body.

Wearing Computers

The idea of wearing a computer is still foreign to many consumers. Whether it is a smartwatch or a fitness, health, or activity tracker, most people have not adopted the practice of wearing a smart object on their person. This market is in the very early stages of development. There is no doubt wearable computers have problems to solve. However for many, those problems are not yet evident. Over the course of 2015, I believe we will take steps to identifying the problems for the masses wearable computers will solve.

Some of these solutions will be general purpose products which will do a range of things well and and possibly one or two things really well. Others will focus on just a few use cases, perhaps doing only several things really well and that is all. One thing I’ve concluded about this space is it will not be limited to just one approach. In a market of several billion and growing consumers who may be interested in wearable computing, there is enough market share to go around. Like many consumer tech markets, wearable computing is not a zero sum game.

Up to this point, I’ve been critical of both the current crop of health and fitness wearables and the current crop of smartwatches. That is not because I don’t believe in the category but because nothing on the market yet cracks the mainstream value proposition. But 2015 looks to be the year more focus across the board will be placed on solving tangible pain points for consumers.

As Lou Gerstner, the former CEO of IBM, once said. “The market is the ultimate arbiter.” I expect many companies to take their licks refining and pruning their offerings to bring something unique and useful to the mass market. There are more possibilities of where this market can ultimately go. But the market will be the ultimate arbiter in the battle for our body. And given the intimate nature of these products in our lives, there is no better judge and jury.

Further Thoughts on the Apple Watch and Smart Watches in General

After spending more time digesting the Apple Watch announcement and talking to dozens of journalists, doing several radio shows, reading many articles, and doing two podcasts, I have some updated thoughts.

If you have read many of my posts on smartwatches, namely this one and this one, you will know it has been a category where the value proposition has not been clear. I’ve been very specific that notifications alone, or at least in their current form, are not entirely useful for your wrist. The value can not and is not in notifications alone. That is the primary value Android Wear has implemented and as myself and many others who have tried every version point out, it is unclear if there is any real value there. So what have we learned from the little bit of information we have on the Apple Watch? Does this product extend the value proposition in any meaningful way? At a high level, Apple brings several assets to the category.

User Interface

As Tim Cook said, in a recent interview with Charlie Rose:

Apple’s goal is to be the best, not necessarily the first, but the best.

This is achieved by their user experience prowess. Apple takes things, related to computing in this case, and simplifies them from the current complex state they are in. If I was to articulate why an average consumer would not like any of the smartwatches I have tried, the word complex would be front and center. For this category to take off, Apple’s user interface and user experience design chops will need to be front and center.

Philosophy

Apple has stated their screen philosophy as “the right screen for the right moment.” This is their argument for not merging iOS with OS X the way Microsoft has with Windows 8. So the interesting question with the Apple Watch becomes, what is the right moment the watch is the right screen for?

Even though I am critical of smartwatches, there are pockets of time where I have found them valuable. All of those instances when I have found value have been when my smartphone is not near me or I’m not in a place where I can use it. For example, when I am at home, I often take my smartphone out of my pocket and leave it on a table near my entry way. With the Android watches, I only get value from the watch when it is in proximity (appox. 15 ft) to my phone. So if I go outside or upstairs or into the kitchen, all my smartwatch is is a watch. Apple’s approach with Wifi will allow the watch to remain smart even when it is not in proximity to my smartphone. The same is true in the car. Personally, I’ve found wrist notifications quite useful during my long commutes. Exercising, bike riding, even walking down the street in the city between meetings, become interesting use cases where arguably a better device than our smartphone could exist to add value to our digital lives.

The right screen for the right moment philosophy is, I think, a key way to think about the role the Apple Watch will play in Apple’s ecosystem. Both for us watching Apple and for Apple itself.

The Evolution of Communication

If we think about it, mobile phones have played a role in the evolution of our communication. Arguably, nothing has had as large an impact on communication as SMS. Hands down, the longest conversations I have with people are when we are face to face. Audibly talking on the phone would come second, but in the digital world, our conversations are shorter and more compact. With SMS, short responses are the norm. Even though a conversation can be engaging or drawn out, it is simply done with shorter messages. Part of me wonders if we are on the cusp of yet another form of mass communication evolution.

Benedict Evans and I discussed this briefly on the Mobile Focused Tech.pinions Podcast, and we mentioned an upcoming iOS app called Popkey. Popkey, in a similar style to Line stickers, is enabling new ways to communicate but through a more visual nature than text. For example, a friend of mine named Ben Thompson who is the author of Stratechery, turned me onto Line. It is one of the seven messaging apps I use, but I only use it to talk to certain people and he is one of them. Our conversation will go along and then I’ll say something like “I’ll email you the details.” He will then follow up with this Line sticker.

This sticker is his way of saying “Ok” or “sounds good” and it is always this same sticker. It has a style and a personalization unique to him. But these stickers are somewhat static. You can create your own but how many people do that? Perhaps Apple’s doodle type method on the screen will enable similar yet even more creative ways for us to interact as a part of this communication evolution.

All of that being said, there are still questions I have that will not be answered even after the Apple Watch is released. For example, what is the replacement cycle? Is there a replacement cycle? Benedict Evans had a great tweet the other day that said, “watches replace their owners.” Meaning, a great watch outlives its current owner and is handed down or re-used by someone else. Is this a product category Apple is future proofing like a watch or is it more like a typical electronics product? Is this an annual release cycle of a product or longer? If you spend $2,000 on a watch will you be angry if it is outdated in a year when the new one comes out? I have a long list of other questions to dive into for another analysis but I’ll leave it at this for now. Smartwatches are officially a category thanks to Apple and good or bad, I have a feeling there will be some bumps in the road.

What Minecraft Means to Microsoft

By all accounts, it appears Microsoft is about to purchase the maker of Minecraft – Mojang. This seems like a head scratcher of a deal, and, without knowing the details of the strategy, parts of it are. However, what this deal signifies in my mind is a broader trend for the 800 lb gorillas in our industry to battle for consumers’ time.

For much of Microsoft’s dominance, they did not just command the operating systems for computers but their software, products like Microsoft Office and Internet Explorer, held sway over the computing time of customers. Microsoft owning a large chunk of computing time is, by far, one of the biggest transitions the last decade has brought. Microsoft used to have some of the most popular products in terms of amount of time per day spent using them. Today, that is no longer the case.

This is why, at a high level, what we are observing from companies like Apple, Google, Amazon, and Microsoft is a battle for consumer time. Since consumer time is finite, this is the most important battlefield. This is why usage is one of the most common statistics today to gauge success. It is no longer just about how many customers one has — it is about how much time is spent using the product.

It is through this lens I view Microsoft’s acquisition of Minecraft. Outside of Office, the Xbox is the only ecosystem Microsoft has, outside of commercial products like Office, that gains any real consumer traction in terms of usage. Arguably, the consumer usage of Office products is exceptionally low, and Xbox is their only real traction with mainstream consumers and even that is limited. Minecraft, while primarily a PC game, is also available on Android and iOS. This game is not free but has shown great success in its ability to monetize its game. Beyond just being a healthy business, Minecraft has some incredibly engaged users. A non-public survey I saw data from earlier in the year suggested the average Minecraft gamer plays on average 2 hours per day. Not bad, when time is what is being competed for by the companies at the top of the industry food chain.

