The Regionalization of the Smartphone Market

One of the more interesting things I have been observing for a few years is how the smartphone market has increasingly become extremely regionalized. It is fascinating to analyze the dynamics that have allowed the smartphone market to go global but, in doing so, open the door for local brands and local companies to be the prime beneficiaries.

This is somewhat contrary to what happened in past consumer tech segments. Usually markets were mostly made up of global brands and those same global brands dominated many markets even where they were foreign owned. The tide is now shifting with smartphones and increasingly it seems domestic brands are gaining the edge over foreign ones. I’ve been anticipating several domestic brands to pass the regional leader (Samsung) for a few quarters now and in some markets it has happened already.

One of the primary catalysts for this shift is an increase in quality combined with a decrease in cost associated with smartphones. Smartphones annually are getting faster, better, and cheaper. Local brands are able to seize opportunity with this wave. Companies will be challenged to be both global and regional simultaneously. But local vendors only need to focus on their market and adapt to the rapid changes in their local domain. By integrating more tightly with regionally specific services than foreign brands are, as well as doing more to uniquely address the needs of their market, local vendors are positioned well going forward.

Xaomi Owns China, For Now

Xiaomi has been on a tear gaining significant quarterly market share in China. Their own company reports and several analyst firms have confirmed Xiaomi is not only in the top five vendors by volume in Q2 2014 but they have also passed Samsung as the leading smartphone vendor by quarterly volume in China.

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China is still the wild wild west when it comes to the smartphone market. The order can easily change, and change quickly, but one thing I believe will remain is it will be local vendors from China who will own the region.

India is Wide Open

India is about to ramp up in smartphone volume. India will be the second largest smartphone market before too long — 2016 by most estimates. The estimates for smartphone shipments in India in 2013 are about 44m. Estimates for 2014 are about 70m. Not bad annual numbers but considering China shipped 100m smartphones for the first time in Q2 2014, the potential ramp for India is massive and is just getting started. India still ships quite a large number of featurephones. That is why a data point from Counterpoint Research’s latest market monitor stands out. Counterpoint states Micromax, a local Indian branded handset maker, has passed Samsung to be the leading handset vendor in Q2 2014. Note this includes total volume of both featurephones and smartphones. But since India is still a large featurephone market, this data point is significant. As you can see from the chart below, Samsung is still the leader in smartphones in India, but the trends suggest soon Micromax will pass Samsung in smartphones as well.

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It is worth pointing out again that relative volumes are key to remember. Where China has typically averaged in the 85-90m range of quarterly smartphone shipments, India averages 13m approximately per quarter. I make this point to show how large the ramp in India still has to go and how that ramp, and the opportunities enclosed within it, could alter the OEM landscape in India dramatically over the next few years.

Apple Owns the USA

It should come as no surprise Apple is the dominant OEM in the US. But it fits our theme of domestic OEMs ruling their region.

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Here comScore gives us insight into US OEM marketshare. I don’t need to say much on this chart, except that watch how much it will change when the new iPhones come out.

A Big Markets

A potential implication of this is that a vendor strategy could be to control the big markets. It is unclear how Xiaomi can succeed outside of China and if they can ultimately compete with regional brands like Micromax in India. However, Xiaomi could have a healthy and sustainable business just within its home market. The same is true of Micromax. Perhaps the same is true of Apple. But there are local brands in Russia, Philippines, Brazil, and even Africa. Could the smartphone world be made up of many different regional players, each competing uniquely in their region and holding off foreign brands from expanding into their territories? This is something I’m very interested to watch.

PC Computing Market Shares

Lastly, I’d like to take a look at the PC category. This is the one area where Microsoft is dominant. However, there is a clear shift happening in the PC segment many fail to realize. Let’s start with the platform share of traditional PC form factors.

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I estimate the total installed base of the desktop and notebook form factor to be 1.52b devices. While PCs were significantly impacted by the monumentally fast rise of tablet adoption, we are starting to see PC sales return to balance as many enterprises begin refreshing old terminals, point-of-sale terminals, workstations, and laptops. 2014 will certainly be a better year for PCs than the past few years. Yet there are still many questions facing the category.

  1. Windows: Microsoft still has a lot of work ahead for them. Luckily they have a partner in Intel who is equally hungry to right the PC ship. Annual shipments of PCs are in the low 300m range and I don’t expect to see a massive jump any time soon, excluding tablets of course. We are seeing a refresh cycle bump, which I alluded to, but I’m not sure the low 300m range of PC sales is the bottom for traditional form factors like desktops and tablets. After the next few years of refresh are complete it, is likely to be a famine again for PC vendors.This is what Microsoft is hoping to address by evolving Windows to be both a touch based computing system and a mouse and keyboard based computing system. If they are successful in this, their single platform can cover the range of use cases from desk to mobile. This attempt would be deemed a failure in my eyes if we were to just use Windows 8 and the existing 2-in-1 and convertible PCs. However, Microsoft never gets things right the first time so we must wait for Windows 9 or even Windows 10 to see if they have the right recipe to keep Windows dominant in the PC category.
  2. OS X and iOS: While Apple with OS X is around the 4-5m Mac sales per quarter, I remain bullish that Apple has an opportunity to gain share with OS X in the overall PC category. More aggressive price points with products like the MacBook Air could be a catalyst. Should Apple move from Intel for a more mainstream priced notebook, this could also be a catalyst for lower priced Macs. Apple is sticking to their philosophy of the right OS for the right form factor. Counter to Microsoft but the right strategy I believe. Apple may be also looking to blur the lines even more between iOS and OS X. Tim Bajarin writes here about the possibility of an Apple-like 2-in-1 form factor. Looking at what Apple could do to start to move the iPad up into broader computing capabilities is interesting thinking. Should they do this, it would still run iOS in my opinion, since its primary uses would be more mobile, but the addition of an Apple designed keyboard, and perhaps a larger screen, could evolve iOS even further to become more capable as a general purpose personal computer.
  3. Chrome OS: Chromebooks, while a small percentage of the installed base and annual sales comparatively, are devices to keep an eye on. They are continuing to rise in sales in the education channel and are challenging tablets in education. It is the commercial sector where Chromebooks are doing well today, but should they crack the consumer nut we could see these devices rise rapidly as a percentage of quarterly sales and overall installed base.

Now for the twist. The conversation, perhaps debate is more accurate, around tablets and PCs is relevant. Referring to my prior post on tablets, there are tablets that are being used for specific things like games, kids, TVs, etc. I would not consider those tablets more general purpose computing devices. The iPad, a few of Samsung’s tablets, and now even some Windows slate tablets fit this build. However, I believe at least the larger iPad should be counted among PC sales. For the sake of the point, I’ve created a chart looking at PC sales by vendor each quarter and have included Apple. For Apple, I added the sales of Macs and iPads.

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From this chart, you will notice by including the total of Macs and iPads, Apple becomes the leading vendor in PC shipments. Now to fully see this landscape, we would also need to include Samsung’s PC sales plus their tablet sales but I don’t have Samsung PC sales. Vendors who sell Android tablets should also be included but those are very minimal and wouldn’t up their numbers much. But the point with regard to Apple is the role the iPad has actually played for them when it comes to the PC arena. The iPad no doubt either gave many consumers the ability to hold off refreshing their PC, or not refreshing their PC entirely. I view the iPad as a part of Apple’s play for the the PC market. Either way, the tablet, and in this case the iPad, is a product that steals time from the PC. ((Yes the smartphone does as well and ultimately we will have to debate the degree the smartphone steals time from the tablet)) That is why I’ve included their iPad sales in this chart. Apple was once almost entirely irrelevant in computers, and the iPad has helped them in a variety of ways in relation to the PC category.

The line blurring between traditional PC form factors and tablets is the narrative to watch in this market going forward.

Tablet Computing Platform Market Shares

The tablet market share story is quite different. While the market appears to be slowing, it is, in fact, still growing. Our data shows year-on-year increases in user numbers have dropped from around +200% at the start of the decade to less than +15% in 2014. This product may be even more subject to seasonality than many other consumer tech products. Therefore, before anyone starts selling the tablet segment short, we need to wait to see what happens in the holiday season. The tablet story is still one of market shares, but with the usage of these products more like PCs than smartphones, the device represents a distinct opportunity. Here is the breakdown of platform market shares as a percentage of the current active tablet installed base.

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In my tablet model, I estimate the total active installed base of tablets to be 501m devices. As I said, annual shipments of tablets are slowing but still growing – albeit slowly. Thus we must conclude the TAM for tablets is still larger than the current installed base. We just don’t know how much larger. Over the next few years I have a feeling we will get a true sense of the size of the market. That being said, there are still two distinctly different tablet markets we must be aware of as we analyze the category. I will cover that below in the AOSP bullet point.

