Understanding Xiaomi Part 1: As a Smart phone Company

I am going to embark on a three part series about Xiaomi. Today, I’ll talk about Xiaomi as a smart phone company. Next, I’ll talk about them as an Internet of Things company. Lastly, I’ll talk about them as an internet services company.

Their Role As a Smart phone Company

Where does Xiaomi fit as a smart phone company? Right now, 95% or more of their volume is in China. It took them five months to sell 1m units in India. Apple still sells more phones in India than Xiaomi in terms of quarterly volume. However, I don’t believe that will be true for long. But, as of the end of 2014, China has been Xiaomi’s primary market. Quite a bit of their strategy and positioning has been focused on China. I detail it in this video analysis. In China, Xiaomi has an app store, an e-commerce store, an e-book store, a video games store, a cloud synchronization and backup service, and more. All of this is regionalized to mainland China.

To take a snapshot with updated data to date, here is Xiaomi’s current quarterly trend line.

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You’re probably asking: what happened in Q4? This is where an important point of how Xiaomi is positioned comes out. What happened to them in Q4 was Apple. Apple had its best quarter by a significant margin in China. The demand of iPhone 6 and 6 Plus was extremely strong in China. Understandable since Apple is arguably the most aspirational technology brand in the world.

Here lies the key point which became clear, for me but not everyone, from Xiaomi’s launch of their latest flagship smartphone. Xiaomi is not actually going after Apple’s customer base. Rather, they are setting themselves up to go after those who ASPIRE to buy an iPhone but can’t afford one. Xiaomi’s bet, and I would agree, is this could be a very large audience. This is why they compared the Mi Note to the iPhone 6 Plus. This comparison is designed to make the statement that it’s on par with the iPhone 6 Plus but less expensive. Xiaomi knows they don’t have the aspirational brand Apple does and, while they are building a fan base and a good brand, it is not clear they are trying to build the status symbol like brand Apple has. As I point out in this Insider post, in China everything about a person externally says something about them. Everything from the car they drive, the clothes they wear, the technology they use, etc., says something about them. A Xiaomi phone says, “I’m upwardly mobile”. An iPhone says “I’ve made it.” While there are similar dynamics in western markets, It is exceptionally pronounced in China.

The price of the new Mi Note is $370, which is the one I believe Xiaomi thinks is their mainstream flagship. They also released a Mi Note Pro that costs $532 and is loaded with specs, which the China market likes. This product, while some may think is designed to go after Apple customers, is actually more of a test of their offerings at this price range. I do not have high hopes it will sell in volume in China or any other market.

Comparing Apple to Xiaomi is certainly apt in some areas where there are similarities. But we have to recognize that, while they have similarities in approach, ecosystem, etc., they are targeting different customers. They are, if I can summarize, bringing an Apple-like solution to the middle-low end of the market. They are bringing Apple’s device, software, and services approach to markets Apple does not care about.

All of this leads us to the next question and analysis. Can their positioning go global?

The Biggest Phone Company in the World

Xiaomi’s CEO Lei Jun said publicly, “we want to be the biggest phone company in the world.” I’m not sure I believe Xiaomi is a smart phone company. I’m also not sure Xiaomi believes they are just a smart phone company. However, the Xiaomi team understands the centrality of the smart phone as the primary computer for billions of people. So, whether or not they are ultimately a smart phone company, the smart phone is central to their strategy. This is where we analyze them on the basis of a phone company and ask the question: can they become the biggest phone company in the world?

Honestly, I really struggle with believing they can. Primarily because it goes against the strongest trend wave I’m observing in the market right now, which is what I call “home field advantage.” Xiaomi understands the future is in software and services, not hardware, at least for the market they are going after. I see two fundamental global headwinds against Xiaomi in many markets.