If you have played Minecraft, you know it can be addicting. If you have kids who play it, you know this fact even more fully. Minecraft is sort of “LEGO” for the digital generation. I think there are fascinating places Minecraft can go. Education angles perhaps being the most interesting.

Gaming is lucrative. Microsoft knows this as do many others. But a consumer’s time is even more lucrative. As products arise that begin to sustainably take consumer time, expect them to be purchased rather quickly from one of the 800 lb gorillas.

Mobile Focused Podcast: Apple’s Doubling Down on the Ecosystem

Ben Bajarin and Benedict Evans discuss the announcements around Apple’s big event. We discuss everything from iPhones taking share of premium from Android, to payments and Apple’s business model advantage, and some high level thoughts on what smart watches may actually be.

Some highlight quotes:

“Apple is blessed by their developers.” – Benedict Evans

“Apple attracts not just a certain type of customer but also a certain type of developers” – Benedict Evans

“With the Apple Watch, Apple is tackling their most ambitious hardware project yet.” – Ben Bajarin

Show Notes

iPhone 6 and Android Value – Benedict Evans

Google Wallet Leaking Money

Global Implications of the iPhone Lineup on the Smartphone Market

With the new iPhone lineup, Apple has addressed every major screen size base for smartphones. What they have not addressed is every price point — unnecessary given Apple’s strategy. My read is the impact of Apple addressing premium (phones over $400) Android smartphones primary differentiating factor, larger screen sizes, this will in turn dramatically impact the sales of the premium Android smartphone market. The biggest impact could come from the US at first but other key markets for premium Android handsets will be impacted as well. If that does happen, it may also impact the Google ecosystem in significant ways.

Apple has taken just about every reason to buy a premium Android phone from Samsung, HTC, LG, etc., off the table. Most mainstream consumers don’t care about specs and features. They want functionality. Many found a larger screen to be more functional for them for whatever reason. My gut tells me the premium Android space, and Samsung in particular, will be severely impacted by the new Apple lineup of iPhones.

In the US, Apple’s iPhone made up 64% of the premium phones sold. Apple’s average of premium phone sales during the past six quarters was 60%. If I was a betting man, I’d wager that is all about to change. Apple will likely get a minimum of 70% (this was their number in Q4 2012) of premium smartphones sold during the holiday quarter in the US. Around the world, Apple’s premium share is dominant as well. In China they make up 78% of all premium phones sold, per the last data point I got from Umeng earlier in the year. In China, Apple has sold just over 12m iPhones since January and approximately 40% of all 4G phones sold since then in China were iPhones. Now that they will release a 5.5 inch device, the demand for iPhones in China amongst the social elite, and even upwardly mobile Chinese consumers, will be higher than ever. Apple’s share in Europe is also higher at just below 60% but the volume of premium phones there is much smaller compared to the US and China.

Globally, Apple has the dominant share of premium smartphones. My last estimate, which needs an update, was premium Android smartphones were just over a third of the total of the iPhone installed base. I sense Apple will convert a significant percent of the current crop of premium Android buyers over the next year or so and this will impact Samsung the most. But it may also impact Google.

If you have followed what myself and Benedict Evans have been saying about the Google Play ecosystem, Google is paying out half of what the iOS App Store is to developers but with just about double the active users. I’m also fond of saying Google has already secured the most profitable customers. Understanding this point, the following chart becomes interesting to dig into.

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That chart is composed of the latest snapshot of app store revenue. Included is Google’s (really Samsung’s) share of the premium smartphone buyers. Prior to knowing anything about the iPhone 6 lineup I had concluded, based on a projection model, that Google would need nearly 4x the iOS user base to pay out the same number of revenue to developers. It was unlikely Google would get that amount but now it is inevitably going to be losing a good chunk of their premium buyers. I’d be willing to bet Google’s and Apple’s App store lines begin to deviate further. Apple’s is continuing to go up and Google’s is showing signs of slowing growth.

While ultimately Google’s overall revenue may still be fine, thanks to the ability for them to make money off iOS customers, the app store revenue could see an impact. Which raises some very interesting questions for developers on Android. Questions I don’t have answers to yet.

Broadly, Android is continuing to sell in volume to low end customers. In many areas of S.E. Asia, India, Brazil, and even others, we are seeing early evidence of manufacturers choosing other services instead of Google’s in order to try and make more money. Monetizing the low end is very hard and it will be hard for Google and anyone who uses Android — unless they create and develop their own services to monetize on top of Android.

China has its own Android ecosystem and it will continue to advance and flourish. Apple will likely never be the dominant vendor there as they are in the US but by further lowering the price of the 5s (which is likely) it could compete quite well against a $400 Xiaomi Mi4 for example. Undoubtedly, Apple will continue to gain share in China but the real question for Apple is India.

India will be the second largest smartphone market at some point in the future. India does not want cheap, crap smartphones. This is a market keen on “value for the money.” Right now, there is better value for the money in the Android camp than there is for iOS for Indian buyers. That may always be the case but as the smartphone ramp takes place in India, I’d be interested to see Apple do some things to appeal to the value for the money mentality in that market. Just under 70% of mobile phones in India are feature phones. I do not expect a first time buyer to get a iPhone. However, as India ramps, and the market matures, the timing will eventually be right for Apple to be creative in that market.

From the data and research I have on the global smartphone market, it is very hard to not be optimistic about Apple’s overall opportunity. Ultimately Samsung is the biggest loser here as is the premium Android smartphone category at large. Android’s most passionate fans will still buy premium smartphones but that is such a small number it will not factor.

The questions around Google’s app store will remain but as new data points come out we can check back in on it. I’ll be spending more time thinking about what Samsung and other premium vendors can do but they are all in for a few rough quarters at least.

Apple Payments and Smart Watches: Just the Beginning

Over the past few years, Apple has been building a loyal user base. Zero sum game analysis of market share is irrelevant to the market dynamics playing out in mobile. So when it relates to Apple, my analysis centers on two fundamental buckets. One bucket is, “What is Apple doing to add compelling, useful, and convenient new features for their existing customer base?” The other bucket is, “What are they doing to expand their customer base?” Most of what Apple launched today falls into bucket number one.

Bucket number one is significant because Apple has not only some of the most loyal customers on the planet but also the most profitable. Apple customers generally spend more in the iOS ecosystem on average than those in the Android ecosystem. It is with this point in mind that Apple getting into payments is significant.

Mobile Payments

I’ve been saying for a while we are on the cusp of the era of digital identity. We will increasingly move our analog banking, payments, identification, and more into the digital realm. Apple has been laying the hardware and software foundation to help their customers transition from the analog era of payments and identity to the digital one. Apple took the first step in this direction with Touch ID last year with the launch of the iPhone 5s. They have taken another step now with Apple Pay.

In years past, the timing was simply not right for NFC. Even though the technology was there, the infrastructure was not. That is all poised to change now that Apple is including NFC in both their new iPhones. Furthermore, it seems the retail environment is poised to embrace and advance the retail experience, thanks to Amazon, and NFC along with Bluetooth LE beacons are poised to play a role.