  1. iOS: Unlike in smartphones, iOS is the dominant platform as a percentage of the installed base. It was common for a while to say there wasn’t a tablet market but only an iPad market. If we just look at Google’s version of Android vs. iOS then this story may still be true. iOS captures 65% of the share of tablets without AOSP. Just like the smartphone platform, the iPad owns the bulk of the most profitable customers in the tablet ecosystem. In the consumer market, tablets remain a luxury rather than a necessity. But we may see if this changes as Apple evolves the form factor, makes it more capable in terms of computing, and the app ecosystem catches on to its full potential. Apple gaining ground in the enterprise could be a likely catalyst for the iPad ecosystem as well.
  2. AOSP: Here AOSP means the same as it did for smartphones. The only difference is AOSP is increasing significantly as a percentage of quarterly shipments. However, these devices are not being used in the same way as iPad and even Samsung tablets. These devices are largely made up of no-name white box vendors and they sell anywhere from $40 and $80. All our research indicates these devices are simply portable video or game players and not much else. There is very little web browsing, commerce, app purchasing, or other functions that would classify it as a healthy ecosystem. Where AOSP tablets start to get interesting may be as service providers like a broadcaster, content provider, or other company who can leverage an existing business model (but not a hardware model), can use the device as a giveaway in order to capture subscription upside. For example, a broadcaster or content network in China can offer the device for $50 but tie it specifically to their content portal or services for a monthly fee. AOSP will continue to open doors for unimagined and creative business models around the tablet form factor.
  3. Google Android: Oddly enough, Google’s version of Android for tablets is the odd man out in my opinion. Given what we know about the tablet market, Google’s Android tablet solution remains unfocused. Their priority is smartphones and there is nothing wrong with that. However, Google risks missing out on a significant opportunity if they are not willing to take leadership in advancing the tablet platform. Nearly all sales of Google’s Android tablet solution have come from Samsung and many of those due to promotional giveaways and extremely aggressive pricing in emerging markets.One interesting trend, however, has been the rise of carrier branded tablets like the Verizon Elipsis. This tablet is now offered for free with a two year contract from Verizon and has captured a 0.4% share after slightly more than 8 months on the market. Tablet solutions like this are ones to watch as it is possible this is the angle which challenges the iPad.
  4. Windows: Windows is in this category thanks to the 2-1 form factor pushed by Intel and Microsoft with the Surface. To be included as a Windows tablet in ours and other analyst firm’s data the device must have a detachable screen. To date sales of these devices have been very low — making up far less than 1m shipped per quarter. While Surface 3 is a positive step forward, and the best of all 2-1’s in my opinion, I still have my doubts this form factor is the future of the PC or, more importantly, that it will ever ship more than 20% of the annual PC volume and perhaps even less as a total of the tablet market.

The story on tablets is still being written. Questions such as, “Is it a one per person device or a one or two per household (like the PC)?” still remain to be seen. Ultimately, there are many specific use cases for tablets in which they add value. We will still see experimentation along with further segmentation in the segment.

Next article, PC computing market shares.

Smartphone Computing Platform Market Shares

Unlike the PC computing era where the industry was made up of “market share” of only one company, the “Post PC Era” is poised to be made up of market shares. That means many platforms competing in different segments, each with a share of each market. As we dive into several of the charts I’ve created, this point will stand out. It will also highlight this isn’t simply a case of iOS vs Android vs Microsoft in every segment. More to the point, it is wrong to look at the industry as purely a platform battle. The right big picture view to have of the industry is to think about what each platform means to each segment and, more importantly, what opportunities exist within each platform independently. I will cover the platform market shares in a three part series. I’ll start with smartphones, then tablets, then PCs.

Smartphones

Yes, Android ships the majority of smartphones each quarter. But what most analysts estimates don’t do is break out the sales between AOSP (Android Open Source Project) and Google’s version of Android. We essentially have three viable mobile platforms. We have iOS, we have Google’s version of Android tied to Google services and Google’s app store, and we have the AOSP version which is what is on over 95% of smartphones sold in China. The best way to understand AOSP is as China’s proprietary smartphone platform. With that context, let’s look at the percentage each platform has of smartphones in active use.

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In my smartphone model, I estimate the total active smartphone installed base to be 2.04 billion devices. As you can see from the chart, the smartphone market is not so black and white as to be just iOS vs. Android. What is absolutely essential in this model is to understand what the customer makeup is within each market share.

  1. iOS: We know iOS owns the majority of the most profitable customers. And while iOS currently has 17% of the smartphone installed base, it is likely Apple could raise that to 20% within in the next 12 months. iOS customers are higher value customers and therefore Apple’s share of the market presents certain opportunities. Things like subscription services, hardware add-ons, a-la-carte media purchasing, e-commerce, and more are viable opportunities for iPhone customers.
  2. AOSP: AOSP is not a forked version of Android (like Kindle Fire OS), it is simply a stock version of Android installed without Google’s core services like search, maps, app store, etc. China has all their own local services and they use vanilla AOSP and vendors pre-load local services and app stores on their devices for that region. AOSP must be understood within the China context. Companies like Xiaomi have uniquely benefited from using AOSP to their advantage in China. Other hardware opportunities may emerge as the door is wide open in China for many companies to leverage AOSP and use inexpensive hardware as a giveaway in order to capture monthly revenue from a service or subscription. It remains unclear how much of an opportunity there is for AOSP Android outside of China. If there is not, this piece of the pie will shrink over time.
  3. Google’s Android: Google’s version of Android will remain the dominant market share, especially as big regions like India, Brazil, and South East Asia start to ramp. Yet, Google is still faced with a problem. As Android begins to saturate in markets where hardware is very low cost, the overall value of an Android customer on average will decline. Google’s advertising business model works well now but how much will advertisers be willing to spend on customers who do not have much monthly disposable income? Android will have the largest market share but it will also consist of a large variety of consumers at different economic stages. Ultimately, I believe this will be a challenge for the platform and the ecosystem.
  4. Windows Phone: This is still a minority platform. Its fate seems yet to be sealed. Microsoft has been slow to gain partners other than Nokia and even those who have embraced Windows Phone in markets like India or SE Asia have experienced very slow sales. It is yet to be seen whether Microsoft can advance the platform by chasing the low end of the smartphone market. Given the extremely low installed base of Windows Phone, and the slow sales, it remains hard to be optimistic on the platform.

Apple has a monopoly on iOS. Market share is up for grabs should they be creative with pricing and services offered. Android OEMs will battle it out quarter after quarter and we will see if loyalty to a brand can be established in Android the way it is with iOS. What is clear is different strategies and opportunities are emerging in different regions. What is working in the US is not working in China but rather something different entirely is a success in China. The same is true of India, and early evidence suggest regionally focused strategies are going to also work in Brazil and Indonesia.

It is fascinating to watch a market in real time where there is so much at stake, yet so little is actually settled.

Next article on Tablet computing platform market shares.

Raising Digital Natives

Every generation faces new challenges raising their children as society and culture changes — from the time they are kids to the time they are parents. Looking back, it seems as the past century saw more generational changes than the many centuries prior. Technology, and the increased pace of innovation, played a central role in bringing about those sweeping changes to culture and society. What makes this challenging is often the challenges facing each generation in the past century were often brand new — prior advice and experience wasn’t always helpful. As a parent of two girls 11 and 9, I often find myself dealing with challenges, nearly all related to technology, that raise more questions than they do answers.

We are raising a generation that will not know a world without instant communication of not just voice, but text and multimedia. We are quickly moving to a world where “instant” is not just normal but expected. Instant news, instant media, instant communication. How will this instant access to information, media, content and more, shape their outlook on life? Perhaps more importantly, how will growing up in such a connected world shape their expectations? We do not yet know.

Talking with friends at a similar stage in life, it seems we all wrestle with the same questions but have yet to land on a consensus of philosophy. Answers differ to questions like, “When should my kids get a cell phone? When should they get a Facebook page, Twitter account, or Snapchat account?” Inevitably, some new thing is around the corner that will have to be evaluated as to what age kids should be before using it. How do we monitor what they use and who they talk to? Should we? These and more are central questions for raising digital natives.

When and When Not

One of the hardest questions we parents of digital natives have to deal with is how much access to digital technology should we give to our kids at various ages? There is clearly sound philosophies around making sure parents don’t over expose their infants, toddlers, and similar age groups to overstimulating media. But it gets tougher as they enter the pre-teen and teen years. We are faced with this every time we go on vacation. Nothing frustrates me more then when we are at a beach, or in the woods camping, and our kids are sitting inside, or outside, on their iPads or smartphones.

Without question there is a time for tech and time not to tech. The wisdom is in discerning the right and wrong time. The problem for many, including myself, is that we are just as bad as our children are. I am as guilty as they when it comes to over-using technology when on vacation. I simply can’t expect my kids to learn when to tech and when not to tech if I am not setting the right example.

It seems a common understanding that many parents use technology to “pacify” their kids in certain situations. Like car rides, or simply when parents need some peace and quiet. But the reality is as often as we use technology to pacify our kids, we also use it to pacify ourselves. At the same beaches, forests, and more, where I find myself using technology when I don’t want my kids to, I am often not alone when I look around. Knowing when to tech and when not to tech is hard.

Everyone will develop their own philosophy for raising digital natives. Each generation will face new challenges, and need to learn and evolve best practices. But I’ve landed on what is most needed in my particular circumstance is discipline. I must exercise this, model it, and teach it to my kids.

Unconnected

A business mentor of mine, once explained to me the value of being unconnected. The way he phrased it was, “Humans living in the digital age need to unplug to recharge.” It seems counterintuitive, especially since we subconsciously use technology to pacify ourselves, but it is absolutely true. One thing my family and I have been experimenting with is a “Digital Sabbath”. I have several friends who are Orthodox or practicing Jews and I have always appreciated their discipline of a true sabbath from sundown on Friday to sundown on Saturday. I hear countless stories from them of how healthy a practice this is and in particular when it comes to technology. As a result, my family and I have been trying this during the same time frame to prevent having a smartphone, computer, iPad, or other form of technology distract us from each other rather than bringing us closer together. It is wonderful and if you have never tried something like it I suggest you do. Many believe if they were to completely shut off all their technology, not check email, respond to text messages or calls, the world will end. I’m happy to report it will not.

