Ben Bajarin – Page 40

Our Services Destiny

Speculating about the future is not easy. Traditional wisdom looks to technology industry history as our guide. The lessons from this history often shed great insight into the future. However, using this history has its challenges and requires context. But using history as our guide, I think it is very interesting to understand the role services will play in the future.

History as Our Guide

I was at a conference a few years ago and heard a presentation from an early executive at Compaq. He shared that when we look at the history of major segments, such as mainframes, mini computers, and desktops. we observe a familiar pattern. That pattern is related to how value evolves through a segment’s lifecycle. His point was that in the early days of a segment the value starts in hardware. During the hardware stage the innovation in hardware, components, form factors, etc., is the driving value proposition for the buyer. His next point was that once the hardware reaches some level of standardization the value then moves to software.

During the software stage all the value is found in software that takes advantage of the compatible build-up of hardware. In this stage, hardware is largely commoditized and all the value and opportunity is in software. He pointed out that while there was still some value left in the software cycle the next step is when that value shifts to services. Most software during this cycle is designed to take advantage of the services being offered. In essence software as a service becomes the longer-term sticky model.

To visualize this cycle as it was in mainframes, minis, and desktops, for example here is the slideshow showing how this happens. Cycle through each slide.

[slider id=’36323′ name=’Value_evolve’ size=’full’]

There is quite a bit of context within our history needed in looking at these slides but the core point is valid. For example, the history in the buildup of hardware may have played out very differently had Compaq’s Rod Canion caved and adopted IBM’s proprietary PS 2 bus architecture. Or perhaps if Gary Kildall would have called IBM back and they used his CP/M OS instead of MS-DOS. But those are stories for a different time.

Using this view of history as our guide, it would suggest that the value cycle related to personal computing is destined to end up in services. Hardware will be commodity and solely exist to run the bulk of compatible software which is just a gateway to a service.

This vision is interesting but I’m not sure it plays out this way. Let me offer two views I have on how this could play out.

Scenario #1

In my first scenario we play out what could happen if the primary view of history, which I outlined above, prevails. This is the view most similar to that embodied today by Google’s Chromebooks and by Larry Ellison’s vision where all computing is cloud-based and hardware is purely thin-client. In this vision the Internet is the platform, not proprietary OS layers.

Here is a slide I created for this scenario using the value shift methodology.

In this view we are still in the ‘beginning’ or the ‘golden era.’ Everything we see happening today with the fragmented platforms, app stores, and services is ‘just the beginning.’ During this stage each platform is evolving on its own related to hardware, software, and services, but will eventually lead to the Internet becoming the platform. This is the pure cloud-based, browser-based computing vision.

What is interesting in this vision is that it is good for software developers but not so good for pure hardware companies. If all hardware simply needs to standardize around web standards, then developers no longer need to write for individual software platforms. Instead all they have to do is create cloud apps that will run on all hardware through a browser or web standards-based operating system.

This vision is at the center of the debate over native apps vs. web apps in our future. This vision seems good for developers because they truly have a universal platform to write software and deliver software to the largest base possible. But it will challenge pure hardware players and force them either more into the software game or services game.

This view, if it does happen, will not happen for quite some time (10 years, at least). I say that because this vision requires that a degree of hardware innovation be exhausted and we are nowhere close to that. It will also require a massive amount of infrastructure related to cloud and wireless networks that are nowhere near where they need to be to support this scenario.

Generally this view favors the strategy of companies like Google and Amazon. It is also the model driving Xaomi’s growth in China. The sheer possibility of this scenario is why companies such Apple, Microsoft, Samsung need to be aggressive about their services strategy.

Scenario #2

In this scenario the future is a hybrid of the models described above. In this future, there will always be some value in hardware, there will be value in native apps but there will also be a plethora of quality web apps and of course increased value in services. In this view, however, platforms such as iOS, Android, Amazon’s platform, perhaps Windows Phone, or even something else all evolve in parallel down the hardware, software, and services value chain. This view favors a more proprietary ecosystem approach that wins with deeper integration across all three segments.

Thus it may look more like this for the specific players I am pointing out.

In this view the market will sustain a range of approaches and more importantly choice will exist throughout the value cycle. You could argue this scenario benefits the more vertical or integrated players. Google, Microsoft, Amazon, and Apple all have varying degrees of a vertical integration strategies. Each can tightly tune its hardware, its software, and its services to create a differentiated offering in the marketplace. We know from many segments that differentiation to mass market consumers is important.

This does not preclude the more cross-platform services such as Netflix or others from being successful. Only that those companies which offer services on all platforms run the risk of being out-integrated on certain platforms by the vertical player who seeks to offer competing services. The players with a services strategy such as Google, Amazon, Apple, Microsoft, and any else that could do it, have the ability to more tightly integrate their services with their hardware and software. Thus they win with an integrated approach. Integrated approaches are more convenient to mass market consumers, easier to use, and thus will be perceived as valuable (that is, worth paying for).

Conclusion

I can see both these scenarios playing out. In my mind the likelihood of each holds equal weight. Which basically means I’m not sure which will come to pass. If Scenario #1 is more modular, Scenario #2 is more integrated. The point that remains, however, is that any way you look at it we are still only just beginning.

The Value of Software and the Evolution of Handheld Computing

We are witnessing an unprecedented event in the history of computing. The upgrade from iOS 6 to iOS 7 is on pace to become the fastest operating system transition in history.

As I reflect on this reality it brings to light some very interesting observations.

The Value of Software

The first which is perhaps the most interesting is the value iPhone users associate with iOS.

With no other platform, mobile or others, do you see this level of demand on the day an OS comes out to upgrade. iPhone customers value iOS. This is significant in so many ways.

I’ve long argued that in the era of Microsoft, consumers ((I make a distinction between business consumers and mass market consumers)) used Windows because they had to, not because they wanted to. Windows was used at work, school, etc., so it is what consumers used and bought for home. Windows became the standard on PCs by default. ((I understand fully that there was a market in the early 90’s where passion for Windows existed particularly around Windows 95. Microsoft in those days was genuinely focused on brining computing to the masses, only the masses could not afford computers.))

Apple, however, maintains a level of interest in iOS despite the market being filled with viable choices. The iPhone did not become the single device with more market share than any other device by default. It has done so, and continues to gain ground, despite the market being flooded with valid alternate choices. This was a market Microsoft never had with regard to Windows. This is why it is losing in mobility. When it came to pure consumer markets, Microsoft never really had a fighting chance.

When you look at existing operating systems, it is hard to find any comparison to the demand for iOS. The only thing that comes close is another OS from Apple, Mac OS X. Apple routinely drives operating system transitions better than any other computing company. This is significant. It highlights the fact that consumers value Apple’s operating systems not just their hardware. Can we say the same of Android? Windows? Windows Phone?

iOS differentiates the iPhone. If consumers value it then it is not just Apple’s hardware that is attractive but also their software. From a competitive advantage standpoint, this point can not be underestimated.

Not Just Consumers But Developers as Well

For whatever criticism Apple takes for controlling their platform, they have the best third-party development community of any platform out there. The quality of applications on iOS and OS X is objectively superior than on other platforms.

What continually strikes me as fascinating is how creative the Apple developer community is and, more importantly, how passionate they are about software development. I talk to many developers on all computing platforms and it is simply unparalleled. More importantly, I use each computing platform and continually search for apps to truly push computing and make it accessible to the masses. I find these apps more often and in greater frequency on iOS and OS X than any other computing platform.

I genuinely get the sense that Apple’s third party development community is interested in advancing computing and wholeheartedly embracing and taking advantage of the computing advancing hardware Apple provides them.

The only community in recent years where I remember this robust of third party developers was the Palm developer community. This is a significant distinction because this community jumped on board with handheld computing on what is arguably the first handheld computer in the Palm Pilot. I see so many similar traits to the early days of Palm’s developer community embracing and being creative with hand held computing with todays iOS developer community.

The iPhone was arguably the first mass market hand held computer. I would argue that it is still that product today and will increasingly become so in the future. This distinction is important because it is also the way the iOS developers view the platform–as a handheld computer. This is also how Apple views the iPhone. This vision of handheld personal computing at a mass market level is key to advancing the platform.

The key observation in all of this is that consumers are embracing this vision and value the handheld computing hardware, software, and, to a degree, services Apple offers. Apple embraces this vision and is laser focused on bringing hand held computers to the masses. Developers are embracing this vision and creating new and unique software for hand held computing.

This, in my opinion, is the core mountain Microsoft and other competitors must climb. The problem is, they have never really had an impassioned third party community like the one we see today for iOS. Android benefits by default because many developer maintain an iOS first and Android second strategy. The sheer size of the Android addressable market is playing in its favor. But I am yet to see such a large developer community vested to advance hand held computing on Android either.

My advice to competing platforms like Android, Windows 8, and Windows Phone is to find developers and build a community doing unique and exclusive things on your platform and expose and highlight those things. Just having the same apps is not good enough. For competing platforms to evolve in a meaningful way with handheld computing it will require computing advancing developers on competing platforms. This has yet to be seen.

This is the challenge Apple has set up for competitors. Apple’s differentiation is not just with hardware, or with software, although it certainly does both. The more powerful differentiation Apple has over its competitors is its vision. Personal computing and advancing what every day people can do with personal computers has always been at the core of Apple’s vision. Now they are extending that vision to handheld computers. Right or wrong, Apple has a different view and vision for personal computing. Based on their success, I’d say they are on the right track.

Apple’s 5C Invasion Strategy

All the speculation around the iPhone 5C was that it was designed to be Apple’s product to infiltrate the lower tiers of the market and begin to take share from Android.

You may or may not know that in several markets like the US, Japan, and parts of Europe, the iPhone dominates the premium section of the iPhone market. This market makes up roughly 10-15% of the global smartphone market. Obviously Android dominates the other and much larger sections of the smartphone market. So the speculation around the 5C was that it was designed to help extend Apple’s product line beyond the 10-15% of the high-end segment. So does the 5C do this? I believe the answer is yes but it is not clear exactly by how much.

I know that is a foggy answer but this is a complex problem. If you study Apple like I do you know that what matters to Apple is not just market share but the right market share. Apple wants customers that add value to their ecosystem. Meaning that they spend money on apps, media, accessories, etc. The ultra-low-end part of the market does not do this. The larger middle-tier of the market does this to a degree. The market that Apple currently dominates does do this and in large volumes.

Apple has brought a current generation iPhone line-up in the 5C at lower-costs than previous current generation iPhones. This is why in the US market the lowest-priced iPhone with a new two year contract is $99. Now in many other markets Apple does not set the price of the phone. The carrier buys the phone then prices it at whatever they want. So this means a carrier in other parts of the world can buy the iPhone 5C then charge any price they want. They can make it free, $49, $69, etc.

So to answer the question we need to anticipate the value of the iPhone to a carrier by way of driving data services. If you follow the iPhone’s market share by way of web consumption (data) then you will know it is the undisputed leader when it comes to driving data usage on carrier networks. This is a big deal and I believe that carriers in markets outside the US understand this value and will price the 5C aggressively in order to attract the more valuable customers to their network.

So what about China?

This is the big wildcard. Apple for the first time included China as a launch day country. This is significant and the Chinese customers will appreciate this in that is shows them Apple is not treating them like second class citizens. Of course to really tackle China Apple needs to have China Mobile as a distributor.

This deal is inevitable in my opinion, especially since the new iPhones support TD-LTE which is the standard for China Mobile network. Cost aside, my firms forecast and from many others I saw, anticipated that a China Mobile deal alone could lead to 3-5% extra market share in China for the iPhone.

Is the cost high for the iPhone 5C in China? Yes, but keep in mind that all imports suffer a massive import tax. This will always keep the cost of iPhones higher than any local brands in China. This fact alone complicates the competitive landscape in China more than many realize.

