Ben Bajarin – Page 28

Eastern vs. Western Business Models

One of the more interesting things I’ve been observing in our global research is how the success of varying business models is differing in certain regions as it relates to the consumer internet. What has stood out to me in particular is how free services subsidized by ads do not seem to work well in markets like China and India. Jenny Lee, from GGV Capital, mentioned this point in particular in an interview recently.

Chinese companies prefer the subscription model, virtual currency/items, commerce model versus a pure ad-based model. Most people do not consume ads online, especially on mobile. – Jenny Lee

An original early theory of this observation was related to the economy of a particular region. Those economies that were wealthier, or even healthier, tended to be ones which supported a business model of free services subsidized by ads. The theory was, since consumers in those economies spend more and as a result, were more attractive to present with advertising. However, even as China has grown significantly in purchasing power, we still don’t see free-with-advertising business models succeeding there. Rather, transaction-based business models are working well in China.

Similarly in India, the free-with-ads business model is struggling. While Facebook is not in China, perhaps this slide from Facebook’s Q2 2015 earnings visualizes well the point I am making.

Facebook’s services may very well touch more humans every day than Google’s. It makes them a decent bellwether to analyze this business model at a global level. If Facebook’s global ARPU numbers look like this, you can imagine Google’s, Twitter’s, and many other free services subsidized by ads have similar regional ARPUs. Just to put a stamp on this point, note Facebook’s ARPU in Asia-Pacific and, while Facebook is not directly in China, WeChat’s ARPU is estimated to be around $7. WeChat has succeeded at encouraging ARPU to around the same as Facebook in the US & Canada, with a very different business model and in a market where free-with-ad business models are challenged.

Now, about how the state of each economy may play into this dynamic. This is a chart I like on the subject to highlight where many economies are, relative to each other.

Although this chart is from 2011, I looked at the most recent (2014) data from the World Bank and the IMF and not a great deal has changed. Based on the point I’ve made, you could argue free-with-advertising based models work better in countries to the far right of the graph vs. those well below the line–at least for the time being. Which, if true, makes for the follow-up observation that most of those countries have a mature and saturated consumer internet. All the growth in users and new business opportunities is going to come from countries with less developed economies, purchasing power, and many other fundamentals that impact this particular business model. This is a key element to why we see transaction-based business models finding more success in the East.

If it plays out this way, then to grow, many companies with free-with-advertising business models will need to evolve to include more transactions as well. Perhaps this is why Twitter, Pinterest, and even Facebook, are trying to encourage more purchasing by adding buy or other action buttons to encourage a transaction of some kind in order to collect a share of the transaction. The mantra for many companies facing slowing revenue growth is to maximize ARPU of existing customers. This is where much of the evolution of these free-with-advertising services is likely to evolve.

While these are current and distinct observations, the story is not over. Something important has not happened yet which may alter the thesis on these business models. Mobile commerce is not the dominant internet transaction model yet. When this happens, and it will, not only will we see country by country e-commerce statistics rise, we may see extremely active shoppers ready and willing to be incentivized to purchase. I’m convinced mobile commerce will be the catalyst to drive overall e-commerce to new heights. With this will come the opportunity to be even more targeted with purchase interests. Whether this manifests itself by way of traditional or new types of advertising we do not yet know. However, while there is a clear separation of Eastern and Western market business models today, we may see some converge going forward as each market learns from the other.

Tech.pinions Podcast: Google Restructures, Samsung’s New Phones, The Tablet Slump

This week Tim Bajarin, Ben Bajarin, and Jan Dawson discuss the key tech news items of the week.

Click here to subscribe in iTunes.

If you happen to use a podcast aggregator or want to add it to iTunes manually the feed to our podcast is: techpinions.com/feed/podcast

RIP $500 and Above Android Phones

Today, Samsung launched the Galaxy Note 5 and the Galaxy 6 + Edge. Neither device will change their declining fortunes in the smartphone landscape. What Samsung is up against is something many struggle to internalize. Most understand Samsung’s issues as being eaten alive from the middle price tier of Android. There is truth to this and I’ll address that. However, it is their losses in the high-end of the market most did not see coming and it is going to get worse as subsidies disappear in the US. I’d like to start by addressing this dynamic, then the change in premium Android pricing.

Change in US Subsidy Structure: The US market is largely a replacement market. The initial belief was the change in subsidy structure would hurt Apple because, once consumers could see the full price of the iPhone, they would choose a less expensive device. The fault in this thinking is a consumer was not going to go from an iPhone to a sub $200 Android handset. Furthermore, the structural shift to installment plans is the icing on the cake for Apple and the nail in the coffin for Samsung.

Carriers knew early on moving to installment plans would not hurt the premium tier. They also had a hunch it would help Apple, but it was just a hunch. US consumers like payment plans and they like putting things on credit. The massive amount of US consumer credit card debt is all you need to look at to understand this point. Nearly all research in this area shows US consumers have no problem paying a monthly fee to get something they otherwise could not afford to get it right now. I recognize the unhealthiness of this, but it is reality.

Let’s look at this through the lens of pricing. Take the cost of an iPhone or Samsung phone and divide it up over 12 or 24 months. You get an average of $25-$30 depending on the SKU. Now, let’s use some logic that says a competitor wants to undercut Apple on price to drive sales. Say Motorola wants to launch an amazingly competitively spec device to Apple and charge $350 for it. Their assumption is a device nearly half the cost of the iPhone will be attractive. And, yes, looking at a price of $350 vs. $649 or even $749 looks attractive. However, most consumers are not going to drop $350 right there to pay full price. Therefore, they will still likely utilize a payment plan to get this $350 Motorola phone. Take $350 and divide it up over $24 and you get $14. The consumer is now looking at $14 vs. $25 per month. Not quite the same differential as $300. What is happening is many consumers opt to get the device they want to begin with when looking at the monthly plan dynamics over the full price of the device.

Samsung seems to be using some of this logic, without realizing the real math, by offering the Note Edge 6 + for more than the Note 5 and the iPhone. The problem is a few dollars isn’t going to make any difference and one can argue they hurt themselves by not being on par with the Note 5 or 6 Plus price-wise. While Samsung has certainly benefitted from payment plans, this may all be about to change. Android OEMs who want into this country understand this dynamic. What is still being settled, in their mind, is what the true price differential needs to be to entice a consumer to buy the phone outright and not opt for a payment plan. Let’s say an Android OEM offers roughly the same specs as a premium Samsung phone but for a price of $250. Would that do it? Maybe $199? Somewhere in that range could make a difference and, believe it or not, there are a few handset companies out there who can make money in those prices ranges. As the costs of components come down as well, we could see premium Android devices get under $199. This would make life miserable for Samsung and I believe things are heading in this direction for Android in the US over the next few years.

All the while, the change in the subsidy structure and the move to installment plans could be the driver that puts Apple over 50% market share in the US. I have even had folks at carriers tell me 60% is not out of the question for Apple. Lastly, a data point. From my sell-through tracking model, Apple captured 85% of the sales of smartphones costing more than $600 in Q2 2015. (Yes somebody on the earnings call suggested 90%, but my data suggests 85%. Either way it is high.)

Overall, premium Android is shifting. Look at devices like the OnePlus or Xiaomi’s phones or Micromax in India. All over the world, extremely competitive phones, specification-wise, are popping up in the $300 range and defining the new Android premium price and spec range. Even in this country, a brand like Alcatel sees growth signs from this strategy with the Idol 3 — an incredible phone for $250. I actually use this device as my primary Android tester phone.

These devices are changing the shape of Android premium phones and, remarkably, there is still a roadmap to keep specs high and drive the price even lower. R.I.P. $500 and above Android phones.

Getting Harder to Beat the Tablet Bears

I’ve been defending the tablet market for some time. I still believe the form factor offers a much more inviting and natural computing environment than a traditional PC. I’ve long argued tablets are great first computers for kids, the elderly, and many in emerging markets looking to do more than their smartphone offers, but who aren’t PC literate. However, these segments alone may not be big enough in annual shipments to sustain many players in the category. At this point, and things can always change, there are a few dynamics we have to fully understand relating to tablets.

First, a great deal of tablets’ global growth and rapid adoption since 2010 has been driven by small tablets in the 7-8″ range, and very low-cost ones. Note this chart of sales and the vast majority, ~80% on average, of tablets in the “other” category are sub $150.

Unquestionably, replacement rate extension is an issue for iPads in particularly. A behaviour we have noted with lower-cost tablets is they are treated as disposable. In markets like India and China, where low-cost tablets saw large volume sales, it was not uncommon for these to be replaced annually. This could have played a role in the surge in volume sales from these products and is also one of the reasons I think we are seeing a decline. It is these customers, who bought tablets for sub $100 in the 2012-2013 growth stage, who are now not purchasing them anymore as larger screen phones are filling their needs. I’ve shown this chart before, now updated for Q2 2015, and we have debated it, but the signals seem be clear that large screen phones are impacting volumes of low-cost small screen tablets.

It is unclear if larger screen phablets are impacting iPad sales, or if it is purely because the iPad refresh cycle is extremely long, but I’m certain large screen phones have dramatically impacted low-cost, small screen tablet sales on a worldwide level.

However, some recent data from DeviceAtlas may provide the best signal of the shift taking place. From their latest Q2 report, DeviceAtlas shows that internet traffic from tablets is declining across the metrics their technology tracks.

Several of the markets tracked here, such as the US, UK, Australia, and Japan, are markets where the iPad installed base is quite high (over 50% in some cases). Which means the decline in internet usage from tablets is not just coming from low-cost, small screen Android tablets. The other point to make is the iPad has traditionally, and still does, lead in nearly every country as the dominant tablet for internet usage. So, to see tablet traffic decline, knowing how much of it globally comes from iPads, enforces again that some of this decline is coming from people using their iPads less to browse the internet. How much less? I’m not sure, but we can’t argue it is not happening.

So where does that leave us? Here are a few ways to think about where the market can go.

Tablets Become SUVs: The analogy that PCs are trucks is apt and holds water. Trucks are not mass market but are specific purpose utilities. The positioning that the tablet is more like the compact car than the truck, meaning it is more mass market than a truck, was commonly used. But perhaps the tablet needs to become more capable, functional, and powerful than a compact car but not quite a truck. Maybe it needs to become an SUV.

This is perhaps why, within iPad sales, we are seeing the mix shift away from the mini to the larger screen iPad. This may also be why there is excitement around a larger iPad, the so-called iPad Pro, which will still be more portable than a traditional PC and nearly as capable.

If this happens, these classes of tablets could compete for the 500m, or more, consumer notebooks in use that are 4-5 years old, when these devices come up for replacement.

Only the iPad and Windows Tablets Remain: Another scenario to consider is Android tablets simply fade away and the only tablet makers left are Apple and those shipping Windows tablets, largely to commercial customers. Since most Android tablets sold are being displaced by large screen Android phones, this scenario could be quite likely. I’d still argue, in this scenario, the tablets becoming SUVs is still the play.

