Intel’s Big Hire; Qualcomm’s Big Acquisition

Big news from the world of semiconductors is dropping this morning.

Pat Gelsinger Comes Home to Intel
I did not want to write about things that were rumors regarding Intel management, even if I had a hunch they were true, but Charlie Demerjian of SemiAccurate broke the rumor Intel ( Paywalled) was on an internal CEO search. I had a hunch this may be true but didn’t want to speculate.

Today, Intel announced that Pat Gelsinger, former Intel CTO and the runner up to Pat Gelsinger as the CEO choice to succeed Craig Barrett (whose nickname, the silicon cowboy I am extremely jealous of). I vividly remember this time in Intel’s history, having been around Intel a great deal those days. Many inside Intel wanted Pat to be named CEO, myself included. No disrespect to Paul Otellini, who managed Intel well, but I’ve always been a fan of more technical CEOs when it comes to semiconductor companies.

With Intel bringing Pat back, or “home” in Pat’s own words, carries with it a great deal of significance for Intel’s future.

Intel is faced with some very hard decisions going forward. Decisions that in many ways go against the engrained philosophies and culture of Intel’s heritage. A major one is a potential shift away from Intel fabs being the primary manufacturer of Intel chips, and Intel perhaps licensing or building technology on another companies process. In years past, this thinking would be heresy. However, in light of Intel’s lagging process technology, it may be necessary. In many ways, some of the hardest decisions for Intel lie ahead.

This is one reason, out of many, I like the move to bring Pat Gelsinger back to Intel as CEO. If anyone has the history, credibility, technical authority, and company respect to make these hard decisions and not be doubted and second-guessed by employees, it is Pat Gelsinger. One of my main worries about Intel bringing in an outsider would have been the doubt cast from employees, and the potential impact on employee confidence, if an outsider made the hard decisions, even if they were the right ones. Should Gelsinger have to make some decisions that are even counter to the Intel of old he helped build, he has the credibility and respect to maintain, and in many ways, boost confidence inside Intel to commit to the new way forward.

Now, that is not to say all is lost with Intel’s own technology and process. Bringing Pat Gelsinger back also brings with it the potential that Intel can gain some ground back with their own process technology and their own manufacturing. I certainly hope this is true since I’ve been vocal that it would be tragic for the US to lose out on semiconductor manufacturing of a US companies semiconductor IP. Even if Intel never regains process technology leadership, that does not mean they can not continue to innovate and deliver a quality process technology solution. With Pat Gelsinger at the helm, I think a number of very positive potential futures exist for Intel.

At the end of the day, Pat’s background and technical expertise are a strong asset for him as he leads Intel. But, instilling new confidence in the company and the company’s future is among the most positive benefits Gelsinger will bring back to Intel as he leads them forward.

Qualcomm’s Big Acquisition
This morning, Qualcomm announced they are acquiring Nuvia, Inc. Nuvia made noise when the announced their company and came out of stealth, largely because of the founding team, which includes a pedigree of ex-Apple employees who were key on the Apple semiconductor design teams.

There are several important points to make about this acquisition. First is the broad impact this acquisition will have on Qualcomm products. While Nuvia’s solution and custom CPU architecture were planned to be a data center product, Qualcomm intends to use this team and their proprietary Arm CPU architecture in most, if not all of Qualcomm’s core products, namely their Snapdragon family of CPUs.

Qualcomm formally is saying this team will help lead Qualcomm down a more vertical path with much more custom CPU cores. Some will remember that Qualcomm used to create their own customized CPU cores with their Krait architecture, and they moved away from that approach with their current Kryo architecture, which uses more generic Arm IP. This acquisition and the pedigree of the team Qualcomm acquired now positions them to go back to fully custom-designed CPU cores and back to a proprietary CPU architecture, which I think is the right technical direction for Qualcomm. I never agreed with their move away from fully custom cores because of the advantage it gave them to differentiate. Qualcomm will now have fully custom solutions for graphics, CPU, AI, DSP and image signal processes, and more.

This will take some time to manifest, but it puts Qualcomm in a strong position to drive current markets like smartphones, AI and the edge, AR/VR, PCs, and extend even more deeply into new markets.

The future will be driven by the semiconductors that power them, and not every brand has the luxury of being fully integrated like Apple. While Intel and Qualcomm are still strong and competitive today, these moves will only help both companies be more competitive and thus good for the tech industry overall.

The Tech Industries Mission in 2021

Years ago, I stopped doing a predictions article, generally because they seem ridiculous, and most readers view them as fiction. I considered doing a predictions article of things I don’t think will happen, and I still think that is an interesting article but have yet to attempt it. But we still do get questions from clients and media about what we expect in the coming year. As analysts, we get to view the industry from a 20,000-foot view, and there is some benefit to that view in seeing broader trends and connecting macro trends to the microelements of tech.

The challenge for many who try to predict the future is the desire to make a bold prediction, something that will happen that could change a paradigm or bring something dramatically new. A new market, a new technology, etc., is what excites people, but it is not what I expect in 2021. Rather, the challenge we saw in 2020 and the rapid movement of digital transformation happening in both enterprise and consumer markets put a giant spotlight on the reality that tech still has a long way to go. There are still huge numbers of pain points, frustrations, less than elegant solutions that need to be fixed.

So for 2021, the tech industry’s mission is to double down on solving the significant pain points that exist all around us as we use digital devices. I expect this to be able to happen much sooner than years before, largely because of the incredible progress of cloud computing. When you look at the core reason many tech companies were able to make the adjustment to work from home, even if it was not perfect and inelegant, the reality was if this COVID-19 pandemic would have hit a few years earlier, many companies would have had no chance at a transition and many businesses would have come to a screeching halt.

In many ways, I remember how the continual advancements in Internet infrastructure of the 2000 decade led to the massive industry opportunities that hit all at once. Most of the decade was more evolution and solving pain points, and that work led to the mobile era. In many ways, I view the cloud infrastructure and the underlying innovation in silicon as a similar laying of the groundwork for what’s next. But what is next is not coming this year, and that is ok. As I said, there are still many pain points to solve.

Which areas can we expect more digital transformation and a continued emphasis on solving pain points? Well, nearly all of them, but the tech industry’s journey has always been one that is a transition from analog to digital. This is why every company will someday be a tech company, if not by-product then by the process. All processes move from analog to digital, and many products similarly will include more digital elements. This is one reason why the auto industry, and in particular Tesla, has been talked about so much. That is an industry whose products have all but abstained from modern technology. Tesla brought the auto industry into the digital age, and there is no going back. I include this industry in solving pain points, which leads to many opportunities ahead.

I expect more companies to embrace direct-to-consumer, and the number of new brands and new products to increase thanks to the ease of services like Shopify for brands to control their storefronts and go direct to consumers. 2020’s e-commerce surge will no doubt assist this effort going forward, and shopping and buying online for everything is now an ingrained habit for many consumers. While e-commerce has made great progress, there are still pain points to solve in the total experience, automation, delivery, and more.

This point on D2C includes entertainment content. We already see movies go straight to digital services, and I expect this to be the new norm and offer a wide range of new experiences and new content. However, the current unbundled streaming landscape is a hot mess, and while our research and many others proves more consumers are leaving cable bundles for other content services, they find themselves leaving one set of frustrations and finding a whole batch of new ones. There is a huge opportunity here for someone, and as of now, I’d bet on Disney to become the new super aggregator in some way.

Enterprise software is another example where many pain points remain. While many companies embraced the latest technologies to enable their workforce to remotely, it was inelegant to put it kindly. There is still tremendous work ahead to more seamless blend workflows for individuals and teams, and that effort will pay off even when people start going back to the office. I expect big leaps ahead in solving these pain points for this category in 2021.

Lastly, Healthcare is another where I hope more tech companies can make an impact. If anything, the COVID-19 pandemic has certainly shown how broken much of healthcare is in the US but has also shown a further opportunity for digital, like Telehealth and other digital services stand to benefit and bring new opportunities.

While I highlight a few areas, and I’m sure there are more we will see pop up in 2021, the bottom line is, while not sexy, the tech industry’s focus and main push will focus more on solving pain points than pushing brand new inventions, or innovations. This is a good thing because, in order to bring about the new computing paradigm, we need to solve current problems rather than just create new ones.

My Experience with The Mac mini M1

For the past few weeks, I have been using the M1 power Mac mini as my primary day to day computer. I have not lived through as many Apple processor transitions as others who have been sharing their thoughts, but I vividly remember Apple’s transition to Intel. Ever since the late ’90s, Mac’s have been my primary computers. I have fond memories of bringing my Mac into meetings with PC OEMs and Intel in the early 2000s and always taking flack for not using Windows and Intel or what some would call a real work computer. Which is why I found it ironic after Apple switched to Intel how many Macs I saw floating around Intel when I was there for meetings. That’s another story.

During the Intel transition, the first Macs running Intel Silicon had a somewhat rocky beginning with many apps not optimized for x86. Rosetta handled the translation of code from Apple’s PowerPC architecture to Intel’s x86. The main thing about that transition that was burned into my mind was endless bouncing icons (the action an icon performs in the dock while it is opening on macOS) and how many times the app either never opened, requiring me to force quit or did not open requiring a total restart. Once apps were open, I recall the experience being mostly solid, with the exception of some frequent crashes. Still, those minutes wasted opening an app as Rosetta translated is burned into my memory.

Rosetta 1’s translation abilities were dependent on the code and Intel’s processing power back at that time, which is not what it is today as the x86 architecture is far more sophisticated and powerful. Given the underlying technology at the time during Apple’s transition from PowerPC to x86, some of these hiccups are understandable in retrospect. Still, many of us early users remember the pain of that transition.

Fast forward to today, and the current experience I’ve had with the M1 powered Mac mini, and it is night and day. After a smooth migration to the Mac mini M1 from my 16″ MacBook Pro, I started instantly picking up some work where I left off on the MacBook. I had a little flashback anxiety as I first launched Superhuman, the email client I run for Gmail, which is fairly lightweight. The Superhuman icon started bouncing in the dock and did so for 20 seconds or more. I briefly had Rosetta 1 deja vu. I immediately quit the app to try again to see what would happen, and it opened instantly. I quit again and opened several times, and each time, it opened instantly, to my relief. I then went on to open nearly all my other applications, which I knew were not M1 native-like Office apps, Zoom, Slack, some audio apps I use for editing audio. All of them took 20-30 seconds at first open but then opened each time instantly after.

What makes Rosetta 2 unique this time around is Apple is translating more like an ahead of time compiler (AOT) than a just in time compiler (JIT). Upon first open, Rosetta 2 is essentially translating all the x86 application code into native M1 instructions, which it will then run at each new open. This is the key experience that led many reviewers to remark on how well x86 apps performed on the M1 and how it felt like a native app. That’s because it basically was a native app after Rosetta 2 translation was performed. This is a huge advantage to Apple being the designer of the Mac CPU. Rosetta could, for the first time, be optimized and co-designed with the M1 and have unique knowledge of each other. This was not a luxury Apple has had in past silicon platform transitions.

I timed each non-native app’s translation process upon first open, and the average time was 26.7 seconds. That’s basically the time it took for the M1 to translate an x86 app to native M1 code. This is pretty impressive when you consider all that is going on under the hood.

Once the translation process was complete, all my non-M1 native apps performed just like I was used to on my Intel-based MacBook Pro. To have a reference, I timed how long it took the same apps to launch on both the M1 and my Intel-based MacBook Pro (2.4 GHz 8 Core i-9 processor). The table below shows the average time to launch, in seconds, and be usable of each app on each system. I timed each app five times and then averaged each out.

M1 Mac mini Intel 16′ MBP
Superhuman 4.41 6.61
Zoom 2.52 2.12
Word 0.94 0.97
Excel 1.89 2.52
Slack 5.65 2.87
Powerpoint 0.97 0.95
Teams 4.05 3.91
Outlook 1.03 0.95
Photoshop 6 7.5
MS Edge 1.81 1.35

As you can see, each system had comparable app times. What was surprising was how none of my work-flows were interrupted as I moved from the Intel MacBook Pro to the M1 Mac mini. Literally zero disruption.

In terms of speed and performance, while I’m not a benchmarker, I did try and tax the M1 system in various ways I could with the software I have. Below was the CPU performance while I opened a native x86 app to run Rosetta 2 translation, scrubbed a 4k video in real-time, while on a Microsoft Teams video call (Teams not optimized for M1). I know it is a weird workflow to test, but it was the most CPU intense software at my fingertips.

As you can see, the spike was caused by the Rosetta 2 translation but never during this 1-2 min span did I see the system become sluggish, unresponsive, or have the spinning rainbow of death known on macOS.

What I found most intriguing about this CPU chart is the M1 has four performance cores and four low-power cores. This CPU chart shows that even the four low-power cores kick in, to a degree, during CPU intensive applications and are not just primarily there for lower-performance tasks.

Suffice it to say, the M1 has gone beyond my expectations right out of the gate, and from the reviews, it looks like I’m not alone. And any localized issues experienced by anyone with some non-optimized apps will be a thing in the past by the end of next year when nearly all, probably all, macOS apps will be optimized for the M1.

The M1 and the future of Macs
I wanted to conclude with a few thoughts on the role the M1 will play for the future of the Mac and Apple Silicon. I’ve long been bullish on Apple’s ambitions with custom silicon since Apple has helped establish the trend of specific purpose silicon away from the old world of general-purpose silicon. We also know Apple’s growing team of in-house silicon designers in-house, which gives them a huge advantage in custom silicon. What is exciting about Apple now challenging their silicon team with setting a new bar for high-performance computing is how those efforts will benefit Apple as a whole, not just with M1 Macs.

The work the team puts in to push the limits of performance-per-watt in high-performance applications will, likely, trickle down to things like iPhone, iPad, future augmented or virtual reality, and more. Meaning, this effort will yield fruit across Apple silicon, not just for Mac hardware.