All of that being said, I’ll say this about what Apple announced today. In light of the competition, they have never been up against an actual iPhone lineup. Competitors have been competing against only one current generation phone. Yes Apple offered legacy devices in the market but I can’t overstate the importance to new buyers and upgrades on current generation devices. This holiday will be the first time that Apple’s competitors will be going up this strong of a current generation iPhone lineup. With that I will add that Apple’s brand and marketing should not be underestimated by the competition.

Many of my analyst colleagues doubt that Apple’s moves today take them beyond the 10-15% they currently own. I disagree. Colors will be of interest to many segments of the market. The gold iPhone will be a huge hit in China due to what the color represents. Pair that with the project Red case and the Chinese will go crazy.

I’m not going to project or forecast what amount of extra share Apple can garner from the new lineup. But I will not be surprised if this takes them beyond the 10-15% and into the 20% if not higher. I certainly believe that in markets where the iPhone is priced even just 100-200 dollars more than a competing mid-tier Android device that the iPhone will fair well. In fact in all but pre-pay markets we estimate the iPhone to take share from the 350-400 dollar mid-tier Android devices.

There are number of data points we are tracking to validate this. Google Play app store revenue in Japan for example as well as the sales figures of Samsung and others in key regions. Lastly, we estimate that by the end of the year iOS will have gained enough ground on Android to now have more than 50% us market share.

Surface Thoughts

As I reflected on Microsoft’s Surface event earlier in the week, I was reminded again that in its current form at least, Microsoft is still not yet making a tablet. They are making a PC that kind of looks like a tablet. Unfortunately, for them tablets are successful for reasons PCs have not been. By applying a PC centric philosophy to Surface, the device in it’s current form is still likely to fare poorly in the market place.

Steve Jobs articulated what Microsoft doesn’t seem to understand.

“The iPad is more intimate than a notebook and more capable than a smartphone”

In the article I wrote last year Why I’m Convinced Tablets are the Future I made a point that I think is key from a behavioral standpoint to the above quote.

Devices like the notebook are kept at arms length. Yet a device like the iPad is held, touched, and used in a much more intimate way. Tablets to a degree are significant because things we hold we love.

Microsoft used terms like ‘lap-ability’ and the Surface has a kickstand, implying it will be set down more than held, while the iPad and Apple’s focus on the experience is more around ‘hold-ability.’ From our observational research on how mass market consumers use tablets, ‘hold-ability’ is more important than ‘lap-ability’.

We are seeing a legacy PC mentality being applied to computing by Microsoft with Surface. This is the root of the problem.

I have no doubt there are small niche segments of the business market that are interested in products like Surface but my conviction remains. Surface is not a mass market product. Perhaps that is not the point. But I still struggle to find the point of Microsoft making the Surface.

One may argue that no vendor has done a better job with this form factor than Microsoft. Therefore the Surface is the best of its kind. That will soon no longer be true and Microsoft’s partners will do a better job with these products. Which again will cause us to scratch our heads and ponder why Microsoft is in this business.

Why is RT Still Alive?

The last question that is still perplexing is why is RT still alive. Microsoft is now in sole possession of the Windows RT market. Their partners have all for the most part abandoned it. We can debate the reason for this all day but my belief is that Microsoft understands they need an ARM solution. If not for this version of Windows but perhaps the next one.

We know almost nothing about the next version of Windows. But we do know that Steve Ballmer has implemented a cadence of RAPID RELEASE FOR WINDOWS. So I expect we will see the next version of Windows sooner perhaps than people think.

My intuition regarding the next version of Windows is that Microsoft will seek to truly unify the Windows code base for PCs, tablets, and phones. To do this Microsoft has to assume that the world will not be dominated by x86 in all those segments and therefore to participate in the upside of both tablets and smartphones, Windows, the development tool kits, and the developers all need to be on board with developing for ARM as well.

RT is still alive simply because Microsoft needs the experience with regards to Windows on ARM and needs to continue to make strides for making it as easy as possible for developers to create cross screen and cross silicon software. Surface RT may seem like a lame duck now but it is the bigger picture we need to look at with regard to Windows on ARM.

Samsung’s Precarious Position

Samsung, I believe is in a precarious position. I’ve felt this way for quite some time despite their continued growth in mobile over the past few years. But my reasoning comes from understanding how Samsung got to the position they are in with regard to mobile and concluding that the current strategy is not sustainable.

Firstly, you need to understand that the vast majority of Samsung’s huge sales come from outside the United States. Take a trip to China, India, and other quickly growing smartphone regions and you see a vastly disproportionate amount of Samsung devices per others in retail. Samsung’s growth in these regions is tied to form factor variety and price that is it.

Samsung’s premium line has been steady doing ok in the US but still less than 20% of all US smartphone sales of devices wholesale of $500 or more. In other parts of the world Samsung’s premium line has done better as it appears the Galaxy line is on track to ship 43-45m units this quarter. Still most of those outside of the US.

In this chart we see what the distribution of current market share estimates by sales from each vendor on a WW basis.

Apple dominates Samsung in premium devices sales in the US and to a degree in Western Europe. But when you look at the chart above you see that the rise of “others” is the source of Samsung’s precarious position. Growing strong regional brands like Xiaomi in China and MicroMax in India are rapidly eating into Samsung’s global sales of smartphones. And I don’t see this trend stopping.

MicroMax has done an amazing job managing their brand and going right at the core value proposition of Samsung in India. Similarly so has local Chinese brands like ZTE, Huawei and more important Xiaomi.

Many of these local and regional competitors are coming back and are employing strategies Samsung simply will have trouble competing with given their current strategy. What I mean specifically is that Samsung is not doing enough to create brand loyalty or ecosystem stickiness. Samsung is stuck in a continual cycle of competing for consumer choice. This is much more precarious position to be in because next year you must compete for the same customers as equally hard as you did this year.

I’d argue that this is not the case for Apple. They have loyalty that is un-parralled and upgrades from existing customers are practically an guarantee. Apple can focus on new customers, all the while satisfying existing in their ecosystem with new hardware, software, and services. Samsung does not have this luxury, they compete for new and existing customers every year.

Both Apple and Samsung, however, are going to be challenged by regional brands in areas like China and India where regional services are more relevant and more specifically proprietary. I’m convinced at this point that for Apple and Samsung to have a larger play in those regions they will need a much more regional centric strategy than they do today. I see what is happening in China and India as a problem for a global company deploying more global strategies than regional ones specific to those foreign growth areas.

Samsung understands its weak competitive position and it is the sole reason it is necessary for them to spend massive amounts of money on advertising.

To the ecosystem point, this is exactly the fascinating strategy Xiaomi is employing specifically related to China. Xiaomi, has the potential to create services and ecosystem lock in if they do their services right. Right now they run a heavily customized version of Android but it is tightly integrated into their core services which is a cloud messaging service, security service, and backup services. This is likely to expand to media, games, social networks, etc.

The key takeaway for Samsung’s position is simply the rise of the local brands in the areas where they have been the most successful to date. We will see how Samsung responds and if they are capable of building their own services framework on top of Android. This in my opinion is absolutely critical for Samsung to get right if they want to remain a major player in the future of computing.

The Cubed Podcast

I wanted to share with our readers that I have started a podcast called Cubed with several colleagues I genuinely enjoy chatting with. They are Ben Thompson of stratechery and Benedict Evans. Our goal is to have smart conversations on the industry at large with a bit more emphasis on mobile and strategy.

We have released two episodes thus far and are planning to do a weekly release. I would love for everyone to check it out and give me any feedback. We have plans to get the Tech.pinions podcast going again and we have even more rich media planned for insiders. As always any feedback is appreciated and always welcome.

There is a lot of great insight in these and I re-listened to them and had to pause to think more deeply about the conversation.

Check out Cubed at Cubed.FM and follow on twitter @cubedfm. You can also easily subscribe in iTunes.

First Episode: C is for Cubed
In our first episode we talked about, what else?, the iPhone. What is Apple’s strategy, will it be successful, should they have a large-screen iPhone, and what about China? Finally, we give our predictions for the iPhone’s success, and talk just a bit about the challenges faced by Windows Phone.

Ben’s Notes:
My personal highlight of this episode is when Benedict called Windows phone a feature phone.

Second Episode: Cheers to BlackBerry
In this episode we explore the tragic tale of BlackBerry (formerly knows as Research in Motion) and perhaps soon to be formerly known as BlackBerry. We also dive into iPhone first weekend sales. We explore the differences in strategy and vision between Google and Apple. And we threw some Microsoft into the conversation for good measure.

Ben’s Notes:
My highlight takeaway was the discussion on the role of the leader, liberties they can take with strategy, and the differences of vision between Google and Apple. Particularly the discussion where Ben Thompson points out that Google’s is not incentivized to focus on apps, because time spent in an app is time not using Google search. Also I share a stat about Apple’s market share in the US you don’t want to miss.

Disrupting Disruption Theory

Let’s file this under the open for discussion category. I have been having discussions of late around disruption theory as it relates to many different parts of the market. There are a number of very important general rules of thumb within disruption theory that are applicable to many markets. The problem is that there are exceptions and more importantly there are situations where it is not applicable.

History in a Vacuum

I’ve read all of what Clayton Christensen has published on the subject. And many of the things he offers in the Innovators Solution point out generally sound observations. This particular one should be of interest.

“The competitive advantage from vertical integration is strongest in tiers of the market where customers are under-served by the functionality or performance available from products in the market. Vertical integration tends to be a disadvantage when customers are over-served by the functionality available from products in the market.

There are a great deal of examples historically to justify this observation. That is why disruption theory works in a very general sense. I would argue, however, that the underlying necessary assumption is that the purchaser of these products is purchasing them with a pragmatic mindset.

In many of the examples always cited within disruption theory the underlying common denominator was a buyer mostly interested in cost using a pragmatic approach to the purchasing cycle, a.k.a trying to find the best deal in order to justify the cost.

I’ll return to this in a moment, but what I’ve concluded my issue with disruption theory is, is that when it was formed there was not a true pure consumer market for personal technology. A failure to understand the incredibly emotional behaviors of mass-market consumers is the common trap most who love to quote disruption theory fall into.

Consumers are Predictably Irrational

I love Dan Ariely’s book Predictably Irrational. I’ve read dozens of behavioral science themed books like it as well. Getting inside the mass market consumer psyche is truly an art form. It is one most companies truly fail to grasp. It is also something most disruption theory fundamentalists have a hard time comprehending.

The idea of a product being “good enough” is a very nuanced discussion. With regard to appliances in consumer markets it is perfectly applicable. When I shop for a refrigerator or a toaster oven, I do so with a very pragmatic approach. I try to find the best deal to meet my needs. Appliances, however, are not personal decisions. The kind of clothes I buy, the kind of food I eat, the kind of car I drive, these are all personal decisions and ones where price often falls lower on the totem pole of priorities. The more personal the the product, meaning one wrought with personal preference, the greater the challenge to use traditional disruption theory is to apply.

Products that are more personal by nature actually disrupt disruption theory. Smartphones, and tablets to a degree, are personal decisions and for the masses the common understanding of a pragmatic approach needed to justify disruption theory are flipped on its head. Personal decisions turn ‘good enough’ into a relative and entirely subjective term. [pullquote]This mindset of personal choice and personal preference has not been present until recently in computing[/pullquote]

This mindset of personal choice and personal preference has not been present until recently in computing. And I would argue no device in the market today or for the foreseeable future is more wrought with personal preference than the smartphone. When personal preference exists value becomes subjective. When value becomes subjective it presents a great challenge to predict when or if something is good enough.

But there is one common denominator in the markets where personal preference and behavioral quirks influence consumer decisions significantly more than just price–differentiation.