Only Upside is Commercial: Another scenario is the consumer market for tablets becomes heavily seasonal, or only large in certain years, where the regularly quarterly and consistent annual upside is in commercial sales. I use this chart often in my presentations to show the opportunity for tablets to take computers into environments the desk or lap-based PC could never go.

We believe workers who spend most of the day on their feet and use paper-based processes in places like factories, construction sites, retail, etc, could represent an opportunity of more than 400 million jobs where a tablet is a viable solution.

The Market is Simply Not That Big:Lastly, we may have to conclude the tablet market is just not as big as we originally thought. Many believed it could be larger than the PC market, meaning north of 300m units per year. Currently, the tablet market is on pace to barely break 200m units this year, a decline of about 25 million from 2014. Of course, this could change, but I’m not as confident as I once was, even if Apple brings out a larger one.

If we do continue to see small tablets shrink and potentially become extinct, it will be time to officially start lumping tablet sales into PC sales and stop separating them. I have a model that adds all iPad Air sales into PC sales since I consider them PCs. But I separate smaller tablets into the tablet category.

Perhaps the tablet category simply goes away as the tablet evolves and matures. Maybe it is even easier to just get rid of the labels and say we have small screen computing devices and large screen computing devices.

Wearable and Smart Watch Market Update

The wearable market, while young, still generates a great deal of conversation and debate and rightly so. There is a great deal of attention being paid to this category thanks to Apple. While Apple has come on strong in the launch quarter of the Apple Watch, Fitbit continues to make strides forward. There are a few questions to address related to Apple Watch sales and also a theory I have about the market as related to Fitbit.

First on Apple Watch sales. I’ve made some points regarding this in our subscriber forum but I’ve come across some new information that may help get closer to the number of Apple Watch sales last quarter. Without question, Apple sold less watches than many of us thought. We were using what we heard and were guided by the supply chain (which we know is risky). However, without broader retail availability, the supply chain was all we had to go on.

Apple’s revenue from the “other” category came in at $2.7 billion for the quarter. Adding some helpful insight, Tim Cook made the point on the quarterly conference call to tell us to not just use the year over year increase in revenue to this category and draw conclusions of Apple Watch sales. The key point he made was that products like the iPod, Beats, and accessories saw declines year over year. So the revenue contribution of the Apple Watch to the other category was MORE than 100%. So the key question is how much more.

In conversations with several friends at the usual retail tracking outlets and from guidance they gave me, I believe Beats, the iPod, and accessories saw an even higher decline than many initial guesstimates. I had heard 10% declines were about where many had landed but it is easily much higher than that. From what I’ve learned, I believe we can make a strong case Apple Watch revenue contribution was in the range of 1.4-1.7 billion dollars. Which, depending on the ASP (which I also think was lower than many anticipated), can give us a range of 2.9-3.2 million Apple Watches. Based on ASP estimates as well as what we have from primary research, I have a high degree of confidence that Apple Watch sales were in the 3 million range. Still lower than initial estimates of 4.5m but also a bit higher than the low 2-2.5m range most landed on post earnings.

With the broader retail expansion, we are confident Apple Watch sales will accelerate and, thanks to well-placed sources, also a bit easier to track until Apple gives us hard numbers.

Updating my model with Apple Watch adjustments and Fitbit’s announced unit sales, this is the landscape up to Q2 2015.

It is not hard to see an increasing number of Fitbit’s out in the wild, gracing the wrists of consumers. While Fitbit posted strong and record number of units sold this last quarter, the ASP declined as the mix shifted to lower cost trackers, namely the Flex. This is quite interesting. It suggests Fitbit is benefiting from the increased awareness Apple is generating to the category as well as an increase in their own marketing initiatives. However, while Fitbit had been selling mostly to enthusiasts or early adopters, where they can maintain a higher ASP, Fitbit is now starting to gain traction with more first-time buyers. Whether the notorious drawer effect remains, where consumers have high abandonment rate after 6-8 months, remains to be seen.

However, my theory is Fitbit may provide a stepping stone to the Apple Watch. Our research suggests activity trackers like Fitbit have a higher percentage of ownership and purchase intention among iPhone owners globally. Which suggests many with activity trackers, and many intending to buy an entry level one, are already in Apple’s ecosystem. Therefore, Apple has a chance to compete for these customers. Part of the view on this depends on what you believe about more general purpose wearables like a smartwatch, or more specific purpose health and fitness trackers, and the market size for both. My gut is the opportunity is larger for general-purpose wearable devices, due to the diversity in use cases they can address, but we believe there will be a market for dedicated health and fitness wearables as well.

Fitbit is in a tricky spot. If they try to move upstream with the “super watch” category, they risk getting too close to the Apple Watch and likely won’t win against Apple on that front. If all they do is sell low-end entry level fitness trackers, that is not great for the stock either. Short term however, I think Fitbit will have a strong year, possibly even a strong 2016. But I don’t see anything changing from the current duopoly of Fitbit and Apple as the majority of sales in the wearable and smart watch category for the foreseeable future.

Addressing Concerns over Apple’s iPhone Growth

This post was originally published for Tech.pinions subscribers. Due to encouraging feedback to have more people read it, we are making it free for all. If you are interested in learning more about our analysis service for subscribers, please click here.

There is no single question I get more from contacts on Wall St. than those that center on how long Apple can keep growing. Knowing Apple derives a great deal of its revenue from the health of the iPhone business, the question of, “How much higher can the iPhone grow?” is fundamental.

Interestingly, Apple added a disclosure to their latest 10-Q for the June quarter regarding risks to results:

“Further, the Company generates a majority of its net sales from a single product and a decline in demand for that product could significantly impact quarterly net sales.”

Clearly, Apple understands what is at stake. However, I also believe they understand there is still headroom to grow iPhone unit sales. Here are some of the fundamentals.

Upgrades: Apple is giving us the percentage of the base who upgraded for a reason. Tim Cook also used a third party statistic about iPhone repurchase intention on the latest analysts call saying 86% of iPhone owners plan to purchase another one. He also compared that with a 50% repurchase intention of the next highest brand measure, which would have been Samsung. The point is, iPhone owners buy more iPhones (the number is in reality higher than 86%) and every upgrade cycle for an Android user is an opportunity for another brand.

I believe the iPhone global installed base has passed 450m units now so Apple still has roughly 330 million (or more) iPhones to sell to their existing customers. It is likely that, by the end of 2015, 40-50% of the iPhone base will have upgraded given current trajectory. We have country by country details from our survey work where we ask about specific device ownership. In the survey, we ask very specific smartphone model ownership questions as well. The iPhone 5s remains the largest owned by a significant margin, highlighting the strong opportunity for upgrading.

Android Switching: This is one of the dynamics I don’t believe is fully appreciated or internalized regarding what is happening globally in the smartphone market. Android is sick and has been for quite some time. The extent of this sickness is not understood but it has been obvious for those who can see it. In 2012, I defended Apple rigorously against investors, and some prominent VCs, who felt Samsung was too strong a force to be reckoned with. I explained why Samsung’s dominance was only temporary. A great deal of my logic was centered around the dynamics of Android itself, which I predicted would have broad sweeping ASP impact on the Android vendor landscape. The clear takeaway is not a single Android vendor will ever be safe. I’m fond of saying when you ship someone else’s software, you are only as a good as your competitor’s lowest price. This makes it very difficult for these companies to do primary R&D and innovate.

The dynamics of a mature smartphone market are consumers internalize and self-select what they want and what they don’t want. It takes time for a market to mature and, when it does, you generally see a more refined set of desires and feature sets. Often, this takes experimentation. Lower cost Android smartphones helped get more consumers into the market of smartphones and, with each generation they owned, they began to refine what they wanted and didn’t want based on their unique needs and desires. It turns out that, in many cases, Android isn’t panning out for them. Android forces the hardware landscape down in cost, which has a broad impact on components and features. Apple does not have to play this game and can innovate on feature, function, user experience, etc. This sets them apart once the core needs, wants, and desires of consumers are refined. This is one of the fundamental dynamics driving Android switching and how mature markets work, evolve, and ultimately operate. This must be internalized to understand why it will continue in favor of Apple in many markets. While helpful (but not definitive on consumer decision making), we chart consideration to purchase by smartphone brand. I’ve lumped the broader (over 30) countries we survey into regions. Notice Apple’s lead in purchase consideration in many of them.

I make this point not to state this high purchase consideration will lead to more iPhone sales. Only that Apple has a captive audience to sell to. This is why we believe they are well positioned as the market continues to mature and consumers refine their interests.

China: Lastly, we have to talk about China. China remains Apple’s single largest region for growth prospects. The ceiling for iPhone sales in the US is close. Apple is creeping toward 50% share of smartphones in use in the US. Yet, I’d argue the sheer desire to own an iPhone is stronger in China than in the US. Apple has, currently, only 13% share of active smartphones in use in China. As middle-class and overall household income in China rises, numbers like 30% of the China smartphone installed base consisting of iPhones aren’t out of the question.

We do primary research in China and one study we run is a quick survey asking respondents what OS they use for their primary smartphone. As you can see from my chart, iOS continues to grow and interestingly for the first time, we saw the percentage of respondents who said Android is their primary smartphone OS decline. This was from our latest Q2 survey of over 2,000 people in China.

However, there are concerns over the Chinese economy. I personally believe they are over blown, but I understand the concern. But let’s look at a case point for reference.

Luxury brand Louis Vuitton reported strong sales including in China, despite the stock market and economic issues in the region. While some brands are clearly being hurt and the article mentions Burberry, it is not doom and gloom for all. I’d argue smartphones are more central, personal, and needed and Apple remains well positioned in the status and aspiration area for Chinese consumers to have an impact on iPhone sales in China. Alternately, many consumers in the rising middle class are not as impacted by the stock market as many would believe. Those who are have enough money that, while it hurts, they still have plenty of disposable income.

A last point I’ll make is that we continue to see iPhone ownership rise among those in much lower income tiers in China. This is a dynamic many can not fully appreciate. However, it is important to understand pooled household income to acquire things is common in China. With the gifting dynamic so high, we notice even in lower-income households they pool their income to buy an iPhone for a younger upwardly mobile member of the Chinese household.

What’s happening with Apple in China is truly remarkable and hard to internalize for many Western minded thinkers. Apple’s ceiling in China is high and their position in the Chinese market will continue to surprise many. You can’t build these surprises into the stock price, particularly as the Chinese market is so misunderstood by many western minded individuals. We can only hope that, while most large institutional investors can’t understand what is happening with Apple in China, they will learn to not bet against it, or Apple in general for that matter.

How to Fuel Global E-Commerce

E-commerce has been on my mind a lot lately. It is one of the cornerstones of the market I study because I believe it has such large and transformative potential. I’m also an advocate of transaction-based business models because I believe they are much more sustainable than free-with-ads business models. Some new data has come in I find insightful on how to fuel e-commerce transactions and get us to the inflection point of 20-30% of all retail transactions being digital. The key? Free shipping.

