Global Smartphone Vendor Market Share and OS Installed Base Statistics

I’ve updated our global smartphone statistics and installed base estimates up to Q1 2014. There are several important observations to call out in the following graphs.

First, let’s take a look at the market share of each smartphone vendor going back to Q4 2009.

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The first major observation is what has happened to Nokia. As you look at the graph, you notice the shift in share from Nokia to Samsung. As we all know, Samsung “fast followed” Nokia and the graph tells the rest of the story. The second major observation is how Apple has maintained their share of the market and is holding steady each quarter going between 15-20%.

Another important observation is what happened when Chinese consumers started joining the smartphone conversation. As you can see the ramp in China happened around the end of 2011. At that point you see the local Chinese vendors like ZTE, Huawei, Coolpad, and eventually Xiaomi (Mi) helped make our chart (and the world) more colorful/competitive.

Let’s see how this looks from the volume shipments of the same vendors over time.

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What this chart does a good job of showing is the overall growth of the smartphone market in terms of volume.

If you recall from the first graph we saw most of Nokia’s market share go to Samsung. What this graph points out is the size of the scale Samsung reached. While their share of the market basically swapped, Samsung’s volumes were significantly larger than Nokia’s ever were. This graph shows Samsung’s steady and persistent growth when it comes to volume. Where Apple and others see pretty seasonal Q4 spikes, Samsung has stayed relatively steady.

Another important point about this slide is to look what happens when the China smartphone market began to ramp. As we see China coming online, we observe the rise of local Chinese manufacturers who begin moving enough volume to get them out of the “other” category and to be tracked as a vendor. Most notable should be Xiaomi. Xiaomi started selling phones in the third quarter of 2011 and by the end of 2012 were moving enough quarterly volume to get on our radar. Now after the first quarter of 2014 they are nipping on the heels of every other local Chinese OEM. In fact, if Xiaomi’s quarter-on-quarter growth rate continues, they may pass Huawei. That would put them at number three in the ranks of vendor quarter volume after Samsung and Apple.

Installed Base

While calculating the exact active installed base of smart devices is an imperfect science, based on historical sales data of devices factored along with active statistics of operating systems on major carrier networks and regionally dominant web services, we can get an approximate that is defendable. The following charts break down the install base of smartphone operating systems over time and where each stands today as a percentage of the active install base.

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As you can see, Android and iOS have been the biggest growth driver of the smartphone install base. Symbian was the biggest loser with most of its user base moving to Android. Blackberry held relatively steady in install base even though their quarterly shipment declines have been steep. What Blackberry’s numbers highlight was while their install base peaked in 2011, they have not participated in any growth and while maintaining a relatively small portion of the install base even at their peak, the next year will likely show steep declines in their install base.

The pie chart shows each smartphone operating systems as they currently stand as a percentage of the install base. Some of my numbers around Apple’s iOS smartphone share and Android’s seem counter to the narratives we hear that Android has 80% or iOS has 15-18%. This is because when most analysts use those numbers they are sharing the percentage of quarterly or annual sales by OS — not as installed base.

There are many fascinating evolving narratives that will continue to be fascinating to watch over the next year. The primary being as the India smartphone ramp starts to show up. India is where China was two years ago and is ramping fast. Karbonn, Lava, and Micromax to name a few may start showing up in our charts soon enough. I’ll continue to update these numbers each quarter and tease out the key observations over the year.

The Next Mobile Era: Digital Identity

We are still deeply rooted in the first mobile era. However, As I am always looking for trends, I think it is interesting to form some ideas of what the next mobile era might look like.

While I think the very far off future will include the decentralization of the modern smartphone experience into other devices on or around our person, that is too far off to speculate. I think the mobile era will go through several phases. The first is the one we are currently in. This era is simply about driving adoption of smartphones for the mass market. This means making prices lower, while bringing capable computing to the masses. Very powerful and very inexpensive smartphones for the consumer. Only 26% of people on the planet have a smartphone. Bringing this to saturation at say 70-80% is the driving goal of this first era.

However, over the next few years, I think we will see more mature markets like China and the West start to enter the cusp of the next mobile era, which will be around identity.

I’m seeing the groundwork being laid, particularly by Apple, to center our digital identity as well as our analog identity, around the mobile personal computer we call a smartphone. Opening up the Touch ID APIs is the beginning of this shift. Right now 5s customers can use their fingerprint to log into their device and make purchases on iTunes. Very soon we will be able to use Touch ID to authenticate access to our houses through our smart-lock, or to do mobile banking payments, or even to manage every password of our life. Biometric authentication will be the first step in the transition to the mobile identity era.

Yet as we continue to advance into this era, it will be predicated upon the gathering of more personal digital data than today. Our analog self and our digital self will start to converge as the Internet of Things becomes mainstream. Take for example health and fitness wearables. As this technology evolves and becomes more capable of capturing very personal health, fitness, and location data along with our eating habits, home habits, shopping habits, working habits, and everything else we can dream up, we will begin to develop an in-depth digital profile of our analog lives. The sensors, we wear, put in or around our homes, and exist out in the world will be collecting quite a bit of data on us. But the one common point for this to be enabled will be our mobile device. These sensors will have a connection to the mobile computer. Via a protocol like Bluetooth LE, and in Apple’s case iBeacon, the mobile device will be the center point enabling the creation of our digital profile. But the key to this next era is where this data is stored, and how it is accessed in order to add value to our lives.

For example, in a sensor based world, my bed will be connected and collecting data about me when I sleep. My heart rate, breathing patterns, resting temperature, and more. Then as I get up and go about my day, other sensors will track my activity, diet, exercise, and anything else I’ve enabled to collect data. Once I have all this, from a health perspective, I may want to share key learnings with my doctor, or with friends and family. However, I will also be wary of having all that data simply go to the cloud in an insecure way. In fact, the security element of this will be the primary roadblock for the evolution to the mobile identity era. However, there is a solution to this problem. Hardware encryption.

Apple does this with Touch ID, where the fingerprint is stored in the Secure Enclave and encrypted and decrypted in real time. This is one of the primary reasons Apple moved to 64-bit in the A7 architecture. Encryption sees triple digit speed performance gains on 64-bit. In fact, I am confident the Touch ID experience would not be possible on a 32-bit architecture. But the overall point is the biometric data is hardware secured to my device. When I go to log in to my house through a smart door lock, my fingerprint is never exposed. All the door lock gets is a yes/no confirmation from the iPhone through the fingerprint verification process.

This is the simplest example of this today, but it will get more expansive over time. Hardware vendors can address this through hardware encryption so my intimate and personal health data, and all my other digital identity profiles, get locked down and encrypted at a security layer. This way, my digital identity as a whole is never fully revealed. I’m only authenticating certain parties to access the bits I want them to see — not the whole identity. In my health example above, I may want to share certain data with my Dr. but not my insurance company. I can authenticate my Dr. to see certain parts of my health data they need to access but my entire digital identity is never exposed. I’m convinced encrypting this data at the hardware level is the key to mobile identity era and it will be driven by 64-bit architectures as well as the advancement of more capable microprocessors in these devices.

Answering the 64-bit Question

This means that Android, and every other platform company and the hardware companies in their ecosystem, must address not only the 64-bit question but also solve the biometric solutions that will enable this process. The concern for Android is this era would somehow come into conflict with their business model. All of this data on our digital identity is valuable to Google, but given the intimate level of this data it is hard to believe people will trust Google with their digital identity. Microsoft may be in a better position given their business model is not entirely in conflict. Microsoft simply needs to address the ecosystem in order to develop this strategy out.

As microprocessor architectures advance, we will enable incredible amounts of computing power in these mobile devices over the next few years. If Apple’s A7 has a billion transistors today, it could have four billion transistors in 4-5 years. That is the kind of computing necessary to pull this off. Intel, Qualcomm, and others will need to enable this ecosystem. They are the architects for Apple’s competition.

As we shift to the mobile identity era, I believe it presents a very clear challenge to some of the dominant incumbents of the current mobile era and will open up opportunities for some of even the less obvious challengers for the next era.

Google, Microsoft, Apple, and the Divergence of Computing Philosophies

When it comes to computing platforms, the dominant leaders of today — Apple, Google, Microsoft — have embarked down three fundamentally different paths. Debating the superiority of these philosophies is not only premature, it is futile. The market is the final arbiter. Not the media, pundits, or analysts like myself. All we can do is point out and understand their differences and hope to learn and gauge the computing evolution ability to meet the market’s needs. Here is how I see the computing philosophies of the dominant platforms.

Convergence

Microsoft owns the desktop and laptop market. Over a billion Microsoft PCs are currently in use today, which is an impressive number. I’ll be repeating a theme throughout this analysis which is that the PC is not dead — its simply not a growth market. Microsoft has developed a computing philosophy based on convergence. They believe the screens that run Microsoft software should have the same consistent UI and, more importantly, that tablets and PCs converge. My read on Microsoft’s strategy is that it remains highly PC-centric. Their hope is their billion plus users will desire a converged experience driven from the PC down to the smartphone.

There is value in convergence. Devices work the same and have the same UI. Consistency has its value where you can learn an interface one time and then pick up new screens in the Microsoft ecosystem and you know how to use it. This philosophy is not necessarily right or wrong. It’s just different.

Continuity

Apple’s philosophy is slightly different in that it emphasizes continuity. The right interface for the right screen at the right moment. Although the devices may have different UIs and experience, there is a continuity in how they work together. Apple believes the function of the PC is different than that of the tablet, which is to a degree different than the smartphone. In essence, each device has a unique role to play. The hardware is different and therefore the software should take advantages of those differences.

Continuity has its advantages. There is a seamlessness of the experience in Apple’s ecosystem. While my screens may have degrees of differing UI, they still seem to function as a comprehensive whole. Apple’s new feature, Handoff, is designed to enable more seamlessness between their devices. What is intriguing about Apple’s philosophy is it appears to be a “mobile up” strategy rather than a “PC down” philosophy like Microsoft. Where Microsoft views tablets and PCs as the same device and the smartphone as an accessory to the PC, Apple views the PC as an accessory to the tablet and smartphone. Again, this philosophy is not necessarily right or wrong, just different.

Cloud

At the center of Google’s experience is the cloud, their cloud. Maps, search, cards via Google now, email, and all the things that feed the Google engine are at the center. Where Microsoft and Apple have traditionally taken a very hardware and software view of the world, and are now working up to services, Google started with a services view of the world and then worked its way into software and hardware. Which is why for so long Google’s services have been better than competitors. This allows Google a certain kind of nimbleness that makes them the competitor they are.

A cloud based strategy has its advantages. The least being if we ever go to a fully thin client/server model, Google stands to be in a strong position. More importantly, Google has dominated many corners of the web experience which remains central to mobile computing. Where Apple views their other computers as accessories to the iPhone, Google views devices as accessories to the cloud. Once again, this philosophy is not necessarily right or wrong, just different.

Just Glass

Our TV, PCs, smartphones, and tablets are all just glass. Their guts give them smarts, their software brings them to life, and their services connect them to the power of the internet. All these screens are important. This needs to be clear. The TV, PC, smartphone, and tablet all have a role as platforms for software and services. Each companies’ philosophy allows for healthy variety to exist in the marketplace. What is fascinating is how each company is serving the market in different ways. Again — not right or wrong but just different. The market is large enough to sustain these differences in computing philosophies. As I have pointed out before, history is still being written and therefore we can’t discount any one of these philosophies of computing. But we can understand their differences and observe which ones gain more or less traction over time. What is important is computing is being advanced by these platform companies. Empowering the masses via computing is ultimately what matters. Not who wins or loses or whose philosophy is right or wrong.

WWDC 2014 Observations: It’s all About the Ecosystem

Much was released today at the 2014 WWDC Keynote that I feel is impactful for Apple’s customers, developers, and the Apple ecosystem. More was released than I have time to get to in this analysis but I want to focus on a few of the highlights.