Having experienced some of the latest processors from Intel and AMD, I am convinced Apple will set a new bar not just in notebooks but desktop and workstations as the M1 scales up to those classes of machines. And this leads me to the last point I want to make.

Apple making processors for Macs is extremely good for semiconductor competition. Not to say that AMD and Intel have been standing still, but both those companies have been focusing on competing with each other and largely competing in the datacenter when it came to pushing performance and high-performance design and applications. Apple has now created a new dynamic where both these companies are now competing with Apple to bring its PC customers a solution that will compete with M1 Macs. If they don’t, Apple could run away with the high-end of the PC market, which would have a drastic impact on the PC category, one I’m not sure Intel, AMD, and the PC OEMs have fully realized yet.

Apple’s December Announcements; Antitrust and Startups

Apple’s December Announcements
Early this morning, Apple made a few new announcements, keeping them on their monthly announcement cycle since late summer. Today’s news was AirPods Max and the availability of Fitness+. When I first heard the rumor about AirPods Max being announced on December 8th, I was initially skeptical because of the late release, mostly missing the holiday shopping cycle. The more I thought about it, the more it made sense they would be super high-end, which would not be the same type of holiday gifts as AirPods or AirPods pro would be. Given the ultra-end high creator, audiophile, target audience, this announcement coming in December will not make an impact but getting them to market matters most. $549 is a pricey solution, but audiophiles would know it’s hard to get a great pair of studio headphones for less than $500, and some of the top ones used by DJs and producers can cost over $2,000.

Commenters are going back and forth on the design, but as with all of Apple’s products, and their wearables, in particular, it is clear their design is meant to stand out and call attention to itself and the wearer. I keep this in mind when I think about Apple’s future glasses solutions and how they will likely follow this pattern and shoot for an iconic look.

As interesting as the AirPods Max headphones are, they will likely be reserved for the premium customer base where Fitness+, Apple’s fitness service now available December 14th, will likely see more widespread adoption. Fitness+ is one of the more interesting services I think Apple is pushing, given some of the philosophical similarities to a Peloton workout. The other thing that stands out with this service is Apple’s integration with Apple Music, iPhones, iPads, AppleTV, and Apple Watch. With this latest service, Apple is creating services in more areas of consumer’s lives and possibly working for a solution to touch all the potential parts of an Apple customer’s life.

Antitrust and Startups
You may have noticed a lot of news about different startups starting to explore or file to go public. There is a range of factors playing into this and one that is starting to cause the startup world to think long and hard about their investment strategy.

First, it is important to note most VCs prefer their startups to go public than get bought. This generally has a longer-tail of reward and upside. But many investors know exits are often their quickest way to return ROI on investment and sometimes the best thing for the startup and its team. The range of IPOs we are seeing is an indication of many of these businesses feeling the need to go beyond private capital to scale their company, and some have a great chance of succeeding in the public market. But the angle that got me thinking recently was how some startups and investors are starting to consider the regulatory challenges around antitrust as a potential barrier for more exits in their portfolio.

With antitrust scrutiny now circling, it does seem it will be harder for large-scale acquisitions to take place, and most startups are raising the kind of capital that will require a large scale acquisition in order for it to provide a return to their investors. This makes for a challenging new dynamic as investors will now have to take this into consideration as they are looking to deploy capital.

All of this to say, a healthier, more balanced venture system is one that I think will do both investors and startups well. I’ve never liked the need for a grand slam for a winning approach but rather an approach that favors singles, doubles, and triples more consistently. Simply meaning, the freedom to invest in a business that is at heart a good business, even if not “venture scale,” is a much more healthy investing philosophy. The challenge is, up to this point, those businesses didn’t do well in the public market. If that changes, and I hope it does then the entire definition of what a “venture scale” company is could change, and that would be a good thing, in my opinion.

Salesforce + Slack; Amazon AWS Trend Setting

Salesforce + Slack
The news is official that Salesforce is acquiring Slack for ~$28b, which is roughly a ~25x multiple of Slack annual revenue projection for 2021. What has been extremely interesting to observe with this deal is how negative financial analysts have been on the deal. I’ve read four notes from large institutional banks, and all of them don’t like the deal. My hunch is they all think ~25x revenue multiple is too rich, which is part of the negativity, but there is another common thread of negative sentiment that strikes me.

Overwhelmingly, Salesforce financial analysts (meaning financial analysts whose job is to provide notes on Salesforce) seem to be fuzzy on the synergy Slack brings to Salesforce. And, to go one step further, many of them are not grasping Salesforce moving further from its CRM roots. It was around 2016 and subsequent years with acquisitions like Quip, Mulesoft, Tableau, etc., that the street began to notice Salesforce pull away from their CRM roots, and this seems to cause some confusion. Looking at it this way, with Slack, Salesforce would now become a market leader for software in sales, customer support, marketing, eCommerce, data analytics, application integration, and collaboration software.

My take on the negative read from the street is they are looking solely for the synergy of these acquisitions to CRM (where little synergy exists) but are not taking into account parallel revenue streams to offer Salesforce’s large customer base. From my perspective, Salesforce is smart to not only want to diversify their revenue streams but to be able to become as close to a complete solutions provider for their customers. Salesforce has not only an extremely large customer base but also a very good, well Salesforce, and the customer engagement opportunity to upsell value-added services that their customers need to run effectively internally and externally puts them in an entirely different competitive solution than those companies just offering one piece of the pie.

Many readers would know I’ve commented before how Slack was unlikely to be able to survive on its own long-term in a world where enterprise software is increasingly becoming a bundled world. I always believed Slack would be acquired. I thought Google made the most sense, but understanding how Salesforce wants to become full suite this deal makes sense for Salesforce as well, even if the acquisition number is quite high.

The last point I’ll make here is how I find it interesting that Salesforce’s investor relations team is not doing a great job helping investors understand the companies long-term vision. If most of their large institutional analyst followers are sending notes to investor clients saying they worry the company is going too far away from CRM roots, and this is clearly the case, then someone internally is not communicating this strategy and working to sell investors on the vision and upside. I track a lot of companies who do investor relations remarkably well, and I sometimes forget how poor some companies can be as well as this practice.

Amazon AWS Trend Setting
Amazon has had a busy week throwing a number of announcements out in relation to Re:invent. When I looked through a range of the announcements it was hard to not conclude that not only is Amazon the market leader when it comes to cloud providers but they also set the trends for the market. Essentially, where AWS goes in terms of features and technology, others will follow. Amazon is also extremely aggressive from a technology standpoint. Note the specific bullets from what I consider their most telling slide.

  • Fastest networking with P4d instances (400 Gbps)
  • Largest high memory instances for SAP (24TB)
  • Largest local storage instances with D3en (336TB)
  • Most powerful ML training instances with P4d
  • Most powerful ML inference instances with Inf1
  • Best pirce/performanice for graphics-intensibe workloads with G4ad
  • Only cloud provider with on-demand macOS instances
  • Only cloud provider that supports Intel, AMD, and Arm processors

I emphasized in bold the fastest, largest, most, best, and only to make the point of where Amazon is looking to lead but also trendsetting. Some of where Amazon goes is feature decisions, these can be copied, others are entirely strategic like macOS support and their own efforts with their Graviton processor for Arm instances. But it is hard to not see Amazon being extremely aggressive and extremely customer-centric with AWS.

It is interesting when reading Jeff Bezos note to investors and the language he uses to convey Amazon’s relentless focus on customer experience and the customer overall. Often when I read this I think about Amazon e-commerce and forget that this culture extends to AWS customers as well. If I was Microsoft and Google, I think this element would worry me the most when competing with Amazon.

The other point I want to make here, and this point is actually extremely relevant to both data center/cloud and client computing devices. What Amazon is emphasizing is a clear shift from general-purpose technology to specialized technology. This shows up in the diversity of underlying computing components AWS is adopting. The data center is less about just CPU/GPU and now more about specialized processors for specialized workloads. A good example of this is Amazon’s adoption of Intel’s Habana Gaudi AI Processors.

Nvidia has long argued the GPU is the ideal general-purpose computing tool for all non-CPU related tasks. For a long time, this was true but we are now seeing the move away from the GPU’s general-purpose back to specific purpose silicon for many of the tasks previously done on the GPU like AI training, inference, AI modeling, etc. I’m not saying there are not still good reasons to use the GPU for some of this modeling, but AWS adopting Habana Gaudi AI Processors which are specific purpose accelerators for AI training demonstrates how some tasks will move of the GPU because they will do these critical tasks better.

Broadly, the trend I’m talking about is the move away from general-purpose solutions to specific purpose technology, and as I said it applies to the data center/cloud as well as client devices. In client, Apple is the biggest champion and adopter of this trend as all their A-series chips and the new M-series chips for Mac contain a range of specific purpose silicon designs. One of Apple’s key performance differentiators is because they focus more on the total silicon solution and specific purpose components rather than just try architect a CPU/GPU to handle a broader range of tasks. Apple designs its chips with specific accelerators or co-processors that handle specific workloads better and let the CPU and GPU do what they are best at.

Honestly, I feel like this approach is the only way forward to compete in the modern digital world. This is a fundamentally different approach to computing solution design than the predominant one of the past 30 years. Many companies will struggle to adopt this approach or understand its full merits, but as I said, ones ability to compete will require embracing this move from general-purpose computing solutions to specific purpose ones.

Intel: From Market Leader to Underdog

Before I dive too deep into the point I want to make here about the challenges Intel faces, and it is worth calling out that my initial theory about Intel’s long-term position turned out to not play out. In 2016, I wrote this article titled Intel and the last foundry standing theory. My intro paragraph laid out what this theory was in a nutshell.

Coming out of the Intel Developer Forum (IDF), I thought I would share more on what I believe is Intel’s long-term thesis about themselves. Quite simply, I believe they feel they will be the last foundry standing with their leading-edge process technology. If you follow this as closely I do, you will note Intel and other foundries like TSMC and Samsung are in a race to get to the next process node. Today, these foundries manufacture at many different nodes, but 14 nanometers and 16 nanometers are the leading edge processes of today. With each jump to new process nodes (10nm being next and 7nm after that), designers can pack more processing power onto a single chip while still keeping a low power profile. The industry calls this “performance per watt” and the amount of performance increases with each new process while still maintaining a lower power voltage.

At the time of my writing of the article, Intel was not yet behind in process technology. And although they struggled to get to 14nm on the timetable they proposed, they were still the leading foundry. But moving from 14 to 10nm proved to be the challenge that sent Intel from leader to underdog. In the time it took Intel to get from 14nm to 10nm TSMC has successfully offered 16nm, 7nm, and 5nm process technologies. In the same time frame, Samsung has transitioned from 14nm, to 10nm, and currently 7nm EUV. Essentially, since 2016, each competing foundry has moved two full process generations ahead of Intel.

Intel should be fully moved to 10nm in 2021 but their process at that density has around 100 million transistors per millimeter square. Which is roughly the same amount of transistors per millimeter square as both Samsung and TSMC 7nm process.

This chart, which UBS created in a recent note on Intel, creates a compelling visual both in terms of process generation timelines and transistor density at each process.

This all ties into my initial thesis that Intel had always believed they would lead in process technology, and that is clearly no longer the case. That being said, the above chart highlights both the reason why Intel struggled for so long to get from 14nm to 10nm. The main reason always stated by Intel for the delay was because of their aggressive targets of transistor density for 10nm. As you can see, Intel’s 14nm had ~40m transistors per mm square, and both TSMC and Samsung’s 10nm had ~55 transistors per mm square. Intel’s target for 10nm was 100m transistors per mm square, which backs up the overly aggressive density target Intel was shooting for. Had they not been so aggressive, it is likely they would not be that far behind TSMC and Samsung.

Intel’s management and manufacturing group has been clear they will not be as aggressive on future notes, which bodes well for Intel executing on a more predictable timeline. But I do not believe they will catch up or surpass TSMC or Samsung.

One of the other elements of my theory was an acknowledgment of how difficult it would be and how much money in research, development, and patent innovation would be required to keep advancing manufacturing to new process technology. With that in mind, another chart I found in the aforementioned UBS report is a bit of a surprise.

The below chart maps the CapEx spend of Intel and TSMC over time.

One of the indicators most of us watched for was Intel’s CapEx spending as it related to buying manufacturing equipment in order to scale up for the next process development and manufacturing. As you can see, Intel had been spending the most in Capex and now is trailing TSMC, although both have been spending less than their peaks. While both are slowing slightly their annual CapEx spend, it is noticeable Intel is behind TSMC, which is telling in my opinion.

While the lower spend in CapEx could signal the less aggressive density targets or the long delays in process technology transition, at this point, Intel committing less and less to CapEx each year further convinces me that Intel will not catch up to other foundries, and further worries me that Intel can sustain their foundry business in the long-term.

Intel’s management, and the company as a whole, find themselves in a situation they have never been in before. They went from undisputed industry leader to now chasing the field as the underdog. In many ways, Intel was a dynasty that is facing a cross roads where decisions will need to be made that could dramatically alter its trajectory and some scenarios would leave us with an Intel so different from its roots for better or worse.

But the great thing about an underdog story is the chance of the upset. Intel does have a rolodex of great technology. They remain competitive still despite the shortcomings they have had the last five years. Process technology is not everything, but it still matters more than some companies want to admit. AMD has been gaining ground on Intel every quarter and in every category. Apple just released silicon for PCs that will likely set a new bar of expectations for notebooks and desktops in the years to come. In some ways, there has never been more excitement, or more ambition, or more validation for a computing architecture other than Intel’s standard of x86.

A well known venture capitalist Josh Wolf coined one of my favorite sayings “chips on shoulders put chips in pockets.” We can only hope that Intel has a massive chip on its shoulder with everyone counting them out. Because while we may not see Intel put chips in pockets, a competitive Intel is good for the industry and honestly good for the US as a country. It would be a terrible shame for no leading semiconductor company to be based in the US. Intel is down but they are still in the game and I do hope the adjustments they make at halftime will keep them competitive in the second half of the game.