The Value of Differentiation

It seems hard to put a value on differentiation. In fact, it seems hard to put a value on many intangible benefits. For example, how much is a product worth over a competitors that comes with superior customer service? The root of that question is actually how much is peace of mind worth? I’ve long argued that familiarity is a feature. How much is familiarity worth? How much is ease of use worth? How much is convenience worth? How much is an experience worth?

All of these things are hard to place a distinct value on. But how the mass market consumer perceives value varies. They simply don’t all value the same thing and in many segments, in every consumer segment, you can find examples where price is not the driving factor.

This is what stumps so many disruption theorists with regards to Apple. Apple is the poster child for disruption theorists who are convinced their future is in jeopardy.

Disruption theorists have a hard time understanding Apple in the same way they have a hard time understanding how the mass market perceives value. When I discuss this with behavioral scientists they have a much more holistic understanding of what value means to the mass market and have many of the same issues with disruption theory and how it seems to be applied to the mass market.

The mass market values differentiation. Apple can differentiate its hardware. It does so all the way from inside out. Apple can also differentiate its software. iOS can be found on no competing products. iOS is found valuable enough by the mass market to nearly crash Apple’s servers and driving downloading the update to become more than 15% of total peak time North American traffic from one provider. iOS is found valuable enough to become the industries fastest operating system transition in our history. The Apple experience is unique and it stands out from the sea of sameness.

The simple and foundational truth is that it is much easier to understand when a product is ‘over-serving’ or ‘under-serving’ when all buyers approach the process from a pragmatic standpoint. Consumers are not pragmatic. They more often than not enter the buying process with a much more emotional driven mindset than a pragmatic one. Disruption theory was never designed to address pure consumer markets with highly emotional buyers.

“Value”, as defined by markets is hugely influenced by behavioral quirks. Any definition of “over-served” that does not take this into account does not actually know the true meaning of “served” and therefore cannot know the true meaning of over serving a market. ((John Kirk gave me this line))

A lot has changed since Adam Smith proposed the theory of supply and demand. Just because alterations have been made doesn’t mean it is any less valid. Disruption theory is valid and useful in the market. However to be relevant to speak to and apply to consumer markets, it needs to be refined to include the practices of behavioral economics.

If this subject is of interest. I strongly recommend also reading Ben Thompsons article on Stratechery called ‘What Clayton Christensen Got Wrong.’ It will come as no surprise that I agree with him 100%.

Computing is no longer generic. It has shifted to personal in a way unseen before in this industry. This is key to understand where personal computing goes from here and who the winners and losers will be.

The iPhone 5s- S is for Superior

I want to share my experience with the iPhone 5s. The whole package, from the new hardware features to the iOS 7, has provided me with an experience I did not expect. As I started using the 5s I was brought back to that moment when I first started using an iPhone. It is the iPhone re-discovered. It started with iOS 7.

Re-discovering the iPhone

I predict iOS 7 is going to do something very interesting. It is going to cause consumers to discover their iPhones all over again.

Most consumers understand what a smartphone offers them. For many, I would assume, there is a bit of profound enlightenment they experience when they first switch from a feature phone to a smartphone.

I believe iOS 7 and the overall advancement of the software for mobile computing is going to cause many similar sentiments to those initial emotions from when we first discovered the world of smartphones. I expect those who purchase an iPhone for the first time or install iOS 7 on their current iPhones will be delighted and enamored.

As refreshing as iOS 7 is, there are also some significant hardware improvements that uniquely compliment the new OS.

Speed

The very first thing I noticed when I started using the 5s was how responsive it was. I test a lot of competitive phones, many which are very responsive running the latest and greatest processors. So I was shocked when the responsiveness of the iPhone was so much better that I noticed it instantly. My wife even noticed it and she is the most non-technical person I know. I handed it to her so she could send an email for me and she said “wow this thing is fast.”

Now when I say I observed that it is fast, what I mean is the manner of the experience feels fast. Everything is just snappier. Scrolling felt smoother, moving in and out of menus felt snappier. It was fast and responsive with the little things. Things I noticed and that made a huge difference visually with the overall experience.

Typing on the keyboard is exceptionally fast. I can type very fast on the iPhone keyboard (50 wpm) and previously my typing speed would outpace the keyboard and there would be a letter-string delay. With the 5s letters appear literally as fast as you can type them. This was again was an example of the little things that made the experience better.

I’ll let other reviewers do the deep dive benchmarks. I did do one however specifically for web browsing speed. I like this benchmark because browsing the web is one of the most common tasks with smartphones. Using the SunSpider Javascript Benchmark I compared the Galaxy S4 against the iPhone 5s.

Apple is inching ever closer to desktop speeds for loading web pages.

Seconds Saved A Day

The Touch ID fingerprint scanner has been knocked as being a gimmick. From my experience it is anything but a gimmick. Every device has some form of swipe to log in enabled. If you’re in the 50% you may have a password set up. Mary Meeker from Kleiner Perkins estimated that people look at their phones 150 times a day. Now while that may be high, I think if you counted how many times you take your phone out and check it the number would be quite high. This means a lot of logging in and in this case many times a day swiping or many times a day entering pass codes.

In business settings this is an even bigger deal. In most enterprise environments pass codes are required, sometimes long ones. Knowing how often the phone is used and pass codes entered in business settings, I predict this to be a highly sought after feature.

With the fingerprint sensor Apple has simultaneously made the device secure while also making the process to log-in that much easier and efficient.

Using the fingerprint sensor to log in has had a more profound effect on me than using it to make a purchase. It has delightfully eliminated what I now consider an archaic step–Swipe to log-in. Swipe to login may be a thing of the past.

In fact, this process has become so natural and an instant habit for me that when I pick up my iPad I forget it doesn’t have TouchID and try to use the home button to log-in forgetting that feature is not on my iPad.

You may think it is faster to swipe to log-in. I’ve found the opposite. The fingerprint sensor registers so quickly that the device unlocks nearly as fast as I can push the button to wake it up. Watch this video demo to see just how quick and easy it is to use TouchID. I created a video to show this point. (This is real time I did not speed it up)

[videojs mp4=”http://techpinions.com/wp-content/uploads/2013/09/touchID.m4v” width=”100%” preload=”true”]

Camera

The Camera is more than just a simple upgrade in my opinion. It is a significant upgrade. Particularly with how fast pictures are taken. One of the primary reasons I still use a DSLR is so I can take high quality pictures and have the image be taken the second I press the button as to not miss a moment. The iPhone 5s snaps pictures just as fast as any DSLR I’ve used. The result, helping to make sure you don’t miss a moment simply because your smartphone didn’t take a picture fast enough.

The other big upgrade I noticed regards blur. I noticed on the iPhone 5, and with many other competing smartphones for that matter, that image blur was often a problem. Getting the camera to focus then take the picture fast enough to catch a moment often resulted in some or part of the image being blurry. Apple has solved this by integrating a much more effective auto image stabilization process. With regards to this technique Apple states:

It works by taking four photos with a short exposure time. Then the best parts of those photos are combined into one image with as little noise, subject motion, and hand shake as possible.

With many smartphone cameras on the many phones I try I find it takes some effort to take a picture that is not blurry. With the 5s I found it hard to take a picture that was blurry.

With many smartphones I have used, I often take a picture, then go look at it to make sure it’s not blurry and everything that needed to be in focus was actually in focus. If this is a special moment you are trying to capture, having to go make sure the image is not blurry means you are spending less time appreciating the moment and more time messing with your smartphone. I was delighted when I realized I no longer had to do this. Snap the picture and get back to enjoying the moment.

Conclusion

I’m actually coming at this from an interesting perspective. For some odd reason prior to iPhone launches I end up using an Android phone for a month or two. Then when the iPhone comes out I go back.

This time the feeling was quite a bit different. I was not just going back to the iPhone but to a brand new experience. Because of this it didn’t feel like I was going back to the iPhone. It felt like I was using something entirely new.

There had always been some things I liked on Android over iOS 6. Some of them were geeky and some of them were not. There is no longer any question, I like iOS 7 better than any previous smartphone OS I’ve used. In fact, in my honest opinion, all other mobile operating systems now look dated to me.

I’ve stated before that my personal preference is iOS. I’ve vetted and tested every competing device and OS flavor out there and after all this experience I concluded that the iPhone continually helps me be more efficient and more productive day to day. What I have realized is that although Android does many of the same things, the iPhone simply does them better. And with the iPhone 5s and iOS 7 it now does them a lot better.

Honorable Mentions–

– I have experienced much better battery life on the iPhone 5s than my time with the iPhone 5
– Burst mode is an excellent addition and I found myself taking a lot of pictures using it just to make sure I got ‘the shot’
– Slo-mo was also a feature I used more than I thought I would. Quick and easy to do. Here is a video:

[videojs mp4=”http://techpinions.com/wp-content/uploads/2013/09/flip_slomo.m4v” width=”100%” preload=”true”]

The Role of the iPad for Apple’s Growth

Analyzing the pricing strategy of the iPhone 5c has led me down some interesting trails of thought. Brian wrote yesterday that Apple simply doesn’t have the DNA to go down market.

I disagree with Brian here. I believe Apple has shown that they can make products for everyone with how they built out the iPod line. I simply don’t think the iPod lines downstream philosophy applies to the iPhone. I do, however, believe it applies to the iPad–at least to a degree. ((there is a difference between the iPod and the iPad. One is a computer the other is not.))

In my opinion, with where the market is right now, I believe it is more important for Apple to be aggressive (not cheap) with the iPad. ((The tablet segment in many regions is growing faster than the smartphone segment))

Stating My Case
The argument many are making about Apple’s need to be more aggressive about the price of the iPhone is to acquire customers at the $400 price range. The counter argument to this is to question the value of a customer in that price range to the ecosystem. The theory I would posit is that the customer of a lower price iPad is more valuable to the ecosystem then the customer of a lower price iPhone–at least right now.

I started thinking about this when I started digging through the results of our consumer research panel on late adopters. Specifically I intended to understand the intent to buy smartphones from those who had feature phones. What I found was interesting. The majority of those who still had feature phones were adamant that they did not need a smartphone. Many stated with confidence that all they do is make phone calls and many of the smartphone features were not of interest to them. What’s more is that 60% of these non-smartphone owners were interested in tablets.

I bring this up to make a point. I’d argue that there are large sections of the market who are not fully reaping the benefits of their smartphones. Perhaps even less so than we originally thought. Even if this segment was to get smartphones they would probably not contribute much to the ecosystem by way of apps, services, etc, at least not yet. Perhaps it’s possible that for a segment of the market even smartphones over serve their needs.

However, we know that tablets, and the iPad in particular is not the kind of product you buy to use for its basic features. People who buy these products are doing so for a vast majority of more computing centric reasons and many that infringe on the value of the traditional PC.

What if they can’t Afford Both?
While debating with myself on this topic, I brought up the point that what if the customer in this price range can’t buy both? This is a good point. But if the iPad was to be more aggressive in price, say less than $300 or even $250, perhaps said customer would opt for an even lower cost phone in order to save money to get an iPad.

I’m not insinuating this logic would represent the totality of this part of the market. I’m mostly just thinking out-loud. But I do think the competitive landscape not just on tablets but also more mid-range phones could face some interesting new dynamics if the cost of the iPad was to get even more aggressive. I also wonder the effect this would have on big phones in the few regions of the world where they are selling somewhat well.

The iPad may be the product that most closely emulates the halo strategy and gateway product to the Apple ecosystem that was the iPod. The time to be aggressive with the iPad is near. Apple has much less legitimate competition in this space and lowering the price would further exploit the vulnerability of the PC and potentially hurt Microsoft even more. The iPad is also the right product to lead Apple’s invasion strategy to China.