This may sound obvious, but if we understand this point as the primary driver to ignite more e-commerce than occurs today, it gives us clarity into the broader opportunity. First, some data.

I apologize the chart is so small. You can click on it to view it full size.

As you can see, free shipping is the number one offering by a long shot to increase the motivation to make an online purchase. While same day shipping ranks high, free is the catalyst. Now, this is a global chart percentage-wise. When I slice this data by region there are some interesting differences I need to point out.

First, in developed markets where retail channels are well established and easily accessible, the “click and collect” statistics rise to nearly 40%. Similarly, the ability to exchange or return in-store increases dramatically in these markets as well. It highlights the omni-channel trend most who study e-commerce champion. This is an advantage of retailers in developed markets and one that will likely challenge Amazon over time as retailers get more savvy in using technology to their advantage.

In other regions, specifically China, India, Brazil, and Russia, consumers rank same day deliver much higher as a purchase driver. In China and India, over 70% rank this as a feature which will encourage them to buy online more often. In Brazil and Russia, it is in the 60% range.

What this screams out to me is logistics. The battlefield for online commerce as a growth engine is in logistics. Here is a chart that shows average shipping times for an online purchase by region today.

The infrastructure required to successfully drive free shipping is still lacking. One would have to imagine this is something Amazon will bring to Prime members but also something only a few global providers have the capital to accomplish. This validates more of my thesis that a great many of these solutions will remain dominant in their region yet have trouble expanding out into other areas where competitors have already established logistics.

Interestingly in India, almost half of all VC money going into startups in the region have a logistics element to them. A recognition of the infrastructure opportunity associated with the inevitability of growth in global e-commerce.

Not surprising, shipping needs tend to be item specific. While we see an increase in the desire to buy fresh goods (i.e., foodstuffs and other groceries) it still ranks low globally. Metropolitan areas rank these higher but that is due to denser populations and generally more affluent consumers willing to pay more for such conveniences.

From much more in-depth discussions I’ve been having with major retailers and e-commerce players, I sense some understand what is happening and some do not, or are taking baby steps in this direction. I stand by my conviction that the prevalence of mobile wallets will be a major driver of e-commerce but my concern is some of the slower moving retailers will not move as quickly as the market.

The Dawning of High Mobility

Over the past few months, I have been running a series of experiments analyzing my own time spent using computers. Primarily, I’ve been tracking the amount of time I spend per day on my Mac and on my iPhone. I’ve started doing this because of some assumptions I’ve had about the future. Mainly, that the smartphone is the primary computing device for billions of people, including those in markets where PC penetration is high.

I’ve studied the market for mobile computing for the better part of the past 15 years I’ve been an industry analyst. We knew early in the 2000s that notebooks were key for PCs to penetrate consumer markets due to consumers’ desires to not be stuck at a desk. The PC experience needed to move beyond the desk and the notebook was the solution. This signaled the first shift to “high mobility computing”. But as I’ve studied and observed how consumer behavior has been evolving in an era of computing which includes tablets and smartphones, we are observing a distinct shift away from traditional PCs. All of this is centered on the view that consumers are highly mobile.

In my day to day work routine, I’ve noticed similar patterns. I don’t have the type of job that requires me to sit at a desk all day to work. I spend a great deal of time out meeting with clients, conducting field research, giving presentations, and taking meetings that extend my knowledge. Once devices like the iPad and now, specifically, the larger screen iPhone 6 Plus, entered my life, I noticed a distinct drop in how much time I spend with my Mac. The iPad allowed me to not bring my Mac to many meetings and still be productive. The iPad 6 Plus has made it so I don’t even need to bring my iPad to still be highly productive in the field. My goal was to quantify this.

I’ve been using an app on my iPhone called Moments which tracks how much time I use my phone during the day. I’ve also been tracking my Mac usage through an app called Time Sink. My average time per week spent using my iPhone is two hours and 53 minutes per day. My average weekly time spent using my Mac is two hours and 14 minutes per day. What I had not fully internalized before was how little I used my PC some days. When I have a report or column to work on, or a data model to update, or new research to pour through, my daily usage is quite high. But that is not every day of the week. Some days I’d use my Mac as little as 30 minutes. Quantifying this was insightful. Although I’d felt I was using my iPhone disproportionate compared to my Mac on a weekly basis, actually seeing data on how little I use my PC/Mac some days was quite interesting.

Perhaps this is why our data shows some interesting global statistics around time spent on a PC vs. a smartphone in every major market we study.

As you can see, in each region, the time spent, in hours, on smartphones is continuing to increase while the time spent with PCs is either flat or in some cases declining. ((This is specific data to people who own both a PC and a smartphone)). This emphasizes another observation being floated that the PC is increasingly becoming just a work/productivity device. The follow-up comment to this one is how the number of people who need a PC to do work is significantly smaller than those who don’t.

This experiment started with an enterprise or mobile worker emphasis. I know myself to be a high mobility worker but what it also showed me is how most consumers can be described as high mobility as well. A PC is great when you can sit down to use it. For many their life is not spent at a desk. The shift from desktop to high-mobility solutions is where computers, software, and services, are all adapting to the mobile era. This is the central reason I believe we are seeing a behavioural shift in the market of time away from traditional PCs to highly mobile ones.

Given there are significantly more highly mobile consumers, the software and business opportunity is changing as well. In many countries, commerce from mobile devices is catching up with that from PCs. Banks are continually highlighting an increase in the number of mobile banking transactions catching up with those from a PC.

All of this is happening under our noses in developed markets where PC penetration is high. This shift is still happening due to the convenience and necessity of high mobility computing. What is key is to understand the opportunity is shifting in nearly every consumer category from the desktop internet to the mobile internet. At a conference I spoke at last week I said, “The mobile internet is the true consumer internet. Business, commerce, banking, searching, discovering, and all kinds of consumer opportunities are shifting to mobile. Outside of some hardware and productivity software, there is little happening that is interesting and exclusive to the desktop or notebook computer. The world is embracing this shift because the opportunity is significantly larger. The time spent observation signals the changing of the times to our mobile future. Hundreds of millions of people live highly mobile lives and now computing can as well.”

Forum Topics: Amazon’s Profits, Ben’s Vacation, Qualcomm

Posted some topics and thoughts in the form for discussion.

Amazon’s Profits – link

Ben’s Vacation – link

Qualcomm’s Battle With Wall St. – link

Apple Earnings Review

It seems it is more interesting to write about Apple earnings when there is controversy. This time, it was two-fold. Wall St. had a high degree of confidence, as did I, iPhone shipments would be above 50m units. They were not and Wall St.’s expectations were priced into the stock (which remains undervalued) and then corrected once said expectations were unmet. Apple beat their own expectations, but not Wall St.’s. This is Apple’s life.

The second controversy was around the Apple Watch. We knew Apple would not disclose sales figures. Yet many of us were confident revenue from the category where Apple is lumping Watch revenue into (“Other”) was expected to be north of three billion dollars. It was not. It came in at 2.7 billion. So this became an exercise in financial reverse engineering to figure out how many watches they sold. I have several thoughts on both story lines.

iPhone

The iPhone continues to grow. Apple will likely grow iPhone shipments for the full 2015 year between 11-18% based on my best and worst case scenarios. iPhone YoY growth continues to increase, despite everyone’s concern it will slow down. This quote from Tim Cook during the earnings call is a key part of the story:

In terms of the… what’s going on with iPhone: The 35 percent growth [year-over-year] is almost three times the market and if you look at it at a little narrower regional level, western Europe grew 30 percent versus a market of 7 [percent] so four times market; Japan grew over five times market; we doubled in Korea versus a market that was shrinking; and in India we grew at 93 percent. And this is on top of the greater China numbers that we’ve already covered that grew 87 percent during the quarter against a market of five percent.

And so we did exceptionally well, I think, in any way that you look at it. In terms of our—the percentage of customers that have upgraded to a 6 and 6 Plus versus those that have not upgraded, it’s 73 percent, meaning that 27 percent of the install base of customers prior to the launch of 6 and 6 Plus have now upgraded.

Several points to make. First, to the installed base. 7% of the base upgraded this quarter. The iPhone has a greater than 80% repurchase rate (higher according to Apple internal market research) so we know The iPhone is sticky. So it is a fairly safe assumption a healthy number of the other 73% will likely upgrade as well to a new iPhone.

Apple also noted the most Android to iPhone switchers of any previous quarter. Interestingly, this was predicted in a report from the Yankee Group in 2013 called “Android’s Leaky Bucket”. This research focused on iPhone owners and owners of some of the most successful Android devices at the time and found continually high repurchase rates of iPhone owners and much repurchase rates and interest to consider other brands including iPhones by current Android owners. Last quarter, private research I read indicated as much as 18% of iPhone sales came from Android switchers in the US and as high as 28% from China. While the US smartphone market was really terrible this last quarter, we can assume a good portion of Android switchers came from non-US markets.

To the point of other markets, Tim Cook quoted a number of growth statistics. Doubling in Korea was an interesting point, followed by a tweet from Francisco Jeronimo of IDC.

Screen Shot 2015-07-22 at 4.39.00 PM

Growth in European markets like Germany and Spain is fascinating. These were very Android-centric markets. Speculation as to why Apple is suddenly doing well could be a combination of larger screen and an emphasis on security. 93% growth in India would imply over 700,000 units sold in the last quarter according to my model. So Apple is on pace to pass 2m iPhone sales in India. Then we have China.

China will be Apple’s biggest market on many fronts before too long. Growth of 87% implies 12-14m iPhones sold in China last quarter according to my model. Economic concerns could have hurt it but I think we are still just learning what China seasonality looks like. My continued research of the China market gives me confidence that Apple’s ceiling there is still much larger giving them a great deal of headroom to grow.

The iPhone remains beautifully positioned to continue to grow and gain share over the long-term.

Apple Watch

Our projections were 4.7m Apple Watches. Acknowledging this as a tricky product to track, we were leaning heavily on supply chain guidance. We knew of several component providers with exclusive parts for the Apple Watch. Build orders and ODM output seemed to indicate build orders in the 5 million range of Apple Watch. Using some yield concerns to estimate down, the 4.5-4.7m range was our guess. It turns out yield may have been much worse than our projections and a higher build order than Apple’s sales expectations was made to compensate.

Second, it appears preorders were even weaker than expected. Which is fascinating even in its own right. Not because we didn’t think people wanted to see it and touch it before buying, but that we believed the number in Apple’s passionate user base who would quickly jump to buy this product was much higher than 1-1.5m people. While I still believe this is true, it can suggest even Apple’s base was somewhat skeptical and wanted to feel and touch before buying. Important if true.