Apple is Getting More “Open”

Looking at many of the APIs and in particular support for third party keyboards like Swype and Swiftkey, shows me Apple is willing to be a bit more open than in previous years. Apple does this through new extensibility features that allow apps to interoperate or integrate at a system level more so than ever before. Apple had been hesitant to do this since security is at a high priority. Enabling third parties to integrate assets into other apps needed to be done in a secure, very “Apple” way. Apple has made strides in this area and we have to be excited about the results.

Healthkit and the Health app in iOS 8 showcase how Apple can work with third party hardware to integrate their solutions more tightly with iOS. Homekit similarly brings the future of the Internet of Things right into iOS. This echoes what I have been saying Apple should do by developing solutions to help third party connected hardware work best with iOS.

Other More “Open” Features to Note:
– Touch ID API integration
– Camera APIs (letting third parties integrate their filters and more into Apple’s camera app)
– Cloud APIs

An Integrated Apple is a Differentiated Apple

Apple is truly showing the difference in their philosophy when it comes to computers small, medium, and large. While OS X Yosemite has some very similar design features to iOS, they are clearly still designed for specific usage. Apple believes in the right screen for the right moment. Sometimes that moment calls for a PC, sometimes an iPad, and other times the iPhone will do. However, integrating seamlessly these devices is the Holy Grail. Apple is marching closer to this goal.

This strategy is a stark contrast to what Microsoft does with Windows. Microsoft pushes “convergence” Apple pushes “continuity.” Apple’s vision is about harnessing the uniqueness of each device rather than converging them.

Nowhere is this more evident than how Apple is pushing continuity between all their devices. Handoff is the process that lets you move seamlessly from the iPhone to the iPad and to the Mac. The example was if you were working on a Keynote presentation, you could move it to any iPad or iPhone in proximity with a touch of a button and pick up right where you left off on the other device.

iCloud/”the cloud” is becoming even more tightly integrated into Apple’s ecosystem and iOS 8 and OS X Yosemite drive this point home. New features like the large file email support into the Mac Mail ap is a great example. But my personal favorite is the family sharing/family cloud solution.

Since 2012, I’ve been vocal in saying we need a better way for families to use all their technology together with better access to digital media. Apple has finally solved this and has done so elegantly. Families can share, media, reminders, notes, to-dos, calendar, apps, and more. This I feel is an extremely “sticky” solution. Something that will make not just Apple’s products desirable, but their ecosystem as well, to an entire family. Apple has a leg up on competitors with this solution and their tight integration should give them an advantage for quite some time.

One other very interesting observation. Apple is leveraging iCloud to make every photo you take, and ever take, available on all your devices. Photo Stream did this but only for 30 days. This solution takes it even further. What’s more, they are offering a monthly billing option for expanded data. With iCloud, you get 5GB free. Now .99c a month gets you an extra 20GB and $3.99 a month gets you an extra 200GB. Think about the size of Apple’s user base. If even a fraction of their users sign up for this, we are talking tens and even hundreds millions of dollars of additional quarterly revenue. One could even make a case given the size of their ecosystem that this solution alone could at some point be an additional billion dollars of monthly revenue. This is a major example of Apple’s potential to further monetize their services.

Other Integration Feature to Note:
– SMS now on all screens
– Better hotspot integration from mobile device to Mac
– Send and receive calls from Mac, making the Mac a speaker phone tied to your iPhone
– Airdrop between OS X and iOS

Developers Rule the World

At the end of the day, developers are one of Apple’s most important assets. I hear developers talk about how they don’t feel Apple supports them enough. Hopefully after today they understand Apple is listening. Apple, by releasing what is basically a new highly simplified programming language, is making developing for iOS even easier. And with over 4,000 new APIs, and a somewhat more “open” Apple from a developer stand point, Apple is working to continue to make iOS the best, easiest, and most profitable operating system to develop for.

Apple making developing for iOS more attractive for new developers, and creating unique skill sets for iOS developers.

Developer Features to Note

– Metal and how developers leverage this technology to fully utilize the power of the A7
– Swift and how developers harness the new language

Conclusion

Ultimately Apple is doing the things only Apple can do strategically. Integration across key areas of the “stack” are things Apple is uniquely positioned to do. As Horace Dediu tweets here:

Today we saw how software advances the Apple ecosystem. In the fall we will see the hardware to advance it even further.

Apple, Beats, and Content as Differentiation

Moment’s ago, Apple confirmed they are acquiring Beats Electronics and, once the acquisition is approved, they will begin working on a roadmap together. In this Insider analysis, I share some perspective on the hardware side of the company. At the end of the article, I tease out how this deal may play into the future of entertainment. That is where I think the real pot of gold is in this deal.

Hollywood and the tech industry have never seen eye to eye. During my time working with labels, I realized this was front and center. They are two completely different industries with differing culture in every which way. Yet these two industries need each other to advance. Hollywood’s content wants to be digital, with a supporting business model, and be offered to the masses. Technology is the mechanism for taking it there.

Note Tim Cook’s remarks in this article:

“The ugly truth is that there is such a Berlin Wall between Silicon Valley and L.A.,” Mr. Cook said in an interview. “The two don’t respect each other, don’t understand each other.

“We think these guys have a very rare talent,” Mr. Cook continued. “We love the subscription service that they built—we think it’s the first one that really got it right.”

Rare talent to be sure. All things that sound very Apple-esque. Jimmy Iovine is one of the most powerful people in the entertainment industry and I am betting his vision goes far beyond music. But the pot of gold at the end of the rainbow could be content as differentiation. While I acknowledge this is a very hard long shot, and has been tried before, the kind of weight the Beats team has with decision makers has had not been a variable in many of the prior efforts.

What makes Apple’s products stand out is they are differentiated by hardware and by software. Much of their software runs on no other computers than their own. What if they can bring content into this fold? What if they can acquire exclusive deals, even if exclusive for short time windows, that are only available on their hardware and through their software? Then what if they do release lower cost phones in the $350 range? If you are in China, India, Brazil, Indonesia, and you are a fan of American music, movies, and even TV, would you pay $100 or $200 more for exclusive hardware, software, and content? Again, while I acknowledge the difficulty or “moon shot” of this effort, content (beyond apps) is an interesting differentiator if done right.

If Apple can bring the universe of Hollywood and consumer tech together it could be monumental, with many new sustainable revenue streams for all parties at a global level. Hollywood content is extremely popular in every major market across the globe. We can’t underestimate how valuable this content is at a global level.

Things like this are never easy and there are never any guarantees. If there is a bigger vision behind this acquisition on the future of entertainment in a global digital world then it will certainly be worth it. If my contacts in the entertainment industry are right in what they tell me about how powerful the team is, particularly Jimmy Iovine, then Apple may very well be in the driver’s seat for the future of entertainment. The next few years will be interesting to watch to see the fruit that comes from this deal.

Cross Platform
Another interesting tidbit is that the Beats service will be available on Android and Windows Phone. What makes this interesting is, for Android in particular, that service could serve as the first experience with an Apple product for hundreds of millions and soon to be billions of potential customers. I would argue that Apple paved the way for their future success in iPhone and iPad by bringing iTunes to Windows. It helped get iPods in the hands of millions of people who never owned an Apple product. Much great research exists that point out that once a customer tries one of your products they strongly consider more in the future.

What is Apple’s halo product for billions of mid-low end Android users that could sway them into the Apple ecosystem? Perhaps Beats Music, or even the headphones, are a step in that direction.

If you are a Tech.pinions Insider log in and see the continuation of this post on Understanding the Apple ecosystem and how they can harness the Internet of Things.

Understanding Apple’s Ecosystem Strategy

Reflecting on where we are with wearables, the Internet of Things, smart homes, smart cars, smart cities, smart malls, etc., keeps opening up interesting holes in Apple’s ecosystem strategy. The more we look at how fast electronics are becoming connected, the quicker this market could get out of hand for Apple.

We start with the important observation that Apple will not make coffee pots, refrigerators, cars, light posts, dog feeders, thermometers, etc. However, they do want those devices to work with iOS. Right now they can through apps. The problem is, all these apps offer walled garden experiences. My thermostat app does not connect to my smart bed in order to adjust the temperature of my room depending on my current body temperature, for example. More importantly, the company that makes my smart bed and my thermostat are likely not to be the same company. Therefore, there needs to be a way for them to work together. What I am outlining is the case that the Internet of Things needs to be open. More specifically, built on open standards. This is, in my opinion, the only way the Internet of Things will move forward meaningfully.

What will be fascinating to watch is how Apple will insert itself in the middle of this. I’ve championed a “best with iOS” strategy I think is part of how they can address this issue. Apple has a hardware accessory program called “MFI” that allows third party hardware companies to make accessories that work with Apple’s proprietary ports like the Lightning connector for iPad and iPhone. Where IoT will differ is these devices will not connect to the iPhone or iPad with a physical cable but rather via an open standard like Bluetooth LE, WiFi, or something new in the future. The point is, these devices will not connect into Apple’s ecosystem with proprietary ports unique to Apple hardware. Any software platform like Android or Windows can come in and enter this new IoT ecosystem. Apple could, however, allow for unique differentiation and integration giving third parties ways to integrate into iOS in unique ways.

CarPlay I feel is an example of this to a degree. Apple is enabling automobile manufacturers to take a solution packaged for them that works uniquely with iOS. What is rumored about Apple’s smart home strategy sounds like it could be similar. Tech.pinions columnist Jan Dawson shared his thoughts on Apple and the smart home and it is worth a read.

The point worth thinking about here is how the broader connected device ecosystem will grow beyond Apple’s control. They will control computing devices that sit in the center of these connected experiences but will have to also work well, and work uniquely, with third parties as well those who will build the connected home, car, mall, city, etc.

In a very strange way, Apple competing in the Internet of Things will require the support and shared vision of many third party partners in a way they have not had to deal with before. I believe they can do this through unique hooks to iOS but we will see if this or some other path is the one they take.

Defending the Surface Pro 3

In the days since Microsoft launched the Surface Pro 3, there has, unsurprisingly, been a variety of mixed opinions. While many thoughtful and important points are brought up in articles from Ben Thompson and Tim Bajarin, I’d like to offer an alternative viewpoint defending the Surface’s existence and strategy.

Let me make a few points. Knowing what I know, having studied both the horizontal (modular) and vertical (integrated) business models, if I worked at Microsoft, I would be doing exactly what they are doing with the Surface line of products. I favor integrated models because it allows you to control your own destiny. However, it is also very hard and extremely risky. This is why there is only one modern day company succeeding at it — Apple.

I also recognize the tension the Surface products create with Microsoft’s partners. I have regular discussions with all of Microsoft’s PC partners and I empathize with their position and concerns regarding the competitive threat. Unlike Apple, Microsoft is tiptoeing towards an integrated model but still depends heavily on the support of their hardware OEMs. Microsoft and Google are in the same boat to a degree.

However, since I don’t work at Microsoft and I understand the tension Surface creates with partners, how then should we think about the Surface and the strategy of Microsoft behind it? I propose we think of the role and goals of the Surface products similar to why Google choses a partner to make their Nexus line of products.

The Nexus line of products exists, not to sell in volume, but to advance Android. Google makes specific and strategic hardware decisions they feel best showcase the latest software enhancements of Android. The target for Nexus phones and tablets is not consumers but developers. Google hopes its most enthusiastic developers get their hands on the Nexus and start creating new software experiences and utilizing new hardware features to advance Android.

I view Microsoft’s efforts with Surface in this vein. Whether Microsoft does or not is the question. However, this is how they should develop this hardware strategy. Several moves on their part make me think they do view Surface in this light to some degree.