  1. Local Brands: One of the main points in favor of local brands is local consumer sentiment for local brands. The Chinese are very proud of their local brands. In many cases, supporting a quality local brand like Xiaomi has a great deal of national and cultural pride behind it. We see the same thing in India with Micromax. There are local vendors growing in UK, Russia, Brazil, Indonesia, etc. Not in all cases is local pride a part of the success but there are certainly more than a few pockets where this is taking place. I believe this sentiment exists and it will continue to grow as a trend, assuming the local vendors do not make fatal mistakes in the market.
  2. Local Services: One of the other reasons local brands are doing well is because they are tightly integrating local services. Local services are driving a great deal of the growing demand in many of these high growth regions. Commerce, media, internet services, etc., are all key parts of local experiences. It is becoming increasingly difficult for foreign brands to identify the key local services and integrate them quickly enough to compete with the brands on the ground in these markets.

The question often comes up as to whether Xiaomi will attempt to enter Western markets like the US and Europe. IP issues are quickly noted, but Xiaomi appears to be taking steps at a component level to take their products international and even to regions where they may have faced IP issues in the past. However, I still think they are a long way, if ever, from coming to the West. These major points play into this opinion but it’s also a matter of how unique the US is when it comes to subsidies. So what if Xiaomi offers an affordable premium product? You can get an iPhone for $199. I’m not sure Xiaomi can offer any product, even for free, that could remotely compete with an iPhone even if that iPhone is $199. Maybe some day, but not in the near future. It is also important to note, Xiaomi doesn’t need to come to the West to be the largest smart phone maker in the world, or to even be successful.

It seems as though, for now, Xiaomi is going to use Google’s services outside of China. Which means price competition will remain a key factor. When you run someone else’s software and services, you are only as good as your lower cost competitor. Fascinatingly, Xiaomi’s greatest competition is the very thing that enabled them to become what they are today, Shenzhen’s manufacturing industry (I’ll dive into why this industry is disruptive in a later post). This industry enables extremely good and very low cost hardware. While Xiaomi may attempt to create lock-in with hardware and services, what is to stop local vendors from using the Shenzhen manufacturing industry to create equally good hardware and tightly integrate their own local software and services? Yes, Xiaomi will try for lock-in via their own software and services but it is very difficult to create globally differentiated and regionally specific services plays at the same time.

Xiaomi would have to fight against these headwinds. They are the exact same ones causing Samsung’s decline. Keep in mind, Samsung has a good, strong brand in many of these markets. Yet, they are running into the above issues themselves. So what does Xiaomi do or offer that Samsung hasn’t or doesn’t in these regions? More importantly what will Xiaomi offer that local vendors can not or are not? We will explore this in part 3 of this series.

Facebook vs. Google in 2015

As I look forward to the next few years through the lens of the “mobile first world”, I find a number of interesting things about Facebook and Google to tease out. The next phase of mobile will bring an additional two billion people on the internet for the first time via a smart phone. While this is a huge number of people, they will also be low value customers. So the question is, who is best positioned from a platform standpoint to serve this next two billion?

As I point out in this report, Google faces a very tricky problem. they have likely peaked and earnings numbers this year will highlight it. Google’s revenue numbers have been very closely tied to new internet users. However, in the past, new internet users were worth more to Google than new internet users connecting today and over the next few years. Inevitably, Google is acquiring lower value customers at a more rapid rate. Which means the ASP of an ad unit will go down as Google cannot make as much money from this booming lower-end audience. I am extremely skeptical of Google’s position in this next phase of mobile.

Facebook has a similar issue attempting to monetize the lower-end audience in this next phase. However, Facebook (and assets like WhatsApp and Instagram) are better positioned than Google because it is a demand driver of smart phones at this tier. Consumers in rural China, India, Africa, etc., are not lining up to get Google Maps or a Gmail account. They are, however, being driven to connect to get on Facebook, WhatsApp, Instagram, etc.