Apple cautioned to just use the increase in revenue to the other quarter, which came out to around one billion dollars, and use that to estimate Watch numbers. Tim Cook also indicated that products in the “other” category saw declines. So we don’t know if Apple Watch contributed 110%, 120%, 130%, etc. A 10% decline is probably likely and a 20% one could be reasonable as well. With an ASP in the $430-$450 range, it seems we can work out, with a reasonably educated guess knowing what we know, that Apple sold in the range of 2.5-3m Watches. There is a way to work the math to get above 3m but I’m less confident in that scenario at this point.

Furthermore, what does this say about momentum? Apple stating they sold more in June than in April or May is positive for momentum. Catching up with supply chain and getting into retail helped momentum positively. Apple expanding retail locations and getting Apple Watch into more stores will be a key driver for momentum. And now, with low yields seeming to be fixed and the Watch in retail, we are still seeing supply chain ramp up not down. So, from what we can see, there are positive signs the Apple Watch is gaining steam from a sales standpoint.

Lastly, thoughts on the Mac and the iPad. The Mac continues to grow steadily and take share. We expect this to keep happening. The iPad is still slumping and this was expected. The iPad is selling like a notebook and is exhibiting signs it is working with PC market dynamics not mobile phone market dynamics. ~300 million PCs get bought each year and that is Apple’s opportunity to gain share of with both Mac and iPad.

Next quarter will be interesting and, while iPhones will suffer the calm before the storm of holiday new hardware, the Apple Watch will likely be a primary story again.

Thoughts on Apple Watch Survey, Segmentation, and Adoption Cycle Theory

I wanted to add a few more points, specifically for our Tech.pinion Insiders, on the Apple Watch customer satisfaction report Wristly and I worked on together. Part of my goal is to help you understand my thinking and my methodology.

As I explained in my article, it was the interviews I was doing with consumers which led me to create the thesis that those later on the adoption cycle viewed tech products differently — perhaps with more tolerance, patience, appreciation, etc. — vs. those who are early adopters or gadget enthusiasts. This is why several weeks ago, when the panel had less than 400 people (it’s now over 1,200), I worked with the team to add screening questions to each survey. This helped us better segment the responses and be able to filter based each profile. Questions such as which iPhone was their first or which iPhone is their current model. People who join the survey are also asked screening questions such as the date they got the Apple Watch and their geographic location. When we put all these together, we are able to use market knowledge to create the segments we did. Note: this is not standard practice to deeply segment your panel when it comes to customer satisfaction results.

I was driven to do this because, if our panel was simply a bunch of early adopters, hard-core Apple fans, and app developers or investors who have a vested interest to study the product, I wanted to know that as I would read the data a certain way, knowing the profile of the panel. Once we learned we had quite a wide range represented, we thought a customer satisfaction survey could be published with a high degree of confidence.

However, the more I started digging into each profile we created and their responses to surveys, the more I saw the pattern play out of how uniquely early adopters and mainstream “average” consumers think about tech products. I’m not sure I’d equate this entirely to a new revelation, since we should assume these categories were different, however, it was the distinctive way they think I could not quantify until now.

We saw this quite clearly in the first “Net Promoter” (someone willing to recommend or promote a product to someone else) score we ran when the panel had 300 or so folks in it. It came back below 40, which is quite low. A good net promoter score is above 80. The closer the score to 100 is, the more likely the group is to recommend a product. Contrast the below 40 number with the very first net promoter score Wristly ran before I was involved, when the panel was only 130 or so, and the net promoter score was 26. When I started reading the answers from respondents, I saw the deep and thoughtful critique this early adopter audience put into this product. You could tell it was heavily evaluated and thought about from every angle.

Contrast that with the interviews I did with other Apple Watch owners. I observed quite the opposite response from those who were obviously not early adopters. It was not that they were not thoughtful. It was more that they honed in on just a few things they couldn’t stop talking about and they seemed to have more tempered expectations or tolerance for the things the early adopters were heavily critical of.

What this has got me thinking about is adoption cycle theory. Folks have mentioned it is accelerating but the Apple Watch got me thinking that, perhaps in Apple’s ecosystem, adoption cycle theory is no longer relevant. Apple may have such a mature ecosystem, and users within that ecosystem, that when they launch a new category, it has the potential to appeal to the innovators all the way to the laggards on day one.

The iPhone is one of the singular tech products that spans the diffusion of innovations curve. I have a sense this plays into something unique about Apple’s ecosystem and the dynamics of adoption cycle theory related specifically to Apple’s ecosystem.

If this is true, it has important implications for Apple. It means new categories are not reserved to only early adopters. It also means new categories have the potential to penetrate higher percentages of Apple’s base faster than earlier anticipated. I originally had a much slower trajectory for the Apple Watch but I’m starting to wonder if it grows faster based on the research we are doing with Wristly.

As I find more interesting nuggets from our data I’ll share them with our subscribers.

Apple Watch Satisfaction

A lot has been written about the Apple Watch. A lot will continue to be written about the Apple Watch. Apple has positioned it as their most personal product yet. Personal tastes are often subjective and sometimes polarizing. Polarizing would certainly characterize the tone of much of the public commentary thus far. While the Apple Watch may be Apple’s most individual product, within the tech media it is certainly the most studied. From our own research, I had long questioned whether the heavy scrutiny by many in the tech elite was representative of the true mass market sentiment toward the Apple Watch. This was what the folks at Wristly and I set out to discover.

Profile of the Research Panel

As a researcher, one of the things critical to understand is the profile of the people you are surveying. With the Wristly Apple Watch Owner Network, we have over a thousand people on our panel. The belief, by many, was this first wave of Apple Watch buyers would skew toward early adopters. When we asked some pre-qualification questions to help us profile the panel, we found a healthy range of consumer profiles were represented.

By our profiling questions, we found 34% of Apple Watch buyers were what we profiled as tech insiders. These were folks who very closely aligned with early adopter behavior. To our surprise, 53% were what we call “enthusiastic” users. These are folks who don’t work in the tech industry, don’t even consider themselves “techies,” and more closely resemble traits of the mainstream consumer market. ((Note on Methodology: We asked a series of profiling questions to help us spot those with early adopter or more mainstream non-tech user traits. Things like first iPhone owned, current iPhone owned, timing of watch purchase, etc. Then we created the profiles of Tech insider and Non-tech user based on the screening questions.))

Customer Satisfaction

One of the best ways to measure how a product is being received by its owners is customer satisfaction. This statistic alone is highlighted by Apple continually as the barometer in which they measure a product’s success. Many pundits will look to Apple Watch sales as the metric for its success. But the real question is, do people love it? The answer is yes.

It is common practice to add the top two boxes, which demonstrate satisfaction with the product, in customer satisfaction ratings. When doing so, we arrive at a 97% customer satisfaction level for the Apple Watch. For even more perspective, if we take a look at how the Apple Watch customer satisfaction rating compares to the first generation of the iPad and the iPhone, we see the Apple Watch has the highest customer satisfaction rating of any previous version one Apple product. Given the current customer satisfaction of the iPhone is at 99%, the first version of the Apple Watch ranks closer to the current generation iPhone than the first generation iPhone or iPad in terms of satisfaction.

This begs an interesting question. Why does the Apple Watch have a higher customer satisfaction rating than the iPad or iPhone this early on in the product’s life cycle? Luckily, we have some observations and data to tell the story.

Early Adopters vs. Average Consumers

I’m going to share with you what may be the most insightful thing I have learned to date about how different customers on the adoption cycle spectrum think about technology. What has been fascinating about the Wristly Apple Watch Panel is how diverse it is across the adoption cycle spectrum. We have those on the bleeding edge of adoption all the way through mainstream consumers who aren’t buying it for the sake of Apple fanaticism or love of tech and gadgetry but because they saw the utility and usefulness of the product right off the bat. They are all represented in our panel. I’m not sure any other product, from early PCs, smartphones, tablets, smart TVs, etc., this early in their category life cycle would have given us the opportunity to survey and talk to consumers with such a wide spectrum of the adoption cycle represented.

In many of our surveys related to questions on the Apple Watch — apps they use, likes and dislikes, willingness to promote or recommend the product to another person, etc. — I was reading through answers and began to observe something. There was quite the range of answers, particularly around a willingness to recommend the Apple Watch. We started seeing a common theme of answers that went something like this: “I like the Watch, but I’m not sure my friends will yet as it isn’t ready for the mainstream.” Or, “I’m an early adopter and I know I like these types of products out of the gate but I’m not sure my friends will.” But then we also started seeing answers like “I don’t see why everyone can’t get value out of this product.” Or, “I love it and can’t stop telling everyone how much I love it.”

Around this same time, I was conducting man on the street interviews everywhere I saw people with an Apple Watch. I’d just ask them what they thought of the product. I’d often make sure my watch was hidden in the hopes they would treat me as someone genuinely interested in the product and looking for a recommendation on whether to buy it or not. I also interviewed, on the phone in many different locations, a handful of volunteers from the Wristly panel. What I discovered was quite fascinating.

As I listened to 14 different people tell me about their Apple Watch, I observed a pattern. Those whose job it was to think about the Apple Watch or who were early adopters who thought deeply about tech and the tech products they buy, were all much more critical of the watch. You could tell they evaluated it and thought about it deeply from every angle by their responses. Then I talked with teachers, firefighters, insurance agents, and those not in the tech industry and not hard-core techies. These groups of people couldn’t stop raving about the Apple Watch and how much they loved the product. It was almost as if the farther away people were from tech or the tech industry, the more they liked the Apple Watch.

As we filtered the customer satisfaction answers by profile we saw something that fit this observation. While every profile ranked high in one of the two top satisfaction responses, it was the non-tech users who ranked the highest for “very satisfied/delighted” by the Apple Watch.

While we don’t know exactly how many Apple Watches have been sold what we can measure and use as a barometer to judge the success or failure of Apple Watch is if current owners are happy, satisfied, and delighted. For that we can safely conclude the answer is a resounding yes.

For the full Apple Watch customer satisfaction report, you can download it here from Wristly. Also please join our Apple Watch panel if you haven’t already for insights and full reports.

Computing: Beyond the Desk, Beyond the Hands

I’ve come up with a different way of explaining and framing the “post-PC era.” I gave the keynote at an IT conference the other day and chose to break out the talk into specific sections. Trends for the Desk, Beyond the desk, and Beyond the Hands. What’s happening in PCs, the desk, is pretty straightforward so I want to highlight some points from beyond the desk and beyond the hands.

Beyond the Desk

I think this is a more helpful way to understand the broader computing trends. Desk/table/lap-based computing only took computing so far. PCs are pricey, require some training to use, and often frustrate consumers but, overall, are the right tool for deeper work. We know the corporate installed base of PCs is around 600m devices and the consumer installed base is around 800-900m, with the rest of active PCs being embedded. These categories are not growing and the PC in the shape of a notebook and desktop has a real limitation — you have to be sitting to use it.