Tablets are an area of extreme growth despite what people may say about it slowing. Here is my firms chart showing what is happening in the overall PC space. Yes we count PCs as tablets because our research indicates that is exactly how consumers view them–as computers.

Food for thought.

What the A7 being 64-bit Means for The Competition

Samsung declared that it too will follow in Apple’s footsteps and embrace 64-bit processor designs in their products. I have no doubt that Qualcomm and Nvidia will catch up with equally impressive 64-bit designs. That being said, Qualcomm and Nvidia do not have what Apple does, an operating system.

Although Qualcomm and Nvidia will make exceptional processors, the question remains as to whether Google will do what needs to be done to transition Android to 64-bit.

When I first saw that the A7 was 64-bit my first thoughts were about what this means for the competition. More specifically I started thinking about what this means for Android.

Now to clarify there is a port of Android that exists that is 64 -bit. It happens to be a port of Android that Intel has developed running on their own 64-bit x86 architecture. That said, this implementation is designed for more desktop device than for mobile. Intel’s smartphone chips are not yet 64-bit. But an interesting point to this competitive story is that Intel has the expertise already to take Android to 64-bit in mobile.

There are two things to understand about this from a competitive picture. The first is that the transition to 64-bit alone is not the only contributor to performance upside. The 64-bit architecture Apple has adopted and modified is an updated version of the ARMv7 architecture called ARMv8. There are a number of optimizations ARM has included that makes ARMv8 a much more enhanced architecture than ARMv7. Efficiencies have been added that are key to the overall story. The fact that it is 64-bits is just part of the story. This is simply a more efficient new architecture built on a 64-bit framework.

Not all companies are like Apple. Apple designs their own chips solely for their own purposes. This is why they can take liberties in the design process that competitors can’t.

Competitors need to spend the lengthy time going through the ARM validation process for all their chips. Competitors also work to tune the software running on their chips but this also takes time, especially with Android, when you have to optimize for many different OS configurations.

There is no question the competition will go 64-bit but will the platform benefit? From what I see, Google wants to go downstream with Android not upstream. They are trying to commoditize computing not do something unique with it.

On Android games will benefit greatly from 64-bit. But I am not sure the rest of the developer ecosystem is trying to push the envelope. I could be wrong but we will have to wait and see. Regardless, Apple can take advantage of every bit of 64-bit computing. I’m not sure I can say the same about the competition.

The biggest blow to the competition will be the iPad. The iPad going 64-bit has the potential to transform the tablet in ways not yet imagined.

Apple’s lead time over competitors in this is significant. It will be at least a year before we see products on the market. Apple will have developers already established and entrenched.

I’ll end again by restating a point. Apple is trying to do something unique with computing. Google is not. The A7 is a prime example of this and there will be many fruits from this effort.

For a bit deeper dive on just some of the uniqueness of the A7 read this article on the role of the A7 with the Touch ID.

The Apple A7 – A is for Ambition

A great deal of articles have come out trying to sour Apple’s A7 processor and the fact that they have moved their ARM architecture from 32-bit to 64-bit. The narrative claims that there are no tangible benefits to make the move from 32-bit to 64-bit in mobile devices today.

Much of the narrative is rooted in a desktop perspective with regard to 64-bit architectures. Folks were quick to point out unless the iPhone has 4gb of memory that 64-bit will be useless. Those folks are using a desktop computing mindset to 64-bit not a mobile one. iOS for example is extremely memory efficient as are the apps that run on it.

This kind of thinking also discounts Apple’s vertical approach from the Soc, to the hardware, and the software. Because they control the OS they can “tune” or “optimize” the software to maximize efficiently every bit of the core they designed. Apple needs only to design the A7 for one purpose–iOS. Therefore, they can focus in on optimization for performance gains in all areas they feel are important.

Now, while we can certainly make the case that Apple could have achieved many performance gains by staying 32-bit we need to understand the context of how they would have achieved that.

Throw More Cores At It

If you study trends in the semiconductor industry you know that more area of the chip is being dedicated to graphics. It is almost as if the GPU is becoming more important than the CPU. But that is a discussion for another time.

Apple could have effectively accomplished performance gains of some magnitude simply by designing a quad-core version of the A7. Apple is yet to design a quad-core SoC and this would have given them performance gains. However, it would have come at a power cost. More cores require more power. Now there are very good and power efficient quad-core ARM processors available today from Qualcomm and Nvidia. But by moving to 64-bit and staying dual-core, Apple has effectively delivered equal to and perhaps better performance than competitors running quad-core chipsets with a dual-core solution.

So where will this matter? Battery life is the biggest beneficiary in the short term. Every task that utilizes the CPU or the GPU will happen faster allowing the CPU to return to a low-power state much faster.

Many will claim that consumers don’t care about specs. And this is true in most regions. However, there is a group that cares very much about specs, a group that is very important to Apple–developers.

Never Before Seen

One of my favorite lines when talking with developers is: “you can never have enough performance.” I hear this exact line so often you would think it is their motto.

Recently, I heard a wise man say: “Performance doesn’t matter. Until you don’t have enough of it.”

The key to understanding the value of the A7 being 64-bit is what developers will do with it.

We saw a great example from the team at Epic Games at the Apple event Tuesday. While showing off the preview for their upcoming game Infinity Blade III they made an important observation. They pointed out that they could keep “turning on features” they wanted to use in the game. Games like Infinity Blade use engines built around the graphics libraries. Many of the features encompassed in the graphics libraries can’t be used if the CPU or GPU can’t support it. When this happens developers just turn off features. When game developers are provided with more performance they take advantage of it and their applications and the experience with those applications benefit.

We will look back in a few months when we see extremely talented and creative developers take advantage of the A7’s performance and create classes of applications never seen or possible before on mobile devices.

Pundits and the media may look at the A7 being 64-bit and say big deal. However, developers who make a living creating best in class software to push the future of mobile computing forward will look at the A7 being 64-bit and say BIG DEAL!

Foundation For the Future

By going to 64-bit now it sets Apple up for greater performance gains utilizing the architecture for their future. This years gains are 2X with better power efficiency. Next years will be 2X or greater with even better power efficiency and so forth. Each generation delivering better performance-per-watt. Within this context it is easier to understand the “why now” angle to the A7 being 64-bit.

Apple certainly could have kept riding the 32-bit curve and just added cores and optimization with each new process node. But by going 64-bit now, it means they have more grand ambitions to push the envelope in what is possible computationally with their smartphones, tablets, and perhaps more much sooner than expected.

The iPhone will benefit from this, as I pointed out, with battery gains and new classes of applications (particular those that are graphically or computationally complex) but the real winner with this move will be the iPad.

I am, of course, speculating but I think it is reasonable to assume that the next iPad will run the 64-bit A7. Bringing a true desktop class processor to the iPad has the potential to change the game dramatically in terms of how the iPad is used and the types of applications possible on it.

And of course, this move will fuel the fire that Apple may have intentions of bringing the A7 to ‘some’ Mac products.

If you are interested in a much deeper dive on this new ARMv8 64-bit architecture, I recommend this article written by David Kanter.((if you do read the article pay attention in particular to the sections on register states, memory, and virtual addressing)) I found something he wrote in the conclusion of interest.

“In some respects though, the more significant changes came not from adding features, but removing them.”

Sounds kind of familiar.

Understanding The iPhone Pricing and Segmentation

In my mind, the key to yesterday is to understand how the iPhone is segmenting and the role the pricing structure plays on the segmentation.

Everyone, including myself, was convinced that Apple was going to be more aggressive with the pricing of the iPhone 5c. Now, looking back, it should be obvious that Apple has not really changed much in the way of their strategy. They did fragment the iPhone line as many expected. They did introduce a ‘new’ product at slightly lower price point. But they did not do what many thought, which was hit a price point that fully targets more unsubsidized and pre-paid markets.

That being said, there is more to the pricing strategy than meets the eye.

Understanding the Segmentation

Over the last few years, Apple has sold a current generation iPhone along side several last years models at discounted prices. From looking at the sales announcements from many carriers, we know that later generation iPhones sell extremely well. Verizon even reported that half of their iPhone activations were non-LTE, meaning the 4S. This just goes to show you the strength, even in the US, of devices at the $99 subsidized price range.

Outside of the US, and in many areas of Europe, the price of handsets vary much more than they do in the US. Carriers can acquire the devices at their wholesale prices and offer them at whatever cost they want to acquire new customers. In the US we see Walmart do this from time to time with the price of the iPhone 5. Walmart just recently dropped the price to $98 of the iPhone 5 with a 2-year contract. They can do this because of the cost structure deal they have to carry the device and incentives on contracts. Couple that with the fact that people don’t go to Walmart just to buy iPhones and you can see how they can make up some perceived cost losses with additional items bought in store.

For many carriers the iPhone does a similar job on their network that it does for Walmart in stores. Carriers hire the iPhone to drive up their average revenue per user. The iPhone is the undisputed leader for network operators in driving ARPU. The iPhone 5c gives them some leverage to be creative with their pricing of the device in order to acquire new customers and drive higher ARPU than they could before with the premium iPhone model.

Take a look at the chart below and the iOS share of web traffic in specific countries.

This demonstrates the good job the iPhone does in driving premium data services. In regions still trying to drive LTE users and monetize the massive investments they have in network infrastructure, the iPhone is the best product for the job.

Looking at the lineup, I will not be surprised if the iPhone 5c becomes the larger share of iPhone sales. Thus Apple has created a phone for everyone, or at least most, and a premium phone to aspire for. This is segmentation at its best.

Economies of Scale

One other element to watch with the 5c is whether the price may come down as manufacturing economies of scale allow. Since the casing is using a process much less complex in the finishing and machining than the 5 and 5s, it may allow for economies of scale to allow for better pricing.

This of course may not be evident in anything other than the carriers ability to be creative with the pricing. It will be interesting to see if the pricing carriers have with the iPhone are the same in six months time or less.

Overall Apple’s competition has never been up against a current generation product line. They have been up against a single new iPhone in two different colors. Previously Apple had two current generation iPhone choices for consumers. Now they have eight.

I’ve always said that it took an army of Android devices to compete with Apple. Now Apple is creating it’s own army. I do have to imagine competitors are a little nervous.

Advancing the iPhone

Apple may have done more today to pave the way for the iPhone’s future than any past event. What was announced today was more than a set of new products but a new foundation for the future. First off, this is the first time Apple has shifted from its tried and true model of one new iPhone a year. Second, this is the first time in a while that they killed off last years iPhone and replaced it with a new one.

There were more interesting things to write and analyze than fits in one article so I’d like to focus on a few foundational aspects of today’s events.

Next Generation

You can’t look at the iPhone 5s and not objectively agree that it is an amazingly designed phone. Aesthetically it stands out from the competition marvelously. But the technology inside the iPhone is truly next generation.

The biggest surprise for me was the announcement that the new A7 processor in the iPhone 5s is the world’s first 64 bit processor in a smart phone. We heard this rumor early on but I dismissed it thinking it would be too soon to move to 64 bit. Apple, however, believes it is the right time.

1 billion transistors. That is truly remarkable. I’m not going to go into the depths of 64 bit architectures but I’ll make a few points on why this is a big deal.

First, 64 bit will dramatically increase the performance of more intensive and demanding applications. Things like audio and video encoding/decoding and any graphically intense applications including games and other visually complex applications. I talked to several prominent developers in the crowd who were extremely excited about the possibilities with 64 bit computing in mobile devices.

What makes this move to 64 bit all the more interesting is the software. iOS 7 is the world’s first 64 bit mobile operating system. The key to 64 bit processors is to have software which is written to take advantage of it. Here again is where we see Apple’s vertical advantage kick in. They control the hardware, design the SoC, and control the software. All these things have led them to create the world’s most advanced processor and operating system. But it is not just about Apple.