They have priced themselves out of the mainstream, on purpose it seems. Like Google’s Nexus line of products, Microsoft does not sell many Surfaces in volume. Surface appears to have “showcase” hardware technology. The first had an optically bonded screen, the Surface Pro 3 has showcase Intel Core silicon that allowed the thinnest Intel Core product built. I view these features as staples to be used as a reference for other hardware companies to show what can be done with Windows 8. The Surface, in my mind, is a reference design to showcase Windows 8. The fact Microsoft commercialized it is what rubs partners the wrong way. But I’d argue it makes sense if you want your most loyal enthusiasts to help you advance the platform. You have to get your showcase reference design not just in front of your partners but in front of your developers. This is what I feel Microsoft is getting at with Surface. ((While this is plan A, it also sets them up for a plan B, in case their partners face unsurmountable challenges (i.e Acer). By gaining valuable learnings by building hardware themselves, plan B puts them in a position to take more matters into their own hands should it ever become necessary.))

Yes, they can limit distribution even more (like online only) so to be certain they aren’t competing for customers. Yes, they should probably stop trying to market it to mainstream consumers because that is a pipe dream and a waste of money. But they should focus on getting the Surface into the hands of those who can help them advance the Windows platform. For better or worse, the Surface is Microsoft’s vision for Windows 8. It should serve as the showcase to advance the platform. Therefore, the benchmark by which we should judge the success or failure of Surface is whether or not Windows is advanced as a platform. This we will not know for many years to come.

The Android Paradox and Computing Inequality

Benedict Evans wrote a great article on android fragmentation. He and I have covered this theme a variety of ways but I wanted to add a few more elements for you to think about. I also tweeted over the weekend on this theme and faced fire from the twittersphere.

 

Furthermore, Benedict makes a point in his post key to understanding the Android paradox:

Again, this is a paradox: Android is the platform best for early adopters and iOS the one best for late adopters who just want something that works, but the market adoption is the other way around.

There is no question Android is a unique beast. I’ve long heard Android compared to Windows. However, I have never been comfortable with this comparison. There are certainly some fundamental similarities but there are also a great deal of fundamental differences. They are similar in that they are both software platforms available for third parties. OEMs can take the software platform and create their own hardware. While those are basic similarities, Android has a fragmentation problem Microsoft never really had.

In the PC era, Microsoft maintained very strict hardware constraints for products running Windows. Intel, and AMD to a degree, also assisted with this a great deal to make sure OEMs had a certain bar that was maintained in terms of computing experience. This came crashing down with Windows Vista. This was an example of Microsoft having too computationally complex a piece of software which made machines with underpowered CPUs, and more importantly weak graphics capabilities, have many issues with Vista. I remember telling the OEMs around the time if everyone just shipped a discreet GPU on all their Vista machines it would be fine. But that would have driven costs up at a time they were all trying to drive costs down. For the most part, we have not had the same fragmentation issues with Windows we have with Android. Curiously, we saw the beginnings of the issue with Netbooks. For the first few years, these devices ran underpowered CPUs which consumers then attempted to use to do things they would do with more powerful computers. This is why early Netbooks didn’t play flash video well, or games, or other CPU intensive tasks. It brings us down an interesting thought trail of where we are today with computing power in lower cost devices. Which leads us to the Android paradox.

Where Windows seemingly was always designed to run computationally capable silicon, Android is and must be designed for the lowest common denominator. Android must run on an extremely low end CPU and an extremely high end CPU. This problem is outlined well in this video and in this post by Game Oven.

The point the folks at Game Oven highlight is the challenge of building a computationally complex piece of software and getting it to run on every Android device in the world. This is a significant problem for the future of computing and it begs a fascinating question. Architecturally speaking, is ARM or x86 better suited to address this particular issue? I do not have this answer yet, but it is a key question.

With my background in semiconductors, I look at this problem and doubt Google can solve it. Google can not maintain control of the hardware in smartphones the same way Microsoft could with Windows PCs. Mostly this has to do with the fact Android OEMs want to make a phone that can be sold for $100 dollars or less. Those devices, by sheer economics, will have to use an inexpensive and low powered CPU. That vendor will also have to make decisions on which sensors or other chipsets to include or not include in order to hit that price. Which means software developers like Game Oven simply can’t run their software on those devices. It emphasizes the point that a software developer Android addressable market is limited by hardware if they are looking to push the envelope of computing.

Going further down this rabbit hole gets even more interesting for the future of computing. With roughly 80% of the Android install base being lower end, underpowered devices, and even more so as we add another billion plus first time computer owners with a smartphone costing less that $150, we have an issue of exposing those first time owners to the full potential of handheld computing. Perhaps that isn’t necessary, since it is their first computer, but it is from the standpoint of personal computing.

However, this may only be a short term problem. When you look at silicon road maps and Moore’s Law, it seems it’s possible that, 4-5 years from now, some incredibly powerful CPUs will be able to run in devices that can be extremely low cost. That being said, as long as Moore’s law exists, software developers will hopefully exploit the new capabilities of latest generation silicon and push software to the limits. Until Moore’s law is passed, conceptually, there will always be an inequality gap with regard to computing.

Intel may have something to offer to solve this problem, as x86 brings many efficiencies to the table for complex operations. Should they get to a very low power yet high performance benchmark over the next few years and gain traction in smartphones, I will be curious to see if the fragmentation issue around what Game Oven highlights could be solved through an x85 Android environment. We will have to wait to see, but I am still skeptical fragmentation can be solved simply by all computing devices running the same application processor architecture.

Remarkably, Apple is one of the few companies who can solve computing’s inequality gap. Should they be able to bring their experience to hardware at lower costs, it could be a huge benefit to the future of computing. Until then, we remain firmly set in an environment where the capabilities of hand held computing are unequal.

Surface Pro 3: Future of a Laptop or Future of a Tablet?

There is a lot to read between the lines of today’s Surface event from Microsoft. Microsoft’s vision for the Surface continues to be of a device both a great tablet and a great laptop. Previous versions of the Surface were neither. From the looks of the Surface Pro 3, it may finally be a viable laptop replacement. The key question for Microsoft with this product is whether or not they believe this is the future of the notebook or the future of the tablet?

Assuming they believe it to be the future of the laptop, they are addressing a shrinking market, not a growing one. Microsoft’s sales of Surface tablets have been relatively small to date. I would confidently estimate them to be less than five million units and more likely closer to 4 million. But they may hope to get a piece of the nearly 200m notebook annual sales. Can they do this with the Surface Pro 3? Only time will tell, but given the trends around tablets and PCs I see and the many conversations I’ve had with CIOs and CTOs, I have a hard time believing the Surface Pro 3, at its current price point, will do much to dethrone the notebook. This is particularly true as Microsoft’s partners like Lenovo, Dell, and HP will remain aggressive in their designs and pricing. Microsoft may look to own the the ultra-premium price segment but there they are competing with Apple and that could be an uphill battle.

The Surface Pro 3, however, has added a new dimension I think is very important. They have added better support in portrait mode by going to a 3:2 aspect ratio. This has been, in my opinion, the limiting factor of Windows 8 in general, but particularly the Surface when used as a tablet. I’m glad Microsoft added this mode and it will make for a much more pleasant tablet experience. Even with the 3:2 aspect ratio, I still feel the Surface is designed more to be a notebook replacement and not a tablet replacement.

As I point, out in this article for Insiders, corporate installations of tablets are going specifically to people like field workers. A 3:2 aspect ratio will help this greatly. Do they still have a tablet dilemma? The issue they continue to face is so much of IT has begun to transition to iOS (phones and iPads) and they are already converting key software assets to iOS. Still, for the value of the tablet form factor and how it is used and deployed for field workers, those companies with field workers still reliant on Windows software and policies may very well like the Surface Pro 3’s approach.

Like most of Microsoft’s products these days, I see the Surface Pro 3 as having a much stronger commercial play than a consumer one. While I don’t think the pure “tablet” nature of the Surface Pro 3 is the “tablet” experience consumers are looking for, I do think there is value in the pure “tablet” experience for IT looking to deploy tablets to field workers. If there is volume upside for Microsoft then it will come from their sales teams being aggressive with IT.

In all of this, we have to remember the reason a form factor like this exists, something considered a 2-in-1 (both laptop and tablet features), is for the worker who needs to be both highly mobile but also stationary. Therefore, the tradeoffs of what a pure tablet or a good notebook offer are worth it based on this mobile workers use case. While a tablet designed to be the best tablet and a notebook designed to be the best notebook will always be better than a 2-in-1 form factor, there is a market (relatively small in the grand scale of things) who will value a device that is a good enough tablet and a good enough PC. In my opinion, the Surface Pro 3 is the first offering by Microsoft good enough at both.

The pricing is still a head scratcher. Why they don’t include the keyboard, given you can’t use all the features without one, is a puzzle. Given its positioning as a laptop replacement, the lack of bundling a keyboard is particularly questionable. Microsoft is minting a premium price point strategy which comes off as high but only if viewed from a consumer standpoint. Enterprise will likely get volume discounts and, since that is where this product will be most successful, that is where the pricing tactics really matter.

I remain confident some level of a PC refresh is coming. There are now over 300m PCs in use in the market that are very dated technologically and over four years old. A win for Microsoft would be if some percent of the coming refresh cycle appeals to Windows laptop upgrades.

At the core of Microsoft’s vision is to bring the mobile world and the PC world together. However, given current trends, it seems the two worlds do not want to come together. We will see in five or maybe even ten years if Microsoft is eventually right or entirely wrong.

Insider Intelligence Charts: Global Market Share Mobile OS

I pulled some recent data from Statcounter to get a sense of what the most active platforms were in each region. Statcounter, like NetMarketShare, tracks over a billion websites globally. Therefore, the tracking and market share numbers represent those actually using their devices to access the web in some way, shape or form. Interestingly, I have caught wind of some data that highlights a larger number of consumers than I anticipated in key markets like China who use VPNs or proxies to access blocked sites from within their country. Many of these VPNs or proxies are based in the US or Europe which means there is a high likelihood that some country numbers are skewed because of these consumers who access via proxy. I’ll deep dive on this as I gather more data.

Let’s look at platform statistics for several key regions and tease out some observations.

Global OS Market Share

global

Looking at the global breakdown of operating systems, broken out by those actively accessing the web, several key things stand out. The first is the noticeable and undeniable trend that Android continues its steady climb. This will continue as billions of consumers get into the market with their first smartphones from price tiers lower than $200 and most likely running Android.

Despite Android’s rise, iOS market share remains relatively steady. For many, this should defy their beliefs about how “open” operating systems crush more closed systems. There is a raging debate around the topic of whether the smaller ecosystem always loses. We are in uncharted territory and history is unlikely a helpful guide. Every time I look at this data, Apple’s ability to maintain share re-enforces the staying power of a premium customer base.

Series 40, while having a smaller market share, also remains steady. This demonstrates Nokia’s ability to maintain brand and solutions in markets like India, Africa, Indonesia, and Brazil to name a few. Ultimately Series 40 will be replaced by Android in those markets. It’s just a matter of time.

Globally, there are around 1.4 to 1.5 billion smartphones in use. That number will be over 4 billion by the end of 2018.

US

US

This chart remains relatively unchanged from multiple sources besides Statcounter. In the US, it truly is a two horse market and each have relatively close market share. Statcounter tracks the iPhone as having over 50% share based on their tracking methodology. This also lines up with recent data from Chitika stating that, when usage is tracked, the iPhone remains the market share leader.

If Apple does release a larger screen iPhone, it will be interesting to look back at these charts and see if Apple has indeed widened the gap against Android in the US as many, including myself, believe will happen.

The US has over 190m smartphones as an install base.

China

China

Android is the dominant OS in China. This should not come as a surprise. However, Apple’s continued growth in market share lines up with many Insider posts on Apple’s device installed base in China. This remains an under appreciated story. I remain convinced the number of iPhones in China is larger than most other analyst firms’ estimate.