Why is this important? First some US credit card statistics:

Total number of credit card transactions in the U.S. in 2012: 26.2 billion ((2013 Federal Reserve Payments Study))
Total number of credit card accounts in the U.S. as of Q3 2013: 391.24 million, vs. 457.64 million in Q3 2003 ((New York Federal Reserve, Quarterly Report on Household Debt and Credit, November, 2013))
Average value of a credit card transaction in the U.S. in 2012: $94 ((2013 Federal Reserve Payments Study))
Total value of credit card transactions in the U.S. in 2012: $2.48 trillion ($2.21 trillion for general purpose cards and $270 billion for private label cards) ((2013 Federal Reserve Payments Study))

On top of those statistics, Apple shared today that, in the US, there are 12 billion dollars a day in credit card transactions which adds up to over 4 trillion dollars per year. Credit card payments are an everyday experience for many consumers. It is also one which feels antiquated in the digital age. Apple is looking to change that. It will take some time but the plastic credit card is dead. With Apple Pay, Apple is looking to be positioned in the middle of this environment by adding layers of security, simplicity, and ultimately, eliminate as much friction as possible from both the in-store and e-commerce transactions. This is good for Apple, their customers, and their ecosystem.

Apple has laid a foundation,and seeing as the US market appears to be on the cusp of a transition to adopt NFC at many retailers, it will be interesting to see if and how Apple meaningfully advances this market. As I said before, Apple has the right customer base to do it.

The Apple Watch

The big surprise was the release of the Apple Watch. Apple is looking to redefine the smartwatch category and until we all get to try the product sometime early next year, we will debate whether or not they have. I’ve been continually skeptical of the smartwatch category. What the job is for the mass market for a smartwatch has been the central tension for me. I’ve noted notifications alone can not be the central value of the smartwatch. In other words, not just duplicating what is on your phone.

Without having much time with the Apple Watch, I think a few points are worth noting on the product. Firstly, and this has been said by many, this is just the 1.0 product. The Apple Watch of today will look and behave dramatically different in three years or less. Second, software is the key. Over the past few weeks, as a watch from Apple seemed to become inevitable, I have been thinking about how this product evolves. More importantly, could–through software–a smartwatch eat the smartphone? Marc Andreessen loves to talk about how software eats the world, but in many cases software allows hardware to eat other hardware. So could Apple evolve iOS and, through natural user interfaces like voice and a number of other advancements, enable the wearable to eat the smartphone? Is the watch/wearable really the evolution of the category? It is a valid question to ask at this point whether or not my 9 year old daughter will use a smartphone when she is a teenager. But again, the point all comes down to software.

Apple has created an architecture for their developers and their ecosystem where they are placing their bet on the smartwatch with the developer community. This is no different than what they did with the iPhone. Giving developers the SDK and APIs now for the smart watch is essential as they build momentum and create a robust ecosystem by the time it is available next year.

While I’m stil not sure what the mass market appeal of smartwatches is today, it is clear that, if they do appeal to everyone, assuming that is indeed the goal (maybe it isn’t), how the software, apps, and functionality advances will be the key driver of this category. This is where Apple’s third party developers come in, and if any company has the third party developers to advance this category it is Apple.

One thing Apple added to the watch that no other smartwatch has is NFC to create the ability to pay for things with just the watch. This could be a key differentiator. We addressed this value proposition specifically in this post, where we learned first hand how Disney World was deploying wearables for payments, and the level of convenience it provided. Payments and health are likely to be cornerstones of Apple’s wearable strategy.

The Brand

The intersection of liberal arts and technology includes fashion. Apple appears to be taking their brand more into this realm. Think about the names for two new products. The Apple Watch and Apple pay are not the iWatch and iPay. Where did the “i” go? Apple is clearly thinking long term and is making the Apple brand even more prominent.

Apple understands this and they began to address it with “Apple Watch”. By releasing three different collections, and a range of bands to choose from, Apple is just scratching the surface in designing a wearable for the masses. Fashion is subjective and for Apple to truly bring fashion to tech, they will need to make even more collections. But this is just the beginning.

The intersection of liberal arts and technology extends well beyond desk, lap, and pocket computers. There are so many directions it seems Apple can now go. Their future is up to them and it will be interesting to see where they go and who follows.

Unprecedented iPhone Demand

As we lead up to this years “main event,” I wanted to share some initial points underscoring my read that there is unprecedented demand for Apple’s iPhone this holiday quarter and beyond.

Major Upgrade Cycle: This has been the source of many analysts’ upside, but I think it may even be larger than many realize. From data points I have from the US, China, and even parts of Europe, it appears there is an unusually large number of legacy devices (smartphones more than two years old) still in use in the world. This includes devices like the iPhone 4, and Galaxy SIII. Our own research revealed the average life cycle of an iPhone in the US is 2.8 years. That number is even higher when only multi-person families are included. Apple’s quality curse is they build such good devices they can and do remain in use for longer than the traditional 24 months.

Gaining Share with the Phablet: One of the more compelling theories for the existence of the 5.5 inch iPhone is it could steal customers away from Samsung who were previously fans of the Galaxy Note line, on the simple premise of screen size alone being the most premium smartphone on the market.

Emerging Market Growth: Perhaps one of the most interesting things Apple can do is use previous years’ models, as they typically do, but be even more aggressive at their price points and target them in emerging regions. Keeping the 5s, for example, at a 5c price would go over very well in China for the middle tier market. Keeping the 4s and pricing it even lower could do extremely well in markets like India and other parts of South East Asia.

All of this gives me the sense this could be more than just a typical growth holiday quarter for Apple but that they blow past most consensus estimates for the holiday quarter with ability to meet the demand their only limiter. While my job does not depend on making estimate predictions for shipments, I would not be surprised, assuming they can make sufficient quantities, that Apple sell mid-60’s of iPhones in the holiday quarter.

The other thing that will be interesting to watch is what happens with Samsung’s sales. Last quarter, Samsung shipped 78m smartphones and they stuffed the channel prematurely to mask some of their challenges. I think it is extremely possible, given the sense I get on both Apple and Samsung trend lines, that Apple and Samsung sales in the holiday quarter could be closer than people think.

As some recent comScore data suggests, iOS and Android are neck in neck as far as users go in the US. I have a sense Apple takes the majority share in the US by end of the year.

How to Turn Around Samsung

In my continual analysis of Samsung for many in the industry, I have frequently pointed out the fundamental issues that have led to their current struggles. I had a friend remind me that, over two years ago, I gave a presentation to his VC firm where I pointed out Samsung would face struggles. He reminded me that, at the time, it sounded crazy but in the end I was right. Through our discussion, the topic came up on how to turn Samsung around. I decided I would write up my thoughts.

The Heart of the Matter

Ultimately, Samsung’s fall was fully predictable. In modular ecosystems (ones where you ship a core part of your product or experience which belongs to someone else) will always be susceptible to text book disruption. Samsung wanted to compete with Apple, and they did for a brief time, but ultimately Apple was never really their competition. Other players in the Android ecosystem were, and unfortunately for them, other vendors created good enough hardware that is continuing to eat into their market share.

I highlight this reality in my post on the regionalization of the smartphone market. If you recall that post and the charts that accompany it, you recall in every market but their own in South Korea, Samsung is losing share to the local player who has home field advantage. In China, it is Xiaomi and a host of other Chinese vendors. In India, it is Micromax, XOLO, Lava, and a few others. In the US, they have never led in quarterly sales.