Apple likes to do things that give developers a distinct advantage for their apps on iOS. 64 bit will do just that and I am excited to see how developers can take advantage of the A7 and create the most amazing smartphone applications ever created.

The A7 being 64 bit, and potentially the results it yields in terms of third party software, gives Apple a distinct time advantage over competitors. No competitors are even close to bringing 64 bit to market and even for some platforms like Android which is focused on the low end non-spec smartphones it may not even make sense.

The iPhone is a Wearable Computer?

Apple also showed its prowess in developing co-processors or dedicated companion cores designed for low-power efficiency for dedicated tasks. Their latest one, the M7, is designed as a motion co-processor that tracks movement and is optimized for contextual awareness. They have an API called core motion that has the potential to create a new class of health and fitness apps.

Several things are interesting about this. First of all this could enable a new class of health and fitness hardware as well. Yes new apps can be built to register and track motion of the phone itself. However, by using the API, perhaps we will see new wearable hardware combined with this more robust software to create new health and fitness solutions. One could assume that the more wearable devices we have tracking relevant data the more accurate it can be.

Second, Apple is giving developers the tools to begin to take advantage of assets in their ecosystem to start developing new health and fitness apps. We speculate that Apple may someday create a dedicated wearable and this API and the M7 could be laying the foundation for conditioning developers for that future.

Security

The fingerprint sensor is a true innovation. I have sensed the secure devices trend for some time. With regards to Apple, this is significant since business continues to be a growth area for the iPhone and iPad. The innovations they are doing around security will only help their case in the enterprise and even into more places like government.

Here again Apple’s vertical advantage shines through. By owning the hardware, the SoC, and the software they are able to securely protect the person’s fingerprint data into a secure enclave, which is a dedicated secure area of the CPU that is blocked off from the OS and designed to keep fingerprint data locked directly to the hardware securely and safely. [pullquote]Instead of one-click purchases, we are now on the cusp of one-touch purchases.
[/pullquote]

The key will be to watch how this advances. This will be a new way of thinking about their devices and security and I imagine Apple will take baby steps in advancing this technology. Right now you can use the fingerprint scanner to log-in to the iPhone as well as use it to make a purchase through iTunes. Over time perhaps the capability will extend to purchases with third party apps as well.

Instead of one click-purchases, we are now on the cusp of one-touch purchases.

Free Productivity

Lastly, making iWork free with all new iOS 7 devices does several interesting things. For one, it may keep Microsoft at bay. Even though Office is offered on iOS it requires a subscription to Office 365. This is not an issue for those who have an enterprise license but it is for consumers. By giving iWork away for free consumers now have a solid Office alternative with their mobile devices.

The most interesting thing this does is it drives more iCloud loyalty. If consumers start using iWork and documents in the cloud, instead of something like Office, Apple has the potential to create more ecosystem loyalty as consumers build up size-able amount of “productivity” data stored on Apple’s cloud.

Strategically this one is interesting.

Conclusion

From my observations I noted a few firsts. I’ll end with these.

Firsts
– First dual-tone LED flash
– First 64 bit mobile CPU
– First 64 bit mobile operating system
– First $99 with contract new iPhone model
– First mobile phone with a fingerprint scanner (that actually works)
– First time Apple releases two new iPhones

Pondering Apple’s Big Day

As with all Apple events I have attended, which is every one going back to the launch of the iPod, there are many intriguing questions leading up to the event. Many have been speculating and analyzing every angle possible about what may or may not be announced tomorrow. I’d prefer to leave the speculating to others and focus my efforts on analyzing the impact at large of what does get announced once we have the whole story. That being said there is something in particular that I find interesting about tomorrow’s announcements. [pullquote]The interest doesn’t seem to be about something ground breaking but something ground gaining[/pullquote]

Apple’s Next Big Thing

What strikes me as fascinating is that everyone is making noise not about speculation of some new “innovation” but rather a less expensive and more affordable iPhone. The interest doesn’t seem to be about something ground breaking but something ground gaining. Apple’s next big thing is actually about Apple’s next big market.

I’ve been explaining to many in both our industry presentations and also in my writing that we can not get lost with where we are in the adoption cycle for products like smart phones and tablets. Moves companies make should be focused on driving adoption and addressing market needs. More often than not, the strategy behind this isn’t ground breaking innovation but practical evolution in order to address market needs. There is in fact, the danger of over innovating and thus over-serving the market with where we are at currently in the cycle.

That is not to say we won’t see some innovative things designed to move the market forward. I have speculated that I believe Apple to move the market forward and take a leadership position with regards to security. But whatever is released that is innovative, I doubt will over-serve the market needs. Apple has a tendency to be very calculated in the timing of the market development and readiness to adopt the innovations they bring to market.

Perhaps there will be a few surprises, but perhaps there will not. Whatever is announced should be analyzed within the scope of this question: does this move Apple’s smartphone business forward to address the needs of the global smartphone consumer market. The big deal about tomorrow will be about the ways Apple is addressing the big market.

So What About Big Phones?

I thought Samsung’s proclamation that they have sold 38 million Notes (I and II) in total worldwide was interesting timing. No leaks or real hard speculation has led anyone to think Apple will release a larger screen iPhone at tomorrow’s event. So it seems as though Samsung wants to get some press that hopefully sticks in people’s heads that Samsung has a large screen phone and is selling millions of them and Apple does not. Especially, in light of the fact that the overwhelming majority of those 38 million Note sales have been outside of the US. Large phones, some call them phablets, do well outside of the US but over the next 2-3 years it is doubtful that they ever get about 10% of the overall market in annual sales. What does have the largest part of the market are lower cost phones. Let’s keep that in mind.

So many interesting questions that I will enjoy analyzing post event. The Daily Tech.pinion will be delayed in so that we can focus on analyzing all the news from the day. There will also be a ton of extra content and analysis on Apple this week for Tech.pinions Insiders our subscription service for those who desire more weekly content and analysis from our team. I encourage you to check it out if you haven’t already. And of course follow the team on Twitter for live remarks of the event.

Ben Bajarin @benbajarin
Tim Bajarin @Bajarin
Steve Wildstrom @swildstrom

Microsoft and Nokia: The Silver Lining

It is easy to look at the Microsoft and Nokia deal and be pessimistic. There are no shortage of challenges facing Microsoft going forward as they battle their position of limited relevance in consumer markets and mobility in particular. It is this point of Microsoft’s irrelevance that I want to focus on. This point is at the foundation of the silver lining of this deal.

While Windows still has the lions share of the desktop and notebook market, consumers are not racing out of the house to buy Windows PCs or Windows based smartphones and tablets. This fact, that Windows is just an OS that runs on the notebook hardware/brand of choice from consumers, is the point that should concern Microsoft the most. Windows, the platform and the OS, is an insignificant part of the purchase in the minds of most mass market consumers because the OS is becoming less relevant while apps are what drives consumer purchasing demands.

This is simply the cycle we are in right now. If you have a preference of a specific OS over another, you are in the minority. For most the OS is insignificant in light of the experience that OS enables on hardware. It is the total experience that garners the demand and the desire is not to own the OS but to have access to as many apps possible that might meet their needs. This is especially true on Windows based PCs.

Now, of course, Office is relevant in work based environments. Yet when we do our ethnographic research and interviews with mass market consumers in the work place, I hear more often I HAVE to use Office, not I WANT to use Office.

While we can debate the relevance of Microsoft in the mind of consumers, their irrelevance in the mobile category is undeniable. This is obviously at the root of the Microsoft-Nokia deal.

Battle For the Consumer

My belief is that Microsoft is losing–badly–the battle for the consumer. There is a reason for this. Microsoft is fundamentally and institutionally inept to the needs of mass market consumers. This is one of the many roots of Microsoft’s problems. This is what needs to be fixed if Microsoft wants to be relevant in 10 years.

On the other hand, I believe Nokia does understand mass market consumers at a global level. Their hardships of late, in my opinion, are tied mostly to them choosing Windows Phone over Android. I believe Nokia would be in a very different and vastly more successful position with their smartphones today if they would have chosen Android. Yet Android alone would not have solved all of Nokia’s problems either in the same way it does not solve the long term problems for any hardware company that ships another companies OS.

When it comes to consumers, a demographic Microsoft does not understand, Nokia has been gathering data at a ground level globally about consumer smartphone usage. They have very good relationships with a long list of global carriers who value the Nokia brand and the job Nokia handsets do for them. And they are much closer to the needs of consumers in a mobile world than Microsoft has ever been.

With regards to Nokia’s non-smart devices they have also had their issues. They missed dual-sim in many regions and for several quarters had their lunch eaten by Mediatek. But Nokia responded quickly and didn’t just add dual-sim to the markets that wanted it but took the time to understand why certain consumers valued dual-sim phones and added software value to even further meet the needs of these customers. [pullquote]Nokia possesses a quality I believe that Microsoft does not..an understanding of global consumers[/pullquote]

Nokia possesses a quality I believe that Microsoft does not. A culture, philosophy, and understanding of global mass market consumers and a desire to create products to meet the needs of a diverse global personal computing demographic.

Microsoft has acquired this by bringing the core skill sets of Nokia in house. The question is will Microsoft utilize it correctly? The newly acquired skill sets and human equity Nokia brings to the table need to guide Microsoft’s forward thinking strategies related to hardware, software, and services. Perhaps, most importantly Microsoft needs to let Nokia’s culture spread throughout Microsoft like a virus. It would also be a good idea to set up and organize this new devices and services division and headquarter it in Silicon Valley.

This acquisition must be viewed as a decade long strategy or longer. Microsoft and Nokia may still have more acquisitions ahead necessary to fight the fight for global computing consumers. I am by no means saying this relationship is a guarantee of their success. Of course many things can go wrong, this is a fact of the human variable, but I remain optimistic on both Microsoft’s and Nokia’s future.

Yesterday I heard Marc Andreessen address this topic of Microsoft and Nokia. He made some important observations in my opinion. He reminded the audience that it was not that long ago that everyone was convinced that Apple was dead. It was not that long ago that everyone believed Apple’s model of hardware + software was the wrong approach and Microsoft’s model of software was the right approach. Today everyone believes Microsoft is dead. And that Apple’s approach is the right one and Microsoft’s is the wrong one. Most importantly he reminded the audience that the one thing that is certain about this industry is its unpredictability. “Whatever we think is impossible today” he said “is almost certainly not the case.”

I’m rooting for Microsoft. This industry does best when there is platform competition. Whenever I evaluate acquisition scenarios I always look for companies that would be better together than if they were separate. The Microsoft + Nokia deal is certainly one where they are better together than apart. But if they do turn this around we may look back and realize that it was not Microsoft that saved Nokia but Nokia that saved Microsoft.

What Will Microsoft Do With Nokia’s Feature Phones?

There are many things curious about this deal. Particularly, the things Microsoft did get and the things they did not get. By not acquiring the totality of Nokia, Microsoft got a steep discount in order to acquire the parts they did. But looking over at the way the deal was structured, it is logical to assume that Microsoft did not have to include the feature phone business from Nokia and could have let that business run its course.

So the key question is what why did Microsoft include the feature phone business. Let’s explore some scenarios.

First, if you subscribe to the theory that Microsoft acquired Nokia because they were going to lose Nokia as a partner, either to Android or to bankruptcy, then it would make sense to not leave a bit of hardware business to Nokia to continue making devices that they can chose to switch to Android. The deal instead states that Nokia can not use the Nokia brand name on any device until the end of 2015. So technically, Nokia could again start making hardware in 2016 but can not use the Lumia name since Microsoft owns that as well. At the outset it seems unlikely that Nokia will make hardware again in the future. However, should things go south over the next few years with this deal with regards to the Nokia assets, name, brand, etc., the door is still open. But by absorbing the feature phone business, Microsoft ensures that by this time next year there are no Nokia Asha handsets running Android in emerging markets or elsewhere.