Related Posts on iPhone in China
How’s the iPhone Doing in China
Data on China: Apple’s Biggest iPhone Market

While Android will remain dominant, I’m not sure the vendor landscape is as clear as others. While Xiaomi is all the rage in China, it is unclear if their model is sustainable, particularly as they run into challenges scaling to meet demand. The hardware/OEM landscape in China is nowhere near settled. This is a key storyline to follow.

China has nearly 600m smartphones in active use in the region.

India

Screen Shot 2014-05-15 at 6.46.59 PM

India as a market could not be more different than China. These are two completely different regions who mass market customers think about technology differently and value very different things. Where in China consumers place a high price tag on status, and technology identified as status symbols, India places a priority on value for the money. This is why India will remain a challenge for Apple.

India has approximately 60-70m smartphones as an install base currently. While estimating total iPhone sales in India has been tough, I believe it to be in the 6-8m range. Likely toward the lower end of that number but certainly less than 10m as a total.

Indonesia

Indonesia

Why am I showing you Indonesia? Every so often, we will look at a market that doesn’t get a lot of attention. I could, and will, continue to show charts from Brazil, and other countries in SE Asia, but I thought looking at Indonesia would be interesting. Indonesia is a huge market and an important one to watch. It is also growing quickly overall as a market for smartphones.

As you see from the chart, Nokia’s handsets have had a good run in Indonesia. But the trend is toward Android — which is no surprise. One other point worth mentioning is BlackBerry handsets have a higher percentage of the install base than indicated in this chart. The reason they don’t show up higher is because many BlackBerry devices in the region are not used to access the web through a browser or apps. Instead, these devices are used more as secure communication platforms due to a high level of distrust of the government. Some percentage of consumers have two devices. They use the Blackberry for secure communication for business or other uses and the Android or Nokia device for other smart phone features/use cases.

This is a snapshot of the overall platform trends in several key markets. In future Insider posts, we will also break down the vendor market share in these markets as well.

The Early Days of Tablet Computing

Much is being talked about and speculated regarding the tablet market. Analysts are adjusting forecasts downwards and pundits are claiming the tablet’s run is over. While we are certainly at an inflection point for tablet computing, the run is far from over.

As many have pointed out, the tablet’s future hinges on software developers. The software community can advance computing in unique ways if only their focus would shift from the smartphone to the tablet. It’s a tough ask in a time where the smartphone is king and will be for the foreseeable future. While I fully recognize and affirm the importance of the smartphone and the central role it plays in bringing many consumers into the computing for the first time, what sticks out to me is a burning question of capabilities. Is the smartphone going to fulfill all the desired capabilities of the billions who know only the smartphone form factor as their central computer or will this next generation demand more than the smartphone can offer?

1978

The way I articulate what I think needs to happen is to reference a particular historical event. In 1978, a very important piece of software came to market. It was called VisiCalc. This one piece of software instantly changed the the future for computing. It was with this piece of software many first realized the PC was no longer a toy or a hobbyist gadget but a tool that would change the workplace forever. From toy to tool with one piece of software.

The tablet needs its 1978 moment. I know many would argue the tablet, and in particular the iPad, has had this moment. But until the masses recognize and software developers embrace the tablet role as a tool then we still have work to do.

What intrigues me as I think about this analogy is the tablet may not have one killer app, or just one 1978 moment — it may have many. The tablet form factor is unique in that it allows its form to embrace a multiplicity of use cases. While one can argue the PC could as well, I’d argue that, from a general purpose viewpoint, the tablet can cover more use cases than the PC. This is the root of my optimism for the category. While it may not be just one piece of software that drives the masses to embrace tablet computing, we need the software community to embrace a vision for the future of computing with a touch computing environment on glass slate.

Early Days

I can’t help but conclude the “sky is falling” theme on the tablet form factor is premature. We are still in the very early stages of this category. As I pointed out in this article on the iPad’s curse, consumers are still figuring out what this form factor means to them on the computing front.

Developers will hopefully embrace the tablet’s capabilities as a tool to produce rather than a form to consume. It is equally, and importantly, both. The masses have seen the consumption value of tablets. Now they need to see their potential as a tool. Once this happens, many things will change.

This is perhaps why Apple is rumored to be adding multitasking to the next version of the iOS for the iPad. This is why Samsung is focused on bringing capabilities to their Android tablets that focus on the tool aspects over the fun aspects of tablets.

Regardless of what other analysts say, I still believe this is a growth category. Watch for carriers to begin to bundle tablets in the subsidy or installment plans they offer to customers. Watch retailers get more aggressive on bundles as well. Watch the tablet market segment heavily to focus on verticals like kids, education, automotive, etc. There are many trigger points which can continue to elevate the tablet market. You just have to know what to look for. While there is no disputing the centrality of the smartphone for the masses, there is a case to be made that devices that extend the capabilities of computing still have a large role to play. Software is the key in taking the tablet from toy to tool. It will happen. It is a matter of when — not if.

Insider Analysis: Apple, Beats, Retail, and the Future of Entertainment

Assuming the rumor is true and Apple is indeed buying Beats, then reading between the lines becomes important for those of us who develop future outlooks for specific companies and product segments. There are pros and cons to every deal so in light of this rumor let’s examine them.

Fundamentals

Beats the Company, The Brand, and the Movement
There are important fundamentals to know about Beats. First, it was born from some of the most powerful people in the music industry. Second, it is extremely well regarded in the music industry and has a great deal of favor. I have a number of deep contacts in the entertainment industry and they all refer to it as a movement, as if Beats also represents Hollywood as a culture. Third, Beats has quadrupled its annual revenue since 2011 bringing in an estimated $1.4 billion in 2013 alone. Fourth, it has a globally recognized brand that is desired, respected, and sought after.

The Premium Over-Ear Category
At CES 2014, I heard my friend Steven Baker from NPD give an updated state of the union on US retail. With regard to the the over the ear headphone category he made some interesting observations. Over the ear headphones as a category were up 50% YoY while ASP nearly doubled. In the premium category, Beats has over 50% of the market share. But Steven made one other point I think is interesting. He stated every major retailer has labeled the over the ear headphone category as a destination within retail rather than a pure peripheral. Which means these products are a major reason consumers are coming into the store in the first place. They are not secondary items. TVs, PCs, game consoles etc., are all retail drivers. Over the ear headphones are now on this list. Which explains why so many big box consumer electronics stores have dedicated areas to them.

What Could it All Mean?

If what my entertainment industry contacts are saying is true then you could make a strong argument that by buying Beats, Apple has indirectly purchased the music industry. In fact, if you know anything about Jimmy Iovine and his connections in not just music, but movies, fashion, global culture, and powerful entertainment lawyers (remember lawyers actually run Hollywood), you can make a case Apple has indirectly bought the entertainment industry. I would assume Jimmy would come with the deal in some capacity whether as an advisor or possibly even an exec at Apple, but that is yet to confirmed. Just like the acquisition.

Apple has, and has always had, the favor of the music industry. Artists, labels, everyone in the ecosystem knows Apple has helped make them a lot of money and helped pull them out of a very scary situation when music went digital. I’ve also heard through many sources deep inside the music industry that execs have been pushing Apple to focus more heavily on a streaming service than just digital downloads. iTunes Radio is a good start but insiders say they want a more robust service with a better business model. With that in mind, it is interesting to speculate that, with the help of Jimmy, Apple could negotiate deals more favorable for an Apple service and perhaps even put pressure on Spotify, Pandora, and Rdio. If the music industry wanted to, they could kill those services. Right now those services pay them fees for the rights to stream music — but if something bigger and better for the labels came around for the long haul, I could imagine them standardizing around it and possibly killing everything else.

Bringing up the retail point I made earlier could be interesting to speculate. With this category of headphones being a major driver of store traffic, it is interesting to think about how Apple can use that to their advantage inside big box consumer electronics retailers to position their products even better at retail.

The Big Trend — Payment Plans

While I want to write more at length about this trend, I need to mention it to make a key point related to this possible acquisition of Beats. Something is around the corner that could entirely shake up the US retail segment for computing devices and in particular smartphones. Every telco analyst and insider I talk to keeps talking up payment plans (or installment plans some call them) as a major trend. What this will do is allow consumers to pay anything from very little to zero money up front and simply pay a monthly fee for hardware. This will allow consumers to get the latest and greatest tech for very little upfront and simply pay a monthly set rate. It is basically the leasing of hardware. Carriers are already acting as finance companies, doing the credit check and risk analysis, so it sets them up to be the aggregator for this model. It will start with just the smartphone but imagine if it grows to include bundles of other technology also. For example, a consumer could get a smartphone, tablet, and Beats headphones for $60 a month. They just add that to their monthly carrier bill and they walk out with the goodies. I have no doubt this is coming.

The key point, however, is this will only work with premium electronics. One of the reasons is due to the high resale value of premium goods on the secondary market. Apple has a high resale value so naturally their products are candidates for this. Premium bundles will sell and given the brand appeal of Beats it is a natural fit for these installments plans through the carrier channel.

Concerns

My biggest concern would be one of culture. Beats is a brand almost as big as Apple’s on its own. Its recognizable, global, and is a lifestyle/cultural brand. How Apple manages this will be key. Would Beats remain independently run or would Apple integrate it more deeply into their roadmap. If the latter then the cultural concern is more valid. Would their be a pride issue within Beats around the brand that could conflict with how Apple wants to manage it against their own? Would the high profile executives like Dr. Dre and Jimmy Iovine run into a cultural issue within Apple, if they do become more involved because of this deal.

The hardest part of any large company acquisition is often one of integration. This is why I made the point earlier that Apple is very careful to make sure cultures will integrate into Apple well. This is one variable to keep an eye on if this deal does happen.

Final Thoughts

While we still have no official confirmation of this deal it has been interesting to speculate. If it happens, I’ll use the above as some foundation to rationalize. If not, this has been a fun exercise. But what stood out to me on first hearing this rumor was the price tag. Apple typically does not buy companies at this size. Generally, they buy companies not many have heard of and for hundreds of millions of dollars — not billions. If this deal happens, and it is in the multiple billions of dollars, it will be interesting to see if this starts a new trend of Apple making larger purchases to give them certain marketplace advantages.

The other important thing to note about Apple acquisitions is they do very deep cultural due diligence to make sure the company is a good fit and not just a pure technology fit. Apple has a unique culture and all companies they acquire must slot into that culture. Meaning, if this deal does happen, then there is a cultural test the Beats team had to pass for it to make sense.

The Windows Tablet Dilemma

We are at an inflection point in the tablet market. Something that grew as fast and as large as the tablet/iPad did is clearly not a fluke. There are many theories about replacement cycles, household saturation, device sharing, tablet over-serving, and the smartphones growing role in computing to name a few. However, I still believe this market is in its early stages. Consumers are still feeling out the tablet form factor and discovering how it fits into their lives. I remain confident the tablet market is a growing opportunity and consumers, along with software developers, will have an “a ha” moment and the rest will be history. While we wait for the consumer market to shake out, there is still a growth story in the enterprise. It is one Apple is winning but Microsoft must remain competitive in. However, Microsoft’s approach is actually a detriment to their success in the enterprise.

The more time I spend with IT managers and CIOs discussing their tablet deployments, the more clarity I get in how they are being deployed. There is a clear trend. Almost universally, tablets are being deployed to those workers who did not have a computer before. This is because their job was out in the field. They work for large construction companies and spend most the day in the trenches and on their feet. They are techs working for utilities companies who may have had access to a PC in their car but never out in the job site. They are public safety workers. They are delivery drivers. They roam around oil rigs or energy facilities doing routine safety checks and procedure documentation. They are people who used to go into the field with clip boards full of forms, blueprints, and other necessary documentation. These are the people getting computers in tablet form and it is empowering them in their job in ways not before possible with a clamshell PC.