Given that my parents, along with parents my age who are raising digital natives, have little to no experience wrestling with these questions, they are ones I’m certain are still evolving. The pace of innovation has made parenting digital natives challenging. But ultimately this innovation is a good thing. Technology exists to benefit its owner. The key is learning the discipline to own technology but not to let it own us.

The Tech.pinions Podcast: Earnings Season for Apple, Facebook, and Amazon

This week Jan Dawson and Ben Bajarin discuss key observations and takeaways from the earnings results from Apple, Facebook, and Amazon.

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

Show Notes:

Jan Dawson
Thoughts on Amazon’s Earnings – link
Thoughts on Facebook’s Earnings – link
Thought’s on Apple’s Earnings – link

Ben Bajarin
The Great Tablet Segmentation – link

Apple Earnings: iPad Struggles and iTunes Revenue Importance

There were several interesting narratives out of Apple’s earnings report yesterday. The most glaring, and most confusing to many, was the struggles of the iPad. I’ll return to that in a moment. The Mac surprised many, but should not have surprised our readers. I wrote this in December of last year, and I explained the PCs upside in 2014. The PC will remain steady but we are still nowhere near the eventual bottom of annual cycles. We are seeing a refresh, mostly by corporations and education, and Apple, like many vendors, is positioned to capitalize on the upside. In an upcoming Insider post, I’ll layout why I think the Mac is actually a strong growth story for Apple.

But the iPad remains an important narrative. The tablet market is functioning exactly like the typical PC market. Therefore, our deep knowledge of PC cycles helps us understand the tablet market. There is one difference though and it is a significant one which has led to many to misunderstand the tablet market.

The tablet is still the fastest adopted technology in our industry history. Take a look at my install base estimates broken down by device.

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Despite what you conclude about tablets, for a category which began in 2010, garnering 22% of the estimated current installed base is impressive. What gets lost is the speed in which this category grew.

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It could be argued the iPad hit the perfect storm of lagging PC cycles, the mainstream’s desire for simplified computing paradigms vs complicated ones (the PC), and the Windows 8 debacle, all of which accelerated the adoption of the category. This burst led many to conclude the size of the tablet market was much larger than it actually is — potentially billions in annual unit shipments. Our forecasts were never that aggressive. While we believe the tablet market will remain a healthy segment, it will also be segmented. Segmentation will be what influences the total size of the tablet market.

With regard to iPad sales slowing, several things need to be mentioned. The first is the iPad had been experiencing solid growth in education and, to a degree, still is. However, new competition in the Chromebook has arisen for Apple in the education market. Every Chromebook manufacturer we speak with highlights to us they can not make enough to meet demand. Google announced they had sold one million Chromebooks to education in the second quarter, and the Chromebook segment is on pace to sell more than 5m units in 2014. While the iPad does more than double that number per quarter, the rising challenge of the Chromebook could be a factor in Apple’s education sector for iPads.

The enterprise is the other significant opportunity for iPad growth. I’ve spoken with a number of job market analysts and have heard numbers in the 300m-500m range for workers who don’t use a PC in their day job today but could benefit from a tablet computer. Things like construction, health, oil/gas/electic, factory workers, etc. Apple’s deal with IBM could help this, if for no other reason than it makes Apple in the enterprise more credible. Being viewed as credible to IT departments means they have more confidence to fully commit to iOS. This lack of credibility regarding Apple in the enterprise has been one of the things we hear from IT on why they hesitate to commit fully to iOS in their enterprise.

Lastly, replacement cycles are central to understand the tablet market. Fellow analyst colleague and Tech.pinions columnist Jan Dawson created a tremendous chart which we must dig into.

Jan has created a chart very similar in philosophy to ones used by all the PC vendors. It estimates the age of devices as a part of the active installed base. When I wrote earlier in the year about why I felt the PC would have a good 2014, it was based on a similar philosophy of estimates that there were around 300m PCs in active use five years or older. Knowing the replacement cycle for PCs to be in the 5-6 yr range, it was easy to conclude a large number would be upgraded soon. Using that same philosophy Jan has created this chart.

iPad-base-and-sold-by-age

What we don’t know is the refresh cycles of tablets and, specifically, the iPad. Apple is somewhat cursed by the fact their products last so long without breaking. Consumers, on the other hand, are blessed by that reality. But if we simply look at the number of iPad’s still in use that are in the three yearr old range we can estimate the number to be around 50m units that should be eligible for upgrade in the near future.

Another key point to iPads we realized is the device is often handed down as new ones are purchased. Again, the value of the long life of the product allows this to happen. The impact of this will add to the overall installed base, but also could lead to a larger and difficult to predict refresh cycle at some point in time.

Adding new customers is the key metric to watch in this analysis. Apple reports frequently that 50% of iPad’s quarterly sales are to people who are first time iPad owners. Maintaining that statistic in our model is key as we track the installed base, growth cycle, and attempt to understand refresh patterns.

All of this brings us back to an important point about Apple’s business model. As I pointed out in my article on why Apple is immune to disruption, I specifically mention Apple has not and does not need to change their business model. What they do have to do, however, is capture more value per user. This is why watching iTunes services and revenue grow is a key statistic in the overall Apple narrative.

The Great Tablet Segmentation

The tablet category is getting quite a bit of press lately. Apple’s iPad is a solid barometer for the category. With Apple’s latest few quarterly results showing the slowing of the growth of the tablet sector, many are left scratching their heads as to what is happening with this product category. There is still a tremendous amount of growth potential for the tablet. The problem is, Apple is the only one driving the class in a meaningful way. Which isn’t all that surprising given Apple makes nearly 80% of the profits in the segment. With such little revenue to fight for, more OEMs have focused on the smartphone segment not the tablet segment.

But I believe we are on the cusp of something new in the tablet sector that will hopefully drive growth back to it. I believe we are about to see the great tablet segmentation. This is a chart I’ve been using in our industry trend presentation over the last year outlining some of the first segments we saw.

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Inevitably, when markets mature, they segment. Consumers must be self aware of their needs, wants, and desires, in order for me to consider a market mature. They must know what they want and why they want it. Tablets, being so new, are just now reaching maturity. Most developed market consumers have had a chance to at least use an iPad or other tablet and what the product means to consumers, families, corporations, etc., is currently being defined. As consumers become more self aware, segmentation opportunities will begin to exist in the tablet market. Nabi, a company focused on making tablets for kids of different ages, sold nearly 2m units in the US in the holiday quarter of 2013 according to our estimates. Not bad for a specialized product. But perhaps the most interesting example of this segmentation opportunity is what NVIDIA is doing with their newly announced SHIELD tablet.

What makes the SHIELD tablet interesting is the way it was purpose built for gamers. Everything from the graphics engine, connection to Steam PC game portal, integration with Twitch, access to NVIDIA Grid technology, a custom controller, and access to multiplayer game engines, sets it apart from any other tablet in the eyes of any serious PC or console gamer. NVIDIA is hoping to appeal specifically to the gamer niche, which is not necessarily high volume but is extremely lucrative. The NVIDIA SHIELD tablet is an excellent example of a segmentation opportunity in the tablet form factor. This product also leverages NVIDIA’s strengths and highlights another trend of companies getting into the hardware businesses they weren’t in before because it is a natural extension of their existing products and business model.

The iPad, as of now, owns the crown of “general purpose tablet”. It can cover the most ground for most consumers’ use cases.
At this point, we must conclude that segmentation opportunities like the nabi kids tablet, or the NVIDIA SHIELD tablet, present the more lucrative opportunities for vendors since competing with Apple in the general purpose form factor appears to be a waste of time.

While the nabi and SHIELD tablets present some of the more interesting segmentation examples to date, I still expect more experimentation by vendors to attempt to discover what other segmentation opportunities may exist. All of this is a key part of the tablet market maturing.

The Myth of BYOD

I’ve caught wind of an interesting trend, or perhaps I should say a counter trend. Recently, I have had a number of discussions with many Fortune 500 CIOs and CTOs about the topic of BYOD. What came out of these conversations was very intriguing. Nearly all of them who have deployed some type of BYOD initiative remarked it hadn’t taken off as well as they thought. Meaning it was still a small overall percentage of their hardware deployments, particularly PCs. They stated for many of their mobile workers, they were still perfectly happy having their IT department equip them with their work PC.

What this is not suggesting is that BYOD is irrelevant. It is still and will be an important program. But as we chatted about these observations, some of the insight as to why BYOD PC programs were slow to take off became clear. It appears as though employees are getting savvy to the work tech vs. home tech ecosystem. The multi-device era has matured the market in a way where more and more employees are happy with a work PC given to them and fully managed by their IT department, and keeping that device separate from their home technology ecosystem. Part of this I feel has to do with security. Having a work PC is already hassle enough when you have an overly aggressive IT department. What I believe many employees are realizing is there is a security risk to both parties. Using the same work PC for work tasks and personal tasks, and the hassle involved with keeping both separate and managed on the same device securely may be turning out to be more struggle than it is worth. It seems as though more and more employees are happy to simply let their IT departments provide them with hardware and manage it as they see fit and use their own hardware at home for personal life. It is still too early to make too many conclusions regarding the BYOD programs to date, but the early insight being gained from these programs is very interesting.