As we dive into what consumers in this next phase of mobile care about, it becomes clear Facebook’s services are better positioned than Google’s. Whether or not this will always be the case, it will be at least for the near future. Those who are getting online for the first time don’t care about an app store with a million apps. They aren’t browsing the web yet and they aren’t purchasing much of anything online. Their needs are very simple. Education apps, for example, do exceptionally well in this market. A rural farmer in India gets online for the first time and starts selling his sheep on Instagram. For those in this next phase of mobile, a smart phone means a chance at a better life and to up their standing economically, learn, and connect to others. At the core, this is not all that dissimilar to developed markets except that, for them, it is their first time on the internet.

There is another angle that makes me think Facebook is better positioned than Google for this next two billion. Facebook can be a “one platform to serve all” where I feel Google can not. Google is going to have an extremely difficult time keeping Android interesting to their first billion users AND their second billion users. The primary reason for this is because the next billion Android customers will want and need completely different things than their first billion. A “one size fits all” Android solution is not going to work to satisfy the needs of their most demanding and most profitable customers versus those who are getting online for the first time with their first computer. Completely different set of customers.

Facebook, on the other hand, can serve the full spectrum with their solutions. They have proven they can and are executing admirably. This does not mean there are no major hills for Facebook to climb but it does mean their foundation is stronger than Google’s.

As a growing number of consumers get online with their first smart phones costing less than $50, it is difficult to see clearly who makes money on this audience. It will, without doubt, be companies who are services companies and not hardware companies. Which is why I look at areas where services are in demand and valued, and that is where I see Facebook being better positioned than Google.

Lastly, it is also unclear whether or not Android is going to be the dominant platform for the next two billion. There is a very good chance it is something else. Firefox OS for example, enables very low cost hardware closely tied to web services. What Microsoft is doing with Series 40 on the Nokia 215 is also interesting. Maybe Samsung gets smart and takes Tizen down to this level in an attempt to get first time smart phone buyers. It sounds crazy to even mention this, but perhaps Android over-serves the needs of the next two billion.

With this first phase of mobile complete, a lot of my time thinking about mobile is dedicated to the next two billion. The obvious point I keep returning to is how dramatically different the market for the next two billion internet users looks from the first. Massive challenges, but also great opportunity for those who get the recipe right.

The Accessory Benefiting Most from Low Cost Android Phones

Every year I walk the little known back halls of CES where the Chinese/Shenzhen manufacturers show off products coming out of the their manufacturing ecosystem. Given the global influence of the Shenzhen manufacturing ecosystem, I go to the halls to learn more about the China market and see what’s the new hot item China is manufacturing.

I was the first to spot and tweet about the Apple watch knockoffs in this area. Nearly every major media outlet asked me where I found it and ran stories of their own later in the week. Here was one of three booths selling Apple Watch knockoff hardware.

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While this was interesting, it was also expected, and not the most compelling thing I saw in the area. Many vendors had extremely low cost tablets and have had them for the many years I’ve explored these halls. Selfie sticks were also seen in a number of booths in a wide variety of styles and designs. Whatever I see in many booths tells me what is moving in large volumes out of this ecosystem. Interestingly, the thing I saw being sold at more booths than any was elegantly designed external battery packs.

There were more booths offering a huge menu of external battery backs than any other single product in the Shenzhen area. They came in all types of colors, sizes, and designs. Some were wrapped in unique material like wood.

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Some were gigantic bricks offering 8000 mAh or more. I inquired about the use case of these external battery packs. The answer seemed quite obvious — Chinese consumers are on their phones so much they kill the battery extremely quickly. For those who take public transportation like trains or buses very long distances, they watch an enormous amount of video or play hours of games during these commutes. So, a common use case is to have one of these very large battery packs and keep the phone plugged into it while watching movies or playing games.