Now enter Microsoft’s approach. Regardless of where you stand in the debate of why Microsoft did what they did with Windows 8, the bottom line is they misunderstood the job to be done by the tablet in the enterprise. Microsoft saw the iPad and assumed commercial workers wanted something more than a slate and no keyboard. When in actuality, the clamshell PC form factor works great for those stationary desk workers, and touch is not as much of a value proposition while stationary than it is while on your feet in operating a computer. I don’t hear from CIOs their field workers need something that is both a PC and a tablet in the same device. Their field workers need a supremely portable and easy to hold for long periods of time “pure slate”. This is Microsoft’s tablet dilemma. Their current approach with Windows 8 is not conducive to a 10 inch screen size pure slate form factor. For one reason, the entire OS is optimized for the 16:9 aspect ratio, so the hardware is quite a bit longer than it is wide. This makes the device larger, heavier, etc. While the Surface form factor, and a few from Dell, is the closest Microsoft gets to the pure slate industrial design, they are still quite heavy and, more importantly, hard to hold and use in portrait mode. Portrait mode is an easily overlooked feature for many field workers. Oftentimes when they are looking at blueprints, using a clipboard for forms, and other typical paper based parts of their job, the orientation matters. Filling out a form is better in portrait mode, for example, due to the orientation being similar to paper’s 8.5″ x 11″ dimensions. My key point is, for field workers, the ideal tablet is orientation agnostic. This point favors the iPad and is one of the reasons the iPad is being deployed more for field workers than any other tablet.

Steven Sinofsky (the original creator of Surface and Surface RT) observed a similar point about field workers in a post yesterday. His point is spot on — there is a transition happening for field workers where the tablet is becoming their central computing device for their job. The software transition of internal apps from PC to tablet is happening and it’s happening fast. Microsoft’s dilemma is they run the risk of being left out of these field worker deployments entirely. If this happens, enterprises will become more dependent on the iPad as they create custom software for iOS rather than Windows. Could the iPad become a trojan horse to the enterprise, which then creates the opening for more iPhones and Macs in the enterprise?

Keep in mind the original reason Windows PCs took off the way they did in consumer markets was because consumers used them at work. They were familiar with them and because of that, they bought Windows PCs. Could the reverse now happen to Microsoft as the iPad, iPhone, and other future iOS devices become the norm in enterprise environments? Windows in the enterprise was its trojan horse to the consumer market in the early PC stages. I wonder if the same may be true for the iPad.

Computing’s S-Curve

Last month, Benedict Evans wrote a great post talking about unfair comparisons. He faced some criticism for comparing PC market sales to smartphone market sales. Many claimed it was unfair. What if Benedict’s comparison actually isn’t unfair? What if comparing PCs to smartphones is exactly the right comparison to make?

Screen Shot 2014-05-06 at 3.47.57 PM

The takeaway from this slide is that one segment is shrinking while one is growing. Those with a PC bias will point out the limitations of a smartphone; highlighting what it can’t do according to their bias and use that argument as a basis to state comparing the growth rates of PCs to smartphones is unfair and irrelevant. When in reality neither are true.

The journey of computing has been from big to small and from complex to simple. Computers started in a giant room and are now in our pockets. Computers which used to require many hours of training to become literate (and many used them and never ever became computer literate) are now operated by toddlers.

So enters the next era of computing. It is computing in the post-modern world. It leads us to computing’s s-curve.

1_computing_s_curve

The reason comparing PCs to smartphones is not unfair is, for hundreds of millions of people and soon to be a billion people, the pocket computer is their only computer. For them, this is their starting point. But will it be their end point? For many in the PC era, a desktop or notebook PC was the starting point and, to a degree, the smartphone was their end point. As you can see in the chart above, computing is moving forward and is now finally being adopted by the masses in handheld form.

Computing’s history up to this point has been defined and shaped by stationary computers. Tomorrow will be shaped by pervasively connected, context aware, artificially intelligent computers that fit in our hands and pockets. As crazy as it sounds with today’s modern technology, we will look back in 20 years and this era will look like the Stone Ages.

Comparing the sales of smartphones to PC is not just a relevant comparison, it is THE comparison. Mobile is king. People don’t want to be tethered. Those with a PC bias will make the claim the smartphone has limitations – which is true. However, the PC also has limitations, and those limitations are the reason the market size for PCs is smaller than of smartphones. The PC represents the capabilities of what you can do with a computer when stationary and the smartphone represents the capabilities of what you can do when mobile. While both evolve on parallel paths, the size of the market for one is bigger than the other. It is a simple as that. More people value the capabilities of mobile computing than they do of stationary computer regardless of perceived limitations. For many, those limitations are computing enablers.

What the future is we don’t know. What’s beyond a smartphone? A valid question is not only what a smartphone will be in the future but what a computer will be in the future?

On June 4th, in San Francisco, Horace Deidu of Asymco, myself and others are putting on an executive summit called Post Modern Computing. If having a deep dive of the key points in technology history that got us where we are today and where it may all go tomorrow is interesting to you, then I encourage you to learn more at Postmoderncomputing.com. Seats are extremely limited.

Apple, Samsung, and The Value of Software Patents

I tweeted shortly after the Apple vs Samsung verdict today that I didn’t believe this case was ever about money. It was about making a point. I concluded by saying the debate will now shift to whether that point was made or not. What is relevant is whether the trial, legal fees, and damages are worth it for another company to take the risk to willfully copy the patents of another company. Specifically in this case, software patents which we will come back to in a moment.

Apple has stood its ground and made their position clear — they will defend their patents vigorously. They did in this case and while the damages were relatively minimal, the point remains only a few companies in the world would and could even attempt to take the risk and willfully copy intellectual protocol.

For Samsung, it has paid off. I have no doubt in my mind the battle and damages (assuming they hold) were worth it for Samsung to leverage the copied IP to gain the market leadership position they attained. They took a risk. They also knew they had the bank account to survive any consequences. Not all companies can do this. This is why many take the route to pay a royalty fee to license technology they wish to use to the IP rights holder. As it stands now, Samsung is basically paying $6.40 per unit for the patents in which they infringed.

Benedict Evans made an interesting point in a tweet where he said:

This is a key observation and true to the extent that, by copying Nokia, Samsung gained their position as a market global market leader in feature phones. The difference with Apple was Samsung used the same tactics they did with Nokia against Apple to become a global market leader in smartphones. Seems there is a pattern.

What is interesting to me is the question of how valuable software patents are in the long run. If a precedent has been set around software patents, then we could see this situation happen more often. This was the argument for many who tried to make the point this trial was about money. If the damages were enough then, perhaps, that would be a detractor for companies who may be tempted to steal software innovations in the future. When I look at where we are still going from a big picture industry viewpoint, I believe we still have a great deal of innovation in software ahead of us. While some software patents are awarded much too easily, we should hope we have enough truly innovative software advancements ahead of us that can truly advance computing in meaningful ways. I’m curious what impact, if any, this will have on software patents and unique software innovations.

Ultimately, the point remains. While it is obvious this strategy worked for Samsung, it may not work or be worth the risk for many others. Apple has made it clear it will defend its original technology and many others will likely do the same. This was the point I believe this trial was about from Apple’s perspective. While it may not seem like it, I sense the point has been made.

What we can hope is Samsung’s pattern is unique to them. Hopefully other hardware OEMs –and future ones who don’t exist yet– will carve out their own path to become global market leaders by innovating in original ways.

Insider Analysis: Android Silver, Good for Google Bad for the Industry

Google is trying to reign in Android with a new program called Android Silver according to recent reports. There are pros and cons to this strategy, however. I believe Google is trying to control something that inherently can not and does not want to be controlled — Android.

There is a paradox about stock Android that is fascinating. It is the purest and best manifestation of Android. My favorite Android devices always tended to be Nexus devices. However, the Nexus program was really a developer program not a consumer one. The goal of the program was never to sell in masses to mainstream consumers. It was for developers to experience the best of Android and to use a model to get them thinking about how to take advantage of the platform with their apps.

What Google fails to realize is one of the primary reasons for Android’s early attraction from OEMs was because they desperately wanted an alternative to Microsoft. Google came in with a solution and provided this one. Which was why early OEMs like HTC adopted it even though it was still very early. The other thing that struck a nerve with OEMs was the opportunity to differentiate with Android. Microsoft offers virtually no customization of their software which means vendors who ship Microsoft software can differentiate through hardware only. All the software looks the same. Imagine how boring it would be to walk into a retail store and see lots of rectangles all running the exact same software look and feel? There would be little differentiation.

drive-in

OEMs were attracted to Android early on because they allowed enough customization for their products to stand out. Forcing OEMs or creating a new class of device where the software looks the same across all vendor hardware is a step backward not a step forward.

Mature markets value differentiation. This is why a parking lot in 2014 looks very different than a parking lot from 1955. Differentiation is one of the most sustainable strategies a company can invest in. If Google is successful at creating a new premium class of device, yet those premium Android devices all have the exact same looking software on them, we will have the sea of sameness all over again just like we had, and still have to a degree, with the Windows PC market.

This environment favors the ones who stand out. Google would be better off working with their vendors to create sustainable strategies for differentiation. The challenge for Google is that one of the ways every partner wants to differentiate is through services, which is Google’s cash cow. Remarkably, Google’s success with Android was strategic for them but has also put them at odds with the inevitable way this market plays out for their partners — shifting from hardware margins and profits to services margins and profits. History teaches us the value chain always shifts from hardware then to software then to services in horizontal/modular ecosystems. This happened with Microsoft PC ecosystem and it will happen with Android in smartphones.

Which leaves you in an uncomfortable position if you are an Android vendor — deeply tied to Google and their services for your future success. Your partner is actually your primary competitor.

Insider Analysis: Amazon’s Chances of Shaking up the Smartphone Market

As a primer for this analysis of Amazon, I recommending reading the Insider report on Smart Devices and E-Commerce. Amazon’s imminent smartphone entry is a puzzle. It feels as though the mobile landscape in places like the US, UK, and other regions where Amazon has a play are mostly settled. Apple and Samsung are the dominant brands, with the dominant ecosystems. So how can anyone break through? This is the puzzle and the question is, does Amazon have a piece that fits into the broader mobile landscape?

It would be easier to speculate, and be optimistic, about Amazon’s plans if most the markets (the US primarily) where Amazon has a foothold were not subsidy markets for mobile devices. The cost of a premium device to end consumers is relatively low, making price less of an issue. Speculating price to be a perceived advantage for an Amazon smartphone entry may not be the right angle, however. What are the possible value propositions then?

Sponsored Data

Part of the picture became more clear as news broke that a key feature may be called “Prime Data.” Amazon is making a push for Prime lately, running commercials promoting the service and even looking to invest in more exclusive content deals like adding HBO Go. The concept around sponsored data is that the cost of the data tiers goes down in exchange for consumer seeing sponsored or advertising content. While this seems like it would not be the greatest consumer experience, the bottom line is if a consumer can get an all you can eat plan for voice, text, and data, at a very low cost or even free, this could be an interesting value proposition.

Another thing to watch with regards to the Amazon phone, or any smartphone coming soon, is Broadcast LTE. No one has been more skeptical of the idea of getting broadcast TV signals on a mobile device than we are. It really only works for things like news or sports. However, Broadcast LTE can use the existing infrastructure. This was an issue with things like Digital Video Broadcast and other live mobile broadcast technologies. Those took not only new technology in many cell towers but also dedicated chips in the handsets. Broadcast LTE is different and when you think about it being free thanks to sponsored data, things could get pretty interesting from a services standpoint. While I still have some big questions about Broadcast LTE, it is something to keep an eye on.