The culprit is the Shenzen ecosystem. This is a radically efficient and rapidly scaling ecosystem of groups of manufacturers who can take a product from nothing to time to market in less than a month. A leading SoC provider from China told me they can get a new customer up and running and in the market with new smartphones and tablets in less than two weeks. Any company can enter this ecosystem, and build “good enough” products to be extremely disruptive.

As an aside, I had a colleague mention, as we spoke about the Shenzen ecosystem, that all this ecosystem needed was a good idea. Now they have Kickstarter for ideas. The key point is product coming out of this region is getting really good.

The Shenzen ecosystem is enabling local manufacturers to build high quality, good enough products and challenge the foreign brands. We are hearing about new smartphone companies coming out of China, Brazil, Vietnam, Europe and more. Local vendors’ home field advantage fueled by a Shenzen ecosystem is starting to rival Samsung with scale and is the thorn in their side.

So what can Samsung do? The obvious answer is chase the low end. However, I think a more interesting alternative may exist.

Procter and Gamble

Why am I bringing up Procter and Gamble in a tech article about Samsung? It is because, as we connect the planet with consumer electronics at extremely affordable prices, I believe we will see similar dynamics to consumer packaged goods come to the consumer electronics industry.

What makes Procter and Gamble successful in global markets is how they regionalize their products and brands. P&G spends a great deal of time researching local markets, understanding consumers needs in those markets, and then creating solutions that meet the unique needs of a region. Often, they use a brand unique to those regions and they market these products differently everywhere. Consumer packaged goods is both commodity but also a continual fight for differentiation. As smartphones reach $10, and as tablets reach $25 it seems inevitable nearly all the dynamics of regionally focused brands, products, and solutions found in consumer packaged goods will come to the tech landscape.

For Samsung, it is essential they get scale. They are oriented in a way many of their core business components depends on the product groups to move significant volume. For the last decade or so, Samsung has achieved their scale by employing a fast follower strategy and executing that strategy at scale. I’m not sure any tech company on the planet is capable of doing this the way Samsung can. This is why they are the most interesting to follow a model like Procter and Gamble’s.

Samsung can ultimately combat the regional brands, who are eating their lunch, by creating regionally focused brands, product, services, and marketing of their own. This would require some significantly different ways of thinking within Samsung to actually do what I suggest. Yet other than just chasing the low end, I’m not sure how else they can recover their former scale. Following Apple is no longer a viable option for growth.

Ultimately, it can be argued the best thing that could happen to Samsung is for Apple to do something truly innovative. The problem is, by being modular, anything they do will be copied and at much more aggressive prices. Apple’s monopoly on iOS allows them to sustain a premium strategy. Samsung doesn’t have such a luxury.

If the World Was a Village – Tech Edition

Bob’s column yesterday brought back into attention some of the things I discussed in this article called Computing’s S-Curve. We are on the path to connect the planet via a pocket computer. This is so incredibly significant it is difficult to overstate.

In many of the presentations we give at Creative Strategies, we emphasize we are still early in the technology age. We point out that the first 25 years of computing was focused on bringing computers to business. The next 25 plus years will be focused on bringing computers to every person on the planet. Much of this is driven by Moore’s Law. When presenting to the more PC focused audiences, this is a favorite slide to emphasize Moore’s Law in bringing computing to the masses.

We still have a long way to go but as Benedict Evan’s points out, this opportunity to connect the planet is hugely beneficial from a humanity standpoint.

So where are we in connecting the planet today? Using a range of statistics I gathered, I made a chart showing a few of my favorite data points from the point of view, “If the world was a village of 100 people, how many would be using what technology?”

What strikes me about these statistics is only one of them is over 50%. The mobile phone (not smartphone) is in use by 63% of the global population. Many of those mobile phone users have multiple subscriptions which is why the latest data from the ITU pegs total mobile subscriptions at nearly 7 billion.

What makes the mobile phones, with 63% percent of the global population owning one, interesting is by 2020 those will all be smartphones. To help drive that transition, we now have smartphones that cost $33 dollars and we will have $10 smartphones by 2020.

Yet, we still have a long way to go. I made this chart from some new data from the TNS Connected Life survey

This chart shows the percentage of smartphone users and non-smartphone users in each of these large global markets. I’ve added their respective population as well in order to see the opportunity for growth and scale.

As we embrace this shift, we realize how valuable these mobile phones are, particularly to those in emerging markets. Mobile phones connected to the internet have given rise to the WeChat business, Instagram businesses, Facebook businesses, and more. People like to argue you need a PC to do work. Tens of millions of consumers, and growing, in emerging markets prove this wrong every day.

As we empower billions of new consumers with pocket computers ubiquitously connected to the Internet, it is bound to have an impact on the economies of these emerging markets. Economists’ estimate bringing connectivity to a market can increase the GDP of that region anywhere from 1-3%.

The Internet has been one of the most critical and disruptive inventions of our era. Bringing the Internet to nearly everyone on the planet may be even more disruptive when all is said and done.

Connecting the Planet, Reshaping Industries

Mobile’s impact will be widespread. Note this chart from Chetan Sharma Consulting.

There are 14 global trillion dollar industries and mobile has the potential to invade, change, and impact them all. Chetan lays out in this white paper that we are entering a new era of connected intelligence. He is correct and it will be driven by two fundamentals: the connecting of the planet via mobile devices, and the connecting of nearly everything else to the Internet.

When we state that the technology industry’s best days are ahead, it is for the reasons I touch on above and more. While we explain the next 25+ years will be focused on bringing computing to the masses, the next 50+ years will be bringing computing to nearly everything.

Mobile Payments: On the Cusp of A New Era

This is the text from the Insiders Big Picture Newsletter that get’s signed up. If you aren’t getting the Insiders Newsletter, be sure to check your SPAM filter. If you are new to Insiders and have not yet signed up, you can use the Insider Newsletter blue button on the right.

I hope everyone downloaded and enjoyed my tablet report. More to come on the matter as we believe the tablet category will begin to heat up from an innovation standpoint over the next few years.

There is a lot of relevant news in the days leading up to Apple’s fall iPhone event. Our Insiders will be happy to know four of our writers have received their Apple invites and will be at the Apple event — digging into and analyzing all we see and hear. Myself, Tim Bajarin, Bob O’Donnell and Jan Dawson will all be in attendance. We will have a healthy range of Insider content and will also do some video analysis after the event with hopefully all four of us. Doing analyst roundtables in video form with the authors mentioned above is a feature we want to start including for Insiders as well.

Enjoy your Labor Day weekend, and get ready to hold on to your seats for all the interesting developments we expect over the next few months.

— Ben Bajarin

Understanding Mobile Payments

With the latest news from Re/code that Apple is looking to partner with American Express, along with the latest rumors the iPhone 6 will support Near Field Communication (NFC), it seems as though the mobile payment era is upon us. As I pointed out in this insider article on mobile digital identity, Apple is in a unique position to provide the hardware, trusted ecosystem, and other necessary components to take a leadership position in mobile payments.

Regardless of how you feel about Apple, they move the market. Apple typically leads and the market follows. With the significant number of premium customers they own, it is arguable that it is necessary for Apple to lead in mobile payments to truly develop the market, particularly in the US.