As I inquired about the different sizes of these battery packs, the guy at the booth explained the size of the brick depends on how long a person is going to be way from a power outlet. Many leave their home in the morning and aren’t near a power outlet all day while at school or work. Therefore, they get these huge battery bricks so it can last them a day and often more. He also added it was not uncommon to see Chinese consumers watching video on the train or on lunch breaks with their phones plugged into these bricks. My takeaway is, for many Chinese consumers, these bricks are their power outlets. It became clear after chatting with a few of these vendors not only are Chinese consumers on their phones much more than the average Western consumer, but power outlets are also hard to come by in their day to day routines. These external power bricks are a third world solution to a third world problem. But this also points out another interesting element.

Most Chinese consumers have very inexpensive smartphone hardware, running somewhat sketchy and low cost and quality Lithium Ion batteries. It seems plausible the common battery issue is, by nature, also a by product of the lack of quality hardware owned by the masses who can only afford a lower-end phone. Given this reality, companion battery packs seem a viable solution to a real problem. This will not only be the case in China but all throughout SE Asia, India, and many other emerging markets.

All of this highlights the extreme differences between the lower tier of the smartphone market and the higher end. Both of these markets have significant opportunities but it seems the opportunities are at different ends of the spectrum. All of this strengthens the position I outline in this report about Google’s conundrum. All the growth in smartphones will come from this lower tier where there are entirely different problems to solve.

Microsoft’s $29 Smart Phone and a Non-Obvious Trend

There are a lot of angles at the 2015 CES worth talking about. When I go to a CES show, I look for trends. Sometimes, the things I find could be a trend or be nothing at all. This early in the year it is hard to know. But a number of things happened and some side conversations occurred around a possible trend, or it may just signal one of the primary reasons a buzzworthy product being released in 2015 may need to exist.

It all started with Microsoft’s $29 smart phone. While the Nokia Series 40 platform is not considered a smart phone by most, it is pretty darn close. It has an app store, runs a full web browser and functions just like many smart phones do. Which is why Microsoft releasing it at $29 (before any subsidies) is quite an offering. Especially when it comes with many Microsoft services bundled in. This phone is actually a perfect fit for the next billion users and I actually believe Microsoft can be quite competitive with this offering against Android in the sub-$50 smart phone market. But that should be relatively obvious for those who follow mobile closely. But it is was a different point about this phone that ignited an interesting conversation. It is encapsulated in this quote in the promotional material.

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It is the second value proposition of the sentence that is interesting: a “secondary” smartphone for just about anyone. What are they implying? I had some time with executives from Microsoft to talk about this particular product and an interesting point was made. Some people may want a simple phone, one which doesn’t contain all the bells and whistles (which are often an invitation for distraction) when they go out to dinner, exercise/run, away for the weekend, etc., but would like a smaller, usable phone to make calls, receive texts, and do other simple web stuff.

As phones get bigger, they also get less portable. I ran a 15K race with my family in San Francisco over the weekend and saw numerous people with an iPhone 6 Plus or Galaxy Note strapped to their arm. The sheer size of these phones made this look a bit ridiculous, yet it sort of works. So I can see, for certain things, how a smaller phone with some music capabilities, a SIM card in case of emergencies to make calls, a camera, and some basic web stuff could be useful.

The following day at CES, after meeting Microsoft about their $29 smartphone, my friend Benedict Evans and I were walking around the China/Shenzen manufacturing section and noticed some fascinating little gadgets that contained phone keypads, but were wrapped in things like walnut and other woods, jewelry, clean metal, and other well designed fashionable materials. These devices were essentially diallers paired with your phone that let you use them to make phone calls. You could leave your tablet or phablet in your bag, purse, or pocket and use this elegant little object to make calls. Very similar to this idea from HTC of a few years ago.