So what to do with it?

Nokia still sells a lot of feature phones. Even though it is declining, every quarter the industry still sells several hundred million feature phones. Last quarter over 200m feature phones were sold with 12-14% approximately carrying the Nokia brand.

Take a look at the chart below which shows global handset vendor market share by sales to end users.

Although on a downward trend, Nokia still held 14% respectively, of all phones sold over the past two quarters. Again the vast percentage of those being non-smartphones like their Asha line.

Here is another chart showing global mobile phone OS usage share as measured by web usage.

I bring up this chart for reason. Nokia’s Asha brand running the S40 operating system is practically a smart phone. It runs Java apps, has an app store, has a UI that feel smart phone like but few consider it a smartphone. This phone targeted emerging markets exclusively and strategically was the device that would be used to transition emerging markets from feature phones to Nokia smart phones.

By keeping this group Microsoft could simply bring Windows Phone to all hardware, including Asha, and keep the low-price points the same in those countries and within a few quarters garner double digit global market share for Windows Phone. Believe it or not many in these countries buying these low cost Android phones have no preference of OS yet. This is why I’m convinced in markets like India, Africa, and even parts of China if Microsoft just put Windows Phone on the very low end the would get market share.

Market share alone may not be enough to build the ecosystem out. I try to remind our readers that market share is fine but it is more important to have the right market share. It is yet to be seen if these low end consumer contribute any real value to ecosystem. But if Microsoft can get some of these customers early in their maturity cycle then it will at least be a start.

Together At Last

News just broke that Microsoft has acquired Nokia’s handset and devices division. Here is the intro from the press release:

Microsoft to acquire Nokia Devices & Services, accelerating the Windows ecosystem

Nokia and Microsoft have always dreamed big – we dreamed of putting a computer on every desk, and a mobile phone in every pocket, and we’ve come a long way toward realizing those dreams.

Today marks a moment of reinvention.

I don’t know if this comes as a shocker to many since speculation of this acquisition has been in the works for some time.

We will have a number of more in-depth analysis of this acquisition and it’s impact to the industry in the days to come for our Tech.pinions Insiders. But for now I encourage you to read Tim Bajarin’s prediction of this even from 2011. His analysis of why Microsoft would buy Nokia still stands today as the context that makes sense of this acquisition.

Vertical is the trend. Any company who owns hardware, software, and services bound together as a complete ecosystem presents themselves as a formidable competitor positioned for the long haul. Doesn’t mean all will be successful with this recipe but many will try none-the-less.

Why Microsoft Will Buy Nokia.

We’ve Seen This Movie Before

One of the many aspects of the technology industry I have to study as an industry analyst is the macro-economic trends. With that in mind, I have been following with great interest media and financial analysts’ discussions about whether a new tech bubble is in the works. I live and work in Silicon Valley so I hear a lot of diverse viewpoints on this topic.

There are certainly things to fear if and when any type of tech bubbles happen; however I believe that what we are entering is a not a new tech bubble. Instead we are starting a massive global technology build out.

Technology Is Embedded into Our Social Fabric

There are a number of market principles at play that give me confidence that this is what is really going on at the moment. For most of the last two decades, we were quite happy when each year we sold hundreds of millions of PC’s worldwide. But now we are selling just over a billion digital devices a year now, and by the end of 2015 it is predicted that we will sell closer to 2 billion digital products each year worldwide.

The first principle is that the personal technology industry as a whole has reached maturity.

A mature market is one where consumers have reached a level of familiarity with a product segment, and their personal choices and preferences are being factored into their buying decisions. Automobiles are a mature market, for example. We shop for cars knowing mostly what we are interested in; our preferences factor into our decision. Prior to a market maturing there is the unknown. Consumers have to experience and understand a product before they know exactly what they want. Tablets, for example, are a new segment and by no means a mature one yet. And smart phones are in the early stages of maturity as well.

When an industry is in the process of maturing, it is more volatile; very similar to the internet tech bubble of the late ’90s. There is more product experimentation and fragmentation as the industry learns what the market wants. The technology industry is currently in a very different and much more mature place in its lifecycle than it was 10 years ago.

Technology has also reached the point of maturity where it is now embedded into our social fabric. This means that many of the products in the market, whether PC’s, cell phones, or the internet, would be hard to live without for many people. Ten years ago most of those things had not been fully embraced by the consumer market, whereas today they are mainstream.

Another one of the stronger case studies I use to validate the point of market maturity and build-out growth is Apple. In a mature market there is more consumer choice and more educated customers. This makes it possible for a more diverse range of products to appeal to larger segments of the market.

Apple’s turnaround, I would argue, could have only happened in a mature market. I have been quoted in the media saying, “Apple was a consumer product company waiting for the consumer market to arrive.” And arrive it did. The arrival of a mature consumer market for personal technology is at the foundation of why Apple is not doomed.

Secondly their continued growth in earnings is unprecedented. What’s more is that during the recent recession they defied the industry and continued to grow even as the entire economy suffered. Those points are both signs of a mature industry as well as one where technology is essential in society.

If history is an indicator we are in for quite a ride.

The Boom, Bust, Build-out Theory

I have a penchant for technology history. After the last bubble burst, I had a conversation with the then-CEO of National Semiconductor, Brian Halla. He’s also a tech history connoisseur and he explained to me what is called the Boom Bust Build-out Theory. The theory, in short, details how every major industry during the industrial revolution until now went through an initial boom, followed by a bust, followed by a market build-out that lasted several decades and sometimes longer.

The “boom” period is a period of euphoria where entrepreneurs, investors and early adopters rally around the product; followed by a relatively short “bust” where tough economic realities are faced; followed by an extraordinary “build-out.”

During the boom, an industry first gains traction and investment money floods the market. The result is that the supply outpaces the demand of the current market state. This is because the early interest is driven by early adopters, which is not a large market. The overflooding of capital, combined with an immature market, leads to the bust. The bust, however, causes a drop in price of essential market components, which leads to innovation.

In an example with the railroad industry, the “bust” led to such cost declines in essential components that it made it possible for enterprising entrepreneurs to create the frozen car, thus spurring the meat packing industry. The two-year railroad bust, however, was followed by a global build-out that lasted a century. That build-out occurred all around the world and forever changed transportation and commerce.

A similar cycle of boom and bust in the automobile industry led to the creation of the V8 engine, power steering, electric indicators and safety glass.

Looking over the history of the personal computing industry, we can spot many similarities with mega industries of the past. The technology industry was not immune to the boom, bust, build-out cycle and if the signs are true, we are right at the beginning of the build-out stage.

Much of the innovation we are seeing today around smart phones, tablets and new PC form factors is the beginning of this build-out. This phase of the build-out is being called the Post-PC era and we are just at the beginning of some of the most innovative times in our history.

The devices we use are going to get smarter, thinner, faster and more. The internet in five years will look and feel nothing like it does today. The build-out that we are at the very beginning of will drive new businesses, new markets, new technologies, and new opportunities.

The build-out we are currently in also explains the hardware renaissance we are seeing in Silicon Valley. I’m absolutely confident that we will look back at this period in 30 years and see the re-invention of the computing industry to what I am calling the birth of the personal electronics era.

That fact alone should give us confidence in the sustainability of this industry and its long-term growth. I can’t speak for other elements of the economy or other industries but I firmly believe that the tech sector has a very bright future. We may have some ups and downs once in a while, but it’s on track to be one of the most significant growth industries for quite some time.

The Very Googley Motorola X

I’ve spent the last week with the Motorola (a Google Company) X. As many who read my columns will know, I prefer iOS to Android and I make that clear. However, when it comes to Android devices I like the stock–Nexus–Android devices the best. Which means, I knew I would like the Motorola X when I first heard about it. However, my desire to experience the device was not because it is running stock Android. It was because I wanted to see if Motorola, the Google company, added any unique differentiators with the software. And they did.

Better Than Stock

What surprised me was that the version of Android on the Motorola X and their new Droid lineup is BETTER than stock Android. It looks and feels exactly like stock Android, but the additions the Motorola software team (I mean members of the ex-Android team) added are very good and feel like features that would come with stock Android on flagship Nexus devices. Yet that is not the case, they are coming on Motorola devices and no one else’s. Not even Nexus devices. At least I am assuming they are not. Time will tell if these great features make it back to the stock Android kernel. But I doubt it.

I kept saying to myself that many of the key new software features felt very Googley. In fact the whole device just felt very Googley. Which is a good thing. Unless you are a competing Android OEM.

So what features make me say this? There are a few. The first is called Motorola Assist. Motorola has had some of these features at a basic level before. But they have now all gotten much more Googley. Take a look at the screen shot below.

That is the screen for the Motorola Assist feature. It looks very Googley. There are many design similarities to Google Now which is a feature of the latest stock Android build. The features of Motorola assist are also pretty slick.

First, if enabled, when driving it will know you are driving and when a call or text message comes in it will alert you via a voice prompt and allow you to answer a call, deny a call and respond with text message, or offer to read you the text message that arrived. Very nice hands free feature while driving with some good contextual automation built in.

The other that was quite nice and worked much better than I thought was the avoid interruptions during meetings feature. When this feature is enabled the service will be aware of your calendar appointments and auto send text responses to anyone in listed in favorites and let them know you are busy and will get back to them. It also keeps your phone silent of all notifications during this time. My wife LOVED this feature since I tried it by blocking off time when we went to dinner on my calendar and our time remained interruption free. This is similar to the iOS Do Not Disturb feature but is automated based on your calendar appointments.

Information at a Tap

The other addition I liked was Active Display. On the stock Android devices, I am a fan of the lock screen widgets. I use this primarily for email. So I can quickly see if I have important messages that I need to respond to without unlocking the phone. Motorola has added some smarts at the hardware and software layers to add to this feature. The home screen on the Moto X will pulse off an on when you have a notification waiting for you. You can simply tap on the icon and get at a glance any recent emails, text message, or missed calls and then choose to ignore or swipe to unlock the device and respond. This is information at a tap rather than a glance but is very nicely done.

The key to this is that Motorola specifically added some hardware and software features to make use of a low-power processor just dedicated to this feature. This way to look at these notifications on the home screen you can do it without waking the CPU or the whole screen. Since the information is just in black and white the screen and touch features can be used with just the additional low-power core.

The other thing the low-power core can do is look for movement of the device allowing me to just pull it out of my pocket and the screen is already on showing me the time and any notifications without me having to press a button. Very useful feature.

Always Listening and Touch-less Control

The last feature I will dive into is the always listening feature. Also using the low-power core is a feature where the device is always listening for the key word “OK Google Now.” When you say this phrase you can then automate any number of features. You can tell it to call someone, text someone, schedule a meeting, set an alarm, etc. You can do many of the same things you can do with Google Now on many stock Android devices as well as Siri. The difference is that you can initiate the whole process with your voice without having to press a button.

This is the feature that is of extreme interest to me. I’ve always wrestled with the question of what we can do with our devices when they can hear us. Meaning that we can interact with our devices without having to initiate the function physically but rather verbally. We are just scratching the surface in this thinking and when we can train our computers to understand us better and provide fully automated value for functions hands free via voice, I think we will be in some interesting territory.

Measuring Success

From my view as an analyst, I think about how we should measure success for Motorola with this product. We could focus on the hardware which is very good. Motorola has made the most usable 4.7″ screen for one hand operation I have used yet. Or we could focus on the customization trend. Which I think is very interesting and a compelling differentiator for the Moto X. We could also focus on their efforts to make this device locally. I applaud their efforts to build this device in the US and again feel that will have a certain appeal.