While this initial insight is related to enterprise PC deployments, where BYOD is critical is with mobile. It is my belief, and has been for some time, that employees will be more particular when it comes to their mobile device than their work PC. Employees are bringing whatever smartphones they choose to work and IT is ready to support it. PCs may stay largely provided by IT but smartphones will not. BYOD appears to be more of a myth, for now, with PCs but more employees will bring their own smartphones and want to have access to corporate network apps, email, and other needed functions for their job. This is an area that makes the Apple/IBM partnership interesting.

Apple and IBM are emphasizing mobile first. When it comes to a soup to nuts hardware, software, and services targeting the enterprise, Microsoft and their ecosystem has a compelling story. Now with Apple’s hardware, IBM can layer their software and services on top and offer their own competitive full solution. The difference is Microsoft is still PC first in their philosophy. From our research and discussions with many IT groups, it is becoming clear there is a difference in philosophies in how mobile devices and PCs are managed and deployed.

Understanding the role of hardware in the enterprise is essential. The initial premise of BYOD does not seem to be playing out the way many thought, especially with regards to PCs. The multi-device era has complicated the landscape but also given us much deeper insight into the best way people use computing hardware as a part of their work and personal life.

The Tech.pinions Podcast: Our Takes on this Week’s Tech News

This week Ben Bajarin, Jan Dawson, and John Kirk discuss the IBM+Apple partnerships, Microsoft’s predicament, Google’s earnings, and Samsung’s challenges.

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

Show Notes:

Jan Dawson
Thought’s on Google’s Earnings–link
Apple, IBM, and the Pareto Principle–link

Why Apple is Immune to Disruption

It remains my conviction Apple must be analyzed in isolation to their perceived competition. Many smart people fall into the trap of believing the rules of the game apply to Apple in the same way they apply to its competitors who make products in the same categories. I don’t believe this is true. Which leads me to believe Apple is immune to disruption.

One of the core results of a successful disruption is a business model change must occur. Since Apple’s existence, it has yet to be forced to change its business model. A key observation must be made that, other than the MP3 player market, Apple has never truly been the market leader. Apple has chosen to go after premium customers in every category they compete in and have not strayed, nor been forced to stray, from this strategy. Apple’s mission stems from the objective to create the best products on the market, whatever that product or segment may be, target the most profitable customers, then repeat the process by creating new categories of products, or reinventing existing ones. This is possible because Apple has strategically decided that, in order to make the best products, they must control the cornerstones of the product experience. These include the hardware and specific components within the hardware like the SoC, the software with iOS and OS X, retail to ensure the best product experience, and an evolving set of services to tie the whole ecosystem together. What all of this leads to is a highly differentiated experience that dramatically stands out from the competition.

Disruption theory is based on the assumption that this integrated model is the most successful in the early stages of a technology. It admits that owning all the pieces of the experience are necessary to make the experience more uniform and thus more easily adopted. It goes on to assume those more modular solutions will eventually be on par with, or close enough to, the experience but will beat the integrated player on price. What gets left out of this equation is the differentiation still available with the integrated player. Where I believe this matters is in pure consumer markets.

Consumers behave differently when it comes to purchasing products. They are more nuanced, often less logical and pragmatic especially when it comes to purchases that are extremely personal or emotional. Because of this, a premium market will always exist in every category of product in pure consumer markets. Cars, fashion, food, tech, etc. I’d argue no competitor for premium customers in any of these categories is subject to disruption. Disruption theory does not take into account the premium buyers values when choosing products. The theory assumes many things, but one is a predictable and somewhat pragmatic buying mindset. More specifically that all buyers will be using the framework of price and performance.

But consumers are subtle and they often buy products for more than just price. The reason markets such as automotive and consumer packaged goods can support dozens of options is for this exact reason. There will always be a segment of the market that will favor the types of premium experiences throughout the ecosystem Apple offers. The real question is how large?

Unquestionably, the higher the price of the product the smaller the total addressable market. More importantly, the higher the price, the less often the product will be replaced or refreshed. PCs are held on to for an average of three years. TVs an average of six years and cars an average of nine years. Technology products priced between $50 and $199 have a higher chance of of quicker refresh rates. This is what makes the iPhone so central to Apple. No product exists today has both the total addressable market, and in some markets, heavy subsides allowing expensive hardware to be sold for much lower prices. It is also a reason I feel it is inevitable Apple offer a mid-range priced phone eventually.

But what being the subject of disruption implies is the incumbent must adjust their business model. This, I maintain, is what Apple is immune to. On the sole basis that, in pure consumer markets for technology, there will always be a large customer base willing to pay more for a premium experience. Thus Apple does not need to alter their business model to compete on the low end of the price spectrum.

What will have to happen is Apple will have to address growth by driving more value and capturing more revenue per unique individual or group. The other way to address growth will be to continue to invest and develop parallel and complementary product categories while maintaining the same strategy to own the high end — thus owning the most profitable customers.

Focusing on owning the most profitable customers is a core tenant of Apple’s strategy. It is one their vertical integration is uniquely designed to accomplish. Their focus on building the best products and experiences is also in line with this strategy. It is a sustainable strategy. One immune to disruption. Lastly, and perhaps more interestingly, owning the most profitable customers is extremely difficult. Apple’s culture, philosophy, mission, and vertical integration puts them in a unique position to own the most profitable customers. In a later Insider Analysis, I will tackle this subject as well.

The Naked Wrist

As you wander about your world, casually observe what people wear on their wrists. You will notice the most common wrist worn device is a wristwatch. But you will also notice most people have nothing on their wrist. If you are super observant, you may notice fewer people under 40 wear watches than those over 40. Fewer under 30 than those under 40. And much fewer under 20 than those under 30. All of this is to say the majority of people have a naked wrist. This is the fundamental challenge any wearable must first overcome. The masses must feel it valuable enough to put something on their body where they have specifically chosen to not place something before.

Is there a job to be done?

Each product must exist for a reason. It must solve a pain point. If the purpose of a business is to find a customer, the purpose of a product is to find an owner. What is the job to be done that only a wrist worn object is uniquely designed to do? That is the question.

Whenever I share my skepticism with this category, and use the “job to be done” philosophy, a common response is “Well, no one really saw the iPhone coming.” It’s as if Apple’s ability to re-invent the mobile device is the benchmark to validate the opportunity for wearables and smartwatches. This is, in fact, a tired response. Many did see the iPhone coming. I would argue anyone who used a Palm Pilot, Treo, Windows Phone, or Blackberry would have known the value of such a product and recognized its potential. Apple came in with a better recipe and, more importantly, one that included value propositions that went beyond the business/professional audience. Since the original Palm Pilot, the job to be done was clear. There is not a single wearable or smartwatch on the market that has clearly highlighted the job to be done beyond a few verticals.

This is not to say someone will not figure out the right recipe that can take these devices beyond niche verticals. But even then, it is up against an adoption cycle issue. Prior to the smartphone going mainstream, many in developed markets owned a basic communications device like a cell phone. The initial barrier to adoption had already been broken by cell phones for smartphones. Wearbles and smartwatches are starting from scratch for the majority of consumers. If we were to use this analogy, wearables are in the cell phone adoption phase, not the smartphone adoption phase. Should the right recipe for wearables and/or smartwatches emerge that can drive mass market adoption, I would expect it to happen faster given it will be closely tied to the smartphone. But the point remains, most people have naked wrists.

While I have no doubt this market will be filled with companies attacking it from many areas, finding the killer app will remain central. I believe digital identity will play a role and, perhaps over time, so will the unbundling of technologies in our smartphones and decentralizing that experience to other devices. The point I want to drive home is timing. The naked wrist is the single observation we need to keep in mind when we think of adoption cycles. While it may likely be a complementary device to the already widely adopted smartphone, the value proposition of any wearable must be enough for the mass market to add a piece of electronics to a part of their body where there is none now.

The other key to addressing the naked wrist is breadth and depth. This is not a one size fits all market. What young people want will be different than what older people want. What women want will be different than what men want. What people in Europe want will be different than Asia and so on and so forth. For any vendor to compete in this market they must have a deep product portfolio that will deliver the same value proposition but come in many styles. This is the one thing I feel will pose the largest challenge for the category to go mainstream, and particularly for any one company to address the mainstream consumer market.

The Awkward Years of Tech

Before we reach maturity, we go through what many refer to as “the awkward years”. It’s a rite of passage as we change from adolescence to adulthood. For most people, the best way to describe those years are with a single adjective–weird. Last month, I gave a presentation at a summit I helped put on where I explained how Moore’s law is going to enable capabilities with computers unfathomable today. Devices like smartphones have a billion transistors today on a piece of silicon just a bit larger than a postage stamp. At some point in the next 10 years we will be able to fit a billion transistors on a piece of silicon smaller than the end of a pencil eraser. Super computers not just in our pocket but on our wrists/bodies/fabrics, appliances, cars, and a host of other devices will change our world dramatically. While this future may come fast, we are right now in the middle of a transition. I call this transition the technology industry’s awkward years.

Analog to Digital

The industry’s awkward years have come about as technology has enabled the shift from analog to digital. Things that were once analog our now being infused with technology in the digital age. Door locks, beds, tennis rackets, basketballs, light bulbs, pet feeders, coffee pots, and more, are all becoming connected to each other and to the internet. Yet as you look at many of the first few implementations of newly connected devices, it becomes clear they are mere glimpses of what they will be in the future. The design is clunky, the UI is clunky, and, more often than not, many feel like gimmicks and have yet to prove their true value. It all just seems awkward, not fully sorted out, but we know there is something there.