Economic Recovery Update, Biden and China

Economic Recovery Update
I’ve been pouring through a number of economist reports that are modeling in the impact of a vaccine on the US economy in 2021 as well as different scenarios regarding the presidency and senate races. I’m not going to dive deep into all the different scenarios but I will take a look at the few that seem most likely.

At a high-level, every economist note establishes the baseline that this slump in the economy and GDP is dramatically different than past recessions even though numbers look similar. I made similar points early on when I was writing about the economic issues and weighing in on the debate of whether economic recovery would be quick or slow. What’s important to note about this recession/economic downturn from prior ones in the last 20 years is that average personal savings are much higher than before. So while people aren’t spending, it doesn’t appear in masse consumers don’t have the money they are simply not spending it. Yes, there are some job losses, and a key part of the recovery, stimulus, and vaccine will hopefully have an impact on employers hiring again to bring the unemployment rate down. But in general, personal savings among US consumers in this environment is much higher, and that gives economists hope that when they feel comfortable spending again they will, and perhaps spending quite a bit.

The scenarios I want to weigh in briefly are the US Presidential and Senate races, and a timeline for a vaccine. Biden has won the presidency and now the scenarios turn to the senate race. Economists universally agree the best scenario for a quick economic recovery is a Democratic sweep of the senate. The belief is a unified government will yield the largest economic stimulus package, multi-year spending plan, and the best chance of getting the virus past us in a timely fashion. Under this scenario, economists estimate real-GDP growth of 2.5-4% in 2021. In most models I’ve seen, a democratic sweep is the best scenario in terms of economic growth, government spending, investment confidence by businesses, etc.

The second scenario is a split senate and there is less confidence in a fast recovery under this scenario. Models in this scenario assume a smaller fiscal stimulus for COVID relief and impacts in spending commitments from governmental and business which would push any pre-COVID level recovery into 2022. The concern in this scenario is the continued falling of the unemployment rate which will only hurt GDP, consumer confidence, and spending and thus dramatically delay any type of recovery.

The other scenario working into these models is the early vs. late vaccine. Headlines provided positive work toward an early vaccine yesterday but there is still a long way to go. Consumer research being done by economists has continually shown a vaccine, not necessarily the elimination of the virus, is the single biggest thing holding consumers back from being confident to return to life as normal. Given the US GDP is driven by 70% of consumer spending any recovery has to assume consumers get back to life as usual.

In an early vaccine scenario, where distribution and availability take place in 2H21, estimates are consumer spending could accelerate and see a 3.4-4.5% GDP increase in the second half of 2021. In this scenario, businesses begin to have more confidence and the unemployment rate drops as businesses open and hires again, thus creating economic positives all around.

A late vaccine scenario is obviously a negative, with deepening unemployment losses, and a much later economic recovery being pushed into late 2023, and worries of lingering issues of consumer behavior, business declines, and more that may last even longer.

That being said, what seems obvious, is the best-case scenario we can hope for, with respect to the economy, is a Democratic sweep resulting in a unified government and an early vaccine in 2021.

Biden and China
A lot of questions have been raised about what the Biden win means for US relations with China. Most questions center on the trade war and the competitive nature of China and the US. Consensus thinking is Biden will not wind down the current trade war with China but may ease some restrictions in order to establish a better path to negotiate going forward. It also seems advisors to the Biden organization have a reputation for better dealing strategically with foreign relations and while we may still have a trade-dispute there is optimism collaboration between China and the US for things like battling COVID and climate change can help build bridges and ease tensions. The positive takeaway here for China-US relations is the new organization is likely to treat this more like a negotiation than a war.

No doubt Biden will be better than Trump in dealing with China, but it is still a tightrope walk given the tensions as a whole but even more so with Taiwan.

Overall, there is optimism international relations under Biden will improve and there is optimism that will create better long-term benefits for the economy.

The Next Chapter for the Mac

As I covered last week, the Mac has room to grow as a business and take more share in the premium PC category where computers with an ASP of $800 or more sell approx 90m units a year. In contrast, Apple sells ~20-25m Macs a year. The Mac is on a growth trajectory this year, setting record sales last quarter at just over 6m units according to IDC, which is the first time the Mac has ever sold 6m or more in a single quarter. The Mac has been partially helped by COVID, and many individuals and families working and learning from home, and a greater need for each person to have a notebook arose.

As I’m sure, many of you followed Apple’s One More Thing event yesterday and saw Apple’s aggressive rollout for Apple Silicon in Macs and a new chip called the M1. Interestingly when I first saw the invite go out for the event and it was called One More Thing, I was intrigued. This phrase, made famous by Steve Jobs, typically was reserved for launching or highlighting something Apple thought was a big deal. When Steve Jobs would stay on stage, “and there one more thing,” you knew what was about to come was not something small or trivial but something significant. It is for this reason, and I think Apple’s ambitions for the Mac may be greater than many realize, and this is a much bigger deal. I think this visual from Apple on the Mac page says it all about their belief in how big this transition for the Mac is in actuality.

As we think about the transitions, the Mac has gone through from Motorola 68k to PowerPC to Intel, and now to Apple Silicon, each platform provided growth along the way. Arguably, shifting to Intel was highly strategic and a key reason Apple was able to grow the Mac business and be a viable consumer and corporate option. But even with Intel X86 designs, Macs still never crossed 10% of PC sales. The Mac is coming off its best year, which makes for an interesting time to begin to transition the platform over the next few years.

I will talk about performance and how that fits into Apple’s narrative in a bit, but I first want to acknowledge how most average consumers do not care so much about performance and specs or whose processor brand is in their notebook. Most consumers care about the features and functions of a product, and what it will allow them to do they can’t do with other products. For the Apple Silicon Powered Macs, I think the consumer value proposition will boil down to two things. The large app ecosystem, and better battery life.

Apple is bringing the whole of the iOS app ecosystem to Macs powered by the M1. This means day one, Macs running the M1 will have the largest collection of apps of any notebook/desktop platform on the market. Battery life is another key story, all though while M1 powered Macs will have the best battery life of any Mac, there are Qualcomm based PCs and some new Intel Evo powered Intel devices also touting 16-18 hours of battery life. Despite that, it is time the entire PC industry moved to better than all-day battery life and it seems we are one step closer to that reality.

Questions remain about how the new M1 Macs will work with the vast iOS ecosystem which had generally been designed with touch screens in mind, and how legacy software works using Rosetta 2, but I think Apple has to be confident in their own real-world tests to have brought out three new products running the M1.

The Purpose of Performance
During the presentation, Apple made some claims about the total computing performance of the M1 as well as the power efficiency of the architecture. Everyone understands why being power efficient matters, it means you can do more and get better battery life. The performance aspect is often overlooked in a world where notebook performance has been largely stagnant. The writers at Anandtech did a fascinating preview of the launch of Apple Silicon benchmarking Apple’s A14 chip to the current processors from Intel and AMD.

They showed a chart comparing the A14 to the latest Intel core I-7 chips and the latest release from AMD on the Ryzen 3 platform. Below that chart, which I encourage you to look at, they make the following conclusion.

The performance numbers of the A14 on this chart is relatively mind-blogging. If I were to release this data with the label of the A14 hidden, one would guess that the data-points came from some other x86 SKU from either AMD or Intel. The fact that the A14 currently competes with the very best top-performance designs that the x86 vendors have on the market today is just an astonishing feat.

The fact that Apple is able to achieve this in a total device power consumption of 5W including the SoC, DRAM, and regulators, versus +21W (1185G7) and 49W (5950X) package power figures, without DRAM or regulation, is absolutely mind-blowing.

With the A14 benchmarking as good, and in many cases better than the current offerings from Intel and AMD, the article seems to suggest that Apple can certainly achieve what they said as the fastest CPU in the world.

The article goes onto what is an incredible observation of Apple’s designs and architecture with their own custom silicon. This graph highlights the point the author then emphasizes.

During the release of the A7, people were pretty dismissive of the fact that Apple had called their microarchitecture a desktop-class design. People were also very dismissive of us calling the A11 and A12 reaching near desktop-level performance figures a few years back, and today marks an important moment in time for the industry as Apple’s A14 now clearly is able to showcase performance that’s beyond the best that Intel can offer. It’s been a performance trajectory that’s been steadily executing and progressing for years:

Whilst in the past 5 years Intel has managed to increase their best single-thread performance by about 28%, Apple has managed to improve their designs by 198%, or 2.98x (let’s call it 3x) the performance of the Apple A9 of late 2015.

Apple’s performance trajectory and unquestioned execution over these years are what has made Apple Silicon a reality today. Anybody looking at the absurdness of that graph will realize that there simply was no other choice but for Apple to ditch Intel and x86 in favor of their own in-house microarchitecture – staying par for the course would have meant stagnation and worse consumer products.

In this case, the performance benchmarks speak for themselves as to why this transition makes sense within Apple’s grand ambitions to truly separate the Mac from the rest of the PC industry. There is an important saying that if you give developers performance they will always use it. Apple has the most robust and thriving third-party development community in the world and their hope is that as they bring industry-leading performance to the Mac, those developers will create software that can only run on the M1 platform. And in the vein of one of Tim Cook’s favorite sayings, the Mac truly becomes something only Apple could create.

Arm Based Macs and Mac Growth, Apple Updates 10-K Risk Factors for Services

Arm Based Macs and Mac Growth
Apple yesterday announced the news of their November event, where Arm-based Macs are likely to debut. My conviction is Apple has multiple agenda’s in moving from Intel to their own Arm-based Apple Silicon, but one of those agenda items is to grow the Macs share of the premium PC market. Proprietary estimates I’ve seen from IDC and Morgan Stanley have pegged the premium PC (defined as $1000+) at approximately 20-25% of WW notebook and desktop shipments. That equates to around 55-65m units a year annually. Apple averages about 20m Mac sales annually for reference or 33% of the premium PC market.

If my assumption is correct, and Apple believes there is share to gain for Macs in premium, then how much growth is realistic for Apple? The first thing we have to recognize is Mac share is unlikely to grow if current price points stay the same. Most financial analyst notes categorize Mac as ex-growth, and up to this point, that has been true. What’s fascinating, in my opinion, is how Apple can sell hundreds of millions of iPhones priced above $800 but only 20m Macs priced above ~$800. I don’t believe Apple will all of a sudden sell a hundred million Macs, but this point goes to show you that a product, when valued appropriately, even if expensive, can still move in volume.

This is why I think Tim Cook’s commentary about how the work-from-home trend gives them optimism for Mac and iPad is based on a potential reassessment of the value of notebook, desktop, and iPad form-factor. For this reason, I do believe Apple has share to gain for Mac in the premium price notebook and desktop segment, but again the question is how much room to grow.

Apple’s Annual Mac sales are in the 20m range and that is with current premium pricing and ASPs of well over $1000. So with the assumption Apple will at some point, bring an Arm-based Mac into the $799-$899 price range, I think Apple has the potential to grow Mac sales somwhere between 8-10m units a year. The unit growth may not seem like much but that is a nice bump in revenue for the Mac category.

In some talks with investors on the subject of Arm-based Macs I was asked if there are scenarios where Apple’s could grab even more share of the PC market, and the premium category specifically. In all honesty, consumers relationships with PCs would have to dramatically change for that to happen. Sure it is possible that Arm-based Macs with industry leading battery life, security/FaceID, incredible power, a new and thriving app ecosystem, and luxurious industrial design could do this, but it is not the scenario I’m betting on primarily.

I’m personally excited about Arm-based Macs and Apple’s likelihood to shake up the PC market. If anything, I’m predicting an interesting battle between Intel and Apple as Intel is likely going to go on the offensive with benchmarks to try and downplay any performance advantage Apple’s touts with Arm-based Macs. I anticipate a fierce battle that may get ugly but it will be fun to watch.

Apple Updates Risk Factors For Services
I wanted to briefly touch on the observation that Apple has updated their 10-K filing to include some new risk factors relevant to the potential regulatory issues around App store and their services business.

Regarding App Store, Apple notes the potential risk of reduced, narrowed or eliminated App Store take rates, which could have material adverse impacts on Apple’s financial condition and operating results. This seems to be alluding to either a mandated lower rate of commission for Apple or the forcing of alternate payment methods in which case Apple would get nothing. Interestingly, the prior risk factor, which was replaced by this one, was developers not using the App Store.

For services, a risk was updated related to gross margins varying and changing over time. The belief is this is alluding to the Google search deal, which if regulations impact, could materially hurt Apple’s services business as this deal with Google is estimated to be 15-20% of Apple’s annual services revenue. The Google deal falls under the licensing and other category and the belief is the Google payment represents the majority of this line item which has been 22% of services revenue over the last three years.

There is debate if this payment if fixed or variable. The argument that it is variable seems to hold water due to the fluctuation and weakness of the segment revenue which closely followed weakness in Google ad revenue. If a variable payment is likely the bulk of the deal’s revenue then that is a normal and fair business deal which should not be impacted. However, if the deal is largely a fixed sum, then it could come under any impact of regulations brought on Google.

The search angle, and revenue from a Google licensing deal is interesting in light of the recent rumors of Apple working on a search engine. While this could simply be Apple improving search as a whole on their devices related to Siri, some speculate Apple is looking to replace Google as a whole like they did with Apple Maps. From their privacy angle, this would make a lot of sense, and while the revenue from Google is hefty, it is certainly not something Apple truly needs or relies on.

AMD Buys Xilinx, Apple’s Bullish on Q4

New of the deal closing between AMD and Xilinx broke this week, and AMD will acquire Xilinx for an all-stock $35 deal. I’ve written quite a bit through the years about how the semiconductor would continue to consolidate, and Xilinx was a natural target, although I did not think AMD would be the buyer.

I found this tweet interesting from David Scor

It gets even more interesting when you look at the revenue multiples these deals closed for. Nvidia buys Arm for 20X revenue, AMD buys Xilinx for 11X revenue, Marvell buys Inphi for 13X revenue. In all these cases, the acquirer makes more per quarter than the total yearly revenue of the company they purchased. In all these deals, the acquirer is hoping to expand their market and leverage their technology to grow their piece of the pie in markets they currently compete in and those they want to compete in.