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Benedict and I talked through this idea and found it interesting that such a thing was taking place in Asia. It also seemed interesting this was the similar value proposition of developed markets for the Nokia 215. While I am certain the Nokia 215 will be an attractive offering for first time smart phone owners, I’m not sure it is the right product for the secondary phone concept. While I agree with the potential, the discussions around this idea had me thinking, what if this is an area where the smart watch comes in? Apple themselves floated the idea around the Apple Watch that you could leave your iPhone at home and still use it for basic things like music and payments. What if also in version one, you can get the Apple Watch on WiFi in a public area and use it to get iMessages, emails, etc.? Carrying this further, what if the smart watch eventually evolves to fill the use case of a secondary phone you can take with you when you are doing things that don’t require all the bells and whistles of your smart phone and is essentially much more portable?

I’m not sure if there is something to this idea of the need or want of a secondary smart phone-like product for a range of uses but I can make the case there may be something to it. A key thought I’ve had from day one of the Apple Watch reveal is how these much bigger smart phones will make a complimentary small screen product even more valuable. Since I’m an iPhone 6 Plus user, I’m looking forward to testing this when the Apple Watch comes out.

I’ve been forming a number of thoughts on smart watches and was on a panel at CES last week on the subject. I published a report this week on smart watches and you can download it here.

The Apple Electronics Show

Every year, pundits and Apple-focused writers make the point that, while Apple is absent from CES, their products and presence are still very much at CES. My friend Avi made this astute point in a tweet:

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Even this VentureBeat headline drives the point home: “How Apple Won CES again — without showing up“. Unquestionably, Apple products were everywhere at every booth of essentially every company doing something cool or interesting. But just this point alone is not the most interesting one. What CES and Apple’s large presence here is truly highlighting is the growth and strength of the Apple ecosystem.

Now, it sounds counter-intuitive to say we can go to a non-Apple show where Apple itself does not have a booth or any official involvement and make a claim it is the place to go and see the best and brightest parts of their ecosystem. We used to have a show called Macworld Expo we would go to and see the full Apple ecosystem. But in all honestly, this is largely what the CES show floor has become.

In fact, I made the point in a discussion last night about the dedicated iProducts Marketplace for iOS-specific accessories. It has become largely irrelevant — nearly every booth was only showing off their products working with iPhones or iPads. The CES show floor has essentially become, or at least it felt like for me observationally, a giant Apple ecosystem showcase. So the question is why and what does that mean going forward.

The why seems relatively simple. Everyone showing off their connected products — connected clothing, shirts, socks, apparel with sensors, connected health, connected home, connected sports, robots, drones, smart watches, wearables, connected cars, connected light bulbs, pretty much everything connected — was demoing using apps on the iPhone and iPad. Now, this is not to say the only thing you can use them with is an iPhone. Of course many offer an Android app. But this does signal to us who is their target buyer. Because Apple has a near monopoly on the most profitable global consumer base, these companies know that, in all likelihood, it is iOS customers who are the most likely to buy their products.

This is interesting and, as I’ve pointed out many times, it feels like there is a real divide clearly happening between the Android ecosystem and the iOS ecosystem. Apple has customers who can and will spend money around the ecosystem and Android increasingly does not, especially as their installed base increases in the extreme low end of the smart phone market.

There are companies at CES supporting Android but support for the platform was publicly, and tellingly, de-emphasized. Interestingly, many companies were making products you plugged your phone into to make it “smart”. I saw several bicycles with iPhone connectors, iPhone-connecting treadmills, health accessories like a glucose monitor, and many other products. Some required the device to be plugged in but weren’t using Bluetooth and all were iPhone only. The key point here is the buying power of Apple’s customer base is genuinely impacting the decisions and strategies of many companies making connected products.

The other fascinating point is Apple’s continued gain of iOS share in developed markets. It is no secret when it comes to the market strategies of nearly all tech companies the West is their primary focus. Recent data from Kantar highlights more evidence for my prediction that iOS will be the majority smartphone platform in the US. With iOS getting stronger in developed countries and many of these connected products companies targeting iOS users, it may very well have a larger impact on the Android platform in these markets than many assume.