With this shift will come entirely new opportunities and experiences. It reminds me of an observation I highlighted in one of our presentations on the early days of digital cameras. Prior to digital cameras, to experience a photograph we had to take the picture, have it developed, and then take action with a physical photo. The photo existed only in physical form which limited how it could be enjoyed and shared. Once photos went digital, experiencing a photo changed dramatically. Not only was it much easier to create but it was also much easier to share. As Benedict Evans shares in this post, in 1999, consumers took 80bn photos in a single year. In 2014 over 1.5b new photos are shared on Facebook, WhatsApp, and SnapChat every single day. Benedict goes on to highlight this key data point:

Total sharing across all social networks, if we include Wechat and other platforms, is certain to be over 1 trillion this year – around 1.5 per smartphone per day. How many are taken in total? Several times that, certainly, but there’s no real way to know – it could be 1tr, or 5tr, or 10tr.

What was once analog and could only be consumed via a single physical object by one or a small group of people is now pervasive in ways we could have never dreamed 15 years ago.

As many of our analog products and experiences of today go digital it is going to be awkward, but we will grow out of it.

Peak Samsung

Samsung’s Q2 earnings and smartphone shipment volume miss should come as no surprise to our readers. I highlighted the fundamentals of what I saw happening to Samsung in this insider article from last September. Samsung has made very little progress competing with Apple in the high end premium segment of the smartphone market and they are being attacked at the low-mid range by a variety of new entrants. Samsung rightly points out in their earnings release that one of the many culprits to their poor earnings and device shipments is increased competition. That is highlighted by this chart:

Smartphone sales by vendor

Yet the best visualization of what is happening to Samsung is in this chart:

Screen Shot 2014-07-08 at 7.50.15 AM

As you can see, Q2 2014 marks the first quarter since their global rise in smartphones that their line is trending downwards rather than up. This chart highlights Samsung has reached its peak. Samsung is trying to play this off as a short term issue and one they see being resolved with 4G. There is some merit to their logic, however, if they see any rebound it will be short lived.

It is important to note that outside of China, by my estimates, Samsung has around 60% share. Including China, Samsung has 36% share and an approximate installed base of a little over 500m smartphones in active use, again my estimates. I have mentioned this before but there is little to no brand loyalty in the Android ecosystem. Samsung has attempted to make its brand aspirational across the board and as chart number two shows, they succeeded at this for a short period. Keeping this momentum is the uphill battle they are up against.

4G is one area where they can see some rebounding in device sales. LTE is being adopted more rapidly than many initially anticipated. Samsung does have a short term lead in affordable LTE devices in their portfolio. However, that lead will diminish quickly since the markets where LTE is being adopted the fastest, Western Europe, US, and China, are all areas Samsung faces the most competition in all segments.

Differentiating outside of cost will be the battle hardware companies in the Android ecosystem face over the next few years. As I have pointed out many times before, there is little to no loyalty to hardware OEMs in the Android ecosystem. However, with the types of customers who will make up the next billion new smartphone users, I believe even loyalty to Google and their services will be challenged.

All of this brings up an interesting question. What is the “product” in the Android ecosystem? Specifically where are the revenue generating opportunities? As the answer inevitably becomes “not hardware”, the product offered must evolve. This is where the basis of competition will shift in the Android ecosystem. This shift will disrupt incumbents and open the doors to new entrants.

Three Years of Tech.pinions

Since today is an off day, at least for most Americans, I thought I would write something reflecting on what I have learned since starting Tech.pinions just over three years ago. On June 2nd, 2011 I published this post on Apple and their competitive advantage and Tech.pinions was born.

Some Background

My idea for the site came from a previous years work I did with a company called R3 media which owns Slashgear.com and Androidcommunity.com. I met their team a couple of years prior at CES and they asked if I was interested in writing a column for them on the tech landscape. I jumped at the chance because, up to that point, I had no real public outlet for my thoughts. As many of you know, the role of an industry analyst is to provide content by way of analysis, reports, and more to executives internally at major corporations. Rarely have industry analysts contributed to the public forum. My father, throughout most of his career going back to the early 80’s, has been one of the few to have regular public contributions to flagship technology outlets. Personally, I had wanted to write more in a public forum but needed an outlet. Slashgear provided that opportunity.

During the course of my writing for Slashgear, the team asked if I would be interested in getting more involved and helping them grow the company, both in readership and in revenue. I thought it would make for a nice new challenge since I had never spent much time analyzing the business of blogging/publishing. I agreed and spent many months focusing on growth tactics, mainly around advertising. During this time, I also did a full competitive analysis of all the leading tech blogs. It was from this work the idea for Tech.pinions emerged.

As many readers of popular blogs will recognize, there is not a great deal of original long form content. Most tech news consist mostly of the “reporting” of the news, which is a good thing. But not much of what exists at those sites is original long form posts by way of op-ed (opinion editorial). Interestingly, many other publishing industries have such a thing. Politics, sports fashion, and many other mainstream publications are built more on original content than just reporting news. My conviction was a technology focused site committed only to original editorial on the technology industry needed to exist. So I started it.

Our goal was never to compete on the news cycle but rather compete on the perspective or insight on the news. You can read the news anywhere but Tech.pinions exists for readers to come and get deeper perspective and insight on that news from industry insiders. All the while maintaining a high quality bar for our content. Ultimately, my goal was and is, the content found at Tech.pinions is useful at spurring thought, bringing up important and relevant issues and hopefully helping shape and form the industry going forward.

The Business

The only reason this site is possible is because the majority of our writers have day jobs and making money from the site is not necessary. The economics of our mission remains a challenge. After managing the advertising side of R3 Media, I made the decision advertising like that would never be our focus. To make money that way, you have to play a very different game and it wasn’t one I was willing to play. I, as a reader, hated blogs cluttered with a dozen useless “belly fat” ads getting in the way of my experience. This is why, from an advertising standpoint, we prefer the sponsorship model.

In writing for an executive audience, my focus has always been to add value to the reader. This is also my goal with Tech.pinions which is why we are more interested in pursuing things of value to the reader. Hence Tech.pinions Insiders was born. By following a membership/subscriber based model we can focus on the reader as our primary customer. Plus, where else can you get industry analysis from some of the most sought after industry analysts for $5 a month? (Although, I’m told by members I need to raise the price but I am still hesitant)

Perhaps one of the most interesting things to me that has come out of this site is the conversation that happens on each column by some of the smartest commenters around. I continually get feedback from industry executives that read our site on how impressed they are with our comment section. It is rare you find a place online where smart and civil discourse can exist and be fostered. This is perhaps one of, if not the most, gratifying thing for me about our site. I’m fond of saying about our site, “Come for columns, stay for the comments”.

But I write this post, not just to give you context but to also ask for feedback. This site exists to add value to the public forum on tech and in no way do we have it all figured out. I’m always looking for ways to make the site, the content, and the experience better. As I reflect on what we have learned from the past three years, I’m more interested in where the next three years and beyond can take us. We are in a unique position to be able to focus on a different set of priorities than most publishing sites. As we think about where we can take Tech.pinions I’d love for our readers to chime in as well should you have any thoughts or feedback.

Why Apple Should Buy Broadcom’s Baseband/Modem Business

As I reviewed Broadcom’s updated SoC and modem business/strategy a few months ago, I became increasingly optimistic with their opportunity in this space. I understood the challenges of growing this business and the internal commitment it would require but still felt there was reason for optimism. Due to the upside I felt Broadcom had, it was a bit surprising they announced their intention to sell it. Broadcom must have come to the conclusion the resources and commitment neeed to grow this segment was more risk than they were willling to take at the moment. Resources poured into this are resources taken away from their other businesses. Broadcom is focusing on their core and this should be viewed as wise, but also conservative, on the part of their management.

What will happen with Broadcom’s baseband assets? I believe Apple is the perfect acquirer. One of my key takeaways from my meeting with Broadcom was they had some IP around their standalone thin modem which would be attractive to Apple as an alternative to Qualcomm. Doing so gives them technical flexibility and the ability to cut costs as well. The point remains for Apple, integrating a modem onto their SoC is the logical next step for the A-series. Getting modem IP, and the patents to globally certify that modem, is not something Apple can grow in-house. Which means at some point in time it will be necessary for them to get this IP from somewhere. Not many companies have these assets let alone are willing to sell them. Apple could license the IP to do this but knowing Apple like I do, they would much rather own this technology than license it. However, the IP alone may not be the driving reason for Apple to buy this group from Broadcom. It may very well be the engineering talent Apple wants and needs.

Broadcom acquired the team and IP from Renessas who acquired the team and the IP from Nokia. Most of the engineering team from Nokia remains intact and is regarded as one of the best communication engineering groups around. This is extremely significant for Apple. I view Apple’s potential to acquire Broadcom’s baseband group similar to the acquisition of PA Semi — more about the talent of the architects than the IP portfolio itself.

As Apple drives down the road of Moore’s law, they will increasingly have more transistor budget at their disposal. I strongly believe Apple’s architecual prowess of their A-series SoCs is one of the most underlooked areas of competitive advantage Apple has. They are in the unique position to spend their transitor budget in ways specific to the Apple experience. They can uniquely tune the SoC to the hardware, to the software, and potentially to the cloud services in the future.