For AMD, Xilinx allows them to expand into automotive markets, acquire IP for FPGA’s, and possibly some elements of 5G. What stood out to me in CEO Lisa Su’s comments on the acquisition was how much they liked Xilinx because of their commitment to chiplets in their architecture. Chiplets are something AMD is heavily invested in from an architecture standpoint. In the broad context, Xilinx is extremely complementary to AMD and their philosophy on semiconductor architecture design.

Lisa Su also said, “the era of monolithic integration is over,” which was a direct shot at Intel given that it has been their mantra for many years. I actually believe Intel is moving closer to the embracing of chiplets, even though they are doing it in their own integrated way.

I have had several discussions with financial analysts about this acquisition, and most are not entirely sure how this deal helps AMD compete more broadly. Especially when AMD roughly makes a quarter how much Xilinx makes annually. But my basic point on why integration is inevitable in the industry is because supplies prefer to buy technology from as few sources as possible, which means the more they can buy from a preferred vendor, the better. This acquisition will let AMD get more share of wallet from customers but also keep those customers more loyal and committed to AMD technology.

This acquisition alone won’t immediately change AMD’s market share, and this is a long gameplay that we will see fruits from in 3-5 years. But, it has to be said, two or three years ago, AMD could not have made an acquisition like this. The fact they have executed and competed so well against Intel has gained them favor in the stock market and thus presented them with this opportunity. Being a public company can often be a curse, but in this case, it is a tremendous blessing for AMD.

Apple’s Bullish on Q4
Don’t call it a supercycle! That’s my favorite theme from many investor notes I’ve read. Everyone points to a number of fundamentals from 5G, expanded iPhone lineup, and elongated refresh rates globally as reasons Apple is well-positioned for a very good Q4. Yet no one wants to call it a supercycle, which is something I agree with. But the tone of these notes and Apple’s commentary on earnings was so positive on the iPhone cycle, yet no one wants to mention the supercycle phrase. It’s almost as if they feel if they do say it, it will jinx the quarter.

During the earnings call, Tim Cook kept emphasizing how bullish they are on iPhone going into Q4. Despite iPhone revenue being down in Q3, and markets like China slumping heavily, the new product launch is strong and new products always impact Q3 as a slump in sales. The reality is demand appears to be extremely heavy in all of Apple’s major markets. Many analysts are estimating Apple’s Q4 iPhone shipments to be well north of 70m with a consensus range in the 73-74m range.

The iPhone feeds the ecosystem, which is why a growing and loyal base is critical to so many adjacent products and services from Apple. While many in the media have been quick to point out how Apple’s reliance on iPhone revenue is lessening, it doesn’t change the reality that the iPhone sits in the center of Apple’s ecosystem and everything else is a branch from that tree.

While a strong Q4 is anticipated, Apple provided no guidance but did mention they expect growth across the board. On top of that commentary, they mentioned they are currently supply constrained across a range of product categories. Supply chain reports I’ve read mention Apple ramping manufacturing to meet demand and barring any more disruptions from COVID 19, I’m not sure this will be an issue impacting sales in Q4.

Lastly, one bit of commentary from earnings stuck out to me. A question came in from an analyst about why not offering a hardware bundle like they offer subscription bundles. Tim Cook did not allude to their interest in a hardware bundle but he did say they know a good portion of their customers likes to pay for products on a monthly play. Both iPhone and iPad can be paid as installments on Apple Card, and I fully expect this to Macs and likely Arm-based Macs to start. This single move to monthly payments for Macs could very well tip the market more in Apple’s favor than just lowering the price of a new Mac. How Apple can leverage Apple Card, or some other medium so their hardware can be paid in monthly installments is a luxury they have most of their competition does not. I expect them to leverage it more and more going forward.

Brief Update: As I read investor notes that hit my inbox this morning it does appear the supercycle language is now back (facepalm emoji). The notable difference is this cycle is being measured on a fiscal year basis, not as a single quarter, which I think is more reasonable. I have no doubt iPhone sales will grow in Apple’s fiscal 2021 and I think growth will continue into 2022.

The Implications of Quibi’s Shut Down

Quibi has announced they have decided to shut down the service. I’m sure this is not a shock to many, although the implications are worth teasing out since I feel some conclusions are worth making.

Quibi’s commentary from management about the decision to shut down the service was largely blamed on timing. As many have pointed out, the timing should not have been better to launch a new service. It has been argued that people, during this pandemic, prefer long-form content over the short-term content Quibi was offering, but my take is good content will get watched and be in demand no matter the length.

What is interesting is the decision to simply shut the door and move-on. It is curious that Quibi, with quite a bit of cash still in the bank, is not attempting at least one pivot to see if they can turn the tide. It must have been concluded the cost to continue to compete, even in a pivot, would have required even more money they had access to, and with raising more money not an option, the conclusion was to cut their losses. This point leads to the main observation that sticks out to me.

Content is hard, and consumer attention is minimal. This was the root of Quibi’s challenge, but as we observe the significant amount of money raised by the company, it is another reminder of how expensive content is. The cost to get in and compete in the content market is borderline astronomical. Both of these points lead to the conclusion that the content industry is basically settled. There will not be content startups for a long-tine if ever that leads with high production value content.

This observation felt mostly obvious given the cost of content and the dynamic of competition favoring companies with existing distribution and a load of cash. There could still be new entrants into the content business, but they will be large established companies, not upstarts who require significant amounts of private financing.

The other implication, and this is a bit of speculation on my part, but I think it is logical, is I feel more consolidation is still to come for the content industry. Given the anti-trust scrutiny Apple, Amazon, Google, and Facebook are under, and I’m not sure if those companies are candidates in the near future to acquire content companies or a broadcast network. Still, I do think the NBC and CBS companies of the world may find themselves needing a partner with more cash and seek to sell.

The point goes back to the scarce attention consumers have and how the platform companies, in many regards, eat up a significant amount of that consumer attention with their core products.

The last implication I want to mention is how celebrities and or content owners/producers may be forced to rethink, where they prioritize their efforts. Quibi had a strong collaboration with top name actors/actresses, and while I’m sure many of them were paid upfront, I’ve heard from my friends who work in talent management that many of these actors/actresses are looking to new media opportunities to not just get paid upfront but also share in revenue growth in the long-term. I wonder if these owners/producers/and talent will start to look for new opportunities or just stick with the known success routes by working with Netflix, Apple, Amazon, etc. Again, the implications here, in my view, are what Quibi’s failure does to future innovative opportunities from the entertainment/content industry.

Apple’s Patient Strategy for the Home

Apple’s strategy for the smart home has been one of the areas I’ve been most critical. Mostly out of frustration when I see Amazon and Google flooding the market with options for smart home control centers. At Apple’s fall launch event yesterday, their smart home strategy becomes more clear and quite differentiated.

For as far behind as Apple has seemed in the home, the caveat in our analysis was always that Apple owned the pocket more than Amazon, and even Google to a degree. I always felt if Apple could better leverage its end computing devices, mainly the one you have with you at all times, they could catch up quickly. I use these words catch up somewhat lightly because, in Apple’s mind, they were never behind, but that’s a different story.

The broader picture Apple painted was how much stronger their HomePod + all other devices strategy could come together now that a $99 HomePod is an option, and you can have one in many rooms of your house. Where this story came together was with Apple’s Intercom feature, where when you want to send a message to your family, it can play on not just the HomePod/HomePod mini in the house but any device, including AirPods.

This image demonstrates Apple’s ability to leverage the numerous other devices in the home and outside the home and glue them together with the presence of a smart speaker. What this highlights again is Apple’s ability to integrate and how a solution can cleanly tie together the more devices you own. Many of the voice assistant products from Amazon and Google feel more like island experiences where the device does what it does, and that’s it. Largely that is because Amazon and Google may have an Echo in a room in the house, but they don’t own all the other common endpoints most consumers care about used daily.

The elephant in the room for this strategy is, of course, Siri. And while I admit Siri is still weak in many of the areas where Alexa and Google Assistant are strong, the more consistent parts of the Siri experience that do shine are the ones where you don’t have to talk to Siri.

Overall, Apple’s positioning of Siri was telling. While I blatantly disagree with calling Siri a world-class assistant as they did, Siri is, for now, a mostly competent assistant for what it is designed for. Apple gave examples of Siri in use cases I’ll bucket as automation, facts, and anticipation.

For automation, I’ve long argued that is all people do with smart assistants mostly anyway. Things like to set the alarm, play music, set a timer, or simply turn off a light. All you are doing is using your voice to complete an action you would have otherwise had to use your fingers for. This is easily the dominant use case for voice assistants today, and Siri is competent here.

Facts had traditionally been Siri’s weakness, and even study after study we did on how people use smart assistants, we did not find facts or general information to be a top use case for any assistant other than Google’s. While it is nice Apple added more facts to Siri’s knowledge base, it is unclear to me if there is much value here for Apple/Siri.

Anticipation is the most interesting category for me. This is where Apple owning the pocket of its customer can reveal the most value in Siri. And most interestingly, the best examples of this today show up in situations where you don’t talk to Siri. Siri suggestions in things like contacts, mail, apps, and others are looking at behavior and attempting to limit steps you need to take to get to the desired action. These are the powerful areas where Apple can press on their advantage of owning the pocket and do more than Amazon can and Google to a degree.

We are beginning to see more of Apple’s home category start to take shape. When they created a subcategory for home out of “other” from a revenue standpoint is indicated they had more products and services than just HomePod in the pipeline. The smart speaker market is a relatively large one with estimates of the current installed base being ~280m smart speakers worldwide. Amazon having the largest chunk of that, and an interesting question is how loyal will current iPhone owners are also Echo owners be to the product when they see more of the ecosystem value and price of HomePod mini. A study we did months after HomePod was released showed price as the major barrier for people to purchase one and the vast majority (54% of people saying they would be very interested in a lower-priced HomePod mini. A note I read from Morgan Stanely indicated the lower-priced HomePod Mini increases Apple’s total addressable market by ~4x.

The lack of Spotify could be an interesting problem for Apple, although I do hope Apple works with Spotify to support the service as it will greatly aid in the value proposition. Other areas to watch are ways Apple can tie HomePod nicely into Apple TV and perhaps even with things like AppleTV+ with unique audio experiences. Another angle for Apple to drive up HomePod’s base is to offer the Mini as a bundle with other hardware via promotions.

Ultimately $99 is a much more aggressive price for the Mini and a key strategy for the home for Apple in my opinion, and HomePod Mini should help Apple gain ground against Amazon and Google and lay a deeper foundation for Apple’s ecosystem.

Google’s Refined Strategy with Google TV

For a recent project around streaming TV platforms I worked on, I had to analyze a number of different platforms and interfaces. While I had seen Android TV demos at Google and had minimal hands-on time with it, after purchasing a TCL Android TV and spending more time with the Android TV platform, I was shocked at how weak the UI was in comparison to the other platforms I was analyzing. Google ranked last in nearly every segment except for app availability and search.

Every bit of research on the space that we have done ourselves at Creative Strategies, or that I have read, strongly suggests consumers have two fundamental driving desires around their content consumption habits. First is to get to what they want to watch quickly, and second, it to find something to watch.

Most platforms I analyzed did one of these relatively decently but did not excel at either. Having done user-interface design before, I understand the trade-offs that are often made, and TV/streaming platforms had to either focus on an app focused UI or a content-focused UI. Roku, for example, is an app focused UI which assumes you know where your content lives (within which app) and wants to get you quickly to the source. It offers little to nothing to help you discover.

A UI like FireTV was much more content forward and sought to surface content from your sources as well as take you down a road to discovery by showing recommended shows based on what you watch.

Both examples had their flaws, and the balancing act between both modes was evident. With the latest refinement of Android now turning into Google TV, Google looks to be building an updated TV experience built around the companies core goal of being helpful. Hence, Google is positioning Google TV as a helpful TV experience.

The one area my analysis of these platforms Google lead was with search. Google TV doubles down on this function with a deeply integrated Google assistant and highlights the strength of their search as a major feature of Google TV. Google is taking a content publisher-friendly approach and seems to have most of the major content sources like Netflix, Prime, Disney+, etc., integrated into their platform, which will help the content forward UI and the search feature. Notably missing from the Google TV content partner list is Apple TV+, and it will be interesting to see if Apple works with Google TV to bring Apple TV+ content to Google’s platform.

There is one area where I think Google has a unique hook here to draw more users to the Google TV platform, and that is YouTubeTV. While Hulu remains the leader in terms of users, YouTube TV is growing at the second-highest rate of any streaming TV service. As of now, it is essentially a two-horse race in streaming TV platforms with Hulu and YouTubeTV well in front of anyone else. I can see YouTubeTV being a driver of adoption of Google TV for all the reasons listed above and the tight integration with YouTubeTV into GoogleTV, giving it an edge with live TV, which is something both FireTV and Roku don’t have.

Both Roku and Amazon have a relatively large lead in terms of platform share for TV/smart TV interfaces. Particularly in the midst of this current pandemic streaming sticks from Roku and Amazon have seen the largest continued growth they have ever seen. Google TV is launching at the right time but still has its work cut out for them. But the product itself is a huge step forward from what Android TV was up to this point. With this market still rapidly growing, Google is now in a better position to take a portion of the growth in streaming TV platforms.

Remote Work Enlightenment

Now that we have spent more the year working from home, and the topic of what the future of the workforce will look like remains a hot debate, I wanted to share some updated observations. What is now crystal clear is how many employees who have been working from home have become enlightened. I’ve spoken with numerous friends and family members all over the US with a variety of different jobs from tech, to government, non-profit, finance, etc., and nearly all of them had said their plans going forward about returning to work had been altered by their realization that they can actually do their jobs remotely.