Wrist Based Advertising

There was an interesting announcement today that many will mistake as “advertising” on the upcoming Apple Watch. TapSense announced a hyper-local/contextual platform that delivers promotions to the Apple Watch. Some see this as something people will hate or not appreciate.

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However, if done right, this could be extremely valuable and strategic in driving the smartwatch into the mass market.

Deals not Advertising
Screen Shot 2015-01-05 at 9.32.45 AMConsumer don’t want ads — they want deals. That is, in essence, what TapSense is offering. When you observe what drives behavior for many consumers today, you’d see it has everything to do with deals. Generally, deals come via email or even postal mail. Retailers have know for decades consumers who opt-in to their programs respond extremely well when offered a deal. This example of a Starbucks deal from TapSense shows the potential.

Where mail and email fail is they are neither timely or contextual. If I am walking by a Starbucks, wouldn’t it be nice to get a deal from them? Or better yet, what if my smartwatch was smart enough to know I was walking, or going to be walking or driving by a Starbucks (since it knows my route thanks to the Maps app), looks at my calendar and sees I have a 30 minute window before my next meeting, it’s 20 degrees outside and I may appreciate a warm beverage? A lot of very smart things have to take place for this to happen but you can see how this is a scenario which is possible and inevitable. One example of many I’ve thought about that make this interesting.

When mobile — meaning not stationary and looking at my phone, tablet, or computer — I’m not staring at my smartphone screen at all times. It is likely in my pocket or bag. The smartwatch is the piece of smart glass I have visible practically at all times. Because of that, while mobile, it is this display which makes the most sense to receive contextual and hyper-local deals.

Lastly, an observation about marketing/advertising. Magazines have always been one of the best examples of great marketing. This has everything to do with magazines generally being fairly niche and interest specific. Personally, I have three special interest magazines I subscribe to — Food, tennis, and farming. I find the advertisements in these magazines extremely useful because I am very interested in these subjects. Therefore, I’m being marketed to because I’m a captive/willing audience for products or services related to my interests. This is the element that has been very hard to replicate in the digital world. Facebook, Google, and others are too broad of platforms and do a terrible job showing me only ads/marketing related to my interests and passions.

I believe the smartwatch will have some role to play here — deal offering rather than generic advertising. Deals personalized to my interests that can impact my shopping/purchasing decisions have great potential. The ability to receive these types of push offerings becomes even more interesting the more personalized the product and the more the platform, in this case iOS, knows (or I allow it) to know about me. And that is key – if Apple allows this functionality, it will undoubtedly be entirely opt-in by the user.

These types of push offers are one of the areas that make me think there is more to this smartwatch category than people realize.

I’ll have more of my thoughts in a report on the smartwatch opportunity later this week.

Why CES Remains Relevant

As the run up to this week’s CES takes place, I have read a number of comments from pundits on how much they hate CES or how irrelevant CES is in general. While I understand why many don’t like attending CES, the truth is that it remains one of the most relevant industry shows from a business perspective.

What many pundits and media often forget is CES is not really designed for them. The real audience for this show is retail buyers. While the public showings of products that may or may not be released is quite a spectacle, it is the parts of the show that happen behind closed doors which makes CES the place to do business.

Retail executives and the buyers for major retail outlets all get to see much more robust and unreleased product road maps for 2015. We have a saying amongst analysts: “They coolest things at the show are not found on the show floor”. This speaks to the business nature of CES and why it remains relevant. Whether vendors, media, or buyers enjoy the show is one thing. But the bottom line is business gets done at CES and, as long as that is the case, it will remain relevant.

For me, CES sets the trends. The trick here is to know what you are looking for. I attempt to find the diamond in the rough. The company or two who is doing something truly unique that could signal a major trend coming. For the past few years, it has been low end tablets I’ve watched closely at the show. Recently, new innovations around connected products have taken shape. CES last year is where I found the examples of the connected bed, tennis racket, basketball, and more. It was then I started articulating how IoT will manifest itself when connectivity becomes embedded into more every day objects. Similarly, CES has a somewhat hidden corner of only Chinese Shenzhen manufacturers. Here I see and talk to the innovative and potentially disruptive members of the China tech ecosystem. Getting to see and chat with those who are on the ground in Shenzhen and hearing from them what trends are driving the Chinese manufacturing landscape gives us great insight into hardware products that are right around the corner.