Like all SoC companies going forward, the onus is on the architects not the architecture. In this light, it makes sense for Apple to have outstanding engineers when it comes to the communication bits as they look to inevitably integrate those bits onto their SoC.

iOS, Android, and the Dividing of Business Models

Without question the mobile platform wars are over. iOS and Android have both won and have won in very different ways. Granted, with an eventual total mobile addressable market of over four billion people, there is room for more than just two platforms. However, when it comes to the largest installed base/ecosystem, I’m confident it will be iOS and Android for quite some time.

Android’s installed base will be larger than iOS — probably three times as large when all is said and done. But it is becoming increasingly clear each platform will be made up largely of very different customers. I outlined the beginning of this in the article last week about Google/Android and the next billion smartphone users but I want to dive into this a little deeper. My overall thesis is Apple will own the large majority of the most profitable customers and Android will dominate the the non-premium segments. Their strategies dictate this reality.

Two Different Strategies/Philosophies

Apple puts a premium on the experience. Everything they do — hardware, software, and services — will revolve around their strategy to make the screen smart. They will use their integrated operational posture to align everything from their custom built SoC, to the internal hardware and components, to uniquely tuning iOS to the hardware, and couple cloud services as the glue to tie it all together. This will continue to attract buyers who value such things.

Google is focusing on smart cloud. While they view hardware as a necessary part of their ecosystem, it is better for Google if the value is to be found in their smart cloud rather than the hardware itself. To put it simply, Google’s strategy is dumb glass + smart cloud. Apple’s strategy is smart glass + deep cloud integration/synchronization. This is the clear departure in hardware philosophy the two companies will take. And it will dictate the types of customers each ecosystem has.

Dumb Glass + Smart Cloud

As Google dominates the landscape for devices outside of the premium segment it has implications on the customer base on Android and the business models that surround the Android ecosystem. The most pertinent is my earlier point that, for Google, it is better for them when value is in their smart cloud and not in the hardware. Google wants to push the hardware cost to zero because it is easier for them to get more eyeballs to feed their smart cloud. This changes the dynamic of the ecosystem. It makes it harder for the value chain to make money, thus altering the business models within the ecosystem. It will certainly help get billions of new eyeballs, but all with a lower average revenue per user as a whole. This is why the overall business around the Android ecosystem is destined to change. Money may not be in apps, or even in-app purchases any longer. Money may be in ads — not much but at least some. Money may be in services, like micro-transactions on payments or other digital and physical goods. Wherever money is found in the Android ecosystem, it will differ greatly than how money is found in the iOS ecosystem.

Smart Glass

Highlighting my thesis again, Apple will control the large majority of the premium segment. They do today with nearly 70% of the premium market in every category they compete and there is no reason to believe this will change. In fact, with much of what Google is doing strategically, they are making it easier for Apple to control the high end of the market. What we don’t know is how big this market is in terms of the total users in the ecosystem. Even though they have 800m iTunes accounts, their monthly active user base is lower than that. Apple’s monthly active users for iOS is likely between 500-600m — roughly half of Android. We know Apple can and will continue to grow this base. What is unclear is what number this base can grow to assuming their current pricing strategy holds. Regardless, Apple will maintain their near 70% share of the premium smartphone and tablet market and may very well grow it as well. When it comes to the premium segment, it is only Apple and Samsung and with Samsung facing pressure from every area in mobile, continuing to compete in premium will be tough. Samsung is tasked with the challenge of differentiating Android from the low end — a task Google will make continually difficult.

The fundamental point to all of this is Apple owning the majority of the most valuable customers. Owning this segment opens up an entirely different set of business models. Ones that appeal to those willing (and able) to spend money on hardware, software, services, accessories, content, and more. And in many cases lots of money on these things. The most innovative hardware always commercializes in the high end and then makes its way to the rest of the market. This means some of the most innovative advances in hardware will happen on iOS first. Already, some of the most innovative software/apps happen on iOS first since it is a known fact iOS is where money can be made by the ecosystem. This will not change so long as Apple dominates premium. As long as there is room for hardware innovation, it plays into Apple’s favor to continue to own the high end.

One last point on this. Just because Apple is focusing more on the smart glass, it does not preclude them from also including smart cloud in the future.

Divergence in Business Models

All of this wraps up with the key realization the business models for the value chain, meaning the developers, hardware companies, service companies, etc., will look very different than the business models in the iOS ecosystem. Which leaves me wondering if, since we will see different monetization tactics in each ecosystem, will we also inevitably see entirely different and separate players in each ecosystem? (Beyond hardware of course)

Apple’s ecosystem, being made up largely by premium customers, opens up the opportunity for the value chain to compete for share of wallet. Android’s ecosystem, largely made up by the non-premium/mid-low end segment of the market, means the value chain must compete for share of eyeballs — and against Google.

One ecosystem has massive volume and the other the most profitable customers. Both are valid, both will demand different strategies. The next ten years are going to be fascinating to analyze.

Android and the Next Billion

There are over a billion active users of Google’s version of Android. Add AOSP and we are probably in the 1.6 to 1.7 billion range of users on Android. Both will grow — however, I believe Google’s version of Android will grow at a more rapid pace than AOSP. This is largely thanks to big and fast growing markets where smartphone penetration is still relatively low — India, Brazil, Indonesia, and other surrounding regions in Latin America and SE Asia. While AOSP works in China, most vendors I speak to plan on using Google’s services outside of China. This is what Google recognizes and why they are releasing their Android One Program.

This concept is nothing new. Every main SoC provider — Qualcomm, MediaTek, and others — already offer reference design platforms designed to provide turnkey solutions for low-end players to go to market extremely fast. Months in some cases. The next billion new smartphone users will enter the market with a product that costs less than $200 and a large percentage of this next billion will buy devices costing below $100-$150. Based on what Google just shared with us on developer payouts this is an extremely significant point.

Google announced they have paid out five billion dollars to developers over the past 12 months. Not bad since the year before they paid out two billion dollars to developers. However, Apple has likely paid out near $10 billion to developers in the same time frame (Benedict Evans estimates). The key distinction here, which Benedict Evans points out in this post, is Apple has paid out approximately double the amount of Google to developers with less than half the active install base. Android has over 1b and iOS with just less than 500m (trailing 24mo..likely around 350m of those are iPhones—my estimates). This last point of revenue payout to developers relative to ecosystem size brings up the significant point I am talking about. Developers make more money with iOS than Android (even though the installed base is larger). A large percentage of the current Android installed base is not on the absolute cheapest device in the world. To put it succinctly, Google–Android–likely has the most profitable customers they are going to get. So what does this mean for developer revenue opportunities when the next billion new Android users will come from devices on the extreme low end?

It is extremely important Google is active in getting new customers online, empowered with a pocket computer, in every region of the world. The problem however, is this group is likely not profitable to anyone but Google and even that may be debatable. Connecting the next billion is massively important but is it profitable? Who will be the hardware OEM, chipset providers, screen manufacturer, willing to chase pennies to serve this market? Certainly Samsung will not. Will it require a new business model like Xiaomi’s where the service is where the money is and not in the hardware? This is an important and overlooked question in my mind with no clear answer yet.

What is exciting, and also scary for many, is when money is no longer in hardware (which is about to the case in the growth markets for smartphones) it opens the door to business model innovation. That is why I’m certain this chart will look dramatically different in three years.

Smartphone sales by vendor

This chart originated from a Tech.pinions Insiders article on my updated Smartphone Installed Base and Vendor shipments.

The Death of Phones, the birth of “And”

I remember my first cell phone. It was a hand-me-down from my father and it looked like this:

0*oDEgYHrbs4BABsr9

As many who had these early cell phones will remember, there was a liberating feeling in the ability to talk to any one, any time, any place. Mobile phones were liberating in an entirely new way. Smartphones didn’t exist at this point in time and as the cellular industry grew, it went on a run where the central value of the device was telephony. Those days are gone. The phone as an app is the popular way to think about the role of telephony on a mobile device.

Which brings us to today. While telephony still exists via an app on the mobile device, it is not the central reason for buying an iPhone or Android device in today’s world. What are consumers buying? This is where the taxonomy breaks down. They aren’t buying a phone and while we call it a “smart phone” the words are just labels. I do, however, feel it is interesting to think about what people are buying in a slightly different way.

When you sit down and really watch people use their smartphones what are they doing? They take pictures, watch movies, check in on Facebook or Twitter, read the news, play games, and more. So what if instead of buying a smartphone, consumers are buying cameras, mobile gaming consoles, portable TVs, newspapers, and whatever else the smartphone can turn into thanks to software? While this may seem obvious, I’m not sure it is obvious to consumers but is rather very subconscious. They may not realize cognitively they are shopping for a camera, a game console, a TV, etc., but they know they want those features and they want them to be great. I think Benedict Evans summed up my thinking on this in this very poignant tweet:

Screen Shot 2014-06-24 at 11.27.41 PM

Mobile is eating consumer electronics. The most personal device paired with diverse software allows it to eat as many use cases as the hardware and the software will allow. The death of the phone as the primary use case is the rise of the mobile camera + connected sharing app (Facebook or other), or the rise of the mass market mobile gaming console, or the rise of the portable TV.

This same thinking applies to tablets. What tasks the tablet absorbs are still being fleshed out but we are seeing it absorb the load from the PC, TV, magazines, books, and more. The use cases the tablet can take on is only limited by its hardware and software evolution.

What makes all this interesting to the point I started out with is, prior to smartphones, we bought a telephony device and that was it. Now consumers are buying this AND that, AND that, AND that, AND that all wrapped up in one product. As we look to how the landscape may evolve we simply need to figure out what the next AND will be.