In many parts of Europe, mobile payments are becoming more ubiquitous every month. However, in the US, the infrastructure for mobile payments is lacking. We have an interesting example about the willingness for US consumers to spend money via a mobile device if only the right infrastructure existed. Starbucks CEO gives us insight from late in 2013 about the type of volume Starbucks does with their mobile payment solution.

Today with 11% of our U.S. and Canada in-store transitions being paid for with a mobile device, Starbucks is far away the clear leader in mobile payment. We are encouraged by how our customers have fully embraced our mobile apps as the most convenient way to pay, reload and keep track of their loyalty rewards. With the current average of over 4 million mobile transactions per week and more than 8 million customers using our mobile app, Starbucks mobile platforms are fast growing customer touch points. Through them we are communicating with and delivering innovation to our customers in a way that no other retailer can and on the horizon, our enhancement to our mobile apps that include mobile ordering and digital tipping are on its way.

We continually hear from retailers in the US they are ready to embrace mobile payments and are actively looking to invest in the necessary infrastructure over the next few years. Globally, we hear the same in many regions as well. It does appear the market is ready to begin to embark on a paradigm shift to mobile payments.

Mobile payments can take many forms, but as you can see in this forecast from Forrester, proximity based mobile payments are poised for rapid growth over the next few years.

Screen Shot 2014-08-31 at 1.42.36 PM Having recently been at an analyst event with many of the Forrester, IDC, and Gartner analysts, we discussed mobile payments and there was a consensus we are on the cusp of the market developing and developing rapidly.

Ultimately, this shift will likely lead to a revolution in retail. As highlighted by the Starbucks CEO along with the leadership at Target, Wal-Mart, and many other large retailers, the ability to target and promote to a captive shopper, in their stores, in real time, presents opportunities that have never existed before.

The foundation appears to be in the process and the market appears ready. Apple will undoubtedly take a leadership position, and it will be interesting to see how this plays out in competing ecosystems.

My Phablet Skepticism Thesis

I have been publicly doubting the existence of the 5.5 inch iPhone for some time. I promised many on Twitter I would share my overall thesis on the category so here it is.

Starting from the data points, we know several things. In the USA, phablet sales are quite small. Our estimates have the active installed base of all Galaxy Notes in the US at under 10m units. Phablets, or smartphones with screen sizes above 5.3″, have tended to not sell well at any price point in the US market. However, the US market is not the only one that matters.

Phablets are successful in some parts of Europe but much more so in Asia, so we will focus there. You could argue Apple needs to make a 5.5″ phone primarily to serve the Asian market and you may be right. But let’s focus on the data at hand.

Here is a chart Guardian journalist Charles Arthur made of active screen size of Android device according to Google’s data.

As you can see, the vast majority of Android devices in use are not phablets. Now, it is entirely possible Google is not tracking or including China’s AOSP Android ecosystem in this chart. If they did, it could certainly bump the active use of phablets a bit higher but it would not be by much.

Another data point is IDC’s own projection of the phablet market which is, somewhat conveniently for my thesis, hot off the presses. This statement can be found in their latest press release.

The other widely discussed trend has been the shift towards large screen smartphones. IDC expects “phablets” (smartphones with 5.5″—7″ screens) to grow from 14.0% of the market in 2014 to 32.2% of the market in 2018. With the expected entry of Apple into this market segment, and the pent-up demand for a larger screen iPhone, Apple has the ability to drive replacement cycles in mature markets despite the slower growth seen in recent quarters.

IDC is stating 14% of smartphone shipments this year will be phablets, growing to 32% in 2018. In raw numbers, based on consensus of smartphone forecasts, that equates to approximately 165m phablets in 2014 and approximately 576m in 2018. In neither case are those small volumes. However, of the vast majority of phablets being sold in Asia, more than 80% cost less than $350. An interesting question is, where do premium phablets, like the Galaxy Note series, sell in volume in high prices points? The answer is South Korea. Good estimates of the Galaxy Note installed base in total is around 60 million. Nearly half of those can be found in South Korea. ((This estimate comes from network data I have on the region as well as some publicly stated numbers of Notes by Samsung. Notes appear to have the greatest concentration in South Korea. However, since Samsung uses shipment numbers not sell through numbers, it is entirely possible millions of Notes are sitting in a warehouse somewhere collecting dust. Perhaps if this is true it helps my thesis even more.))

What we know today is:

Phablets are not the majority of form factor sales.
The price points they do move at in volume are not price points Apple seemingly would want to play at with an iPhone.
Where phablets do sell at high price points, and where Apple would seemingly play, are in Samsung and LG’s home country of South Korea. A market Apple has very little share in today.

When I share my skepticism, it is due to the nature of what we see regarding phablets today. However, there are always other ways to look at this data.

Firstly, perhaps the large screen phones have not sold well in the US because Apple does not offer one? Possibly yes. However, if I had to place a bet on which of the two larger screen models Apple offered would do better in the US, I would bet the 4.7″ would be the better seller.

The real question to dig into around the necessity of an Apple 5.5″ iPhone is to address a market that may be choosing Android instead of the iPhone specifically due to that sized phone. Apple will address many people’s desire for a larger phone with the 4.7″ and, in many markets, particularly the US market, it will likely bring users back to the iPhone who may have left and bought a Samsung Galaxy S series because it had a larger screen. But ultimately, Apple already dominates the US market and has an extremely loyal customer base. I don’t believe the argument for a 5.5″ has anything to do with the US.

So — back to Asia. The affluent audience who purchases iPhones in that market due so because of the status that accompanies buying an iPhone. It is entirely possible there are more iPhones in active use in Asia than in the US thanks largely to the secondary market. A 4.7″ iPhone alone will be a huge hit in Asia and break sales records at whatever price. So why offer a 5.5″ also? Is there evidence that those in Asia who can afford a $650 iPhone (not the majority) are choosing to buy an Android phablet for $350 just because Apple doesn’t offer one in that screen size? I see no evidence of this and it is the primary source of my skepticism. The decision to release two new flagship models, at the same time, and possibly causing some difficulty deciding between the two by Apple’s core customers, has to be to appeal to new customers who don’t just want a bigger iPhone (the 4.7″ will do this already) but want one specifically at the increased size of 5.5.”

Bottom line, phablets move in volume at lower ASPs than iPhones in Asia. Those who can afford iPhones in Asia will buy whatever Apple makes due to status. I’m not convinced Apple is or would lose customers in Asia if they did not make a phablet. That being said, and looking at the data I have, there are always times to forget data and go with your gut. It will be exciting to see what Apple’s gut has told them to do.

Tablet Report: The Next Frontier of Personal Computing

I’m about to make some updates to a tablet report I publish through my firm Creative Strategies. Usually, this type of report is reserved for our clients only, or to purchase a-la-carte for $499. I decided to give Tech.pinions Insiders a promo code to download and read it for free. The code expires at the end of the month, August 31st, so make sure to download it before then.

We have, of course, been observing some interesting trend shifts in the tablet market. This report still represents the basic foundation of my thinking for how the tablet will evolve, and the future role it will play, particularly in emerging markets as you will see. The updated report, which will we will offer a brief version for free, will highlight some of the usage trend changes we are observing, and include a more clear outlook of the tablet’s future.

To download the report go to: http://creativestrategies.com/downloads/tablets-next-frontier-personal-computing/

Use the code at checkout: TPinsiders08

Below is an overview of topics covered, and screen shots of the entire .PDF.