There are, however, hundreds of millions of employees who do not sit down to work. This is one of my favorite visuals of how computing is moving beyond the desk in work-based environments.

Computers are replacing clipboards and bringing computing to the job site where there was no computer before. This remains an untapped opportunity and, from the discussions I had with IT managers, one they are most focused on, not just from a hardware standpoint, but a software standpoint as well.

Most of these workers would get back to a desk at some point to do data entry but, as these tools evolve, the process can become more streamlined and real time. How many factory workers or managers want to head back to a desk at the end of the day and do data entry? I visited a friend’s construction site where he was working as the foreman on a large building here in Silicon Valley a few years ago. They were carting around a notebook on a rolling cart on each floor of the building to go over plans, look at modifications, and enter checks and updates into the main database. I distinctly remember him saying the part of his job he hates the most is data entry. He is a carpenter by trade and loves working on and building things. He doesn’t want to sit and do data entry at the end of the day. This company has since moved to iPads and integration of their software on the iPhone as well. Data entry is done in real time with a much simpler and quicker interface. He can’t say enough good things about how this process has changed and made his life easier on the job site.

Beyond the Hands.

What wearables in general and the Apple Watch in particular got me interested in was how computing can now go to workers who don’t have the luxury of walking around and holding an iPad or iPhone, but work with their hands primarily. Here is a screen shot of a factory worker with quite the interesting solution.

While this solution works in concept, it seems a better way to achieve this result is in sight. The use case was simple, factory security checks with core systems. Sure, he could pull the phone out of his pocket, swipe or use a fingerprint to log-in, and hit the button to validate the security check and that everything is normal. But a smartwatch seems like potentially a better implementation here — check the system, do a tweak or two if needed, tap the watch, move on to the next item.

Interestingly from my conversations with IT folks at this conference, there was a lot of interest in wearables. Not just for health tracking reasons but for some of the examples I stated. Workers who use their hands but need to interact with system software in real time could do without the disruption of pulling a phone or tablet out to enter data or get information. I share these stats from research we have on Apple Watch owners related to productivity use cases and the Apple Watch.

57% of Apple Watch owners indicated essential/highly valuable during meetings
54% indicated essential/highly valuable while traveling
58% indicated essential/highly valuable around the office
64% of Apple Watch respondents favorite and most used applications were productivity or utility apps 
80% of desk workers deemed health and fitness elements essential

Interestingly, a number of IT managers mentioned to me what they are seeing with the Apple Watch in corporate environments is very similar to what they saw with the iPad. Executives have purchased them, found them useful, and have asked them to start looking into how to support and use the platform. I’ve felt since early on in the smart watch category there were more productivity and business use cases than folks were willing to think about and it seems the early evidence suggests there is.

As I summarized these thoughts at the end of my keynote, my last point to the IT-centric audience was “Watch the Watch.” This is valid advice for all.

Preliminary Q2 2015 Global Smartphone Market and Observations

I thought I’d give our subscribers a quick view of what the landscape is shaping up for with regards to Q2 global smartphone shipments.

The top 5 looks like this:
#1 Samsung
#2 Apple
#3 Huawei
#4 Xiaomi
#5 Lenovo

For Samsung, we believe shipments will be in the low 70m range, 73-74m to be exact. Our Apple estimates are for 53m units sold. Huawei announced 50m smartphones sold in the first half of 2015 which, by doing the math on first quarter sales, means 32m smartphones shipped. Xiaomi announced 34m smartphones shipped in first half of 2015 for first quarter shipments of 20m.

For philosophical reasons, I do not lump Lenovo and Motorolla sales together. If we were to combine the two, Lenovo would be #4 and Xiaomi #5.

Folks love to talk about Xiaomi but it is clear their initial target of 100m smartphones sold in 2015 is unlikely. This is why they recently have publicly changed to a range of 80-100m smartphones as a goal. In all honesty, even 80m may be a stretch at this point. I’ve been telling people to keep an eye on Huawei as a more interesting Chinese player right now than Xiaomi. While I think Xiaomi has the better business model for the long haul, Huawei has quite a bit of assets and large amounts of capital behind them. Huawei is not just a smartphone manufacturer but also owns HiSilicon which is a semiconductor company supplying networking equipment as well as connected devices. And Huawei has an infrastructure business selling global telecom equipment, among other categories. They have many parts of the business to help fuel their R&D. They are well positioned in several categories from a business and revenue standpoint. That is translating into continued aggressive designs in smartphone hardware and globally their sales are increasing faster than Xiaomi’s. Huawei is, for now, the one to watch and perhaps this battle between Xiaomi and Huawei will get more interesting in 2016.

The markets where Huawei is starting to pick up steam is in Brazil (LATAM as a whole), SE Asia, India, and parts of Africa. In many markets, Huawei is now starting to take share from Samsung and compete strongly with local vendors as their branding and quality perception is increasing. As I said, I still think they are the Chinese company to watch right now with global smartphone sales.

Lastly, we still hear tech news sites insinuate these Chinese brands are coming to the US market in force. This is simply not true. The only area where companies like ZTE have any share is with pre-paid, very low-end smartphones. These are areas the carriers don’t really care much about as they make such little money off these customers. No Chinese brand has any relevant share of the post-paid market and I see no signs of that changing. Pre-paid is growing but very, very slowly and I emphasize these are not profitable customers. We remain pessimistic, given what we see about the US smartphone dynamics, that any Chinese branded handset becomes relevant in the US for the time being.

The Mobile Commerce Inflection Point

I’m convinced an inflection point of mobile commerce is upon us. Several catalysts are developing and 2016 is shaping up to be the year we may look back and reflect upon as the year our commerce, banking, and financial services went mobile.

One of the benchmark data points I research is share of mobile commerce as a percentage of e-commerce, both globally and in individual markets. Although e-commerce globally is still less than 10% of total retail sales, momentum is picking up and the evidence is mounting that mobile commerce is a key part. This has to do with the high percentage of mobile commerce in rapidly growing e-commerce markets like China where mobile commerce share of total e-commerce is 33%. China has surpassed the US with now just over 11% share of local retail transaction dollars coming from e-commerce. Both China and US are the largest markets in terms of dollars spent via e-commerce. But in the US, mobile share of e-commerce is less than 20%. In terms of dollar amounts, China easily has the largest market coming from m-commerce.

The shift has been slow for consumers to adjust their behavior to shop from their mobile devices vs. their PCs. The PC is still the market share leader when it comes to the device used to make an online transaction, but I am convinced this is all about to change and mobile payments will be the catalyst.

In October of this year, the US market will go through a massive overhaul of its retail payment terminals. Credit card issuers must move to a more secure chip-and-pin solution and retail outlets will comply with this shift due to a fraud liability change in process. What this new solution changes is the credit card companies will no longer be responsible for fraud charges and instead, the retailer or the bank will be responsible for fraud. This liability shift is at the core of massive change coming to US retail. As these terminals get upgraded, the vast majority will support NFC so Apple Pay, Android Pay, and others will be supported in the vast majority of US retail outlets. While mobile contactless card payments are currently less than 1%, I won’t be surprised if, by the end of 2016, they make up 10% of POS transactions in the US.

There is a similar shift happening in China mandated by the Chinese government. By the end of the year, most major Chinese retailers will support a new, more secure credit card solution which will also make many retailers upgrade their point of sale terminals. Here again, NFC will be included in these new terminals making the China retail environment ripe for contactless mobile transactions.

These two events, set to be completed by the end of 2015, will cause the inflection point for the shift from PC-based commerce to mobile-based commerce and may provide a boom for e-commerce at large. Once consumers become comfortable paying for things with their smartphones and realize it is inherently more secure to do so than paying with a credit card (especially in restaurant environments where your card is out of your sight) it will open the floodgates for consumers’ willingness and confidence to rely more on their mobile devices for commerce. I am convinced this will be the catalyst to propel not just mobile commerce but e-commerce in general to new heights.

There may be some interesting new opportunities around mobile commerce to emerge — in particular, I’m watching financial services. Once my smartphone becomes my primary payment mechanism and all my financial information is stored and managed on my device, then I’m not reliant on someone to issue me a plastic credit card to partake in their financial services. This could open up a fascinating new battleground in financial services once the credit card itself is replaced by the smartphone.

An example of this is AliPay in China. While UnionPay is the market share leader for physical card payments in China, AliPay is preferred and used by over 60% of Chinese consumers shopping regularly online. Once they can use their AliPay payment information to make payments at local retail using their smartphones, it gives Alibaba a way to compete in financial services in new ways. This is one reason why I believe Alibaba is looking to get into issuing credit to buyers based on analyzing their online purchases. The global arena for credit has been largely lacking in emerging markets and what I see coming together for mobile transactions both at physical retail and online will likely create new opportunities in this arena.

What I’ve concluded, as I look globally and put some of the puzzle pieces together, is the smartphone will be the catalyst to drive e-commerce to new heights. This shift to more consumer trust of smartphones as payment mechanisms will lead to more opportunity to compete in financial services and new banking paradigms as well. The smartphone has disrupted many industries and will continue to disrupt many more. It will be interesting to see if we add payments and banking to that list.

Forum Topics: What Does Apple Do about Echo?, PC Doldrums: Mac vs PC Growth

I posted some new topics and commentary in the Tech.pinions forums. I encourage you to check them out and chime in with your own commentary.

What Does Apple Do About Amazon Echo?
I’ve been using an Amazon Echo for a few days and it provides some interesting experiences around smart home potential and voice UI. Makes sense for Amazon, and I can see this being provided for free as a part of Prime subscription. This experience highlights again how important an ecosystem is.

PC Doldrums and Mac vs. PC Growth
Q2 2015 PC sales were bad. I’m not sure we have reached the bottom yet.

Any feedback on the forums so far is appreciated. I like the idea of using it as my own blog to think out loud and share un-published thoughts or data, but I’d like feedback on this. Would you prefer me to do that in the forums or turn each of those posts into an Insider article on the Tech.pinions website?

India: Where the Future of the Mobile Internet is On Display

Every market I study is fascinating in its own right. What keeps surprising me is the seeing how different things are in the markets I study. It would easier if all the markets were roughly the same, with the same brands, products, business models, et., all paralleling each other. But this would also be boring. I’ve outlined what is happening in China with mobile devices and the mobile internet on several occasions. Now I want to dive into India.

Mobile Only

I model global installed base of devices and platforms by country. There are several insightful points to understand about the India smart device landscape. The first is PC penetration is exceptionally low for such a large country. PC penetration (stat includes household, individual ownership, business, and Internet Cafe) in China is over 400m. In terms of pure volume, China and the US have the most mature PC audience respectively. In India, PC penetration is 10%. That breaks out to just over 100m PCs in a country of over 1 billion people. The PC in India is largely a work/business/productivity device and reflective of the number of tech workers or healthy individuals in the region. Yet, the number of smartphones in active use in India is over 250 million. Which makes India the country with the largest number of mobile/smartphone only internet users.