A Controversial Business Idea for Google, Inc.

As many of our readers know, I have been thinking quite a bit about the issue of security. As we move into the next era of mobile and all things digital — where our identity is tied to digital devices — I believe some form of security consciousness will arise with consumers. Which always lead us to the question of a company like Google. Every time I raise this issue the point is made that it is counter to Google’s primary business model, which is data. It behooves Google to gather as much data/knowledge about you as possible to feed their massive machine learning engine. All of Google’s advertising revenue models are built off this machine learning to help advertisers target customers appropriately. But what if in the era of digital identity Google adjusts their model?

While it is way out there, I propose Google could offer a security service and actually charge consumers to entrust them with their digital identity. This sounds crazy. But think about it — if Google became your locker for the key elements of your digital identity and offered it as a service, it could become an interesting model for them. Security as a service offered by Google. Of course, this would require some significant infrastructure changes but it may not be as far out of an idea as you think. Take Nest for example.

It is possible Google is employing the standard anti-disrtuption strategy with Nest and acquisitions like it. The strategy where you bring in a separate brand/entity to deal with the potential disruption in a new way. What if Nest, or other acquistions around wearables or smart devices, become the trusted Digital identity gateways? These brands could serve as the revenue model within Google’s ecosystem for digital identity management and security.

In this model, Google could conceivably operate their ad business but only have access to certain data I am OK with being public because I get value from being advertised to when it meets my interests or needs. But the private areas of my identity I want to keep secure and managed are kept by a separate entity, for a fee, but still by someone in the Google family. Interesting to think about.

Of course, Google could conceivably just do this themselvs and simply offer a secrity/privacy service for a fee if they deemed it was an important enough issue. Either way, while this is an entirely controversial idea, I think it is an interesting angle to think about relative to the issue of security, privacy, digital identity, and other things that could cause issue for Google in the future.

I know this sounds crazy but I wanted to throw it out there for our members to kick around and share feedback or other thoughts on.

Insider Report: The State of The PC

The PC has gone through a rough transition. What we are witnessing is a rebalancing of the PC market. As I reflect on the the turmoil of the PC over the past few years, a single important point stands out. It is highlighted in this chart:

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Around 2008-2009, the PC market became heavily weighted towards the consumer market. The implications of this were clear. Consumers operated on different refresh cycles than corporate PC buyers. As we neared 2011, we hit a milestone where roughly half of the PC installed base consisted of consumer PCs. With such a large base of consumer PCs, who operate on different upgrade/refresh cycles, it is no wonder we saw a bit of a collapse in 2012-2013. See the below chart:

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Of course the tablet contributed to this as well, as consumers who already don’t upgrade on predictable cycles got their hands on a device that let them hold onto their PCs even longer. What has been interesting is to watch the PC stabilize a bit. While still off, on average about 5% per quarter, we are seeing some stabilization driven mostly by corporate customers starting to engage in a refresh cycle. While the PC industry will likely not return to a growth industry it will remain a stable industry. That is not in question. What is in question is where the rebalancing of the market will stabilize with regard to annual shipments. Understanding where the bottom of the PC rebalance will end up is the key to resetting expectations of this industry. It is safe to assume we will land somewhere in the 200-300m range, probably closer to 200m annually when all is said and done.

While the PC market’s annual sales will remain steady and driven by corporate PC users, there is still a question of what will happen with consumer PCs? As of today, I estimate there are between 400-500m consumer PCs in active use approximately four years old or older. Do consumers still need or want a PC? This data point suggests they do.

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This chart shows the type of devices most used to connect to the Internet by the online population. As you can see, the PC remains an important tool by the majority of the online population. Many like to focus on the centrality of the mobile device. However, I am continually surprised by the high usage of PCs even in emerging markets like China and other large “mobile primary” regions. What all the data points I see tell me is the PC’s role remains an important one, even if for many it is more in a companion role than a primary one.

Which leads us back to the question of what will consumers do when it is time to upgrade their PCs? One hypothesis is they will look to desktops over notebooks. In this scenario, consumers are content with a smartphone and/or a tablet for the bulk of their mobile/lean back use cases, and look to get a desktop all-in-one that is used as the shared/family PC. Therefore, we could see spikes in desktop sales for a brief period as consumers upgrade their aging PCs with desktop computers.

Another scenario is more consumers gravitate toward tablets as PC replacements. The tablet will certainly increase in its capabilities through the years which can make this scenario increase its probability.

The commercial and consumer divide is the biggest issue the PC industry must work with. For the stability of the PC industry, vendors must focus on meeting the needs of customers for whom the PC is an essential work tool.

For consumers, PC vendors must embrace the multi-screen reality of the consumer market. Where a corporate customer may spend many hours a day on their PC, a consumer will spread those computing hours over many devices. This is where Apple’s strategy around continuity becomes interesting. Windows vendors should look to apply similar solution-based thinking through software and cloud services to meet the multi-device computing flow of the consumer market.

There is also an opportunity for PC OEMs to look at emerging markets and begin to insert more value for the PC into the ecosystem. Markets like China, which are developing extremely quickly, have young generations growing up middle class who will go to school and the workplace and likely need something other than their phone or tablet for work. Even though this area won’t make up growth volumes, these first time PC customers in emerging markets can at least add to the stability of the market.

Overall, the fact that stability is returning is a good sign for the PC industry. Vendors who can manage the lean years will reap rewards as the stability continues.

Mobile Opportunities and Challenges In the Android Ecosystem

The more I study the mobile landscape the more it becomes clear that many companies are competing for what is arguable the most important device for global consumer–the mobile device. Winning mobile, and by that I mean being sustainably relevant, is the battle that is happening as we speak. Those who entrench themselves as leaders in mobile will reap rewards. However, this will be the most cutthroat and competitive sector for the foreseeable future. Who wins these battles today will likely have huge advantages tomorrow. Battles will take place on three vectors — hardware, software, and services — and they are more related than many realize. In this article, I’ll focus on the hardware, and more specifically, the Android side of the hardware landscape/ecosystem.

Hardware

All vectors will be extremely competitive, but from a hardware standpoint what area has more churn than mobile? Consumers will change devices on a yearly or bi-yearly basis. Meaning every two years, new potential customers emerge. In no segment of mobile is this more of an opportunity, and challenge, than for Android hardware OEMs. I’ve stated time and time again that, in Google’s ecosystem, Android customers are loyal to Google — not the brand on their smartphone. I can just as easily go from Samsung, to HTC, to LG, to Huawei or ZTE, or any hardware OEM who has the best device to meet my needs whatever they may be at the time. As long as the OEM ships Android they will be competing for new and existing customers every year. This is actually a good thing. For a brief period of time, the PC industry saw an average 2-3 year replacement cycle of PCs. During this time, it was enterprises, not consumers, engaging in this churn. During this time, we saw rapid advancement of hardware. Once the lifecycle extended, then we saw less innovation happen in PCs. Smartphones will remain in the 1-2 year replacement cycle for most people, which means in the Android ecosystem hardware innovation will be key to keeping and winning customers.

This is where Google must step in. Google must advance their OS in a way that allows hardware OEMs to push the bar and innovate. Whether that be around 64-bit support, new display technology, optics, and more. All things I am anxious to see how Google addresses at their developer conference this week.

With the point of churn, and lack of OEM loyalty in the Android ecosystem, it is honestly anyone’s race. For our members, I dove into the following chart.

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No single Android OEM is safe. None can rest on their laurels. Today’s underdog could be tomorrow’s leader. Just like in the chart above, Samsung could be the new Nokia and see their share go from majority to minority. That is what makes it exciting.

The key for hardware OEMs who wish to win mobile is to come to grips with the reality that, at least for now, Google is their partner not their enemy. This will be a very hard pill for many to swallow. Until the role of the OS changes, this will be the reality. I suspect for some OEMs, Android is used but the relationship with Google is kept at arm’s length. For others however, Android could be their rise to power and global relevance.

Of course, this is where we are today. This is a battle still very much in the early stages. When it comes to the now over one billion Android users, it is still very much anyone’s game.

The Mobile Gateway

I say “winning in mobile” because I have a sense it is the gateway to other consumer electronics. From a hardware standpoint an OEM must be concerned with this reality if it becomes true. Winning the mobile experience could be the thing that leads other hardware vendors’ ecosystems. Take Xiaomi for example. A company I love to study and talk about but one that could easily be gone in five years or dominate the landscape. They sell TVs (and TV set top boxes) running Android. They sell routers and they sell tablets now. All this is possible because of their relevance in mobile. Now let’s look at Sony. A company whose best business as of late is their optics business. The TV business is suffering, they shed their PC business, and PS4 is a bright spot but still has a long road ahead. Here is a company struggling in mobile. Yet one which still has an opportunity in mobile. Could it be that for Sony to save their TV business they need to win in mobile? I think an argument can be made for this angle.

There is a centrality of mobile and owning some share of the mobile engagement, either at a hardware, software, or services layer, is intertwined with consumer electronics going forward. Some of these companies may own more of the hardware, software, and services endpoints than others but it is still related. Right now the battle is for mobile. For most of the consumer tech companies we like to talk about this is the central battle ground. The foreseeable future represents monumental challenges and monumental opportunities within the Android ecosystem.