It is true CES generates a great deal of buzz around a host of products which may never see the light of day. The trick is being able to cut through all the noise and find the products that can truly impact the landscape. CES is still the show to find these things. Tech vendors from all over the world come to CES and scratch and claw to try and get the attention of a buyer who may order their products en masse.

Predict all you like that CES is going to die but I don’t see it. More importantly, neither do those who come every year and place millions of dollars worth of orders for products to carry in their stores.

Misunderstanding Apple

A number of prominent personalities on Twitter yesterday retweeted some “expert” opinions of the iPhone from 2007. I particularly liked this paragraph:

The big competitors in the mobile-phone industry such as Nokia Oyj and Motorola Inc. won’t be whispering nervously into their clamshells over a new threat to their business.

The iPhone is nothing more than a luxury bauble that will appeal to a few gadget freaks. In terms of its impact on the industry, the iPhone is less relevant.

This image of a Street Smart article also contained a notably negative view on Apple’s chances with the iPhone as well.

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This view of Apple from many “smart” people seems rooted in what I call the common misunderstanding of Apple. Most investors, either VCs or Wall St., like to put nice, clean definitions they can understand on the companies they cover. They like to use a template for other similar companies. Often, trying to fit Apple into their templates is like trying to fit the proverbial square peg in a round hole. And when their predictions about Apple or their products don’t pan out, they have little explanation. This type of investor has templates for hardware companies, software companies, and services companies. They more often than not use a hardware template model to analyze Apple because Apple generates nearly all of its revenue from hardware products. However, that would not be possible if they did not also own their software and services. A tricky combination for most.

But I’ve always found it helpful to think to what a company actually sells. And while I’m generalizing this viewpoint, I’ve always felt Apple is an experience company and, at the center, that is what they sell. It is the experience of their products consumers gravitate towards. It starts with the design and flows to the simplicity and delight that comes from the software. Tight services integration will be the next step Apple brings their famous experience to.

Some define what I call “the Apple experience” as the Apple ecosystem. They are certainly related but I believe the Apple ecosystem was born out of the Apple experience first and foremost. Ecosystems and experiences are harder to understand and companies who sell an “experience” of any kind are bound to confound many.

I was thinking about this point when I was giving a talk about Sleep Number at an executive summit for a Fortune 500 company. I explained how Sleep Number is using technology to better the sleep experience. I told them that ultimately, Sleep Number is not selling a mattress or a bed, they are selling better sleep. That is essentially their mission and technology is now an enabler to them selling better sleep.

While we can debate the ecosystem, or even the lifestyle elements of Apple the company, it is ultimately the experiential part that will continue to cause misunderstanding. Experience is nuanced and it may mean something different to many. For some, Apple is a way of life, for others it is the technological product that causes the least frustration. For many others, it simply gets out of the way and empowers them to compute in ways other products make too complicated.

When companies or products don’t fit the standard templates of experts, they can make bold claims that end up hurting their credibility, especially with those who do know better and who are usually the ones the experts hope to have credibility with. Lots of folks love to write off Apple and history proves writing them off is a bad idea. On this point, a quote from Chris Dixon seems apt:

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No company is perfect, and no company can be held to the standard of making perfect products. But as Colin points out, Apple does a good job making products people want and love. Failing to recognize this point continues to be a central error.

The common misunderstanding of Apple will continue as they advance into new categories. A general misunderstanding of the goal and definition of what success looks like for the Apple Watch will be THE misunderstanding of Apple in 2015.