Topics covered:
– Global Statistics of Internet Penetration
– Infographic “If the World was a Village” – global technology statistics
– From Click to Touch
– The State of the Tablet Market
– Growth in Emerging Markets
– Tablet Usage Trends
– The Touch Generation
– Food for Thought
– Key Takeaways

Dear Smartwatch, thanks for the notification, now what?

Every now and then I try out a variety of smartwatches. The latest I am putting through its paces is one based on Google’s own Android Wear platform. I keep hoping I’ll crack the nut and discover something new that may explain why this particular product might be successful. I’m still skeptical, but perhaps I found some light at the end of the tunnel.

The value proposition of smartwatches, to date, is notifications. What stands out to me, each and every time I use a smartwatch, is that nearly all notifications pushed to my wrist are just duplicates of what is on my smartphone. Nothing different. Same thing, on both devices. A phone call comes in and my pocket and my wrist start making noise. A text message comes in and my phone and my wrist start making noise. An email, a twitter message, a message saying my photos have been backed up to Google cloud, a message from one of the six messaging apps I use regular to talk to people all over the globe, each renders a nice buzz and ring on both my smartphone and my smartwatch.

Where this really is amazing (/sarcasm) is when I’m on my PC, have my phone on my desk and my watch on my wrist. I get chimes, buzzed, and notified in several different ways all at the same time. With regard to the watch, these notifications are utterly useless in most situations. Given I am OCD about Twitter, email, and texts, I thought I would genuinely like getting notified of a text, email, Twitter message, or phone call on my wrist. The problem I’ve found is the notifications I’m interested in always knowing about are only somewhat appealing when I’m not staring at some other digital screen in my life, which also gets these notifications — like my tablet, PC, or smartphone. So when are these situations? When I’m walking through the city from meeting to meeting and my phone is in my pocket. When I am driving. When I am in a lunch meeting with a friend or colleague. Basically, whenever my smartwatch is the only personal screen I have in sight. The problem with this is, in many of those contexts, the notification is nice to know but un-actionable. Thank’s for the notification but now what? This is how I feel more often than not when I get dozens of notifications on my wrist.

So where do we go? Is there a “there there” with smartwatches? Perhaps an experience I had today gives us insight.

I was on my way back from a meeting in Palo Alto to have dinner with some colleagues in Santa Clara. I had two hours to kill before appointments so I went to Starbucks to catch up on email and Twitter. I’m accustomed to looking at my smartwatch with every little buzz, even though I am rarely rewarded for doing so. However, at about 5pm, I got a notification that was rewarding, relevant, and extremely useful. I was deep into email and Twitter and lost track of the time. I got a notification from Google Now, which said leave at 5:11pm to arrive on time. Pictured below.

Thanks to Google Now, my smartphone knew what my next appointment was, where it was, looked up local traffic data, and notified me when I had to leave to be there on time. Given I had lost track of time, that was useful. I’ve noted Google Now is the beginning of an anticipation engine, and for the first time that anticipation engine yielded value which appeared on my wrist.

As I use these devices, what becomes apparent is most notifications pushed to the wrist today are useless. More importantly, they are notification overload. One of my concerns is this causes a “my watch cried wolf” kind of syndrome. When so many notifications come to my wrist, and 90% are not useful, I learn to ignore them and then subsequently miss the few that are actually useful.

All of this to say, and to agree with Tim’s column today, we still have a long way to go for this to be a viable mass market solution. Notifications must get smarter. Google Now telling me when to leave with a notification I don’t see on my PC, and one that can be lost in other notifications on my Android phone, was useful. It was contextual and relevant. These are the kinds of things that make sense. The problem is, I find them few and far between. Maybe Apple cracks the nut, but maybe we just aren’t ready yet. We will know soon enough.

Analyzing the Surface Pro 3

I’ve spent the past week with a Surface Pro 3. I’ve used every previous version of Surface and given what the promise of a 2-in-1 PC was supposed to be, the Surface Pro 3 is the closest yet to fulfilling that promise. I was very harsh on the original Surface and, while my overall thesis (which we will get to) on the 2-in-1 PC form factor has not changed, my stance on the Surface itself has softened. Don’t consider this a review of the Surface Pro 3. There are many good reviews of the Surface Pro 3 and serious buyers should read those as well. I’d like to do a more analytical take on the form factor.

Comparing to a Tablet or a Laptop?

The first point we need to address is which computing form factor, laptop or tablet, must we use to create a comparison for the Surface Pro 3. Which type of buyer is the Surface attempting to appeal to? The potential laptop buyer or the potential tablet buyer? Microsoft’s own marketing gives us a clue. They are clearly targeting a customer looking to buy a laptop in the near future.

On that basis how does it compare to a laptop? Overall, it is a decent notebook. Many features are exceptional, like the extremely high screen resolution of 2160 x 1440. This should literally be the standard resolution on all medium to premium priced Windows PCs. While I appreciated the screen compared to other Windows PCs I tested, I am spoiled by the 15″ Retina MacBook Pro, my primary notebook, with a resolution of 2880 x 1800. As I used the Surface Pro 3, I had to leave my Mac experience behind and just think of the Surface as a competitor to other similarly priced premium Windows PCs. Two of my favorite premium Windows PCs are the Lenovo Carbon X1 and the Dell XPS 13. Despite what many may believe about the Surface Pro 3, I would consider it to be in a class of premium Windows PC products. Given that a traditional clamshell notebook is the Surface’s competition, we have to again evaluate it as a viable notebook competitor.

Overall, I was pleased and impressed with the Surface Pro 3 as a notebook. The size and weight certainly put it into the class of ultra-portables. The Touch Cover keyboard case has been dramatically improved. But there was one area that was a rub for me. What I call “time to on.” Time to on is the time it takes to open my laptop and start working. Every busy person who walks from meeting to meeting knows how valuable it is to sit down, open your notebook, and quickly be ready to start a meeting. Since Microsoft wants to compare the Surface Pro 3 to a MacBook Air, I compared the “time to on” of both machines. For this test, I only looked at the time it took for me to open my notebook and get to a point where my computer was on and usable. For both tests, the MacBook Air and Surface Pro 3 were placed in the exact same position on the desk in front of me. I simply tested how long it took for each machine to be usable from a “sleep state”.

The average “time to on” in five tests with a MacBook Air was 1.63 seconds. That’s the time it took to flip the lid up, wake up, and let me move the mouse and start using the notebook. The average “time to on” of the Surface Pro 3 in five tests was 6.68 seconds. That was the time it took to tilt it up off the desk, set it back down, flip the keyboard down, flip out the kickstand, swipe the log-in screen (no passcode set), and actively be using the mouse and the notebook. Now, a 5.05 second difference may not seem like a lot, but when you compare the difference in “experience” to having a near instant on notebook to a somewhat clunky process to get the Surface up and running, the two seem like worlds apart.