Throughout these conversations, it became evident the main thing holding people back was a combination of both their concern and doubt and their manager’s concern or doubt that working from home effectively was possible at the company both in terms of culture and employee productivity. Despite the many success stories of companies successfully working largely remote, like Cisco, most organizations did not take the leap. COVID obviously forced everyone’s hand, and digital transformation is now rampant and accelerated by a decade in most cases. This is what has led to the enlightenment by many that they can effectively work from home.

From all my discussions, it seems the companies they work for as well, being forced to take the relevant steps to empower remote work, also seem enlightened that remote work is possible even if not ideal. I noted Reed Hastings comments early in the year scorning remote work. I have several friends who work at Netflix, and they certainly disagree with their CEO, but the biggest challenge going forward for companies will be understanding the new balance that must take place if they are to keep their employees happy and healthy.

The other element of this remote work enlightenment worth highlighting is the personal one. Everyone I talk to has been overtly vocal about how much they have valued this prolonged time with their family. Despite some of the challenges around kids being home and spouses working from home, I think many workers and particularly those with tech jobs, have been enlightened about how much they work and how out of whack their work-life balance has become. This, I think, is going to be the hardest part for people to let go of post COVID when employers want them back full-time.

This is the main reason that I feel more workplaces will need to strike more of a balance of a hybrid work environment where remote work is more common on a regular, perhaps weekly, basis. Nearly everyone I talked to, except for my friends at Apple, has said they plan to keep working remotely at least one or two days a week going forward. I believe strongly this is something that will stick, and most companies will need to adapt to a more flexible workweek where some days are in person, and others are remote.

Another option I’ve heard floated, mostly by friends on the east coast, is the potential to move to a four day work week. In this scenario, they would go in four days a week and then actually get Friday off. I have two friends who work in Nashville, and their companies are transitioning to this model, and I’m curious how it goes and what the employee response is.

Even prior to COVID, we did some research on corporate and employee workflows and saw some indication employees were looking for tools that could help them be more efficient, so they had more time for non-work activities. Pre-COVID, I think people had a sense they would like more time to do non-work things, but post-COVID, it is clear this reality has sunk in, and going back to the way things were prior from a workplace standpoint seems highly unlikely.

There is not just a work-style change that has occurred but a mindset change that has occurred as well. This is the area where I think companies will have to truly understand and embrace and use the immense investments they have made in digital transformation and remote work empowerment to provide much more flexibility to their employees. Given the way tools are evolving that make remote work not just possible, but fruitful means that a more flexible work environment will not come at the cost of productivity.

My First Digital Conference Was Not Terrible

Over the weekend, I attended my first virtual conference, and it was not as terrible as I thought. It had nothing to do with the technology industry but was related to the sport of Tennis, which is a world I’m deeply connected to. I am a member of the professional teaching network called the USPTA, and over the weekend, they held their annual national conference where coaches from all around the world get together to learn, collaborate, and connect. When they first started promoting the event and the virtual forum, I was skeptical it would present anywhere near the same experience. But after attending and using their virtual platform, in many ways, I found this to be superior to attending this conference in person.

Here is the image of the lobby where you select where you want to go. Many of may note the video game feel of this if you have played any kind of first-person adventure type game. That is what it reminded me of, at least.

The lobby is clearly broken out into the main sections you care about. The Lounge was a series of chat rooms, more on that shortly, the exhibit hall where you could go talk to vendors/sponsors and see their new products or services, and the auditorium where all keynotes were happening. Let’s start with the keynotes.

First off, sitting in a gigantic auditorium looking at a speaker from a distance on stage has never been something I enjoyed. The benefits of a virtual keynote for a session like this were two-fold. First, I felt it was easier to digest the content and take relevant notes. The video of the speaker was high quality, their screen sharing for drill or other demos was much easier to see on my monitor up close, and I personally felt it was more interactive on their part. Basically, acquiring information was much easier. Secondly, and this may be the one thing that this format excels at, was the interactivity. The whole video element of the conference was done over Zoom, so the chat was live while the speaker was speaking. I was able to engage with other participants who shared complimentary ideas, tips, etc., and then at the end, the speaker was able to answer specific questions. What I had not realized was lost in the QA of in person is how you don’t generally get to hear a speaker answer the questions of those who line up after to talk to them. Many of the participants asked great questions, I was genuinely interested to know the answer to, and if this was in person, I would not have been able to hear the speaker’s answer.

The speaker’s willingness to stick around and answer questions, then be willing to be around in the lounge for 1:1 interaction, was incredibly helpful and not the kind of thing you normally get at in-person conferences. Usually, these speakers have to leave quickly or don’t stick around, but because they were virtual, I felt it was easier for them to stay present. My best example with this is a coach named Craig O’Shaughnessy, who was on the coaching staff of current world #1 Novak Djokovic and is now the lead statistician for the ATP World Tour. He loves data and stats as much as I do, and he analyzes the vast majority of data from professional tennis matches. I was able to get some 1:1 time with him even though he was simultaneously pressed for time, analyzing the data from Novak’s win in Rome in advance of the French Open. Maybe I could have still snuck time in with him if I was there in person, but the format of being relaxed, on video, and his ability to jump from our time back into his workflow leaves me doubt. The last point here, all the conference keynotes stayed online and demand, and being able to go watch key sessions again is extremely useful. I wish more conferences did this as well.

I had attended this conference before when it was in Northern California, and while the speakers were certainly approachable, I felt more of them were easily accessible in this format than in person. Which, when you are genuinely at an event to learn, felt extremely helpful.

The lounge presented another interesting experience. While I’m not an introvert, I’m still not a fan of networking. I do genuinely enjoy meeting people, especially those with whom I have things in common. In the case of this conference, I’ve met many great individuals who coach Tennis all over the world and share a love of the sport. But I also meet these folks more out of chance than me being proactive. The chat rooms in the lounge were broken out by topic and category, which made for interesting conversation. You could be in several at once, and I found it quite engaging. The speakers would participate as well, many of them having resumes that include coaching professional tennis players, which made it that more engaging as everyone asked questions and shared experience. The ability to join conversations by topics was much more engaging than the more random chance networking that takes place at conferences. This element, I felt, was far more helpful for the intent of the event than what can be done in person.

Lastly, the obvious part that suffered the most from being virtual was the exhibits. Especially since this event has most of the top tennis products in the world show up, and you can see what’s new with rackets, balls, strings, etc. There is nothing like holding, touching, trying this product when trying to see if you or the players you coach will be interested, but they tried their best. Exhibitors were ready to answer questions and show video demos of products, but not being able to see or touch them in person was seriously lacking. The challenge I see here is how, for most conferences, the exhibitors and sponsors are the financial mechanisms that keep them going.

While I don’t expect all conferences to stay virtual, my feedback to the UPTA and any feedback I’d give to conference organizers is to see how to bring the best parts of being virtual also to physical conferences. There are certainly pros and cons to both, and finding a blend can add entirely new elements of engagement and value that you could not get before in either medium.

Today’s Topics: Apple Silicon and Moore’s Law, The One Bundle

Apple Silicon and Moore’s Law
Who would have thought that Apple is the company likely keeping Moore’s Law alive? Noting Apple’s aggressive adoption of new process technology from TSMC, I made the point years ago that Apple was taking over as the company to bring to market Silicon on cutting edge process technology, which was something the industry always looked for Intel to do. But now it is also clear they have taken another thing from Intel, which is Moore’s Law.

I’m not going to debate whether Moore’s Law is dead here or not, but in isolation, if we just looked at Intel, we would have to conclude it had dramatically slowed. In the 20 years I have watched and studied Intel as an analyst, they had constantly pressed forward with Moore’s Law and staying on a roughly two-year cadence of moving from one process node to the next. They called this their tick-tock cycle. Tick was the year they moved to the next process node, and tock was the year they optimized the process node with their architecture. This was up until an array of challenges faced Intel, and Tick Tock became Tick tock tock tock.

But now Apple has been transparent enough with both their process node transitions with the A-series processors, and the number of transistors they are putting on each node, to be confident Apple has been on a tick-tock cycle with their silicon development and A series architecture. At least for the last cycle. The A11 and below did not follow a roughly doubling of transistors. But with the jump from 7nm to 5nm, we see the transistor count did roughly double.

Apple Silicon:
2018 A12 7nm = 6.9b transistors
2019 A13 7nm = 8.3b transistors
2020 A14 5nm = 11b transistors

Now Moore’s Law is more than just transistor count. It also states the cost per transistor will go down as well roughly every two years. We don’t know the economics of Apple’s silicon costs, so it is hard to know if costs are going down, I suspect not, but the transistor doubling seems evident.

It is important to state that doubling transistors for the sake of doubling transistors is not helpful. What matters, and why it matters that you get more transistors in a process transition, is because of how many more operations per second you can run when you have more computing available to you. This is why how a company spends its transistor budget, how they put their transistors to work is more important.

This is where Apple’s silicon architectures come into play. And that is why they show a chart like this every time they release a new A-Series processor.

Apple uses a chart like this to highlight the unique customizations they are putting into their architecture. This chart is a rough highlight of how they spend their transistor budget. Over the years, the number of specific customizations Apple has made has grown from around a dozen to roughly two-dozen. This is insightful as it shows us that as Apple has more transistors available to them, the more customizations they can make for their needs. I pulled this quote from yesterday’s event when the details of the A14 were discussed:

Our goal is to build chips with industry-leading performance, powerful custom technologies, and extremely efficient use of energy to make every one of our products best in class.

The above statement is the foundation of how Apple will spend their transistor budget, and the last line here is truly critical – to make every one of our products best in class. This is why Apple Silicon is so critical. It is the very reason their products will remain best in class.

Hopefully, I can tie all this together succinctly. When Intel, AMD, Nvidia, Qualcomm, etc., all these companies design their architecture and spend their transistor budget in ways that are designed to cover as many possible bases as possible. These companies need to build general-purpose products that can cover a range of customers’ needs, and they do a tremendous job at this. But this comes at a cost. Building a general-purpose architecture means just that it is a general-purpose. Apple built a specific purpose architecture with only one customer in mind, Apple. This allows them to make fundamentally different decisions on how they spend their transistor budget, and it is ultimately the fundamental reason Apple products will outperform other products in the key areas Apple desires and ultimately the reason they can confidently say their products are best in class.

The One Bundle
Apple released the long-awaited bundle of services. From day one, many of us knew this was inevitable, and a number of studies we have done on Apple services made it clear a good portion of Apple services users wanted a bundle.

Apple’s One Bundle pricing is fascinating to analyze. What they included and what prices are quite telling. But the tried and true bundle pricing psychology is well implemented here as Apple has one package that is designed to come across as the easy choice, which is Premium. Here is a chart I snagged from a Morgan Stanely report late last night.

I’d wager a bet, and family plans are quite successful for Apple. Even if you are single, you are likely to be on a family plan with other single friends, or family, etc. I’m sure Apple knows this, hence the attractive pricing for families across the board. The interesting factor here is storage. iCloud storage may be the most attractive hook here, and it lends itself toward Premium as well. I’ve seen research studies suggesting high adoption of iCloud storage but at the .99c and $2.99. I’ve also seen sentiment studies that suggest Apple customers feeling the pain of running out of storage but finding $9.99 or higher for multiple TB of storage harder to justify. The higher tier of iCloud storage makes the premier package even that more enticing.

Assuming I’m right, and more customers choose Premier, it is also strategically brilliant by Apple. I’d again bet, most people who choose Premier have not tried half the services included. They are likely an Apple Music subscriber (a number I think is well north of 100m by now) and an iCloud storage subscriber. Which means they “could” feel included to try these other services, which I think are pretty good, and end up getting hooked. This, for the overall Apple ecosystem, is a good thing for Apple and its grand ecosystem of hardware, software, and services strategy.

Nvidia’s Arm Strategy and Regulatory Challenge

On Sunday Nvidia signed an agreement to purchase Arm from Softbank. There is no shortage of hot takes out there, but this is a very interesting development. There are, no doubt, significant obstacles to overcome, but Softbank wanted (needed?) to sell Arm, and there are only a handful of companies who could actually purchase the company, and Nvidia was one of them.

Strategically this is very interesting. Jensen has his target set entirely on x86 and displacing it and Intel specifically, from the data center as well as limit their opportunity at the edge and with AI. Nvidia is arguably the dominant force in AI and Arm the dominant force at the edge. And honestly, for all the talk that has been Arm in the data center going up against x86, Nvidia guiding it may be the only chance the Arm architecture has to actually succeed at scale, on all fronts, in the datacenter. This point from Jensen in his QA with analysts and reporters confirmed this strategy:

So I’m super excited to focus a lot of energy around turning Arm into a world-class data center CPU. That alone would excite all the customers and all the licensees of cloud data centers and enterprise data centers in high-performance computing centers who are clamoring for an online CPU.

Nvidia saying they would bring Nvidia tech to the Arm ecosystem was an interesting angle. To quote Jensen responding to a comment from Stephen Ellis from Reuters on what we can expect in terms of Nvidia technology being available and brought to the Arm network:

The first obvious thing for us to make available through our Arm’s vast network is our GPU and our accelerated computing architecture. Our AI computing is world-class, and the processor, the algorithms, the compiler, the applications for the world’s industries could be incredibly valuable. Those could be two obvious places to start. We soon have the ability to reach these thousands of developers who are creating billions of things which will soon be shipping trillions of chips.

I’ll start with Jensen’s wording that select Nvidia technology would be made available to the Arm network. The main question I had in the weeks prior, as we learned of Nvidia’s interest to buy Arm, was whether end customers were going to have to use any Nvidia technology. Jensen is saying its made available doesn’t make it sound like it, which means any more customized Arm solution will have options, which is in line with how Arm works. That being said, a good portion of Arm’s 22 billion chips shipped every year are not customized Arm solutions but more general off-the-shelf solutions. This is quite interesting when you think about the strength of Nvidia’s graphics technology alone and the potential for it to impact the Arm Mali GPU, things get interesting. Would Qualcomm want to use that if some of that solution is better than their own? What if Mediatek goes all-in with Arm, as they do, and thanks to Nvidia, can make a smartphone with better all-around computing solutions than Samsung or Qualcomm? Both Qualcomm and Samsung use some Arm IP and customize others. The idea that Nvidia could dramatically change the competitive landscape around off-the-shelf silicon is a fascinating option when just looking at mobile computing alone.