What has become clear to me over the past few months is many carriers in Amazon’s battleground countries are complicating their plans to the point consumers are getting extremely confused. This smells like an opportunity for someone to simplify  plans and give consumers value in a way they can understand. While I don’t expect Amazon to become their own mobile operator, I would look for them to do something creative with a carrier like T-Mobile or possibly AT&T.

Mobile Commerce

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One of the other points to speculate on is the degree Amazon’s play has anything to do with mobile commerce. At the end of 2013, Amazon stated they had 237 accounts. While it pales in comparison to Apple’s 800, Amazon’s are active where Apple’s are just registered. I would estimate Apple’s active iTunes account base to be in the high 600m range, with a decent degree of confidence from our data. With that in mind, the speculation around Amazon’s mobile play is around the concept of “showrooming.” The idea behind this is consumers go to retail stores, look at the products, make a decision, and then go home and buy it online. Recent data we have highlights that 68% of mobile users surveyed said they have “showroomed” in the past month. During the Q4 2013 time frame 27% indicated they purchased the product they showroomed via their mobile device. The same research we have said the top categories for “showrooming” are: clothes (33%), shoes (26%), books (23%) and gifts (22%).

Not surprisingly in the regions where Amazon has a presence, they were the preferred retailer for someone who was showrooming. Whether from a PC, tablet, or smartphone, 48% indicated they purchased the product they showroomed through Amazon. The corresponding figure for eBay is 38%. Perhaps Amazon knows this and believes their smartphone can help drive more sales from showroomers through their portal.

Amazon is well positioned when it comes to show rooming; however this can be done through their app on any smartphone. It is hard to see how Amazon can make it any better or easier on their platform versus someone else’s.

Fighting Against Webrooming

One interesting trend where we are specifically getting data now is around “webrooming.” This is where a consumer researches online and then goes and buys the product at retail. In the above category of showrooming where 68% have done so, 74% who say they have used the internet to search for a product or service to buy offline. Clearly both are happening, with one slightly more frequently than the other, but the majority of the online population is participating in both showrooming and webrooming. However, webrooming does not benefit Amazon. They would prefer to drive the sale back through their portal. We can speculate any entry from Amazon may be designed to bring the masses, and more frequent shoppers, to do more showrooming than webrooming.

What is left to be stated is, in developed markets, the PC is the dominant e-commerce device by a healthy margin. Over 90% of online shopper indicate they shop through the PC regularly with just under 50% indicating they do so frequently from mobile, and 19% indicating they do so frequently through a tablet. Knowing this calls into question the degree Amazon’s value proposition in a smartphone hinges on the point of mobile commerce.

Beacons Play a Role

In general, beacons like iBeacon and other devices based on Bluetooth LE, will play a significant role in mobile commerce. A transformative role one might even say. For an excellent read on the promise of beacons check out this excellent piece by Steve Cheney, who works for one of the leading beacon companies.

These beacons in retail have the potential to give deeper context to a shopper through their mobile device. What’s fascinating is, beacons don’t necessarily have to drive e-commerce to dramatically change the retail experience. Instead, a shopper can walk down the cereal aisle, trigger a beacon, and be presented with coupons or promotional offerings on cereal. Beacon’s will bring proximity to retail and it stands to change the game entirely. More importantly, it will give retailers a chance to compete more fully against the Amazons of the world.

Challenges for Amazon’s Smartphone

In mobile, no company shipping a forked version of Android has attempted to succeed in mature markets. This is because Google and Apple have all the apps, the map services, and a host of other things considered essential for a mobile device. Amazon has a much weaker app ecosystem in mobile on their Android fork. They have no mapping solution, and will need to use someone else’s most likely. They will need to use a search engine like Bing as they do on the Kindle Fire tablets. Knowing what their options are, it is extremely difficult to have optimistic projections for their smartphone entry against the likes of Apple and other Android vendors like Samsung.

That being said, Amazon seems to be playing a very different game than others. So perhaps we need to shape our expectations of what success looks like for Amazon different than others in the smartphone market. Whatever the case, it will be nice to see some new competition enter mobile. And if Amazon can prove that a fork can compete against the incumbents, it could open the flood gates of others driving hardware as a service in multiple segments related to PCs, tablets, and smartphones.

Amazon’s hardware play, in any category, is their attempt to acquire valuable data and integrate their experience. These are two things they will have trouble accomplishing if they are simply a software stack on someone else’s platform. But whether they can pull it off, or whether their platform is even the right one, remains to be seen. In terms of mobile eyeballs, payment opportunity, and overall share of mobile engagement time, I again leave this slide as food for thought.

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The iPad’s Curse

There have been many good articles on the iPad lately.

iPads and Tablet Growth – Benedict Evans
Don’t Give up on the iPad – Ben Thompson
The Astonishing, Disappointing iPad – MG Siegler

However, I still think there are several missing pieces of the iPad puzzle. While it is still all theory, I’d like to offer my perspective on the iPad and tablet market. The source of my optimism for tablets is rooted in the unique combination of form and function. The larger screen makes it more capable, as well as more diverse, in its function than a smartphone. The lack of a clamshell design with attached keyboard makes it more portable/mobile than a traditional PC. This combination allows the device to be extremely varied in its supported uses. Specifically, the iPad is the most general purpose computing device I’ve ever studied. It can be so many things to so many people and do a wide variety of things well. It can be a DJ’s mixing board, an art easel, a portable DVD player, a music recording studio, an e-reader, a web browser, a gaming console, and so much more. I believe this range of supported use cases is what made the iPad Apple’s fastest growing product and one of the most quickly adopted devices in consumer electronics history.

As I have reflected on this point, it has led me to think the iPad may be cursed. It may be too good of a general purpose device in that it lacks a preferred or specific use case. What I mean is the iPad lacks a function its owner prefers or can only do on the device. One that can not be done on any other device they own. We recently received a large data sample of consumer use cases for PCs, tablets, and smartphones. Included in this was usage data of each device. What stood out to me was, of the top 50 most common tasks ((The survey defined these tasks and was very comprehensive. Things like check email, search the web, make an online purchase, watch a video, watch a movie, play a game, etc. It was a global survey of 30,000 consumers)) consumers engage in with computing devices, there was not one single task they indicated they did more on their tablets than their PCs or smartphones. This data supports my theory that, for most average consumers, the iPad/tablet did many things well. But in relation to their smartphone or PC, it didn’t necessarily do any one thing better which led them to use the device exclusively for that function. Even if we can make the case the iPad does succeed at doing a few things well or better than a smartphone or PC, are those things worth the cost of the iPad when most consumers still have access to either a smartphone or a PC? Because of this I feel, for the time being, the iPad is still viewed as a luxury not a necessity. Its place between the smartphone and the PC is evolving but while we still have a huge number of people with access to a traditional PC in their home or workplace and owning a smartphone, the role the iPad plays is one more of convenience/luxury than necessity. The iPad’s curse may be it can do many things well but does it do anything better? That is a key question.

The iPad’s Consumer and Commercial Divide

I make the above points with the distinction I am talking about the general consumer mass market. Without question, the iPad has distinct and differentiated value in commercial and education markets. For field workers who don’t sit at a desk all day or who work from a stationary position, the iPad has been a valuable asset to their job. In many schools, the iPad is the absolute best device for student-teacher interaction and learning. When it comes to the commercial verticals we study and the education sector, I can rattle off dozens of use cases where the iPad/tablet is not only the preferred task for the job but also the only product uniquely designed to fulfill that job.

I also make the above points understanding the iPad’s role for kids and seniors. That the iPad is fulfilling the task of a primary PC for these groups who have no PC or are limited in their computer literacy is a significant point and one worth including in tablet analysis.

How Much is the Smartphone to Blame

The other element worth adding to the puzzle is the degree to which the smartphone is to blame. I believe there is merit to the idea the smartphone may have covered more ground for consumers’ general computing tasks than previously anticipated. It was our conviction the PC over-served the broader consumer market. The upside of the tablet was this device was good enough to replace the PC for most consumers. It turns out, the smartphone may actually be good enough for the masses–for the time being. Add a larger screen to the smartphone and the number of use cases it can cover as the primary computing device grows even more.

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We look at the chart above and initially believed the decline was directly correlated to the iPad’s release. While there may be some truth to this observation, we can also argue 2010 is approximately the time the smartphone went mainstream. Hypothesizing the smartphone may have more to do with the PC decline and the slowing of the iPad may not be too far off. It seems clear in many markets we have had an interesting perfect storm occur. The PC market, for the most part, became saturated with nearly half the planet’s population having access to a PC in some way, shape or form. We had the rise of the smartphone as it went mainstream and we have had nearly half a billion tablets sold. By the end of 2014, we will have a combined installed base of 4.1 billion PCs, smartphones, and tablets. ((All stats here from my firm Creative Strateiges, Inc))

The key takeaway is the iPad/tablet is closer to the PC than the smartphone. We never modeled the tablet to have a total addressable market as large as the smartphone but we also agree it is larger than the PCs TAM which currently sits around 1.5b (although declining). We remain bullish on the tablet but the dust must settle in pure consumer markets with their use of the PC. We believe the iPad/tablet still represents the best form and function as a mass market personal computer. With regard to the smartphone we must keep one thing in mind. While essential, it may always be limited by its screen size. This limitation opens up the opportunity for larger form factor computing devices. I anticipate a battle between the tablet and the PC over the next few years for the hearts and minds of mainstream consumers. If I had to bet, I’d put my money on the tablet.

For a more formal note on the tablet market, read my latest report at Creative Strategies titled Tablets: The Next Frontier in Personal Computing.

The Tech.pinions Podcast: Post Apple Earnings Observations

We are getting the Tech.pinions Podcast going again. Look for the Tech.pinions podcast on Saturdays.

Ben Bajarin, Bob O’Donnell, and Tim Bajarin get together to share thoughts on Apple’s earnings, what it means in the big picture, and discuss some of the issues facing the tablet market.

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

Runtime: 26:19

Analyzing Apple’s Emerging Growth, iTunes, and Explaining iPad Woes

Apple surprised with iPhones and “disappointed” with iPads. While many in the media will overreact and question Apple’s growth prospects, I find myself as optimistic as ever about Apple and its future. The foundations for a long term, healthy ecosystem are starting to shape up. It starts with the iPhone.

iPhone

Our biggest takeaway from the earnings data around the iPhone should be the success we are seeing in emerging markets and especially China. Key points:

  1. iPhone took 55% of the smartphone market in Japan according to Kantar Worldpanel
  2. Double digit growth in Taiwan, Indonesia, and Brazil
  3. Sales in India and Vietnam doubled
  4. 85% of iPhone 4S buyers in China are new to iPhone
  5. 69% of iPhone 5c buyers in China are also new
  6. Many of those are switching from Android

The story for the iPhone has to be its growth in these new markets. While readers of my analysis should not be surprised at the China stats, since I have long been saying the China opportunity is underestimated, the growth in these other markets is worth noting. While it is true Apple has a small base in these countries and the percentages look good because we are talking about small numbers, growth remains growth. In particular, Apple is seeing growth, even though modest, in regions which are viewed as “low end.” Most other analysts I speak with completely discount Apple in these markets and say they have no chance to succeed. Modest growth is still growth. Keep in mind this comes with Apple not necessarily changing their pricing strategy much. They keep their newest products at a premium and use their older generation products as entry level. This is the investment they have made in quality components, design, and build quality paying off. Products several years old can succeed as entry level products years later for markets who generally can’t afford the latest and greatest.

Another chart to ponder. Here is a look at the countries where Android is most dominant. We will keep an eye on these numbers.

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iTunes

While it is a point Apple’s iTunes revenue has stayed relatively flat, we can’t ignore the now massive size of the iTunes active user base. Apple highlighted they have 800m iTunes accounts now and nearly all of them with a credit card on file. To put it into perspective, let’s look at the user numbers of other large user base companies.