The Surface as a Tablet

I’m not going to spend a ton of time on this part, since consensus seems to be that comparing the Surface to a tablet (iPad) is a losing battle. I actually think Windows 8 is becoming a better large screen tablet platform than Android, but that is because Microsoft is getting some decent larger screen dedicated tablet apps where Android is not. However, very few are buying an Android tablet as a PC replacement, and even fewer are buying Android tablets with screen sizes above 9″. One other positive improvement was Microsoft’s adding of a better portrait mode experience with Windows 8.1. Previously Windows 8, running on tablet form factors, was terrible in portrait mode. Some discount this mode but our observational research shows extremely high amounts of use in portrait mode for many tablet use cases. I’ve argued portrait mode is an important experience with any product attempting to be a tablet. Microsoft finally got portrait mode usable.

Another plus for the Surface was the stylus. Not a feature I see being attractive in pure consumer markets but in vertical enterprise environments like in medical, construction, legal, etc., where notes and pen/paper are still heavily used, I can see the appeal. The stylus was not perfect, but still worked better than any stylus solution I’ve used to date.

The Surface Pro 3 is a bit too large for me in pure slate mode. Most of the time I use my iPad I am laying down in bed, or reclining on the couch or a chair. Most often, I’m also holding the iPad up and not resting it on my body or chest. While the Surface Pro 3 is the thinnest and lightest Surface yet, it still caused discomfort while holding it for long periods of time. In all honesty, the Surface Pro 3 would be an outstanding tablet, if the iPad and iOS tablet ecosystem was not in existence.

Who is the Surface Pro 3 for?

This is the main question. I have no doubt there is a market for the Surface. As I point out, the Surface Pro 3, while competitive, will be bested experientially by the pure notebook clamshell form factor. However, as I pointed out earlier, in the Microsoft ecosystem, given the touch landscape for devices and Windows 8 in general, the Surface Pro 3 is a competitive product with other premium Windows notebooks.

While, I struggle to see the opportunity for the Surface in pure consumer markets, I do feel Microsoft has improved the hardware so that, for key vertical segments, the Surface Pro 3 is a viable solution that will suffice as a laptop but can add perks of tablet mode for those in specific fields where those features are useful.

In this week’s Tech.pinions Podcast we discussed the 2-in-1 PC at length. I still believe the demand or market pull for this product is limited. That being said, there are plenty of things Microsoft, Intel, and partners can do to extend this category. Given the trends in tablets we are seeing, where new quarterly data is showing up signaling usage declining in key areas by tablet users, I fear the tablet was not the potentially disruptive force Microsoft and Intel believed it to be. Which means it is reasonable the entire touch based desktop/notebook/2-1 solutions were built out of a reaction to a concern that didn’t really exist.

Each product has its role, its context, and its value. For some, a pure slate will be a form of entertainment. For some, a laptop/notebook replacement. Still, for others, it is a luxury. And in some enterprise markets it will be a necessity. Intel and Microsoft would love to believe the 2-in-1 form factor is the future of the notebook. This may be the case, and those two companies can certainly force their will on the ecosystem. Intel hopes that this form factor will make up over 70% of the notebook shipments in 2018. But my contention is if that happens, it won’t be because the market demands it.

iPhone and iOS Usage in China

Every few months, I update some unique data I have access to that allows me to monitor the usage of device models actively being used in China. I have this for Android but will focus on iOS for now and do Android later. For the first time, the iPhone 5s is now the most used iPhone in China for apps, the web, etc. This data comes from a proprietary dashboard from Alibaba and their recent acquisition Umeng. It is a combination of network usage data and app usage data.

This is a monumental moment for Apple in the region. As you see when you look at the chart, the iPhone 4 and 4S have been the dominant iPhones in China. The vast majority of these devices came in through the grey market or the secondhand market. A key takeaway is that many of them were not purchased brand new. The iPhone 5s, on the other hand, likely was. The iPhone being available now on most major network providers in China is a help. The 5s running on the China Mobile 4G network, which they are pushing pretty hard, plus the fact the iPhone 5s is the most recent device, is a help. Combined, we can easily conclude the bulk of these iPhone 5s are new and not used. This is significant and it is underscoring the upside for Apple that was not there prior to the moves they have been making to be available in the region.

I remain entirely convinced, from my research and study of the Chinese market. that Apple is in full control of their destiny in the region.

All iOS Devices

If you are wondering why the market share does not add up to 100%, it is because I did not include all the iPad models in the data. Mainly because there is a number of models being tracked and color coding all the data points so they can be specifically recognized is a pain. But I did it anyway since I knew this question would come up. So below is the chart of active use in China by each device.

What Does This eBay Wearable/Smartwatch Data Tell You

I thought I would do something different and show some charts and let our readers help interpret them and share thoughts on what the data reveals. I found data from a service called Terapeak that provides a range of analytics for products on Amazon and eBay. Since Jan wrote a great article today on wearables, I thought it would be interesting to look at this data from eBay listings separated by product and revenue generated from each product from sales on eBay. Below are the charts and a few points on them.

Total Listings on eBay

This chart shows the total listings, over the past year, by a few select wearables and smart watches.

Fitbit has the largest number of listings of any of the devices by volume on eBay. There are a few other data points of interest to note with this chart with regard to new vs used listing for each device.

Pebble = 30% of listings were used
Samsung Gear Fit = 8% of listings were used
Fitbit = 22% of listings were used
Jawbone = 13% of listings were used
Mio Alpha = 16% of listings were used
Basis = 23% of listings were used

Total Money Made by Each Product

This chart shows the total volume in dollars made by each product over the past year.

Google Glass is the most expensive of all the products listed here so it should come as no surprise that it makes a good chunk of money from sales on eBay.

Comparing Categories

Just to add perspective, I’ve included the total sales on eBay of the past year’s iPhones, other mobile phones, and tablets.

Apparently, selling iPhones on eBay is a half a billion dollar per year enterprise.

Given Jan’s article, and what many others on this forum have shared about the challenge facing wearables, what observations stand out to you with these charts?

Deeper Dive on Android vs iOS Web Usage

I gave a brief overview of my thoughts on global web usage in the Tech.pinions Insider weekly newsletter that goes out each weekend. But I wanted to dive into a few more points I think are interesting.

When it comes to the business model of so many companies in the smartphone, tablet, and PC market, usage is an essential metric. For online companies like Google, Facebook, Amazon, app vendors, and more, web usage or the extent to which one gets on and uses the Internet is even more essential. What we are seeing is the early signs of the problems connecting the next billion customers for many companies. For a long time, iOS dominated Android as a whole in terms of web usage. Interestingly, an online metrics service I track points out this specifically in their FAQ on their site.

Android ships in larger quantities, but iOS dominates usage. Point number two is perhaps the most insightful. Not only are iPhones typically supplied with generous data plans but they are purchased by people who can afford to liberally use the web. Someone who can afford a $500 or higher phone in non-subsidesd markets can also afford a premium tier data plan. I’ve started using the term “data budget” to describe this. iPhone users have a higher data budget than the average Android user. Another point is broadband is not equal in many parts of the world. Many emerging markets have spotty and slow broadband. It makes the web challenging at times due to the lack of speed. These are part of the complexities I feel led to Android taking so long to pass iOS in terms of web usage, despite having more than double the usage base for quite a while.

While I recognize the disparity in methodologies of StatCounter and NetMarket Share, I still find them both useful. StatCounter, measures total usage of a user and will count the same user as a page view every time that person views a website they track. That is why StatCounter has Android ahead of iOS in web usage and says it has been for some time.