For me, however, the way I’ll measure success for Motorola is not in how many devices they sell this quarter or next. Or what market share they gain or don’t gain. For me I will measure success if these devices help establish credibility again for Motorola as a hardware company and specifically a smart phone brand. Brand is everything in my opinion. Motorola had a good one and they are an American success story. I sincerely hope they can re-establish themselves as an innovator, thought leader, and a credible brand. From what I have experienced wit the Moto X, I think they are on the right track.

Other Things I Liked Worth Mentioning

Battery life was better than average. Motorola touts 24 hours and although I never tested that claim, I routinely used my phone from 6:30am and plugged it in around 10:30pm and the battery level never went below 30%
Motorola Connect was a nifty feature where by installing a Chrome plug-in you could reply to text messages on the PC as well as choose to ignore a call and respond with a text message all on the PC through the browser plug in. Very clever Google.

The Myth of an iPhone Killer [Updated with added chart]

The resiliency of the iPhone in not just the US but global markets as well is truly a marvel. As we will see in some of the charts below, against all odds Apple’s iPhone market share remains steady.

I’ve long argued that vendors in the Android ecosystem compete more with each other than with Apple. One can take a perspective that says a consumer who buys an Android phone is a lost customer to Apple, at least for the time being. In the case of the ultra low-end and cheap phone market, those customers are likely simply not Apple’s target. They may be when they are ready, if they ever get so far as to value the things Apple creates. In the case of the premium market for devices like the S4, HTC One, etc., we notice that these devices seem to take share from each other more than Apple–especially in the US.

I don’t think many realize how dominant the iPhone is in the US among premium handset market share. Getting these specific statistics (iPhone 4s, 5) share of premium sales is tough but from inside sources I’m told that by quarter the iPhone US share of premium can go between 60-75%. The key take away is that the iPhone is the dominant sales device in the premium segment of the handset market.

Even knowing that, myself and many would agree that looking at usage of the devices is the key metric. People can buy lower end and even premium Android devices all they want but if they are not being used as smartphones, or creating value to the carrier, then we wonder if we should even count them.

Below is a look at the share of platform usage in the US.

As you can see, even when new premium Android devices are launched in the US there appears to be no significant impact to the iPhone. Perhaps even more interestingly is the dip in iOS usage share during the “droid franchise” peak. Then as we can see when the iPhone came to Verizon it gained share back. The key losers over this time period was clearly RIM.

Now if we turn our eyes to the global vendor market share, we see similar patterns. For obvious reasons, the iPhones share of the global smartphone install base is much lower than the US but what we see is that its piece of the pie stays relatively the same size.

Notice for example that Android’s gains are not making the iPhone’s share of the pie look like RIM’s, Bada’s, or Symbians. Meaning declining. Android is gaining, yes, but the iPhones share is not decreasing like the others.

Now to look at what the opportunity looks like going forward I want to show a much bigger global handset vendor picture.

When looking at this image there are several things to note. First is that the iPhone’s share again remains relatively constant. It is not shrinking dramatically like other vendors but keeps its slice of the pie relatively static. However, look at the global rise of “others” in this chart. These are largely white box label vendors flying off the shelves in China. The size of the “others” pie is even larger in China than local brands like Huawei and ZTE. Others is the real growth opporunity as we see customers refine their interests and look to go with more established brands than white box makers.

I can show charts all day of global vendor sales and in no chart will you see iPhone’s share of the pie shrink rather you see it maintain. Obviously, what we will watch going forward is for the share of the pie to grow, likely at the expense of “others” to begin with. The point to take away in all of this is simply that there is no such thing as an iPhone killer, even though many assume there is.

Microsoft is at a Fork in the Road

Many of us have caught the news that Microsoft’s CEO Steve Ballmer’s tenure is up. Over the next 12 month’s Ballmer will work to transition a replacement. This replacement will be faced with extremely hard decisions about Microsoft’s future. Whoever he or she is, I hope they are ready.

In my opinion the crux of Microsoft’s fade into irrelevance is their complete ineptitude to understand consumers. I believe Bill Gates, Steve Ballmer, and the rest of the crew at Microsoft understood a business user but I don’t believe for a second that they had any genuine understanding of consumers and consumer markets. On the flip side Steve Jobs had an amazing understanding of consumers. This was who Steve Jobs built products for and unfortunately in the early days it almost killed the company. The reason for this was because there was no true consumer market for PCs there was only a business/enterprise market. Bill Gates and Steve Ballmer and crew, built solutions that they understood–business and enterprise focused solutions. And during this time it was exactly what the market needed to grow. However in the early 2000s things changed. A pure consumer market emerged for computers and Microsoft was not prepared to compete against a company whose focus and passion were consumers.

The Fork in the Road

So Microsoft finds itself at a fork in the road. I find it very hard to believe in todays global marketplace that a single company can compete effectively in both consumer and enterprise markets at the same time. I believe Microsoft must choose to focus on business/enterprise customers OR consumer customers. They cannot do both.

Not much need change in the way of Microsoft’s outlook and strategic direction should they choose the enterprise focus. However, I don’t believe this is the path they will choose. RIM was in a similar position and chose to go after consumers and it killed them. But I believe the allure of a giant, yet not always profitable, consumer market will entice Microsoft to go this route. If this is the case, a lot must change at Microsoft.

The new CEO must change the culture first and foremost. Microsoft needs an agile and forward thinking group of executives with a vision of the 20 year future and Microsoft’s role in that future. Microsoft needs to focus more consumer oriented RND and innovation efforts. But perhaps most importantly, Microsoft needs to bring executives to the forefront who actually understand consumer markets. Things like the whats and why regular consumers buy things. This is not easy and only a few companies even remotely do this well.

The other expertise Microsoft needs to acquire if they choose the consumer path is regional expertise. Consumer markets in each region outside of the US like Asia, India, etc., will all behave differently. Gaining consumer intelligence is key but so is gaining that insight for the nuances of each region.

Without question Microsoft’s new CEO will be faced with a gamut of challenges. Even a new CEO does not guarantee Microsoft’s future security.

How Apple Could Lead the Next Big Tech Trend–Security As A Service

Security is a hot topic in many countries at the moment. And it is going to be a hot topic for the foreseeable future, perhaps for reasons you may not even know yet. It is fascinating to listen to water cooler conversations from folks on the topic. Security, or a lack-there-of, is quickly becoming top of mind for many human beings and rightly so. The question that I think is interesting in all of this discussion is the role technology can play around the topic of security. More importantly, what can technology companies do with regard to security.

Computers come in all shapes and sizes these days. Some go in our pocket, some go in our bags, some sit in our desks and others in large cooled warehouses. Soon we will even have computers that we wear on our person. What comes with this new era of ‘personal electronics’ is new levels of intimacy with our devices. Our smart phones are very personal and more importantly heavily personalized. They contain quite a lot of data about us and are gathering more each and every day. We use them to communicate, participate in commerce, gather information, etc. As I look out at the markets I study and the technologies orienting themselves to serve them, I am becoming increasingly convinced that the idea of security and, more specifically the idea of security as a service, is about to get a lot of attention. And given Apple’s leadership role on a lot of digital things, I expect Apple to lead the charge in next generation of personal digital security too.

An Embedded and Integrated Experience

There are several reasons I think Apple will move the goal posts as it relates to security. The first is related to their acquisition of AuthenTec in 2012. We had been tracking AuthenTec at the time and they had many of the leading solutions for mobile security and biometric sensor technology. AuthenTec also conveniently holds the vast majority of patents in many key areas related to this type of security.

The second reason, which is why Apple bought AuthenTec rather than license the technology, is because Apple is a highly vertically oriented company. Meaning they own and control all the essential elements for them to create the Apple centric experience.

By owning all the key components from designing the system-on-chip, to the hardware and software security layers, the operating system, the hardware itself, and the underlying cloud framework, Apple is uniquely positioned to create a security solution unlike many others.

Security as a Service

Traditionally we think of security as a feature. I’m proposing we think of it as a service. This would include a set of features, when combined and continually implemented, it will be embedded into the fabric of the computing experience.

Earlier this year, in an article for MacWorld, Rich Mogull wrote a great piece. In this article he made many astute observations and comments. This one in particular:

Despite a rocky start, Apple now applies its impressive design sensibilities to security, playing the game its own way and in the process changing our expectations for security and technology.

Apple can afford to play the game their own way since they are the most vertically oriented personal electronics manufacturer on the planet. This will let them do things like bind elements of device security to their processor designs. This follows Intel’s logic with their purchase of McAfee to create new generations of secure silicon adding new levels of encryption to local data. Apple being in control of their hardware and software also would allow them to offer customers the ability to do a thumb scan or image recognition before engaging in a transaction, manage all our passwords in the cloud, etc, and ultimately give us more control of our own digital identity and security.

No Trivial Problem

What I find fascinating about what Apple and others in the industry moving in this direction is not only how complex this problem is but also how risky it is. On device security is one thing but securing data between the device and others as well as the cloud gets even more complex. But I’d argue that tightly integrated solutions stand the best chance to deliver.

Security is a big deal and any company touting the benefits of security as a service has just put a target on their back. But, that doesn’t change the fact that it is important and necessary for companies providing solutions to the consumer market to address this issue. That is what makes this discussion incredibly strategic to Apple as well as others. [pullquote]It is a battle field their core perceived competitor has no interest in playing on[/pullquote]

Security as a service could become a key differentiator for Apple products and a driving reason to choose Apple products over others. But even more interestingly, their competition (Google) doesn’t care about security. It is a battle field their core perceived competitor has no interest in playing on. And that makes it all the more important.

I’m not going to go speculate on how this is going to play out. I just feel the trend bubbling up in a way that makes me believe more security centric solutions are coming and it will be made a big deal. What’s more, only a few companies seem like they have it in their interests to offer this service to their customers as a part of the holistic computing experience.

The iPhone’s GOLDEN Opportunity in China

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We are at the point in time with relation to Apple’s September 10th event that we have to start taking many rumors very seriously. In that light, we have heard whispers of a gold colored iPhone option. I have to admit when I first heard this rumor I discounted it immediately. I even stated on Twitter that I was extremely confident there would be no iPhone. Then our friend at iMore, Rene Ritchie, wrote this on the gold iPhone. I talked with Rene a bit about this on Twitter and was forced to reconsider my position. Then today M.G Seigler wrote this article on TechCrunch. After much thought we must seriously consider this rumor. And even if it doesn’t happen, which is possible, then this will at least have been an interesting discussion and scenario analysis.

Very early on in discussions I have on this subject I added this caveat to my opinion. Although, I personally don’t like the idea of a gold iPhone I can see it being big in certain markets and namely China. In M.G’s original column he did not mention the idea that a gold iPhone may be big in China. In fact, many have missed this point. After M.G tweeted his column, myself and apparently many mentioned to him on Twitter that it may be a good strategy for China. He then proceeded to update. But this point about a gold iPhone being potentially large in China is worth analyzing.

I tend to gather a lot of data on China and usually it is only technology focused. However for the past few month’s I have intentionally begun collecting data on China’s luxury goods market. I’ve done this specifically because although most technology products and brands are not considered ‘luxury brands or items’ in China, Apple’s happen to be. So any peripheral data related to China’s luxury goods market became interesting.

The luxury goods market has seen some ups and downs in China last year and this year due to issues in China’s economy. ((China’s luxury market grew just 7 percent in 2012, compared to 30 percent in 2011.)) Yet all the research I have gathered suggests that China luxury goods market has not necessarily been slowing but it has been shifting. Consumers in China are maturing and gaining more affluence at a rapid rate and markets are maturing in near real time. From data I have read from many management consulting firms and marketing firms from the region recommend a change in tactics to capture this shift in China’s consumer market for luxury goods. One report specifically contained this point that I found interesting:

consumers are putting a lot more emphasis on quality & function, not just the label, with brands focusing increasingly on memorable customer service and exclusive products.