Obviously, this has a broader impact when we look at robotics, automation, and self-driving cars, and a host of other categories where Arm IP may be dramatically more competitive to its competing brands of Intel and Qualcomm, for example. But as we all know, a little competition is a good thing, and Nvidia fueling even more innovation in the broad IP from Arm would certainly do just that.

Going back to the strategy, it is clear this move is Nvidia wanting to control an architecture they way Intel controls X86. Licensing business models are hardly lucrative. Certainly not as lucrative as Nvidia’s existing business models, and even with Arm shipping ~22 billion chips a year, their annual revenue is still $1.5-2 billion compared to Nvidia’s $10 billion annual business in GPUs alone. And Nvidia’s annual GPU shipments are measured in millions compared to Arm’s billions annually.

As I said, if anyone can dramatically change the course of the future of Arm, it is Nvidia, but massive challenges remain for this deal. One including regulatory scrutiny.

Regulatory Challenges
During the press QA, two things stood out to me that I think are the key factors in getting regulatory approval. The first was Nvidia and Arm’s confidence this deal can happen. Jensen used his experience buying Mellanox as being key in understanding how to navigate the regulatory waters as it relates to a deal like this and the regulatory bodies’ desire to enable competition.

This indeed will help. Nvidia is also being very specific about how they talk about Arm, specifically pointing out how their technologies complement and do not compete in any way in any market, which is technically true.

The biggest issue to me is China. Arm in China is a bit of a hot mess, which is being managed by a joint venture in which Arm, and if the deal goes through Nvidia, will hold a minority share. But Arm IP is critical in China and a big bet of the Chinese government in order to create true silicon independence. China has a lot riding on the openness of Arm, and if that is ever to be perceived in jeopardy, they could create real problems for anyone bringing Arm-based solutions into their market.

While China likely can’t veto the deal, the deal itself still has to appease the needs of China, given their dependence on Arm at this point and the implications for Huawei specifically in some cases.

The biggest question I have around this is one more about politics. I believe some concessions will have to be made to appease China, and I am curious if those concessions will not fly if Trump is reelected. I think it is very clear at this point the spat between China and the US is like a Sumo wrestling match with both countries trying to be big and strong and push each other around. Neither country wants to appear weak or back down, as evidenced by this ordeal with TikTok.

Nvidia being a US-based company, may cause the Trump administration, if reelected, to be more stern on this deal if the necessary concessions to China are made. Again, the hot mess of the China Joint Venture of Arm, where some deals have gone rogue to appease China has to be straightened out, and both Jensen and Arm CEO Simon Segars noted getting the Chinese Arm JV straightened out was a top priority.

There will also be pushback from customers. I’ve already heard of several large customers who are not happy about this deal and even specifically telling Arm not to go through with it.

The Elephant in the Room
This may be one of the trickiest deals to get approved in our industry’s history, which is why I lean more on the side of the skeptic. Should this deal not go through, it leaves us with a still perplexing question and the elephant in the room? If Nvidia can’t buy Arm, then what is Arm’s future?

Softbank wants to unload this asset. This means Arm’s future is very much up in the air should Nvidia not be allowed to buy the company. As I mentioned, only a handful of companies even have the money to consider buying Arm. But Arm is also best if independent. Perhaps a joint venture is an option where the main customers, Nvidia, Samsung, Apple, Qualcomm, etc., make sense to own Arm. As difficult as this would be to manage something like that could be the second-best option to Arm’s true independence should the Nvidia deal fall through.

I have no hope this deal gets approved or denied anytime soon. This is going to take a long while, but one thing I’m quite confident in is any hope for this deal to pass requires Trump not to be reelected. Nvidia better hope and pray Biden wins in 2020.

Surface Duo and Two Screens vs. One

I have had the opportunity to spend time with the Surface Duo. A product that certainly has room for improvement, but which I think signals something about the future of mobile computers.

The emphasis from Microsoft was on a true two-screen experience with Duo, which is where the differentiation with this product and it’s most interesting use cases reside. As always, when I use a tech product that brings something new to the table, my exploration focuses on what I can do with this device that I could not do before. With Surface Duo, this was evident from the start where the side by side screens allowed to run two apps together side by side. What immediately hit me about this experience was how it was a mobile experience of my favorite way of working on iPad by using two apps side by side at the same time.

The bigger the screen, the more customers can do with their devices. This is why the notebook/desktop has always been positioned as the ultimate productivity computing devices. But also why the debate with iPad got blurry since it allowed for much better multitasking but on a more mobile device than a laptop and desktop. To that end, those of us who have always study consumer behavior has always been fascinated by just how much traditional computing tasks most consumers do with their smartphones, which has continually led me to conclude that what consumers really want is the most mobile device form factor that they can get the most done with. This is why the Surface Duo is so intriguing to me because it enables a dramatic amount of productivity in a pocketable/pursuable form factor. Which, as I mentioned, I have concluded, is exactly what consumers will continue to gravitate toward and exactly why I’m convinced folding pocketable devices have a bright future.

One of the more difficult parts of testing the Surface Duo was getting ample opportunities to stress test the productivity angle while out and about due to COVID-19 and the reality that many of us are not leaving the house. But I did take it out into the world every chance I got and intentionally took some video calls/meetings while out in the world which, given the work from home moment we are in, actually proved to be one of the more interesting use cases.

We can all relate to the painful amount of video calls/meetings we are all experiencing lately, and to be honest, before using Surface Duo, this is not something I would have considered doing with my smartphone due to my need to be present and on camera as well as take notes. This use case, in particular, is where the side by side apps and increased multitasking function of Surface Duo stood out to me as quite compelling. This use case is also made more functional due to the size of the side by side screens on the Duo, compared to something like the Samsung Galaxy Fold. While the Fold can run apps side by side, the Duo allows a little more real-estate for those essential productivity apps, which was quite empowering and gave me quite a bit of confidence to do more while I was on the go.

Going back to my point about how the Duo brought the most empowering productivity angle of iPad in side by side apps to a more mobile device causes makes me think it is better to think of Surface Duo as a pocketable tablet than a smartphone. The more time I got to use Surface Duo out in the wild, the more this became clear that using it feels more like using a pocketable tablet than a smartphone.

V1 and Software
There was a great deal of conversation around the software with Surface Duo. There were many fair criticisms of the Surface Duo hardware specs, and the greatest challenge for the platform and Microsoft, and Google is to get more apps optimized for the folding mobile device experience. Yes, Duo is a V1 product, but the broad commentary about the hardware was spot on. From a design standpoint, the hardware is amazing. The biggest hardware knock being the camera, which is also fair. But again, if we think of Duo more like a tablet than a smartphone, both the potential customer for this and the broader future of mobile devices becomes clear.

For all the criticism the Duo has taken in software, I think it is worth pointing out that getting the hardware right for this is an equally important task and arguably the first important task. The software can update over time, but hardware can not. In fact, even with the shortcomings in the camera specs on Duo, if this product was running the Google camera that powers Google’s Pixel phones, I don’t think the Duo camera criticisms would have been as negative.

I think Microsoft nailing the hardware design in many regards was the most critical first step on their journey. They are collaborating deeply with Google, which is an interesting side point. And given the bent on the productivity potential of Surface Duo and the fact that most of Microsoft’s productivity suite was highly optimized for Duo, being productive with Office was quite effective.

For Microsoft, this is a marathon, not a sprint. And for Surface, the goal of the Microsoft hardware line was never to be the market share leader in terms of sales but to be a catalyst for innovation and push the Microsoft ecosystem of software and hardware forward. While I am certain Microsoft has more Surface mobile hardware coming, if this product and their collaboration with Google causes the mobile ecosystem to move forward and support more sid by side app usage, then everyone wins. Especially Microsoft, as the more we can all get done in more places for our day jobs the better positioned Microsoft software and services solutions are on all devices.


I found the flexibility of folding the Duo over for one screen usage quite compelling when I went to triage email or to enter long text. My biggest complaint was the keyboard for text entry when the device was opened to two screens. A challenge I think, will need to be solved for us to take folding devices more seriously. But that was solved by flipping Duo over into single-screen mode when I could use it more in a context like my iPhone for inputting and feeling comfortable inputting long text.

One very interesting thing I found, was because of some of the challenges inputting text I found myself using voice input more often. It caused me to wonder if this two-screen/folding screen mobile solution may cause more usage of voice as a computing interface and the role of smart assistants whenever it becomes mainstream.

Microsoft also did something with the software that I wish Apple would with iPad. Which was group different apps together so you could launch specific pairings of apps you pre-determine. Essentially I created several dual-screen workspaces with the most common pairings together. I did things like pair Teams and OneNote or Twitter and Edge, Facebook, and Instagram, etc. This way whenever you clicked the app grouping they both launched together side by side.

Ultimately, I land on the same point many reviews did with Surface Duo. It’s not perfect. It will get better (both hardware and software), but by using it, we get a chance to use a bit of the future today.

Today’s Topic: Apple Counter’s Epic Claims

When the Fortnite news first dropped that they were trying to circumvent the App Store, I really felt it was a quick ploy and would get resolved. I even said Apple was not likely to pull the app. Boy, was I wrong. All along, Epic was playing the game, knowing what Apple would do and preparing a tactical attack that included lawsuits with claims of anticompetitive behavior. Yesterday, Apple fired back in this fascinating game of cat and mouse.

Apple Counter’s Epic
Apple filed a counter to Epic’s complaint yesterday with what included an extremely useful answer and defense to Epic that sheds even more light on how Apple thinks about the App Store. For anyone wanting to get deep in the weeds, it is an interesting read, but I’ll summarize some highlights.

The most insightful part of Apple’s response, for me, is more clarity on how they think about the App Store and the elements they feel they bring to the table that is worth 30% of revenue derived from their platform. Here are some choice quotes (bold emphasis mine):

” Although Epic portrays itself as a modern corporate Robin Hood, in reality, it is a multi-billion dollar enterprise that simply
wants to pay nothing for the tremendous value it derives from the App Store. ”

“For years, Epic took advantage of everything the App Store had to offer. It availed itself of the tools, technology, software, marketing opportunities, and customer reach that Apple provided so that it could bring games like Infinity Blade and Fortnite to Apple customers all over the world. It enjoyed the tremendous resources that Apple pours into its App Store to constantly innovate and create new opportunities for developers and experiences for customers, as well as to review and approve every app, keeping the App Store safe and secure for customers and developers alike.

As a direct result of Apple’s investments, the App Store has grown into a diverse marketplace with a community of 27 million app developers worldwide, with about 1 billion customers across 175 countries. And, by all accounts, Epic has taken advantage of Apple’s support and services more than any other app developer for the past two years.”

Right there in the opening paragraphs, we see the crux of Apple’s perspective on the value of the App Store. We also see quite clearly, that for Apple, the App Store is a service Apple provides. Apple is making a statement that the App Store is not stagnant or a stale marketplace. It is a market place enabled by their tools, technology, and software. And deemed trustworthy by consumers because of the effort they go to for human review. Said trusted environment is why consumers choose to engage and spend money on the App Store and, therefore, a key reason why their app store is unique in their mind. Apple also is pointing out their marketing assistance, customer reach, and breadth and depth of access to apps as well.

Apple also stated with clarity, some things that had already stuck out to me in prior public language. One is that Apple is not simply a payment processor. A point I’ve made countless times. Second, Apple’s 30% (%15 on subscriptions after a year) is not a fee nor a tax but a commission for being an integral part of the economics for developers. This section seems to quite clearly make those points. Again, bold emphasis mine:

“Under the current model, developers (like Epic) contractually agree to pay Apple a commission for its services. In this context, Apple’s In-App Purchase (IAP) function is not a “payment processor[]” within some imagined “iOS In-App Payment Processing Market” (Compl. ¶¶ 10, 12); it is simply the practical, efficient, hardware-integrated, and consumer-friendly way by which Apple collects its contractually agreed-upon commission on paid transactions.

That commission reflects the immense value of the App Store, which is more than the sum of its parts and includes Apple’s technology, tools, software for app development and testing, marketing efforts, platinum-level customer service, and distribution of developers’ apps and digital content.”

The last part I want to mention is the element of customer service and the app store. I’ve again stated many times, the hill I will die on in this debate is the one that puts the customer first. How the current app store process is the only environment where we can nearly guarantee consumers can’t be taken advantage of. For all the arguments stating the benefits of the open web and the potential innovation that brings, it also forgets to handle the opinion that the open web is one of the largest sources of fraud and customer pain (via malicious intent, viruses, spam, tracking, scams, etc.)

Buried deep in Apple’s response is this interesting nugget: ” (Apple) specifically denies that Apple has “little incentive to compete through customer service.” Apple provides peerless customer service through AppleCare, addressing more than 25 million customer support cases and handling almost $500 million in refunds per year.”

If I read this right, Apple is defending its handling of the transactions as an element of customer service. If they did not sit in the middle as the trusted transactor between the developer and the customer, there is a much greater risk of fraud. Even if some of those reimbursements are accidental purchases or consumers not happy, etc., there is certainly no guarantee if the developer was in control that they would give customers their money back. This is where the element of customer service comes in as if customers constantly got ripped off in the App Store, word would spread, doubt would be cast, and the everyone Apple, customers, developers, etc., would pay the price.

The other interesting angle that hit me here lies with a common complaint that developers have will Apple regarding their payouts. Apple doesn’t pay developers right away but sometimes takes a month or longer, and often not until the next quarter. What hits me about this process is how Apple holding onto those funds ensures they can refund customers in a timely fashion and guarantee those customers will be refunded when justified. Again, if we put the developer as the one who decides, we can’t have such confidence. While I know developers want and sometimes need their money right away, my belief is this policy exists for best in class customer service.