Answering the 64-Bit Question

When Apple announced their latest processor architecture for the A7 was 64-bit based instead of 32-bit, they created the media misunderstanding of the century. Not only were a great many of the media misinterpreting the significance of the new architecture but many industry executives did as well, with some calling it just a marketing ploy. How wrong so many were.

Many good articles came out attempting to explain and educate interested readers. Still, many missed the single biggest feature of the iPhone that required it to be based on a 64-bit processor — encryption. I have had many long conversations with chipset architects since then and repeatedly heard encryption is THE use case that will see the most performance benefits from a 64-bit architecture. Which means, it is likely Touch ID is simply not possible, at least in Apple’s deployment, on a 32-bit architecture. This could also explain why so many competing attempts at a fingerprint solution are terrible compared to Apple’s Touch ID.

Playing Catch Up

Apple’s competition is left playing catch up. This is one of the key things I am looking for Google to address next week at Google I/O. As I sit attentively in the audience, I anticipate they will answer the 64-bit question. This is essential for Google, not just because 64-bit mobile architectures are the new basis of competition but because these architectures will usher in the new mobile era. One based around a new ecosystem of security and privacy through hardware encryption.

All the leading chipset providers have announced 64-bit processors at some point in the future. What we still need is Android to support and incorporate key features that will take advantage of 64-bit.

I’d like to take a minute to preempt a common attack of a 64-bit Android supported OS. Many will immediately call out that, even if Android goes to 64-bit, most developers will not take advantage of it in any meaningful way. This is likely true but it was true of iOS as well. This also misses the point. ARM’s V8 instruction set is, at a foundational level, more efficient than the previous V7. Which means even 32-bit applications will see a significant performance benefit in their existing form. So, while the true benefit will come when developers start to leverage 64-bit architectures with 64-bit apps, the point remains — existing apps will see a benefit in efficiency and performance as well.

24 Month Lead

However, even if Google comes out and nails every point effectively around 64-bit, not just saying Android supports 64-bit but also the specifics of encryption, security, third party biometrics sensors, and all the other key features, I believe Apple still has a 24 month lead on the competition in these areas. Apple has just started scratching the surface with their developers of the power of the A7 being 64-bit nearly 10 months after announcing it. Apple is in a unique position because they are integrated and control more elements of the stack. It will take developers time and we are likely still not going to see the A7 fully utilized in graphics, security, identity, and more until the end of the year. Which means Apple itself took a year to get their own controlled ecosystem on board with 64-bit. Imagine how long it will take Google’s partner ecosystem? If Android’s history is our guide then it may be a while.

That is why I’m sticking with my 24 month lead projecting, which may very well be conservative.

Tech Observations From the Field

Over the past few days, I have been taking notes on my observations of tech, primarily mobile usage, of “regular humans” in the wild. And by that, I mean at Disney World where my family and I are vacationing.

I have been compiling notes here and there as well as spending time in lines talking to consumers, getting their feedback on a range of tech related questions. A wise man once said, “A line was a market research opportunity” and I often capitalize on that time to get in the heads of consumers. I also like to observe large groups and how they actually use technology while mobile. I have always found Disney theme parks, and in this case Disney World, a great place to make important observations on the mobile consumer.

I have been (rightly) banned from much of my smartphone use by my wife and kids but as time has permitted (while my girls wait in line to meet princesses), I have formed some thoughts.

Main Observations

An observational habit I have when in large crowds is to observe what types of smartphones people are using. What I observed over the past week lined up with much of my data. The smartphone installed base is largely dominated by Apple and Samsung. I saw more iPhones and Galaxies than anything else. I could literally count on both hands how many Windows Phones and BlackBerry devices I saw in use. Which again fits my installed base estimates for the US market.

When it came to the types of Galaxy and iPhone, things got a little more interesting. What stood out in ways I did not anticipate was how many iPhone 4/4S devices I saw in use. I have known for some time those devices got handed down to family members but estimating the exact numbers of these hand me down devices is near impossible.

This observation may indicate a larger than estimated number of legacy iPhones currently in use. The data I have been using for US iPhone installed base is based on sales data of the past 26 months. What this observation leads me to believe is the US installed base of iPhones is higher than I’m estimating.

A key question that comes from this observation is how big of a refresh we may able to anticipate with the upcoming iPhone 6. However, it is not reasonable to assume all those legacy hand-me-down iPhones will be upgraded with the latest model but that current generation iPhone 5 and 5s devices will also be handed down.

In terms of the large percentage of Galaxies I saw in use, they were largely S4 and S5 devices. I saw a very small number of Note devices being used. This lines up with my small number of estimated percentage of Notes as a part of the US installed base.

Another observation was how many people I saw using FaceTime to talk to friends and family who were not present. I saw this activity repeatedly. I even had a teen tell me she “FaceTimed” her friend while on Splash Mountain to share the experience of her first time on the ride.

Wearables were everywhere just not the type you think. I saw only a few smart watch and hearth and fitness wearables. I bet if if I was in Disneyland in LA I would have seen more. The point remains only a small fraction of US consumers use health and fitness wearables or a smart watch. However, nearly everyone was wearing the Disney Magic Bands which is a wearable band with an RFID tag tied to your identity while at the park. You can unlock your room door, pay for everything, get all your ride pictures tied to your account and more. The convenience of such an experience is what makes the wearable valuable. Perhaps we can tie this to a certain value of payments, identity, health and more that the wide spread adoption of such wearables is possible if the recipe is right.

Interviews

When I get opportunities to talk to consumers, I like to understand how they make decisions about what tech products to buy. Overwhelmingly, they said discussing with friends and family was the primary input they received that led them to their purchase. Typically, they started with online research to get an idea of what they were leaning towards and then looked for feedback from friends and family. When I asked about product reviews from tech blogs, they shared these had little to no bearing on their decision process. Frequently, the point was made they want to know what people like them think of the products they are interested in not some “techie.” This was not surprising but I always enjoy hearing it.

What this emphasizes is the tech decision buying process is just that — a process. From online, to retail look and feel, to friends and family based reviews being the most influential parts of that process. This may not surprise many but it’s a good validation of what we already knew.

I talked to five Windows Phone users and asked them if they planned to buy another one when they upgraded. Two said they would consider it and three said no — they are getting an iPhone.

While somewhat unscientific I have been doing this annually when we trek to the happiest place on earth. I find it a valuable part of observational research that is yet to fail me. I asked a number of additional questions to the 50+ people I talked to but will save those details for a later post.

Man With a Smartphone

I came across a tremendous talk by Steve Jobs on how computers are like “bicycles for the mind”. In this short video, he outlines a report from Scientific American that tested the efficiency of locomotion of different species. Humans didn’t fare well as energy efficient travellers, he pointed out, until Scientific American tested a man with a bike.

As it turned out, a man with a bicycle was the most efficient when it came to locomotion. Jobs’ point was humans are tool builders. The bike as a tool empowered man to be the most efficient traveler. This was how Steve Jobs envisioned computers. Computers are tools. Yet for most of Jobs’ career he made computers, and software to run on those computers, that were stationary or designed to be used while sitting. Perhaps you have seen this great illustration of the PC era.

evolution-man-computer

Apple and Microsoft did important work in bringing the computer from the closet to the desk. However, the era we are in is the one where the computer has moved from the desk to our pocket, allowing humans to take computing into the world and be unchained from their desks and sitting positions. To reap the full benefits of computing, we can now move out into the world as it no longer requires us to sit to compute.

As I watch that video of Steve Jobs talking about the bicycle and locomotion, I think about how we are moving ahead with mobile computing with the smartphone as the ultimate tool. Steve Jobs’ vision of the computer as the bicycle for the mind I feel is fully imagined in mobile computing via handheld devices.

Humans desire to be mobile. Remember when you first learned to ride a bike or got your license to drive a car or could go take public transportation on your own? Did you want to just stay at home or did you want to go out into the world? The smartphone is, for now, the manifestation of all of computing’s visions as a tool but now in handheld form.

And now thanks to Moore’s law, we have advanced computing into a handheld form so billions of people will get their first computer. It may not look like yours or my first computer but this device will radically change the life of its owner.

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If you see this slide (which I discussed at the Post Modern Computing Summit last week) and think it is an unfair comparison, then you have already missed the bigger point. Moving computing from the desk to the hand is what enabled our market to go from millions of computers shipped each year to billions of computers shipped each year. Mobile computing is on the cusp of and will be shortly, the primary–and in many case only–computing mechanism for the masses.

Man has created tools to help make humanity more efficient. Computers are a tool. Handheld computers are a tool. We are just scratching the surface of how efficient a tool a handheld computer will make us as we unleash computers from their fixed position. The key to this era lies with those who make the tools — the hardware, the software, and the connected services.

This is what makes an event like WWDC and Google I/O so important. In this excellent post by Horace Dediu, he points out how Apple gave the builders tools to make the new mobile world. How Horace explains it is, I think, the best way to understand what is being built around mobile computing. We are empowering the architects, the builders, to create the mobile computing era. The closet and desktop eras of computing will look antiquated compared to where we are headed.

In the not-too-distant future we will look back and find the arguments we had about what is and isn’t a PC and whether we can do “real work” or be efficient with a device like a tablet or smartphone and remember how silly we were. Personal computing inherently wants to be mobile because humanity wants to be mobile. The era ahead will increasingly see the most innovation around mobile. The mobile era is exponentially larger than the desktop PC era. Ultimately, our handheld devices will be tied to our identity, our ultimate digital assistant, and perhaps one of the most powerful tools created by man for man.