StatCounter’s data will favor the heavier of web users, thus their data will give us a broader picture of how active on the web each platform may be. But it is also skewed toward the top percentage of users who more liberally use the web. It leads us to the conclusion that the Android data collected by StatCounter is likely heavily influenced by those Android users who are more like iPhone users in terms of disposable income, data budget, quality of connectivity, etc. That point is well understood when we look at the device vendor breakdown of StatCounters data. We see Samsung users have been driving the bulk of Android’s global web browsing in their network of sites. Samsung’s premium and mid-tier devices would have similar users where usage would be impacted.

NetMarketShare presents a different picture and for different reasons. NetMarketShare only counts each user once per day on their network of sites, so we get a bit more holistic view of platform usage which is not skewed by the power users of either platform.

One thing to point out on this chart is it is measuring absolute share. iOS’ line is not going down because iOS is being used less, only because Android is growing as a percentage of overall web traffic on their network.

It was inevitable Android would pass iOS in terms of overall usage. What this brings up though is the striking point that usage is not equal between the two platforms per users. Meaning the average iOS consumer will still use dramatically more Internet services than your average Android user. Given the many points I’ve made before that Google’s Android already has the heaviest web users and the most profitable customers to their ecosystem as they are ever going to get, the longer term trend is problematic to their growth if it remains solely tied to usage of Internet services. The same is true of Facebook. In both cases the next billion will have a lower data budget, less reliable and likely slower connectivity and will have to prioritize that data budget accordingly. In short, this next billion will prioritize survival over entertainment. They will likely use a messaging service like WhatsApp because that is how their commerce or trade gets done. That is a worthwhile spend of data budget. Those needs will trump entertainment for the foreseeable future.

While looking at iOS vs Android web usage is helpful, it is really still only part of the story. I track a range of developer toolsets that show web usage by particular devices as well. Often many of these include app usage as well since most of these analytics services are for app developers. Here are a few select countries of interest because they are big but also because they qualify as those I consider with a stringent data budget.

All this does is emphasize in countries where the iPhone has a presence, even if only small, those users dominate the usage the landscape and often by a healthy margin.

Take Aways

What is becoming increasingly clear to me is at a platform level, the opportunity within iOS and Android for app developers, providers of web services or services in general, are simply different on each platform. You could make the argument the opportunity within iOS is very different than the opportunity within the Android ecosystem. Thus, each ecosystem may have an entirely different set of developers, services providers, and more.

For a more detailed view of this angle, listen to the latest podcast with myself and Andreessen Horowitz partner and analyst Benedict Evans on our latest mobile focused Tech.pinions Podcast.

Mobile Focused Podcast: Less Expensive iPhones, and the Globalization of Tech

I’m happy to announce that I am rolling up my podcast with Andreessen Horowitz partner Benedict Evans into the Tech.pinions podcast as well. We will shoot to release these discussions between us every few weeks, midweek.

Ben Bajarin and Benedict Evans discuss what a low-cost iPhone could mean for Apple and explore the global and regional differences of iOS an Android.

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

Posts Mentioned:

Benedict Evans – Note on Cheap iPhones

Ben Bajarin – The Regionalization of the Smartphone Market

Jan Chipchase – Connectivity is not binary, the network is never neutral

Margins: Apple, Samsung, and Consumer Electronics

Some recent media has come out stating we need to acknowledge Apple knows what it’s doing as a company and with their strategy. I don’t know any analysts worth their reputation, either on the financial or industry side, who ever doubted Apple knew what it was doing. Part of the quibble with Apple from said media is the belief Apple was leaving money on the table by not changing their established and successful business model of focusing on the high end, more profitable segment of the market. Many called for Apple to make a lower cost iPhone in order to capture more “hardware” sales. But what many of us knew is just selling a lower cost phone doesn’t necessarily mean more money. And, in fact, it could have consequences on the higher margin products. Luckily, Benedict Evans shared a post recently that broke down exactly what I and many others have been saying around the implications of a lower cost iPhone.

What Benedict wrote is something he and I have spoken about on past episodes of our podcast. The thesis was always that a lower cost iPhone would certainly help raise sales of iPhones but would not raise revenues. Selling a lower cost and lower margin product means you need to sell substantially more product to equal similar revenues to selling less of a higher margin good. But as Benedict points out, this does not necessarily mean Apple should not release a lower cost phone — only that it would not necessarily be for the hardware revenue but for the potential value to the ecosystem, in terms of revenue capture beyond hardware, like apps, subscription services, etc. Benedict rightly points out Apple has more options than ever and I would add few companies are in full control of their destiny than Apple.

Back to Apple knowing what it’s doing. This relates entirely to a margins discussion. Several days ago Jan Dawson posted on his blog some thoughts on Samsung. I asked Jan to add Apple and Samsung to a particular chart on margins and it is below.

If any chart shows Apple knows exactly what it is doing, it should be the chart above. Apple remains the anomaly of all consumer electronics companies when it comes to operating margins. Apple has not and does not have to chase the lower margin commodity products thanks to their vertically integrated advantage. Granted, no one is arguing Apple chase the uber-low end. That’s unwise for any branded OEM. But rather, there is a healthy and growing middle of the market. What we are discovering in many markets like China and even pockets of India and Brazil, are more mature customers who started off buying lower cost entry level smartphones are moving upstream and being willing to spend more on their next smartphone. I believe this trend will continue as a large percentage of smartphone users move off basic devices and become willing to spend more on devices in mid-range price tiers.

Whatever strategy Apple decides, given their approach, they have a limit on their total potential customer base. We simply have no idea what the size of that number is. Employing this strategy means Apple will need to foster opportunities for their customer base to spend more in their ecosystem thus incrusting their average revenue per customer beyond the hardware. The point remains — Apple is in control of their destiny.

Samsung, on the other hand, is a giant question mark. What does Samsung do? They have built a business that requires scale. Their strategy has been to fast follow companies and products which have scale then leverage their vertical components businesses to sell products to each other as they scale. Each group benefits, revenues rise, and they are able to slightly buck the low margin fate that faces so many companies. Samsung has always been Samsung’s best customer in components. But the main point is their business requires scale. So what does Samsung do to maintain scale? They are losing in premium to Apple, and they are losing in the lower and mid-tiers regional players in the regionalization of the smartphone market.

What is even more interesting about Samsung’s struggles is they are actually price competitive with some products in many of these markets with the same vendors they are losing out to. So the question is why? Why not Samsung in these markets where they are price competitive? I do believe it has something to do with the fact they are a foreign brand in markets increasingly favoring brands from their home country. Therefore, to assume Samsung should just compete on the low end to get scale back does not necessarily solve the problem. Nor does doing so help their margins, or the inter-departmental sales approach their components business sell within the country. Samsung, like Jan’s chart shows, is stuck in the middle. Their margin line is unlikely to go up toward Apple’s and unfortunately if it is to go down toward the others, it’s a huge, company wide issue for a vertical component company who requires scale.

What I keep landing on is increasingly hardware, for all vendors including Apple and Samsung, is going to have to play a role as a mechanism to other revenue. Xiaomi is a great example of this, using hardware as an entry point to increased revenue of proprietary services. Amazon also, to a degree, employs this model. However, it is foolish for many to believe Apple can’t do this and that their future depends only on hardware sales. The challenge for others, like Samsung, will be to differentiate on more than hardware. The role of the OEM is changing, and will continue to change.