For Apple, the customer ultimately sits at the center. This formula works, and Apple’s wording throughout their defense emphasizes this point of view as the reason many of the policies and practices of the App store exist. You may agree with Apple or with Epic, but what is not in dispute is anything that could erode customer trust, security, privacy, customer support, and the overall customer experience can not enter the app store of it will be a loss for everyone.

Today’s Topics: Zoom’s Boom, Apple’s 5G Moment

Zoom’s Boom
If you are an investor in Zoom, congratulations. It’s hard to see a stock that has benefited more from the COVID-19 pandemic than Zoom, after reporting somewhat predictably stellar earnings yesterday where the company has grown 355% on an annual basis and had back to back triple-digit quarterly growth. Zoom also announced new customer revenue growth for the quarter of 81%. This shows Zoom’s growth is continuing to come from new customers, which they are adding every quarter.

The early debate among investors was whether Zoom was a stock to short or to play the long game. Many believe these stocks fueled by the pandemic, nicknamed pandemic stocks, are easy targets to short. The argument is made that when life returns to somewhat normal, these stocks will be hard-pressed to show similarly financial and user growth like they are showing right now. There is certainly some truth to this point. However, it is true of any market growth sector. What is unknown is what the true TAM for remote work software is, which makes it hard to know when the growth ceiling will be hit.

That being said, Zoom has clearly seen strong conversion from many institutions they gave free accounts to, largely in .edu, and I do not see strong data points to suggest Zoom accounts/businesses/institutions are leaving Zoom for something else. This means there is a good chance Zoom will retain the majority of users they acquire.

In January, for subscribers, I wrote about the future of work as a tech trend to watch this decade. I made this point, which COVID has helped accelerate, and the results have played out pretty in-line with my prediction:

In this decade, we will see new paradigms of working together that have never been possible, and it will all start with enabling humans to work together from anywhere in real-time. Real-time collaboration in the workplace today is still largely done in person. This is where I think video and then eventually, telepresence via augmented reality, will fundamentally transform how we work and where we work from.

I say this not just because of the idea of being free to work without the constraints of location is attractive personally, but also because it is practical. It would remove more cars off the road for people not having to commute to the office every day. It would ease the pain of high costs of living in metropolitan areas allowing people to live and work freely from the location of their choice. It will save companies money as they can re-think their real estate strategy and not depend on a singular head-quarters to house their giant workforces.

Obviously, I could not have predicted this global pandemic, but many of the holes I outlined with real-time work, as well as how the software will adapt to meet the needs of a real-time remote workforce, have been pretty spot on. While I’m certain this moment of true remote work, collaboration, and real-time remote work would have happened anyway, COVID-19 as speed it up in a remarkable way.

With regard to Zoom, I have a hunch that the market share leaders in this space will remain. Like most other categories, it is very hard to get users to switch to new platforms in mass. Right now, remote work behaviors, habits, and workflows are being developed with and around Zoom, given the strength of their market position. If I had to bet, I would bet that Zoom’s market share holds strong whenever the remote workspace is saturated. But I also expect competition to heat up dramatically as the market is growing. The battle is for new users in this part of the S-curve this market is in, and it will likely be fleshed out over the next few years.

Apple’s 5G Moment
Reports continue to circulate about Apple’s launch plans for iPhones this fall. It is an entirely poorly kept secret that Apple will launch 5G iPhones sometime this fall. The question is how many and at what prices. The supply chain reports I’ve read suggest all four new models will be 5G with two more affordable Sub 600 Mhz devices and two higher-end mmWave devices.

The question remains as to how big a push 5G devices could give Apple for this fall. Apple has historically benefitted from new technology changes, like the shift from 2G to 3G, then from 3G to 4G. So you could argue they should see some lift from the 4G to 4G transition. Apple has also historically seen a surge in sales when they release devices with new design language or form factor design. Interestingly, both these things could be true for Apple’s fall launch. Which is one of the big reasons I am seeing analysts on the sell-side predict a pretty strong holiday quarter for Apple.

I do sense this quarter could be stronger than most, but unlikely to be a record quarter or a “supercycle,” as some have suggested. A report from Bloomberg today suggested Apple is gearing up to make 75m 5G iPhones for fall. This scenario would be absolutely the best case, and I’m sure Apple is preparing for all scenarios in order to meet demand. While it is possible Apple could sell 75m iPhones this fall, it is one of the least probable scenarios, in my opinion.

That being said, it is clear a large portion of the market is due for a refresh, which includes a fascinating stat out of China from Morgan Stanely, where their smartphone market research has uncovered a massive amount of smartphones in China that are more than two years old. The smartphone refresh rate in China had been about 1.9 years up to this point, so the fact the market slowed down refresh could suggest a potential pop for Apple considering new network technology and new design language. While I firmly believe Apple can and likely will have a strong holiday quarter, the situation around COVID-19 remains the biggest element and potential risk. What if we can not go to retail stores in mass come November and December? Historically physical retail has been the biggest driver of sales, and if any restrictions or concerns around COVID-19 limit that, I find it hard to believe Apple can hit a significant sales number from online sales channels only. That being said, we are in unprecedented times, so anything can happen. Suffice it say I am cautiously bullish on Apple’s holiday quarter prospects.

Today’s Topics: TikTok’s Fate, Apple and Developer Good Will

What’s going on with TikTok is quite a saga. There are lawsuits against the US government, blog posts, and lobbying efforts attempting to show their transparency from everything to use growth to what data is used/collected, and where it goes. And now with the newly minted CEO Kevin Mayer announcing he is leaving the company. And even more news, today saying Walmart is joining the interested party and maybe linking up with other buyers in this sale.

Reports have suggested that whatever fate awaits TikTok is going to be announced shortly. While I’m not sure how a consortium of owners will play out, if that is indeed the resolution, TikTok’s fate has implications on a much broader global business strategy.

Years ago, I wrote an article called In Consumer Tech The World is Round. I was essentially arguing against the globalization theme of an easier ability to access a global market, which was the subject of the New York Times columnist Thomas Friedman book called “The World is Flat.” My position was strictly that it may be much harder to be a global company than ever before. Everything from local currency, local apps, local entertainment and commerce, and even countries putting regulations in place that favor local companies over global ones entering their market. This is the China playbook, but it seems now, more than ever, this strategy is coming to most major countries. TikTok’s challenge in the US and India is the latest example and one this dynamic and may very well shape how companies think about their global strategies in the future.

This situation with TikTok has the potential to impact global strategy more than we currently comprehend. Coming off a decade where globalization was a key part of many company’s strategies, this pivot to semi-regionalization is fascinating to watch but also inline with the theory I presented in 2015.

Lastly, I wanted to mention the Walmart potential joint deal with Microsoft. If you look at what is a much larger trend of influencer commerce in China, and how major social apps have ties either to their own commerce marketplaces or in partnership with commerce platforms, it makes sense TikTok has ties to a commerce marketplace. Of all the social media apps I’ve used, TikTok is by far the best positioned for ads and social/influencer commerce. Mostly because the way the videos are produced makes ads feel fully integrated and often not like you are watching an ad. And second, because the promotion of products is so cleanly integrated into videos and in much more compelling ways than Instagram and Facebook ads. YouTube is a close second, but it is the continuous scrolling of the TikTok For You Page that better positions it for ads and social/influencer commerce over YouTube from a standpoint of discovery. If Walmart does indeed secure a position with TikTok, it will be interesting to see how Amazon and even Shopify can leverage potential integrations with TikTok. If any social media platform can pull off taking social/influencer commerce mainstream, I think it could be TikTok.

Apple Developer Good Will
I don’t want to get into Apple App store debates. in this section, but I do want to mention something briefly around Apple developer’s goodwill. While there are wide-ranging opinions on both sides of the app store debate, the one place I do think more risk exists is that of developer goodwill. This is also the one area I’m most sensitive to, and particularly when it comes to the smaller indie developers.

While I would not anticipate a max exodus of Apple developers for iOS, the concern I have over developer goodwill is more about the next platform battle than the current one. Admittedly the point I’m about to make is not terribly strong in my opinion, I do want to throw it out at least out there.

If this App Store situation were to greatly deteriorate Apple’s relationship with developers and create a wide sense of developers to be fed up with Apple, then developer support in the next platform (likely AR glasses/wearables) could be at risk. One of the primary arguments for Apple’s continued success from one platform generation (iOS) to the next is because of the software ecosystem. and developers who will create software experiences unique to Apple’s platform. The biggest risk to Apple platforms is absolutely losing their developer base.

If developer goodwill erodes to the point that a competitor can step in with a platform in whatever era comes next, there is a risk those developers are fed up enough and align more closely with someone else. Maybe Microsoft, Google, or someone new offers a more “developer friendly” approach with their AR glasses platform (for example,) and developers make the jump. Again, this is a big leap in thinking, but it is a potential scenario worth considering.

While I understand many of the arguments Apple has about the app store, developer goodwill is a central element to consider as they look to preserve what’s best for two sets of Apple customers, the end-user and the developer.

The Modern Antitrust Debate and Competition’s Inflection Point

I’ve been attempting to soak in many diverse viewpoints, as well as different academic positions on our current tech industry theme of antitrust and monopoly market power. Suffice it to say, I’ve been down some interesting rabbit trails of reading and academic commentary. But the more I ingested a range of information, the more I’m convinced we are at a critical time for the entire understanding of what it means to be competitive as a business. Competition, at its very nature, is at an inflection point.

Historically, there is some precedent, but also no precedent for where the tech industry finds itself today. Every industry has had its 800 lb Gorilla’s, however, what makes the digital age unique comes with both its scale (overall size of the market and total potential customer base) and a very different cost structure in terms of marginal cost. On the marginal cost point specifically, in the digital realm, these are often much lower, and sometimes even zero, than the analog world.

This point of the competition, and the deeper need to re-evaluate it against previous antitrust/monopoly eras, is one of the main themes being discussed which came out of the Ninth Circuit ruling in favor of Qualcomm over the initial ruling in favor of the FTC. The key theme now being highlighted in antitrust academia was a point made in the Ninth circuit opinion of hypercompetitive actions being different anticompetitive actions. There is now debate and a school of thought that desires to more clearly clarify what it means to allow hypercompetitive action and how, and in what ways it differs from anti-competitive action. This debate will be ongoing, but I think it has only amplified what much modern thinking believe which is we certainly need to reform antitrust laws, into something more equipped to deal with a world that is so different thanks to technology and the digital age, than the one many of the foundations of antitrust law were built on.

One of the challenges, of many, facing those who may propose legislation, or be in a position to rule on and enforce legislation, will be to look beyond just economics. Pricing, or costs, are often brought into the discussion where the competitor with market power is impacting pricing, distribution, or both as it relates to stifling competition or innovation with the side effect of consumer harm. Proving harm, particularly consumer harm, is one of the most critical exercises here.

Within that, it was a little worrying, and also a showcase of how difficult this exercise will be, that the judge in the recent hearing between Apple and Epic used the example that Apple does not allow other app stores as an example of potential monopoly behavior. While you can argue, and Epic is, that there are concessions Apple can make to allow for different economic benefits for consumers to buy at lower prices, suggesting the remedy is allowing other app stores has the potential to harm consumers even more. If any company or app store could launch on iOS, it creates an opportunity ripe for the stealing of sensitive consumer data, malware, theft and fraud, and a host of other issues. I bring this up to simply say, there is a much broader conversation to had about how to protect consumers and have their best interests at heart. Apple’s position on requiring in-app-purchase is largely in an attempt to protect consumers from the larger threat of malicious intent. I’ve stated this before and will argue it as justification for this imperfect process of Apple’s as the benefit that outweighs many of the other tradeoffs.

I hear a lot of critiques about Apple’s position with regard to third-party payments but see little critical thought offered about what alternative can be provided that still protects the consumer from fraud, theft, and invasion of privacy. When it comes to Apple’s potential solutions here, debating how to safely protect the consumer from the tremendous harm that has come from the open web is where to start. Teasing out all options with this angle of consumer protection is critical first and foremost.

Progress here will be very slow. However, analyzing every case, hearing, and in certain cases, any rulings are critical as the groundwork being laid will set a precedent for future cases that antitrust academics, lawyers, and those in the judicial process will all be watching closely.

This theme and the surrounding debates will be an ongoing development for what I assume will be years to come. But as I stated, what’s at stake has the potential to reshape competition in the 21st century.

Qualcomm Follow up Point, Epic/Fortnite and the App Store

Qualcomm Follow up Point
I appreciated all the email discussion yesterday on my article. I had hoped a point I made at the end was more precise, but just in case it wasn’t, I want to add a more specific clarification.

As I concluded the article, I made the point that the superior technology, and IP, as well as the massive amount of RND Qualcomm spends in order to make it easier for customers to make wireless products and compete is why you can argue some of the higher fees associated are reasonable. I was trying to elegantly challenge the assertion the FTC put forward that Qualcomm’s royalty rates are “unreasonably high” and that the FTC argued those rates are reasonably high because of their dominant market position. To make it clear, what I was trying to put forth was that competitors failure to create competitive products–and their failure to engage in the wireless ecosystem meaningfully–without Qualcomm’s IP then suggests their rates are not unreasonable but also that they are worth it based on superior technology not dominant market position.

The court went on to say the FTC’s argument fell short here and specifically called out this argument as something better suited for IP law than antitrust law. Which I think is spot on.

Lastly, and somewhat of an aside, I remarked in my summary of the congressional antitrust hearing that I was concerned at the suggestion from certain folks in congress that basic business competition tactics are wrong or frowned upon. To that end, I found this statement to be poignant from the 9th circuit judges opinion:

“Anticompetitive behavior is illegal under federal antitrust law. Hypercompetitive behavior is not……The company (Qualcomm) has asserted its economic
muscle “with vigor, imagination, devotion, and ingenuity……It has also “acted with sharp elbows—as businesses often do.”

May businesses continue to act with sharp elbows!