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Thinking about the opportunity for an active base with nearly 800m credit cards on file is an extreme source of optimism. Tim Cook made a point on the earnings call to point out their loyal customer base begins with a product that gets new customers into their ecosystem. This is why the statistic of first time customers coming into the Apple ecosystem is key. Once into Apple’s ecosystem, customers are loyal and begin to invest. The relatively flat growth of the iTunes ecosystem is likely due to these first time Apple customers coming in at lower price points and therefore representative of an audience with monetary sensitivity. As I pointed out for Tech.pinions insiders yesterday, many consumers in these markets use payment mechanisms other than credit cards. If Apple can embrace these consumers, meet them where they are and cater to their purchasing habits beyond credit cards, I fully expect iTunes revenue from these customer to increase rapidly.

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iPad

There is a dynamic about the iPad I don’t hear many talking about. It is something we have become aware of due to recent research. Take a look at this statistic from a GWI report of 30,000 global consumers.

This shows the percentage of people who share specific devices with one or more people. What we have learned is 50% of tablet owners share their tablet with one or more people. This is a key observation. We have long debated whether the tablet was communal or personal. There is surely a case for both but what the research is showing us is for a large percentage of the tablet install base, just shy of 500m customers, the device is for the most part communal. Which means one or two per household suffices for the time being and the necessity for one per person does not exist. This dynamic completely changes how we think about tablets, their use cases, and their refresh cycles.

That being said, I am still extremely bullish on the tablet segment. We view this device as the true mass market computer. While it has tremendous benefits for enterprises and education markets, the pure consumer market is still ripe for tablet growth. In emerging markets we are already seeing tablet owners leapfrog the PC and go straight to the tablet computing form factor. All of these points are why we are confident this market is bigger than the PC market.

The iPad is in uncharted territory. We are still in an era where we are figuring out all the things it can be and do as well as how it fits between the PC and the smartphone. In 1978 Visicalc came out and immediately people understood how the PC was going to transform everything. The tablet has not had its modern day 1978. It will and hopefully sooner than later.

The Changing Shape of the Smartphone Market and What it Means for Samsung and Apple

When I study data and trends in every major smartphone market in the world several points stand out. The first is the dramatic rise of regional smartphone players. Most of these players are coming from Asian markets due to regional manufacturing infrastructure. This article includes a list of the top 15 Asian handset makers who are, for the most part, focusing only on certain regions of Asia. This is a major trend and is one of the most fascinating to watch. It is also perhaps the biggest challenge for companies like Samsung and Apple who are the brands dominating the global smartphone market today.

The second major trend is related to the price bands where all the growth will come from in smartphones the next few years. Since we have, for the most part, saturated the total addressable market for smartphones in developed economies, the vast majority of the growth (over 80%) of the smartphone market will come from devices costing less than $150. When you combine the two trends I just described, you can see why these lower cost regional players are rising fast and worth paying attention to.

To Be Global, Think Regional

Be global, think regional. This will become the mantra for every global tech company selling products to consumers worldwide. I am becoming increasingly convinced a global brand strategy will work but a global product strategy won’t. Global companies like Apple and Samsung will have to be sensitive to the unique market dynamics of each region and, in many cases, offer products and services unique to those regions. As I study larger regions like China, India, Indonesia, Brazil, and even Africa, it becomes clear there are specific things that are popular and working in those regions not available elsewhere. More often than not these are regional services like micro-payments, search, and local commerce (transit, leisure, etc.). This is not to say these things don’t happen in developed markets, but the infrastructure is highly localized in many cases. For example, in developed markets credit cards are a common method to handle transactions but in many of these emerging markets, credit cards are not common. The key takeaway for companies looking to compete in this region is the necessity to support and integrate the vast diversity of highly localized services dominating these regions.

These local players are succeeding, and in some cases dangerous to the likes of Samsung and Apple, because they are focusing so heavily on localized services. This is a key point due to the economics of these regions. We are seeing business model innovation in handsets due to the extremely low cost of these devices. The OEMs know the money is not in the hardware but in the services upside. This is why, for example, it is not out of the realm of reality (and would not surprise me one bit) if companies like Tencent or Alibaba got into the hardware business with a smartphone or tablet in China.

The massive growth coming from the low end is driving companies to focus more on localized services. This is an attractive proposition since these markets thrive on local services. Companies willing to go out of their way to cater to these customers and their localized needs are the ones positioned to succeed.

Samsung and Apple

Although often compared, Samsung and Apple are in very different positions when it comes to these markets. Samsung has risen on the basis of their low end smartphone business. The premium category line of Galaxy smartphones is relatively new and not where the bulk of their mobile hardware revenue comes from. Nor is the Galaxy lineup where they see the bulk of their mobile device shipments. Samsung’s mobile group thrives from the low end in markets like China and India. Coincidentally, the exact same markets where these regional players are squeezing them out of that low end. I remain convinced Samsung can not and may not even want to compete in the low end any longer with these upstarts. It is a battle they can’t win, especially when they don’t have a services business model to get incremental revenue beyond the hardware.

On the other hand, they are shifting to become more of a premium player. This is why they are willing to spend billions of dollars on global marketing for the Galaxy brand. With just over 200m ((Creative Strategies estimates)) Galaxy smartphones sold to date, it is a slow but steady crawl. Samsung’s only hope is to develop into a premium hardware player. Whether they can create a services revenue model on top of that hardware is yet to be seen. Samsung is in the more precarious position of any company in my opinion.

Apple, on the other hand, has no intention of competing in the low end with the companies I mentioned. This is the right decision. So what is Apple’s play, if any, in these markets? The first is their continued investment to support local services. Apple has shown, with regard to China, they are investing in features in iOS and Mac OS X to integrate local and regional services. There is still more to be done but this is a good start. While Apple has stayed away from carrier billing, it happens to be the norm in many of these markets. Whether it is embracing carrier billing, or integrating better with a local payment services, it is in Apple’s interest to integrate with the transaction models that are the norm for the regions where credit cards are not standard. Apple can not just be a hardware company in these regions but must be in a position to monetize software and services within their ecosystem. Going beyond credit cards is the key in these markets.

While it is reasonable for Apple to not go toe to toe with these low end companies, the risk is in the business model innovation happening around them. Xiaomi is a good case study to continue to keep an eye on. They have managed their brand well. They sell affordable premium devices at cost but monetize services as a part of the platform. They have global ambitions as well. Today, they renamed their company to Mi in an effort to expand globally with a name much easier to brand than Xiaomi. Very smart on their behalf. This business model may very well represent the future of OEMs. Premium hardware at cost but tied to services is a model to watch in every region.

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I don’t think Apple is in nearly the precarious position Samsung is but I will wait and see how they adapt to the global trends at all levels of their business, hardware, software, and services. Global brand, regional strategies are the key.

Tech History is Being Made Not Repeated

I’m not going to try to convince you that, in the case of the tech industry, history does not repeat itself. In some cases, it does and it will. Rather, I’m going to tell you why any claim, or any conclusion, being made today that we are waiting for history to repeat itself is premature.

I speak with VCs, C-level executives, pundits, and any opinionated type about things related to the theory and philosophy of the technology industry. My most valued discussions come from those who have been in this industry since the beginning. Their observations are time and time again better than most and often more accurate. The theory of the cyclicality of the industry is often brought up in many contexts but most often I hear it brought up about Apple. I hear things like “the smaller ecosystem always loses.” Or, “closed always loses in the end.” Or, “vertically integrated companies always get phased out.” I know my industry history well enough to understand their logic, but I continually think these claims are premature.

Claiming history is ready to be repeated, rather than still being made, discounts the point that most of this industry’s history has been focused on commercial markets not consumer ones. Most of this history has been focused on developed “affluent markets” not developing markets. We can make some sound observations about the industry’s history up to this point as we have talked about millions of consumers but can we make the same observations once we start talking about billions of consumers? I’m not so sure.

Uncharted Territory

I say history is being made rather than being repeated because I believe we are in uncharted territory. Those who like to make points about tech history repeating itself are primarily using the history of the mainframe, mini computer, and desktop/notebook PC form factor to make it. Points get made about these segments around open vs. closed, integrated vs. modular and so on. But using “PC” industry history as our sole basis has flaws. We are in the midst of one of the largest global rollouts of consumers getting their first smartphone, in many cases the first type of computer they have ever used. Billions and billions of people have leapfrogged the PC and jumped straight to a computer in their pocket. They have no concept of what it was like to grow up with a PC or even in a PC saturated region. They didn’t have PCs in their school to learn computer literacy, they haven’t had to deal with the Microsoft Windows monopoly, they never dealt with corporate IT bureaucracies. In the very near future, the number of people in the market who had nearly zero contribution to tech industry history will dwarf the number that did. So how can we, with any degree of intellectual honesty, claim so boldly we know how this will play out?

I feel a proverb I’ve heard time and time again from those who have been around from the beginning is appropriate.

The market is the ultimate arbiter.

We can debate theory and philosophies related to how much of a predictor industry history is of the future all we want but ultimately the market will decide. My hypothesis is that, unlike the PC era we know so much about, we have no idea how these next several billion consumers will dictate the winners and losers. For example, I like to use the analogy that Facebook and WhatsApp are serving as the emerging market equivalent of America Online — connecting these consumers to the internet and to others digitally for the first time. Yet in the PC era, consumers outgrew the walled garden approach of AOL. Do we know for sure these emerging market consumers will outgrow the walled garden? Or maybe walled gardens win in the end? We have no idea. These consumers are coming online with very different social, national, and economic backgrounds. We are observing usages of mobile devices in places like China, India, and other markets we have never seen before. If we see things that are new how can we apply industry history to it?

What will be a smartphone in the future? Will native apps or web apps win the future? What’s an app in the future? All of these and more are subjects where industry history is used to attempt to shed light. I have no problem with that. It is useful and in some cases I imagine history may repeat itself. The problem is we don’t know which part it will be.

If we were having this discussion 20 years from now I feel the “history will repeat itself” mantra would be more applicable. We simply don’t have enough industry past under our belt to claim what we do have is the part that will repeat. We are still in the middle of this journey from analog to digital. We are still bringing the masses online for the first time. They will still play a role in writing the history we are observing today. In all likelihood, the history which may “repeat” is still yet to happen.

Chart: How’s the iPhone Doing in China?

About a month ago, I went into detail on Apple’s presence in China. Since then I have been tracking and plotting the iPhone’s presence on Umeng’s app and device usage analytics network since 2012. If you recall Umeng’s latest report, it was clear the iPhone had a larger presence in China than many thought. More importantly, the iPhone completely dominates the premium tier in China, a segment larger than many realized at 27%. I dug around and concluded Umeng’s analytics data is fairly comprehensive – likely covering approximately 70-80% of the smartphone market.

I’d like to share the chart I made plotting the breakdown of iPhone models in China over time.

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The lack of popularity of the 5c is not surprising. The price differential is too minimal for the market in China who view premium devices as status symbols. For the group that can afford or aspire to afford an iPhone in China, only the best will do. This explains the rise of the 5 and 5s in the chart. The real observation needs to be made about the plotted lines of the 4 and 4S. The install base of these two devices is largely driven by the secondary market. The bulk of Apple’s install base in China and its continued rise is still driven through illegitimate or “gray market” channels more so than through legitimate channels. I believe this will change over time but a great many Chinese customers still buy iPhones from the secondary markets and having them activated to the network of their choice.

The 5s is on a steady ramp, like the 5 was. This looks to continue. From Umeng’s data, no version of the iPhone saw as high a monthly increase as the iPhone 5s. It is also worth noting there isn’t a single Android SKU in China that shows up as a percentage of monthly activity on Umeng’s network any higher than 4%. This shows how incredibly diverse China’s Android landscape is.