India is shaping up to be the feature market showing us what a mobile-only world looks like.

One of the key stats we uncovered that got me looking into India as a template to understand mobile only markets was the share of mobile commerce, as a percent, of e-commerce vs other countries. India has the highest share of m-commerce transactions as a percent of total e-commerce than any country. Mobile share of total e-commerce transactions in India is 43%. The next closest is China where m-commerce makes up 32% of e-commerce transactions. Every other country is distant at 20% or below share of mobile commerce.

This incredible emphasis on mobility, where the mobile internet is truly the only consumer internet in India has led companies like Flipkart (the leading e-commerce company in India) to shut down their desktop website and only offer their service through a mobile app. Myntra, a Flipkart property, is also going in mobile and shutting down their desktop website. While these are several examples of companies who had a PC focus and shifted to mobile only, dozens of upstarts in India are starting with mobile only businesses and never bothering to develop a desktop website.

This is again because the internet in India is primarily mobile and with regard to the consumer-centric mobile internet it is absolutely mobile only. Because of this, we will see mobile only innovation coming out of India which we can use as case studies for other markets. I’m watching for new services in banking and finance, payments and micropayments, e-commerce/m-commerce, hyper-local services like fresh food delivery, and more. These areas are all growing out of a mobile-first environment where, even though I’m watching these services in other countries, many in Western markets particularly will still embrace the desktop web. My thesis is, the ones who focus mobile only will bring out innovations not seen yet by those who still embrace both mobile and desktop experiences. In all the areas above, from mobile banking, mobile cash/payments, mobile bill paying, India ranks among the highest in terms of mobile share of these activities.

The other thing that makes India interesting is the proportion of Android to iOS devices is dramatically in favor of Android and we see no signs of that changing for the foreseeable future. Normally, when I’d analyze a market for things like value of user (ASP), average order value with commerce, and other metrics, we would isolate iOS from Android. The basis for this is the understanding, generally speaking, that Apple customers are more valuable than Android users in metrics that matter. However in India, while the super wealthy do have iPhones and are worth more than their Android counterparts, there are simply not enough of them to truly matter. There are a number of economic reasons for this and one of the more fascinating dynamics for Apple between China and India. It is the perceived luxury which drives Apple in China, where that same strategy does not work in India. To help you visualize this gap, here is a snippet from my global country by country installed base model by mobile OS. This is India, iOS vs. Android number of smartphones in use.

Apple will be challenged in India. Even though there are aggressive sales of the iPhone 5s happening, I’m hearing from users on the ground the legacy experience is not competitive with modern devices and leaves a sour taste in consumers’ mouths. India will be a challenge for Apple.

However, the point remains, what we are seeing happen in India in developing as a truly mobile only country is fascinating. While every mobile only example may not work in other markets, it is helpful to understand what is happening in the region and learn from any relevant innovations.

Discuss in the Tech.pinions Forums: What can I tell you about tech in India?

Forum Topics: Microsoft Smartphones, iPhones in China, Slice Apple Watch Data

One of the ways I’m using our new forums is to share some shorter posts and solicit more of a discussion around certain topics. So I’ll frequently post a short post, or top of mind thought to the forum. To let everyone know there is new content there I’ll create a post like this one and link to some of the newer topics I’ve posted in the forums. Here are the recent posts with some commentary by me to get the discussion going.

How Long Will Microsoft Keep Making Smartphones?
With the recent news of layoffs and restructuring what is the future of Windows Phone and does Microsoft need it to be successful.

Latest iPhone In China Charts via Baidu
Long time readers will know I have access to data from Baidu (China’s leading search engine) that helps me track iPhones in China as a percentage of iOS devices accessing Baidu. I’ve updated these charts up through June and added some commentary around the most recent trends.

Thoughts on Slice Apple Watch Data
I shared some of my thoughts on the Slice Apple Watch sales data that is circulating the news outlets. There is already a great discussion happening on this forum thread.

If you haven’t already be sure to check out or new subscriber only forums. I firmly believe our site has the smartest readers and commenters of any site out there so I deeply appreciate your engagement and we created forums just for this community engagement. There are also a few subscriber initiated forum topics on switching from Android to iOS or Vice Versa and the Future of the Apple Watch. I encourage you to check those out as well.

Forums.Techpinions.com

Introducing Member Only Discussion Forums

When I first started the Tech.pinions exclusive Member Only subscription service, I had originally envisioned it as a method for myself and other analysts to engage with our community in a way the public couldn’t see. In my role as an analyst, there is a great deal of information and insights I don’t want to share publicly. I had always wanted a way to have a non-public conversation where I can dig into a discussion without worrying about my comments being displayed to the general public. Disqus has worked but the downfall is, everything we talk about on an Insider article can still be read by anyone. We have solved this by adding an exclusive forum just for our subscribers.

I’m pleased to introduce you all to our exclusive forum. You are still free to comment on the articles and I’d love to keep the forums active which allows me to get more involved and share more “off the record” insights.

I’d also like to share some thoughts, kind of a “thinking out loud” environment and get feedback from subscribers. I’ll experiment with sharing some early data and research and get thoughts on it from our community.
I only ask we keep the discussion private. What is said in Tech.pinions forums stays in Tech.pinions forums.

You can use your same log-in information to access the forums at any time. http://forums.techpinions.com

Google, Apps, and the Closed Web

The accusations Google has been manipulating search results have been happening for some time. It was this last article I read on the subject which brought about a thought. We shouldn’t blame Google for manipulating search results in order to favor their business model. But, as we reflect on how (through apps) Google did it and how the web may actually be becoming more closed than open, I wonder if the masses actually care?

As long as I get the information I’m satisfied with or get information from a search query that’s “good enough”, do I really care if I’m not seeing all the choices? Apps are showing us the internet experienced within the shell of an application satisfies the needs of many people every day. We have “containerized” the internet because it is more efficient to do so. It is possible this contraction from a broadly open internet to a more closed one is a result of the vast amount of data/choice out there. I’d wager most consumers rarely get past the first page of Google search results. I’m sure they know there are many more pages of results, but the first page is generally good enough. Part of this is because Google is extremely good at returning relevant results. The other may simply be that the first set of answers is sufficient for most.

There is a great book I read years ago called The Paradox of Choice. The book outlined a behavioral observation that too much choice can often cause people to be overwhelmed and thwart the decision-making process. In a world of more than 600 million websites and hundreds of thousands apps, there is, arguably, too many choices and most people don’t want to spend hours sifting through all the apps or websites their search results return. This is perhaps why relevance is prioritized and is critical to continue to improve upon, as the number of websites, apps, and overwhelming options continues to grow.

We return to the question of, is intentionally limiting choice through curation actually a bad thing if it yields what we are looking for? The walled garden experience of Facebook in many countries, or WeChat in China, appears to be gaining in popularity as the amount of time spent in closed web experiences grows across the globe.

We can certainly argue manipulating search results is morally wrong. Particularly since it puts Google in a position to punish or exclude otherwise valid options consumers should be presented. But, I do think there is a trend toward the curated web and the question of discovery is central to this shift. We already see evidence of consumers curating their social graphs to get the information they have deemed important. This includes new outlets and brands they follow, celebrities, etc., on things like Facebook or Twitter. Some data points from a research project I have on Millennials highlight this shift.

Millennials acquire news for many reasons, which include a fairly even mix of civic motivations (74 percent), problem-solving needs (63 percent), and social factors (67 percent) such as talking about it with friends
Facebook has become a nearly ubiquitous part of “Digital Millennial Life”. On 24 separate news and information topics probed, Facebook was the No. 1 gateway to learn about 13 of them and the second-most cited gateway for seven others  
Contrary to the idea that social media creates a polarizing “filter bubble,” exposing people to only a narrow range of opinions, 70 percent of Millennials say their social media feeds are comprised of diverse viewpoints evenly mixed between those similar to and different from their own. An additional 16 percent say their feeds contain mostly viewpoints different from their own. And nearly three-quarters of those exposed to different views (73 percent) report they investigate others’ opinions at least some of the time — with a quarter saying they do it always or often

While this is focused on news, it also has relevance to discovery. Many demographics in our research panels specifically point out that what friends are linking to on social media, Facebook in particular, is how they discover most current events. One has to wonder how much this curation will bleed into other areas and perhaps even search in particular.

Hopefully, what Google is doing is emphasizing relevance rather than actually manipulating results. Time will tell if the lawsuit reveals any further truth in the matter. Overall however, there may be a larger trend around the filtering or intentional limiting of choice by consumers themselves due to the overwhelming amount of information they are already presented with online. Consumers may be closing the web themselves as a result.

For an exclusive discussion, feel free to comment on this article in our new subscriber only forum.

My Week Without Apple Watch

Sometimes, in order to truly appreciate life with modern day conveniences, we have to be reminded of what life was like before them. As an experiment for the last week, I decided to live without the thoroughly modern convenience of the Apple Watch. I was lucky enough to be included in the first group of folks outside of Apple to get an Apple Watch. I’ve been wearing the watch all day, every day since April 1st. Here, I shared my thoughts after my first week. Since April 1st, I have deeply integrated the Apple Watch into my everyday life. I decided to run an experiment and see what a week would be like without the Watch after 85 days of living with it. This is what I learned.

iPhone Present vs. iPhone not Present

The first thing I noticed was my heightened awareness of where my iPhone was at all times. One of my observations from my first week with the Apple Watch was how it untethered me from my iPhone in a positive way. Whether it was in my pocket or on the coffee table or near the front door, the Watch allowed me not to worry about my iPhone needing to be with me at all times to remain connected. Life without the Watch reminded me of the habits I developed to make sure my phone was always near me. I would make sure to always put it in my pocket as I moved around the house or carry it with me from room to room.

This behavior is a result of wanting, and sometimes needing, to respond whenever I get a buzz or ding of a notification, whether it is an email alert, text message, or something else. I don’t like the idea of missing something important and this led me to be much more aware of where my iPhone was when I was not wearing the Apple Watch.

Notification Disruption

One of the ways I integrated the Apple Watch into my life was to heavily filter what notifications I allowed to buzz me on the wrist — voice calls, VIP emails, text messages, and only a handful of apps which push me useful information. However on the iPhone, even though I limit the notifications, all of them are treated equally and my phone was constantly buzzing telling me I had a notification. Of course, I check it to see if it is important and needed an immediate response. I had forgotten how much I had to pick up and check my iPhone prior to the Apple Watch. I’d prefer the luxury of reaching for my phone when necessary. Apple Watch helped me achieve this.

iMessage notifications were the worst of the bunch. The vast majority of my daily conversations are via iMessage. Prior to the Apple Watch, this would not have bothered me, but the first few days without it and I was irritated by how often I’d get a buzz of a message, reply to it, put my phone down or in my pocket, get another buzz a minute or two later, reply, put my phone down, get a response a few minutes later, reply, put my phone back down, ad infinitum. For the first few days, this really bothered me because a text message conversation is not always one that happens in real time. Sometimes it takes the other person time to reply. I’d rather not stare at my iPhone screen continuously waiting for the person to respond as I find it inefficient and a waste of time. So I put the phone down or in my pocket between messages and continue what I’m doing. The constant pick up, reply, put down sequence frustrated me. With Apple Watch, this process is seamless. Notifications come in reply from the Watch with text or Siri voice dictation and I keep doing what I’m doing. Living without the Apple Watch for a week showed me how much I took this one experience for granted before the Apple Watch. This was the most frustrating part of living without the Apple Watch because of how much I use iMessage to have conversations throughout the day.