Another key point that stood out in a similar report on luxury goods in the region specified this about Chinese consumers:

“brands will have to bring luxury back to basics, which means providing a unique experience, backed up by high-end quality and service,”

All things that Apple does well.

Why gold? Of course every region values gold, but some certainly more than other. Gold sales have historically done very well in China and even in high parts of this year the sales of gold jewelry have jumped anywhere from 17%-35% year-over-year in certain regions. Gold in china symbolizes wealth and also happiness. One can also argue that gold is similar to yellow and thus could also symbolize the Earth element which is the storage money element (wealth) in Four Pillars of Destiny. However, that may be reading too much into the symbolism.

Now, another bit of interesting data is that it is clear that luxury brands in China are targeting millennials. Estimates are that the luxury goods sector in China is poised to grow 40% over the next 10 years, driven largely by China’s millennial generation. It is estimated that China has about 270 million people aged 18 to 30, according to the National Bureau of Statistics. Of those 270 million millennials 92% own smartphones.

When we take a step back and look at a global picture, we can see a stronger case for a gold iPhone. It could get even more interesting if this product was exclusive to China, but that is pure speculation as is most of this discussion at this point. This could get even more interesting if a gold iPhone is unique to China AND only available on China Mobile, who is yet to carry the iPhone and has over 700 million wireless customers.

Apple is and has always positioned itself as a lifestyle brand and many would even argue a lifestyle brand. I pointed out with the release of the iPhone 5 that this was the first time I thought a smartphone was as elegantly designed as a luxury watch. If this design trend continues, Apple may easily be able to position the iPhone in China as a luxury item even more than it is today.

Some other key stats relevant to China:

– Chinese represent 25% of the global luxury market. However, only 13% is consumed in Greater China (China, Hong Kong, Macao and Taiwan). The remaining 12% is purchased in Europe (representing at least half of average tourist spending), North America and the Middle East. The main driver of nondomestic consumption remains the price difference: Import tax and luxury tax inflate Chinese prices by about 30%.

iOS App Store vs. Google Play: Key Stats and Important Observations

I’ve come across a few stats regarding the iOS App store and the Google Play store that are more than just a little interesting. If you follow the industry closely then you are aware of the narrative that gets circulated that iOS garners heavier user engagement than Android. There are many data points to support this but the below picture outlines where things stand today.

All of this is important to understand in context. What all data, like the above, showing engagement is tracking are identical tasks. Yet if you evaluate each platform you realize not all time spent on the device are identical tasks. The ones above are common, yet what we don’t know is how much time is spent on other apps and more importantly how much time is spent browsing or shopping in the app stores. This is why I’m more interested in data showing app stores sales and related behaviors than anything else.

I recently came across a new report from Distimo which tracked both Google Play and iOS App store revenues across many different regions. Below is their data of total revenue of each app store in each country tracked.

So many interesting observations need to be made from this chart. The first is related to the United States.

What this chart shows, and many other data points I’ve acquired point out, is simply how important the US is from a revenue standpoint for developers and for each platform. One could argue that the US is the most important strategic battle ground in many different ways. The US has just over 313 million people of which 191 million currently own smartphones. In Smartphones, Android has a slight market share lead over the iPhone with approximately 95 million users on Android and approximately 88 million on iOS and the rest with either BlackBerry or Windows Phone. ((I say approximately because I know I’m close with those estimates but possibly not exact))

The second is related to Japan. Japan is clearly the second largest app marketplace in terms of total revenue. Japan has 127 million people of which 45% own smartphones. This brings Japan’s smartphone install base to approximately 57 million. iOS has 33% OS share in Japan with just over 18 million iPhone users. Android has 66% market share giving us 37 million users in Japan. The iPhone in Japan is the single best selling device followed by Sharp, then Sony, then Samsung. I highlight this data so you have context when looking at the App store sizes and revenues.

South Korea has an active Smartphone install base of 50 million of which 70% own smartphones. Out of the 35 million smartphone users 90% use Android or 31.5 million people. The bulk of the additional 4.5 million consumers in South Korea use iOS.

Now with those data points in mind, let’s consider the following:

Japan and South Korea are Google Play’s largest revenue generating regions with significantly less Android users in each region. In Korea, and this is fascinating, 35 million Android customers outspend 95 million US customers in the Google Play store. Please don’t forget Samsung is based in Korea as well as LG and both run Android. Now back to my first point. Not forgetting that the US is a critical battle ground for App stores, what about South Korea? Put yourself in Samsung’s shoes. How much leverage does this give them against Google? Google, from a Play revenue standpoint, can not afford to lose South Korea. Yet Samsung is toying with the idea of usurping Play store and developer revenue from Google. And the scary part is that Samsung can do this just for their home country and bring in a pretty penny. Although I believe they have much more grand ambitions that just conquering their home country, which should have just happened by default if you know anything about Korean culture.

the iOS app store shows strong resilience in all the markets in which it competes. With the battle that Both Google Play and iOS are in at a global level, notice what country is not in the chart. China. Google Play will likely never be in China, yet Apple is still planning their attack.

The data also points out that the Google Play market grew 67% in the past six month’s. Mostly thanks to Samsung mind you. During that same period the iOS app store grew 15% yet the Apple app store generate two times more revenue. Much of this thanks to iPad, and keep in mind without any real help from China..

So here again we see the narrative that although Android has a larger install base, from an app economy it has the weakest position. With that we factor in the interesting question Ben Evans raised the other day:

“If total Android engagement moves decisively above iOS, the fact that iOS will remain big will be beside the point – it will move from first to first-equal and then perhaps second place on the roadmap. And given the sales trajectories, that could start to happen in 2014. If you have 5-6x the users and a quarter of the engagement, you’re still a more attractive market.”

He is just making the point of engagement and not around app store spending. So let’s look at the graphic provided from Distimo on App store growth.

Note that the Apple App store has remained relatively flat while The Play store is trending up. So the question then revolves around whether the trajectory of the Google Play store will catch up with the Apple App store. I maintain that it will not, since the iPhone and iPad are not standing still and the iPhone is still doing remarkably well in every region. Also if you look at Google Play’s biggest markets currently, Japan and South Korea, they both have smaller populations and South Korea already has remarkably high smartphone penetration. So one could argue that the room to grow in order catch up is simply not there given the timeline needed. And as I point out Google has no ‘Play’ in China (pun intended).

One market to watch with regards to Google Play is India. Per capita it is one of the largest growth sectors but this will also take time to manifest in Google’s favor from an economic standpoint. Android is doing well in India but those customers are not spending or investing much in ecosystems at the moment.

With the picture I just painted you can see what it makes sense strategically for Apple to begin to build out an current generation iPhone line of products in order to target different segments and different price points. It is all about getting customers in the door so they can invest in your ecosystems value chain.

Customer Acquisition and the Entry Level iPhone

From an industry and market standpoint, a lower-cost iPhone certainly has the potential to shake up the market. In what ways we can only speculate but there are a few points about an entry level iPhone that are worth discussing.

The Cost to Acquire a Customer

This is basically how I view any product Apple prices below a premium price point. Any move Apple makes to go downstream is a strategic move to acquire customers who seek value but not at premium price points and get them into Apple’s ecosystem.

If Apple was just a hardware company and that is all, then it would make sense to have a discussion about how fast they can go downstream in order to compete globally. But Apple is not JUST a hardware company. They are a hardware + software + services company and each part plays a critical part to the whole experience.

To analyze Apple correctly we need to understand how the hardware plays into the software which plays into the services. Therefore we look at an entry level iPhone as a way to acquire new customers Apple finds valuable. I make this point specifically because I don’t believe a customer who just wants a “cheap” product is the kind of customer Apple wants or one that adds any value to a computing ecosystem. I say this because these customers don’t spend much if anything in app stores. These customers just want the cheapest data plans possible. These customers are unlikely to spend money on additional services, etc. [pullquote]The fallacy those who think price is all that matters fall into is believing that all consumers value the same thing.[/pullquote]

This is why Apple will never compete with anyone in a race to the bottom. Those customers are simply not valuable in the grand scheme of things and arguably not worth competing for. And luckily those who just want cheap are only a percentage of the overall consumer segment. The fallacy those who think price is all that matters fall into is believing that all consumers value the same thing. It is incorrect to believe that its hard to compete with free. It is easy, all you do is create a better product, experience, or solution, and market it to those who will value it.

So the philosophy of an entry level iPhone pricing is as such: the lowest price Apple believes is necessary to capture the type of entry level consumer who is still valuable to their ecosystem.

Horace Deidu, posted on his site Asymco in May, that iTunes customers spend at a rate of $40 per year as an average. Certainly in some cases, like mine, people spend more than $40 per year, and certainly in some cases people spend less. A person who just wants cheap would not spend nearly as much if anything in Apple’s ecosystem. But the key point for Apple and an entry level priced iPhone is how low does it need to be to still acquire a customer who will spend money and add value to the ecosystem. Apple could take a margin hit in order to acquire said customer and still make up that margin hit on the hardware and then some over the lifetime value of that customer. This is why the services (iTunes, iCloud, and future services) are so important to Apple’s long term strategy.

Redefining Engagement

Some additional necessary thinking was shared by Benedict Evans today with is post Defending iOS with Cheaper iPhone. Lots of good thoughts in this post as usual from Ben but one in particular is worth fleshing out.

“If total Android engagement moves decisively above iOS, the fact that iOS will remain big will be beside the point – it will move from first to first-equal and then perhaps second place on the roadmap. And given the sales trajectories, that could start to happen in 2014. If you have 5-6x the users and a quarter of the engagement, you’re still a more attractive market.”

This is a very interesting point and worthy of thinking and discussion. Engagement is an important metric but we must first back up and ask whether all engagement is equal? For example are even the most “engaged” people on iOS and Android doing the same things? In some cases, like in working professionals or premium customers, the answer may be yes but I’m sure there are also many cases where the answer is no. The other challenge with using the engagement statistics most promote publicly is that they all exclude important metrics. For example we don’t know how much extra time iPhone (or iOS) consumers spend on the device browsing the App store or shopping for music. The same is true on Android. This would be some key stats that would shed more light on engagement and said users value to an ecosystem. ((of course, engagement on tablets is so disproportionate on iOS vs. Android. And on this point, it may never be equal.))

If we just measure engagement by things like talking on the phone, texting, browsing the web, doing email, playing games, etc., then on the surface we can make an observation that at some point this these will be equal by sheer volume of Android. Simply because these are common tasks. What needs to be added additionally for a holistic ecosystem analysis is how much time is spent additionally where things (and all regions) may not be equal.

Regardless, even if the level of engagement does become equal taking Android 5-6x (or more) the customers to reach the same engagement, both platforms will remain and will be a focus for developers.

Lastly…

This is a point I have not seen made yet that I think is very interesting. As much as Apple will benefit from getting new customers with an entry level iPhone that benefits their ecosystem so will Google. We know Google makes more on iOS than Android and interestingly an entry level iPhone will likely help Google’s bottom line as well. When you dig through the numbers on how profitable iOS is to Google’s search revenue, Google may be the biggest cheer leader for a lower-cost iPhone.

The questions around this are interesting. If a lower-cost iPhone does shake up the market in Apple’s favor globally would Google put even more emphasis on iOS? Would Apple even let them? Will Apple do more strategically with Siri to usurp search or other value from Google?

Services are a critical part of the end game for many industry players. Google was always fascinating to me because they are a services company first who worked their way backwards into software, and now hardware with Motorola. Apple came from it the other direction starting with hardware and software and now investing heavily in services.

Strategically, so much is going on in the market that will define the next decade or more of computing.