What Mobile Can Learn from the PC Industry

The PC industries doldrums continue yet many seem to be scratching their head as to why. The common answer is to blame tablets. While there is truth to that statement, some important context is still missing from this puzzle. What many don’t initially observe is since about 2007, the PC market, specifically the notebook segment, began to over-index to the consumer segment. Meaning gradually since then, more annual worldwide notebooks sold were to the consumer segment rather than corporate. Note this chart from Benedict Evan’s slide deck Mobile is Eating the World.

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During the PCs run when more PCs were shipped to corporate segments than consumer ones, the corporate buying cycle was like clockwork — every two to three years. Refresh cycles were predictable. As the PC and notebooks became more saturated in enterprise environments, the PC run continued as it bled over to the consumer segment. Consumers, who either used a desktop PC at work or had no PC at home started to bring PCs into the home. The observation that gets lost is the consumers who caused the PC to over-index to that segment were not early adopters. If you are familiar with the diffusion of innovations, you know the late adopter parts of the market are much larger in terms of volume than the early adopter parts of the market. As the late part of the early majority and the following segments started buying PCs, we saw growth but more consumer PCs were sold than corporate PCs as a part of the overall mix. The trouble with this, which the past few years of PC decline has evidenced, is the later part of these consumer markets behave much differently with electronics. Many in the early majority, late majority, and laggards, buy tech based more on needs not wants. More to the point, once a product is acquired they generally don’t replace it until it’s “beyond repair”. Technology products’ life cycles are extended when this very large part of the consumer segment gets into the market.

By this time, the market is to the point where it is fully mature and reaching “post maturity”. Around this time as well, costs for components also come down, become mature, and generally can and will last longer. The perfect storm hit the PC industry where a significant part of the install base bought their PCs, and the maturity of the hardware allowed them to last for quite some time, dramatically extending the life cycle of the product for customers who won’t replace it until it breaks. This is where we are today. The PC segment has reached a fully mature replacement market and growth is declining. So what observations from the fully mature PC segment can we glean for mobile?

While the PC is not a “one per person on the planet” product the smartphone, for the most part, is. The total addressable market is significantly larger. The PC install base will settle around 1-1.2 billion while the smartphone install base will settle around 4-4.5 billion. ((due to economies of emerging countries, growth beyond that point will simply be slow. More on this at another time.)) However, we have an install base of around 1.5-1.6 billion smartphones now with the bulk, 70% approximately, in full replacement markets. Because of this, I divide the smartphone market into two segments. There is a mature segment, rapidly going to post maturity, and there is an immature segment which is the quarter to half a billion first time smartphone owners coming on each year for the next few years. The two largest markets from an install base standpoint of smartphones are China (approx 525m currently) and the US (approx 225m currently. Per my PC observations I’ll focus on these two markets.

USA

This market has been a defining one for mobile in many of the same ways it has for the PC. With smartphone penetration nearing 70% in the US, we are well into a mature replacement cycle market. But to get to where we are now, we have a huge install base of the late state early majority, late majority, and laggards who are in the market and will increasingly become so during 2014 as we drive saturation to 80-85%. As in the PC space, we are already seeing the “I’ll replace it when it dies” mentality impact smartphones. This is stalling YoY growth, and making it harder for the likes of Apple and Samsung to drive the masses to their latest devices. While the refresh rate of smartphones will remain approximately 24 months for a percentage of the market, I sense there is a growing percent who will wait a bit longer. Perhaps 2.5 years will be more common rather than two or less as it will be for some segments. The issue? Are there more people who will need to be persuaded to upgrade than there are those who will do it routinely because of their love of technology? This last bit is tricky but there is hope. For example, it is for the reasoning I just laid out that the time is right for Apple to release a larger screen iPhone. That, plus perhaps longer battery life, enhanced security thanks to 64-bit, and a few other simple features, could significantly move the needle for Apple in the US. Note this ChangeWave survey indicating nearly half of all smartphone buyers who are intending to purchase a smartphone plan want to buy one with a screen size around 5″.

The US is an iPhone dominated market with Samsung gaining ground, little bits at a time, with each new Galaxy release. Both need to start moving the needle or we will continue to see refresh rates extend. Every PC OEM we speak to regular beats to the mantra of “give them a reason to upgrade”. This is a key theme for consumer markets and applies to PCs, smartphones, and tablets, once they reach maturity.

China

China is crazy. It is unlike any market I study in depth. The swings of market share as a percentage of quarterly sales by different vendors is staggering. Xiaomi, in less than two years, is shipping more smartphones than Samsung each month. China is saturated with half a dozen and growing key Android OEMs all going after each other with new device releases every quarter or so. Could you imagine in the US having six to eight smartphone manufacturers releasing new devices every quarter or even twice year? It would seem like overkill but in China? It isn’t. Selling a few million each quarter is being fueled by rapidly releasing hardware. The average smartphone lifecycle in some parts of China is 11 months and in upscale areas it is seven months. ((My data)) While the smartphone market in China looks and feels mature, and in some cases even post mature, it really isn’t. While Xiaomi is all the rage, we have no solid data what Xiaomi’s loyalty rates are. Are consumers jumping to different brands just to try the hot thing every year? What are fads vs. what are sustainable trends is much harder to predict in China.

While I sense many of the same PC market observations apply to mobile in the US, they are not applying to China. Significantly, China has more smartphones than PCs and is largely now a mobile first (and for a growing percentage, mobile only) market. All of this is to say mobile can learn nothing from the PC segment for China, which is a point in itself. Perhaps the strategic dynamics of a mature market, and eventually smartphone saturated one like China will behave fundamentally different than the US. If this is true of China will it also be true of India (where PC penetration is less than 10%), Indonesia, and Brazil? I suspect this is the case but we are in such early days it is hard to tell. Which makes it fascinating.

A New Way to Think About Apple’s Hardware Business

I have been thinking quite a bit about Apple’s hardware business. As many readers know, I believe Apple is equally a hardware and software company. I also believe they will naturally evolve into a services company wherein they will become equally a hardware, software, and services company in the future. All three of these segments will play a unique role in differentiating their ecosystem and deeply integrating their assets to form a consistent whole. I do not believe any other company on the planet can do what Apple can do to benefit from such an integrated strategy. This is what sets them apart and is why I am in the camp of those who take a long view of Apple. That being said, most people, when they analyze Apple, have them tipping the hardware side of the scale more than they should. This is why I propose a new way of thinking about Apple’s hardware strategy. Let me start by laying some foundation.

When we think about Apple’s core hardware products today, we observe their primary business is making computers small, medium, and large. ((Thanks to Jean-Louis Gassee for giving me this core observation)) The computers that fit in your pocket, your hands, and your lap/desk are the center of their hardware strategy. These will always be the products Apple can use to maintain their margins and continue relatively steady ASPs. This is because these hardware products are personal computers. The intimate nature of personal computing devices by default will keep them from becoming commodities in most cases. In particular, Apple’s small, medium, and large computers will never be commodity products because they run a computing operating system unique to their hardware. This is where the equal parts hardware/software company come into play. Because of this differentiation, these are the products Apple can sell at higher prices. These are the products where independent value will lie. These three products also cover the spectrum of Total Addressable Markets. The iPhone has the single largest possible TAM, followed by the iPad, then the Mac. But the key foundation we need to lay with regard to Apple’s hardware strategy is the volume and price combination.

Selling a higher priced product, that can also sell in high volumes, is the ideal revenue growth driver. Right now this product is the iPhone, which sells in higher volume than any other single smartphone on the market and at a higher ASP. For this reason, the iPhone is more than half of Apple’s revenue and will be for the foreseeable future. As they offer lower priced options, they need to sell dramatically more to maintain a steady line. For example, a company like Nokia can sell magnitudes more phones than Apple but not make nearly as much money. As the price of a particular piece of hardware goes down, regardless of margins, significant volume is necessary for it to make a blip on the revenue radar. This is the key reason why any new hardware from Apple that is not a core computing product and can’t sell at premium costs and/or in large numbers needs to be viewed more as a software and services story than a hardware story. This applies to both new “categories” being spoken about today such as wearables/smartwatches and TV.

I want to restate it is my conviction computing products are the ones Apple can sell at high ASPs, margins, and in significant volume. This is why it is hard for me to believe the hardware element alone for any wearable, smartwatch, or TV is the upside for Apple. Even if they sell a large piece of glass for $1500 or more, they will not sell it in large volumes even though the ASP could be high. The same is true with a wearable or smartwatch. Even though volumes could be higher, the ASP will not be. Meaning volume is key for the revenue on the hardware to be significant. How many $199 wearables would they need to sell for it to register on the revenue radar? If they keep their traditional margin strategy, the cost would be quite higher than $199. Knowing the build of material costs of these devices — the screen, the sensors, etc. — if Apple does keep margins on one of these products it would be quite costly. As the cost goes up, the TAM goes down. This is why I propose the new way to view Apple’s hardware strategy — outside of computers small, medium, and large — is to not view the iPhone, iPad or Mac at the center but to view iOS at the center.

Putting that statement a little more clearly, a TV, smartwatch, health and fitness wearable, car, etc., are all accessories to iOS. The hardware itself is simply a feature of iOS. This strategy deepens the ecosystem and lock-in for Apple but also highlights the benefit of the software and services upside. For example, a health and fitness wearble could tie deeply into iOS and open the door to subscription services, payments or authentication for example. For other companies looking to compete in the health and fitness wearable space, Apple can uniquely offer them tie ins to iOS that ensure their iOS accessory works best with iOS. As these companies build in services like subscriptions or coaching or nutrition advising for example, Apple can sit in the middle of those as well. Accessory hardware simply becomes a feature of the iOS ecosystem. Given the centrality of the iPhone, one could even state it by saying accessory hardware becomes a feature of the iPhone.

If we view lower cost hardware as a feature of iOS, it serves as a gateway to other services and types of transactions where money changes hands. We can then see how Apple benefits from the upside of what this hardware will enable. This is exactly how I feel we have to view any hardware Apple will release that is not a computer small, medium, or large.

Of course these hardware products from Apple may run a proprietary OS, and even iOS in the case of Apple TV, but we can’t let the reality slip that those products are not computers the same way the iPhone, iPad, or Mac are. Outside of that core, iOS is the center, not the hardware endpoint.

One last point. Apple being fully integrated across hardware, software, and increasingly services puts them into a position to benefit financially from all three — in some ways more than any competitor. For example, even though a health and fitness wearable, or even Apple TV, is a gateway to software and services upside, with iOS at the center, Apple can still get margins on hardware in ways others can’t. While the margins may not be as great as their computing products, they can still make some money on the hardware. My point, however, is it won’t be enough to make a blip on the revenue radar without that hardware also leading to revenue upside on software and services. Thus the margins and revenue upside is diversified across all three vectors — hardware, software, and services.

Going forward, we are dealing with new economies of scale in terms of growth. Selling high margin, high ASP products will simply hit a wall at some point in time as it saturates and you run out of customers. Relying on the hope new customers will emerge in the high end is too unpredictable of a variable to count on. Lower cost products is the surest way to grow into the mass market. Tablets, Macs, TVs, health and fitness wearables, and even a smartwatch are not subsidized products. Selling them at extremely high cost, like the iPhone, is simply not an option in many markets. ((Of course, there are options in some markets where retailers will offer payment plans thus bringing tablets, and wearables, into the subsidy ecosystem. But this again is a variable and brings with it competitive complications as well.)) Lower cost products require significantly higher volumes. No product Apple can launch will be like the iPhone. That is why what I lay out is the key to thinking about Apple’s hardware going forward. It’s more about iOS at the center than hardware endpoints at the center. This is the fundamental building block to a an ecosystem that can deliver growth and revenue across the hardware, software, and services spectrum.