Time Saved

When I told people about my experiment, many were curious if I used my phone less as a result. For a few weeks prior to this experiment, I had been using an app called Moment, which tracks your iPhone usage each day and how many times you pick the phone up, turn the screen on and look at it. While I didn’t see my iPhone usage in terms of hours per day decline during the week without the Apple Watch, I did see a significant drop in the number of times I looked at it. The average number of times I picked up and looked at my phone my last week with the Apple Watch was 74. This last week without the Apple Watch my average number of daily pickups was 102. I charted it to see the difference.

When I had the Apple Watch on, I averaged 28 fewer times I looked at my iPhone each day. This is a good proxy of how notifications on the watch help minimize the number of times I need to look at my phone to see the nature of each notification.

After reflecting on what looking at my phone fewer times meant in my daily life, I concluded the experience was less disruptive. Don’t get me wrong — I love my iPhone. It is my primary computer. However, having to respond to your phone or pull it out of your pocket or bag for each phone call or text message turns out to be fairly disruptive. As I’ve observed my wife’s behavior as well with her Apple Watch, she articulates similar feelings. As she is out and about, not having to fumble through her purse each time her phone dings is a less disruptive experience in many daily situations. Particularly since not all notifications are important or in need of an immediate response. However, without the use of the Apple Watch, you would not know this without getting your phone out and looking at it. This is an area of immense value that can only be understood once experienced.

Interestingly, the same sentiment is noticed by other Apple Watch wearers. I’m working with a company doing research on existing Apple Watch owners called Wristly (if you have an Apple Watch please consider joining our panel) where 32% of respondents said they spend much less time on their iPhone and 58% indicated they use their iPhone somewhat less.

So what did I conclude? As I pointed to at the beginning of this article, the Apple Watch is a modern day convenience and should be understood as such. It is a convenience in the same way a dishwasher or washer/dryer or a microwave is. None of the items are absolutely necessary, yet so many of their owners can’t imagine life without one. This is what my week without the Apple Watch taught me. Of course I can get by without it but, given the number of conveniences I’ve been able to quantify in the flow of my daily life, I can no longer imagine life without it.

Report: Apple and Fitbit Dominate Wearable Market

As a part of a broader report I’m developing for my company’s clients both in the tech and financial industries, I’ve been modeling our views on what happens in wearables for the next few years. I will break out smart watch shipment estimates and health and fitness devices separately, although each category is intertwined in the wearables category. Taking a step back and looking at the macro view of the wearable market up until the launch of the Apple Watch, Fitbit was the dominant vendor in terms of unit shipments. Fitbit’s share of the health and fitness tracker wearable market was just over 70% in 2014 and over 50% of the total wearable market shipments even when smart watches are included. However, the problems with the current health and fitness market loom and must be solved for us to continue to believe in the upside of dedicated health and fitness trackers.

To put our view of wearables for the next few years into perspective, I’ve mapped them among our forecasts for other primary computing devices.

As you can imagine, doing a forecast like this for something unknown like the wearables category is tricky. It is loaded with assumptions which we build into our reports for clients. I typically like to create a bull-base-bear scenario for each forecast outlining things to watch for which may signal the way the market is heading. But for now, we will operate on the assumption the wearables category will continue to gain interest globally. However, I do feel the next few years will signal more of a shift toward smart watches or perhaps smarter, more capable health and fitness bands than the basic health and fitness wearables which make up most of the market to this point. I’ve charted that shift here.

Apple’s entrance to the category has contributed and will continue to contribute to a massive YoY growth spike for smart watches in 2015. We continue to see year-over-year growth in smart watches, more so than health and fitness bands, largely driven by the Apple Watch over the next few years. Where we do see some upside, and it is reflected in our forecasts, is in basic health and fitness bands, including ones with more sophisticated health sensors, that are starting to be adopted by doctors and health insurance companies and prescribed to patients with specific health conditions. This class of product would be purpose built as to pass the required regulations to be used and integrated into a health provider’s services.

Apple vs. Fitbit

I’m sharing a chart from my proprietary model of sales estimate and forecasts by specific vendors. I do ask our readers keep this chart private and don’t re-post it to the web for free. I build these models for investment firms and they are quite valuable. I have this model built out through 2016 but, as to not give too much of that away, I’m showing and will walk you through my estimate only through 2014.

My initial estimates for Apple Watch sales appear to be tracking for both calendar 2015 and a full year of product availability. I’m still confident in our estimate of 19m Apple Watches in fiscal 2015 sold and the momentum is gaining toward the back half of the year as evidenced in our primary research of buyer intent. Supply chain sources continue to validate shipment momentum and, knowing Apple’s retail inventory tactics, it can only mean, as supply is catching up with demand, sell though remains in line with supply chain output volumes we are tracking.

As you can see from our estimates, the wearable market is a two horse race between Fitbit and Apple. While Xiaomi, with their low-cost MiBand, has come to the party and taken share, it still remains relatively low compared to Apple and Fitbit. We expect Xiaomi to stay committed to this category and hear other wearable products are in the pipeline.

I believe Fitbit will still carry some momentum and Apple Watch’s presence is what we believe will help Fitbit continue that momentum. Our buyer intent surveys around wearables have seen a dramatic increase in interest both in intent and consideration for the category since Apple’s entrance. This backs up many analysts views that the Apple Watch will help float all boats in the category. However, our surveys indicate it may help float FitBit’s boat more so than other wearable products and we don’t know yet for how long. FitBit has higher brand awareness than any other wearable–other than the Apple Watch–and the money they raised with their IPO should help them spend on marketing, IP, and future products. I have a bear case for Fitbit that keeps them competitive a while longer. These are the base assumptions being used to forecast Fitbit’s model through the end of the year and into 2016. This holiday season, both the Apple Watch and Fitbit products will likely see the strong seasonal bump the category saw in Q4 2014. This Q4 2015 is likely to see a much larger spike, thanks to the Apple Watch.

Where the Apple Watch will really outpace Fitbit is in their China momentum. As I outlined in my China smart phone report, Apple is becoming a genuine force to be reckoned with in China. While we surveyed the landscape in many markets, it was China that had over 20% of respondents who claimed a strong intent or a definite plan to buy the Apple Watch. China’s iPhone installed base is near that of the United States with nearly 100m units in active use (the US is over 110m units now). With such a strong and growing base of iPhone 5s (the single most owned iPhone in both China and US) and above, the China market is a hot zone for the Apple Watch.

Microsoft is the dark horse to watch. Right now, our estimates are the Microsoft Band has less than 10% market share of the health and fitness market, but they are only on version one of their product. If version 2.0 is much improved, it could help Microsoft grab market share, likely impacting FitBit, in the health and fitness wearable market.

The Voice UI

I hear the phrase “voice is the new UI” often during meetings around Silicon Valley. This is nothing new. I’ve been involved in many industry discussions over the past 15 years where the “voice as the user-interface” vision has been well articulated. Science fiction stories have long portrayed humans interacting with machines via voice and, to the astonishment of the audience, the machines talk back. Consumer technology is unquestionably headed in this direction. We will have to explain to future generations what it was like to live in a world where we couldn’t operate our electronics with our voice and our electronics were not smart enough to understand us.

If we step back and take a look at a general theme in consumer technology today, we notice a pattern emerging – the elimination of friction. The success of messaging apps as platforms all over the world are based on the simple premise of eliminating friction. The move to contactless mobile payments is a move to eliminate friction. Google with Now on Tap is moving in that direction as is Apple with Proactive in iOS 9. The examples are countless and the trend is clear. Convenience trumps nearly everything in consumer electronics and things that eliminate friction are convenient.

Being able to pay with my smartphone or smartwatch is convenient and eliminates friction. Amazon’s brilliant idea for one-click purchases was to eliminate friction, making it easier and faster for me to buy things from Amazon. Voice as a user-interface layer eliminates the friction for many tasks that are possible by typing on my smart device but, often for such small interactions, voice is much more convenient. To text my wife a short message I could pull out my phone, used Touch ID to log-in, pull up iMessage, click on her contact info, and start typing. Or I could lift my Apple Watch and say “Hey Siri, text Jen I’ll be home in 30 minutes.” If we believe we are on the grand path to eliminate as much friction as possible from the world of technology, we have to believe voice truly is the new UI. Honestly, it can’t get her fast enough.

I look at this in two ways. The first world viewpoint and the third world viewpoint.

First World Problems

I was having a discussion with a family member about the future and he said “I want to be able to talk to my oven and tell it to turn on to 450 degrees.” Voice as UI layers applies to all kinds of household appliances. “Refrigerator, how much milk do I have left?” Or “how many eggs do I have?” “Do I have everything I need to make waffles?” In this vision and many like it, the appliances talk back, making sure we get what we need. Your refrigerator may tell you that you need more eggs and ask if they should be added to your grocery list. Once your shopping list is complete, you can send the request to have everything you need delivered by the end of day.

Interestingly, Amazon’s Echo is presenting this vision and trying to make it mainstream via a singular household appliance. If you have never seen this video on the Amazon Echo I recommend it. I’ve yet to try an Amazon Echo but one is on the way. This product is a great example of the potential of voice UI and what can happen when more and more of our appliances become “smart.” When you watch videos like this or have experiences of our own where we use voice to control and interact with appliances, you conclude this is the direction we are heading. The challenge is all the innovation surrounding this vision that still needs to happen.

Echo is great, but it’s only one product. While Amazon is touting integration with smart home products so you can control them through Echo, most appliance companies will be slow to adopt any standard and integrate with a product like Echo. It’s more likely, at least in the beginning, that each appliance manufacturer will want to build the smarts into their appliances rather than work through an aggregator. This is a debate I hear frequently in industry circles.

It is true voice recognition has come a long way. However, we still need artificial intelligence layers in the cloud to mature even more than it is today. The cost of components and sensors need to come down in price as well before we can see this expand to everyday appliances at price points the masses can afford. As much as I want this vision to become a reality sooner than later, it seems we still have a bit of a wait ahead.