Epic/Fortnite and the App Store
Epic today announced the MEGA Drop. A new way to pay for virtual goods within Fornite. If you look over the blog post released this morning, it is quite clear they have done this to directly address the app store commission and underlying debate within iOS. When this first hit this morning, there was some question as to if this was done with Apple’s blessing. However, reading through the blog post I do not think this was negotiated with Apple and Epic is indeed daring Apple to do something.

Pundits on Twitter are adding the “grab the popcorn” emoji’s to their tweets on this knowing how Apple responds will be crucial when it comes to this debate about App store fees, payment choices, and developer revenue. As we all know, Fornite is a massive global ecosystem and I honestly see no way Apple pulls the app. This means this may be the last shoe to drop which will force a change by Apple.

What is interesting in the press announcement from Epic is how they framed the two top of mind questions/issues surrounding the app store. Safety, and choice. Here is the excerpt:

Why has Epic decided to implement its payment system for purchases inside Fortnite on iOS and Android?

By offering an alternative payment system, we’re not only offering players more choice, but we’re able to pass along the savings to players.

Does a new payment method on mobile mean purchases there are less safe?

No. Thousands of apps on the App Store approved by Apple accept direct payments, including commonly used apps like Amazon, Grubhub, Nike SNKRS, Best Buy, DoorDash, Fandango, McDonalds, Uber, Lyft, and StubHub. We think all developers should be free to support direct payments in all apps. In operating Fortnite on open platforms and operating the Epic Games Store, Epic has processed over $1,600,000,000 of direct payments successfully, and uses industry-trusted encryption and security measures to protect customer transactions.

Clearly Apple and Google acknowledge that third-party payment services are safe and acceptable for goods and services. Epic direct payment simply offers players the same kinds of payment options as these other apps.

Quite tactfully, Epic has structured the above clarifications. The first about why brings into the spotlight something most consumers do not really think about. Which is the 30% fee given to Apple and Google, which is usually passed on to the consumers in cost. They are basically saying we are doing this to save you money should you prefer it, and spoiler most will prefer it.

Second, they address the matter of safety. This is truly one of the core arguments by Apple and Google (but more so Apple) to use Apple payments and not offer other choices which is safety. Safety is a legitimate concern since no consumer wants to buy a random app and then realize their identity has been stolen by a hacker or data sold by the company they purchased the app from. I affirm this concern, however, I have always maintained it does not apply every company distributing apps in the app store.

Epic is essentially hitting the nail on the head here saying they have already processed over $1.6 billion in payments, making it clear they know what they are doing here, and that they use industry-standard encryption.

The user-interface for this move is also quite interesting, and should this adaptation be granted by Apple, I think this is the way to do it.

If you do not already have an account with Epic and choose to use Epic direct payment, you are then taken to a screen where you enter your name and credit card details. Should consumers get to that screen and decide they don’t trust Epic or don’t want to take the time to put in your payment information, they can go back and use Apple’s payment or Google’s. Epic is essentially saying if it’s more convenient or you get more peace of mind using Apple’s or Google’s payment process then feel free it just costs a little more.

It will be interesting to see Apple’s response. But I do believe evolution in their policy is necessary.

Qualcomm Vindicated and Enlightened Antitrust

Yesterday, news broke that the US Court of Appeals overturned the 2019 ruling in favor of the FTC over Qualcomm on antitrust behavior. There is so much to unpack in this ruling, many that have specific implications on future antitrust rulings, but also critical elements in IP protection law.

I’ve written many articles on the battle between the FTC and Qualcomm. I attended two days of the trial in San Jose as key witnesses took the stand to help make a case for the FTC. From the two days, I attended, and the subsequent material I read, I never personally felt the FTC met its burden to demonstrate both competitive harm and consumer harm. After I read the opinion ruling reversing the decision in favor of the FTC, I’ve concluded that any antitrust body, in today’s tech economy, will have a much more difficult time proving the burden of both competitive and consumer harm than I would have thought a week ago.

I want to unpack a few things, but anyone that is desiring to go deep in the weeds like me, I recommend reading the full ruling of the reversal and the opinion of the appeals court since this may need to be referenced should any antitrust suits come against the likes of Amazon, Google, Apple, etc.

Below a few things from this reversal opinion that strike me as important to internalize.

Monopolies are Not Illegal
I’ve alluded to this point before, that many tech companies acquire dominant market position not because they acted like a monopolist but because they have superior products. In an earlier analysis on the FTC v. Qualcomm trial, I made this point which is highlighted by the FTC’s own definition of monopolization:

Obtaining a monopoly by superior products, innovation, or business acumen is legal; however, the same result achieved by exclusionary or predatory acts may raise antitrust concerns.

The US court of appeals opinion similarly underscores this point here on p.25″

“The mere possession of monopoly power, and the concomitant charging of monopoly prices, is not [itself] unlawful; [instead,] it is an important element of the free-market system.” Verizon Commc’ns Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 407 (2004) (“Trinko”).

“The opportunity to charge monopoly prices—at least for a short period—is what attracts ‘business acumen’ in the first place; it induces risk-taking that produces innovation and economic growth.” Id.

“To safeguard the incentive to innovate, the possession of monopoly power will not be found unlawful [under § 2] unless it is accompanied by an element of anticompetitive conduct.”

Keeping all of this in mind is incredibly important anytime we think about, or read the headlines about companies being monopolists. In many ways, all these points above resonate quite succinctly with comments both Jeff Bezos and Tim Cook have made about their passionate obsession with the customer and their drive to make the best products in the market. If they acquire dominant market positions because of that bent, there is nothing wrong with that, and the free market system encourages it. The element that then comes under scrutiny is the competitive behavior said companies with market power engage in when it comes to harming competition, which has to be followed with as harm to the consumer. In the case of both Apple and Amazon, I’m increasingly convinced any suit will have a hard time fulfilling the burden of sufficiently proving both competitive and consumer hard. Specifically, since both company’s practices, in many ways, dramatically benefit the consumer. I’m sure some will disagree with this point.

Just to emphasize what the Appeals Court opinion specifically calls out regarding my point (emphasis BOLD mine):

Accordingly, plaintiffs are required to prove “anticompetitive abuse or leverage of monopoly power, or a predatory or exclusionary means of attempting to monopolize the relevant market.” Allied Orthopedic, 592 F.3d at 1000 (quoting Foremost Pro Color, Inc. v.Eastman Kodak Co., 703 F.2d 534, 545–46 (9th Cir. 1983)); see also United States v. Grinnell Corp., 384 U.S. 563, 570– 71 (1966) (distinguishing “willful acquisition” of monopoly power from “development as a consequence of a superior product, business acumen, or historic accident”). “[T]o be condemned as exclusionary, a monopolist’s act must have an ‘anticompetitive effect’”—that is, it “must harm the competitive process and thereby harm consumers.” Microsoft, 253 F.3d at 58. “In contrast, harm to one or more competitors will not suffice.” Id.; see also Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 458 (1993)

I also found this sentence helpful. Antitrust laws are directed “not against conduct which is competitive, even severely so, but [only] against conduct which unfairly tends to destroy competition itself.” Again, these cases will be quite hard to make against the bigger tech firms because of the actual competitive environment they have created from a free-market context.

A Ruling for IP Protection
Specific to Qualcomm, in this case, I want to highlight how this ruling will be seminal when it comes to IP protection. Which I think is important in the context of encouraging innovation. This ruling quite clearly justifies Qualcomm licensing business model practice. Something that has come into question frequently before and during the 2019 trial. What sat at the center of this case what Qualcomm’s dealings when it came to their contractual agreements with FRAND (Fair Reasonable and Non-Discriminatory). FRAND in itself is open to interpretation as what is fair and reasonable is entirely subjective depending on the context. Plaintiff’s complained about licensing, and royalty mandates placed on them in order to deal with Qualcomm. Qualcomm felt their IP was valuable and wanted to be fairly compensated for it. There are two sides to this coin whenever FRAND is in dispute.

Where I think this debate starts to get interesting, and it is a bit specific to Qualcomm’s IP and RND, is when it has become clear how valuable the IP and Qualcomm’s RND investment in wireless actually is. The FTC used Intel quite extensively as a case study in a company wanting to compete but being bullied by Qualcomm and making it difficult. Other cases of competitors listed were Samsung, Huawei, and MediaTek. In every case, the competition’s products were not as good as Qualcomm’s, and I don’t believe this is even disputed. Qualcomm’s negotiations in the license and royalties were not the issue competitors could not make chips that could go toe to toe with Qualcomm. It’s because wireless is exceptionally hard, and no company, other than Qualcomm, spends all its energy solely on being the best in wireless technology.

It’s worth mentioning here that even before this reversal, and even after it looked like the FTC had won, Qualcomm succeeded in acquiring every single smartphone OEM as a licensee. And just last quarter, they finally resolved a years-long battle with Huawei over licensing technology. A fundamental reason for this was 5G. Consider this point about Apple.

I have it on extremely good authority that the main reason Apple decided to finally acquire a license from Qualcomm was because of their struggles building a 5G device, and specifically around Intel’s challenges to succeed in 5G. Again, challenges Intel faced simply because this is not a core competency, not because of Qualcomm’s licensing or royalty fees. It became clear to Apple they needed Qualcomm and the access to their portfolio to get a quality 5G device out the door. I think the difficulty in 5G transition and Qualcomm’s extensive expertise and portfolio for 5G is the main reason they have now secured a license with every smartphone OEM. Again, emphasizing how difficult wireless is.

In this context, then, should any claim around FRAND interpretation be taken into consideration when it is nearly essential that the company providing the technology be involved for the OEM even to begin to compete? This is again not by nature of discriminatory practice since the US Court of Appeals’ opinion affirmed Qualcomm does not engage in OEM discriminatory practices but uses the same practices with all of them equally.

The point I’m making here is the access to Qualcomm’s SEP portfolio is essential to compete, others simply can’t without it in any meaningful way. Qualcomm’s continued investment in RND and IP is the sole reason OEMs can compete in the first place. For what it’s worth, I think it has to be taken into consideration that undoubtedly, Qualcomm’s technology enables competition AND that even those who license their technology and build competitive products still fail to compete with them at any scale. It is this point that makes this entire debate that difficult. There is not another company that can make as good of modems as Qualcomm, so whether or not they would behave in an anti-competitive way to that hypothetical competitor, we may never know.

At the beginning of the Appeals Court opinion, they make a specific point between anti-competitive and hypercompetitive practices. All the points I just made, were among those that the court reasons Qualcomm fell more into the enabling of hyper-competition and not anti-competitive practices. And the point I made about pricing and licensing, and the challenge of wireless sticks out here. Qualcomm actually makes it easier by these practices, and their spend on RND to meaningfully move forward and compete. I could argue it would be much more expensive for a company to go at it alone and attempt to spend the RND themselves necessary to compete. This is why I think this ruling is well-positioned as protection for IP business models and ultimately good for innovation in many ways.

Two Brief Takeaways Post Apple Earnings

There is no shortage of summaries on Apple earnings, but there are two specific things that struck me I wanted to share.

iPhone SE Irony
While management commentary that the iPhone 11 is the volume seller the surprise, to me at least, was the clarity that the iPhone SE was a significant contributor to iPhone revenue in the quarter, as well as the biggest contribution to the unit volume upside that exceeded nearly every financial analyst’s expectations.

There are several things worth mentioning about the iPhone SE. First, that Tim Cook mentioned the iPhone had seen a return to momentum in switchers from Android to iPhone. This dynamic had not been mentioned in several years, and from nearly every smartphone user survey I see, the switching dynamic had all but gone cold. The poignant observation here is an ironic one.

If you recall, Apple moved smartphone screen sizes larger to compete with the growing market for a larger sized smartphone. Yes, that is still the case, but now that we look at the success of the SE, particularly with Android switchers, is the lack of quality Android offerings in that form-factor. Mostly because the vast majority of Android device competition is in large screen sizes, so it is ironic, somewhat, that Apple sees success in the device form factor many felt they needed to abandon to better compete with Android.

The price point is also key, not just the size. The dollar value for smartphones that cost less than USD 400 is ~$180B, according to IDC. Meaning this price segment alone has the potential to increase Apple’s iPhone total addressable market by 65%. That’s a big upside growth number if Apple continues to play their cards right.

New Users to Mac
The other thing that stood out to me was a statistic I’ve never heard before because I am not sure there was a point in Apple’s history where this was the case. The noted on the earnings call that 3 out of every four buyers of Macs in the quarter were first time Mac owners. Now, this current situation with COVID-19 has been unprecedented for the PC category, so we have to acknowledge that. However, Apple had a bit of luck on their side, announcing updates to the Mac line just before the work-from-home/learn-from-home mandates came down. This put Apple in a great position to be attractive to loads of customers needing to upgrade their PCs due to working or learning from home.

We hope to never be in a situation like this again, but the fact that so many first time Mac buyers came in during this quarter is an interesting signal for Macs as a whole. I’ve long argued the lowest hanging fruit for Apple for market share growth is with Macs. I firmly believe if there were just slightly more price-competitive, they could increase their Mac market share into the high teens if not 20% or so of the market. The upside may very well be much higher, but I err on conservative for the moment.

I make those points because first, that 3 out of 4 Mac buyers being the first time Mac owners in the quarter should scare the PC OEMs. While Mac volume in the quarter was certainly not as strong as the likes of HP or Dell in the US in the consumer channel, Apple’s appeal to new Mac owners is clearly as strong as ever. If we then take current Mac momentum and add to it the potential for Apple Silicon to completely rejuvenate the Mac business, then a growth scenario for Apple’s Mac business seems like a reasonable scenario at this point.

Another factor that could get interesting is if more tech companies enable more remote work if the PC hardware dynamic changes. I do wonder if Macs become more popular for workers to choose as their notebook is if they are working from home more regularly. I have no evidence here, just an interesting shift in workplace dynamics that could benefit Apple.

The bottom line, the Apple growth story is still strong and, it encompasses nearly every business segment they have. Which, given the historical narratives of peak this or peak that, is quite interesting in my opinion.