Third World Problems

As interesting as voice is as an interaction layer to most of us in the developed world, it may evolve to become central to those in the third world, particularly with things like smartphones. One of the primary problems, besides economics, to connecting the next billion humans to the internet is a lack of technical literacy and often the lack of literacy at all. There are massive pockets of humans who live in villages with maybe one TV and radio. Which brings up the interesting question of how would they use a smartphone even if they could afford one and the data plan attached to it? This is where things like voice as a user-interface may provide a solution.

There is still a long way from commercialization for this specific use case and voice as UI will have to become fully mature and established in developed markets first. But if we can bring natural interfaces like voice to the masses and include the ability to understand the many languages and dialects spoken today, we could be one step closer to connecting the next billion and the several billion after that to the internet.

The Coming Battle for Your Mobile Wallet

Something interesting is going to happen in 2016. I believe, in certain markets — Europe, US, and China — we are going to have a watershed moment in mobile technology. Let me first lay some groundwork.

As I alluded to in the China Smartphone Report, the infrastructure for mobile contactless payments is coming to China in a big way, mandated by the government by the end of 2015. While this order is more focused on the distribution of physical payment cards with a secure element embedded, the card readers being deployed will include NFC, which means mobile is along for the ride. I’m hearing most of the major retailers in China are preparing to upgrade all their terminals. The challenge in China, however, is there is quite a fragmented retail environment where there are a large number of “mom and pop” retail shops in comparison to major retailers. To put this into perspective, between 2010 and 2012, the top-100 American retailers made up 57% of all consumers sales. By comparison, China’s top-100 retailers accounted for 11% of sales in 2010 and just 8% last year.

This is important to know as we think about how quickly point-of-sale terminals will be rolled out in each market. In the US, the large proportion of major retailers will drive this terminal upgrade to meet the EMV and liability shift deadline of October 2015. I firmly believe the vast number of major retailers in the US will have NFC terminals to support contactless mobile payments by this fall and the upcoming 2015 holiday season. As I spoke with several companies providing these terminals, I found there will be a substantial financial impact once liability shifts from the provider of the service that accepts credit card transactions to banks or retailers after the deadline. Many insiders in merchant services I spoke with stated their confidence that this increase in fees to take credit cards will drive the smaller mom and pop retailers to convert as well. Put all the things together and you understand why I’m confident contactless payment terminals will be nearly ubiquitous by the end of 2015 in the US.

The government mandate in China will also help drive terminals. I’ve been speaking with local Android OEMs and component providers in China and have heard they are all planning for this and including NFC in phones for the local China market for the end of 2015.

I’m anticipating the number of contactless payments occurring at local retail to have a dramatic increase this fall. One helpful way to understand the readiness of consumers to embrace this is in share of mobile commerce as a portion of total e-commerce sales. Below is a chart from my primary research on the subject:

I use this data point to show the readiness of consumers to use their mobile device for payments. In China, 34% of Chinese smartphone owners are already comfortable using their mobile device for e-commerce. It suggests same number of consumers will be ready and willing to use their phone to also pay at local retailers via contactless payments.

Similarly in the US, where we know less than 1% of retail credit card transactions are by contactless (largely due to infrastructure and availability which will be solved by end of year), 15% of US smartphone owners participating in online shopping are doing so regularly via their mobile device. If we simply move the share of US contactless transactions from 1% to 10% it would be a dramatic market shift. In the case of the US, there will be an ecosystem ready to make this happen as my rough estimates based on the trajectory of the iPhone 6 and 6 Plus and the (likely) fall iPhone lineup could see upwards of 30% of Apple’s US iPhone installed base have NFC capabilities.

The Mobile Wallet

The opportunity and challenge now moves to the mobile wallet once the fundamental infrastructure is established for contactless mobile payments. In the US, it will be fairly straightforward with Apple Pay and Android Pay as the primary solutions. In China, things are going to get quite complicated. I’m hearing every Android OEM – Huawei, Lenovo, Xiaomi, Samsung, etc. — are all going to be pushing their own wallet solutions. Coupled with Alibaba’s Alipay and Tencent’s TenPay (both already dominant and established digital payment solutions), who will also want to compete and use their existing payment platforms to take share of physical payments as well and the environment will be quite messy. The way each of them architect their solution is also tricky since it is illegal to store credit card information in China. Hence, something like Apple’s tokenization method is already well positioned to abide by the rules in China. Each mobile wallet solution on Android will require something similar so credit cards or banking information is not stored. Alipay and Tencent already have solutions and each OEM will need something as well if they want to compete.

What this fundamental shift may also bring about is an opportunity for innovation in financial services. If I am not necessarily dependent on a bank or credit card to issue me a piece of plastic to make payments, then others may be able to capitalize on this opportunity with new and innovative banking and financial services. Given UnionPay’s dominance in China, I’m not sure how this plays out but, in the US market, it seems an opportunity may present itself for us to see some disruption in this area.

I’m continuing to talk with insiders at all levels on the payments, merchants, retailers, and NFC component terminals, and will share new insights as they arrive on this subject. I feel we could be on the cusp of a monumental shift when it comes to mobile payments, both as a share of physical retail and online commerce. Who controls the wallet will play a key role.

The China Smartphone Market Report

Every so often for subscribers I do a deep dive on the China smartphone market. I’ll do another one on India in the upcoming weeks. We have some recent data on the China smartphone market I think paints a fascinating picture of what is happening as it relates to several players, and Apple in particular.

China is like no other market I study when it comes to not just mobile but the mobile internet. While we may be able to glean insights from the mobile internet trends in China and apply them to other areas, I’m not convinced we can apply the hardware trends — namely, the size of the market for customers willing to pay extreme premiums to own iPhones.

Overall View of the Market

I track global sales of smartphones by vendor, but also break them out by region. Here is a view of the market share paths of the major vendors since early 2013.

As you can see, the story of China’s smartphone growth was largely about Android, but also being driven by local manufacturers. In a market which grew from an average of 60 million units a quarter to over 100m units a quarter, there was plenty of share to go around. China was cutting their teeth on mobile and local vendors and low-cost handsets were driving the growth. All along, those of us who study the market knew Apple had a high aspirational brand but had yet to see the masses move. One thing these vendor share charts don’t show is the secondary market or the grey market. The market where iPhones are bought, not through official channels, but through unofficial ones. Remarkably, amidst the rapid smartphone growth of local vendors, Chinese consumers were buying iPhones in such significant numbers where, for a period of time in 2012, illegitimate iPhone sales made up 9-10% of all smartphones sold per quarter in China including through legitimate channels. Which, if legitimate plus grey market shipments were counted, would have put Apple in the top 5 of smartphone vendors by sales volume in China going back to 2012. Our research revealed that, during the time period, grey market iPhones sales were nearly double the number of iPhones sold through legitimate channels. This is why the device usage data from Baidu/Umeng had such high usage rates of iPhone 4 and 4s during that time frame. Such high penetration can only make sense when we add both grey market and legitimate market sales.

As you see from the chart over time, the huge base of iPhone 4 and 4s owners began to diversify and Apple began bringing new customers into their ecosystem as they cut more deals with local carriers with China Mobile being the driver of Apple’s growth push in China.

Android remains the dominant OS in China’s market of now over 600 million smartphone users. It wasn’t until the launch of the iPhone 6 and 6 Plus that Apple began to pull ahead as the majority leader in market share for the premium smartphone market in China. By vendor, Samsung and Apple were the two primary drivers of the premium smartphone market with Huawei and a few offerings from Xiaomi in the mix. Thanks to the iPhone 6 and 6 Plus, Apple’s share of the premium market is now over 60%. Furthermore, for the past two quarters, the iPhone has been the best selling smartphone brand in mainland China.

With the premium market sealed up by Apple, the real battle moves to the middle-income parts of the market. Tim Cook made an interesting statement last quarterly earnings call when he stated the iPhone was beginning to penetrate the mid-tier parts of the Chinese smartphone market. This correlates with some recent survey work we did in China where over 50% of those considered in the middle-income bracket expected to spend more money on their next smartphone. This is where the battle will lie for vendors in China. With the most developed parts of China already at 90% smartphone penetration, any meaningful growth by any vendor in mainland China will come from taking customers away from someone else. For the time being, this favors Apple but there are over 50 smartphone brands who sell into mainland China. However, only four brands rank among the most owned across all income classes–Apple, Samsung, Huawei, and Xiaomi.

Consolidation is likely coming in the China smartphone market as it will be difficult for all 50+ brands to continue to do well in the mid and premium price tiers. Any smartphone vendors looking for pure growth must look below the $100 device range and many are not positioned well to succeed there. While Apple is among those well positioned to grab new users from Android brands, Meizu and Oppo are brands to watch as well. Xiaomi was hot for a while but has now seen two quarters of back to back declines and we will see how 2015 pans out for Xiaomi in their home country.

Lastly, another data point that makes China interesting from a growth standpoint for well-positioned brands/vendors is that Chinese consumers replace their smartphones on faster cycles than any other market. The average US consumer refreshes their smartphone every 26 months while the average Chinese consumer refreshes every 22 months.

This is a picture of the market as it is today, but there are new dynamics coming to the Chinese smartphone market which may shake things up in an interesting way. In a similar vein as the US, the Chinese government is mandating all credit cards and retail store point of sale kiosks move to dual-purpose cards. These are cards not unlike the chip and pin cards coming to the US market but using different technology and including the secure element. These kiosks coming to point of sale will include both the RFID dual-purpose chip and an NFC chip which means there will be significant infrastructure for contactless mobile payments in many developed areas and the larger Chinese retailers by the end of 2015. I hear nearly every Android OEM is going full steam with NFC in China as well as OEMs and mobile payment companies starting to put the pieces together to compete for mobile wallets and mobile payments. Of course, if Apple can secure the right deals with UnionPay and others, they will also be right in the mix as the Chinese market ripens for mobile contactless payments via smartphones. Everyone I talk to at the component and hardware level who focuses on China believes another competitive cycle is coming from OEMs to capitalize on this new dynamic of mobile payments.

What’s perhaps most interesting about the smartphone hardware market in China is how it is moving more toward a premium market. Thanks to Apple, ASPs in China are actually growing not declining. Remember most believed the way to be successful in China was to make low-cost/cheaper handsets, but the market is actually moving up and this is true across income brackets. I’ve plotted estimates for ASP in China compared to that of the US to show this.

All these dynamics make China quite unique. It is becoming the largest premium smartphone market and I don’t see that changing anytime soon. It is the largest smartphone market with over 600m smartphones in active use, and the vast majority of those 600m smartphone users are looking to spend more on their next handset and simultaneously are investing more in the Chinese mobile internet and contributing to local economy. You can see why this market is so important to many competitors due to its size but for Apple it’s crucial to their growth. This is why we are seeing and will continue to see significant investments and customizations with Apple’s hardware, software, and services specific to the China market. To compete in China, hardware, software and services core competencies are becoming essential. Which is why my sense is there are only a handful you can tough it out.

Soon I’ll do a deep dive on the Indian smartphone market. India in terms of potential user size will rival China, but as you will see dramatically different market dynamics exist.