While it was hard to really understand the true impact of the iPhone at the time, for a contrast to the doom and gloom of the Bloomberg article above, take a look back at Tim Bajarin’s PC Magazine column from July 2007 on his first impressions of the iPhone after the launch. I particularly liked this statement at the end of the article:

“The iPhone will become the gold standard in smartphones, and likely give Apple at least a two-year edge over the competition.”

Tech Devices Owned in 2014

>As we enter 2015, I wanted to give our readers a look at some of my survey data highlighting the percentage of ownership by specific tech products as of the end of Q4 2014 from our research panel. Since we do research panels quarterly on a range of topics, I’m setting the stage so we can look back throughout 2015 and beyond to see how the data changes with time.

First, a note on methodology. While respondents to the survey could take the survey from their smartphone, tablet, and even featurephone, the vast majority of respondents took the survey from their desktop or notebook PC. This panel went out to over over 40,000 people with larger volumes of respondents in Western countries. I have data for over 30 countries but I’m focusing on certain markets for this post. For each market, I’ll share the chart and make a few observations. But overall they are self explanatory.

Question: What devices do you personally own?
*Smart TV was defined as a TV that could access the Internet
*Smart Watch was defined by using examples like Pebble, Samsung Galaxy Gear, Sony Smartwatch
*Smart wristband was defined by using examples like Nike Fuelband, Fitbit, Jawbone UP
*Tablet was defined by using examples like Apple iPad, Samsung Galaxy Tab
*Smartphone was defined by a phone with access to an app store, browser, maps, email, etc.

US/UK
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This panel was to over 27,000 respondents in the US and UK. In both these markets the PC, smartphone, and tablet percentages closely align with actual penetration of each device. I have a high degree of confidence the other categories represent the general penetration as well of the US/UK market based on retail and sales data I have.

I expect moderate growth of both the smartwatch and the smart fitness band products by this time next year in the US and UK market. The PC will likely remain flat and may actually decline and I do expect the tablet percentage to increase.

China
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China requires some context for this data. This panel had 4,700 respondents. The percentages do not line up with the penetration of core computing devices. So we have to take that into account. PC penetration is about 35% in China and smartphone penetration is nearing 50%. What we take away from this panel is the mix of device ownership by the online population, a group that can generally afford a range of gadgets and a group where PC penetration is quite high. This is why, within this group, the smartwatch percentage is quite high. In fact, of every country surveyed, China had the second highest number of respondents who said they personally owned a smartwatch.

While an important segment to understand, this data represents a picture of tech device ownership of the top 30-35% of the China market. This picture would look different if we just researched the lower tiers where a smartphone is likely the only smart tech device they own.

India

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The India panel had 3,100 respondents. Much of the same context of the China market applies to the India market. Only here, we are looking at the top 20% of the market. PC penetration in India is around 10% and smartphone penetration about 9%. Smartphone penetration is growing rapidly in India and, in Q4 of 2015, smartphone penetration will likely double and be near 20% or higher. It was interesting among these respondents that smartwatch ownership came back so high. Granted, we are polling the higher tiers of the market so their disposable income and ability to afford multiple tech products is higher than the overall Indian market.

Japan
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I’m including Japan because I’ve always found it a particularly interesting market. This panel covered just over 2,000 respondents but again has similar penetration rates of PCs, smartphones, and tablets. The tablet never took off in Japan the way it has in other markets, and the smartphone amazingly didn’t take off as fast as I thought either. This in the context of how fast Japan has been in the adoption of other leading tech categories. I’m very curious to see how the Apple Watch does in Japan. We know the Japanese have an affinity for Apple products and tech/gadgetry in general. While Japan is not on any lists I have seen as a big market for the Apple Watch, I think it may be a sleeper market.

I gather data points on these markets and many more and use them to round out my analysis on each region. But, as a starting point for our readers, I wanted to start with some of the specific device ownership data and keep updating models throughout 2015 as key observations come to light. Obviously, the smartwatch is a key category I’m observing and will continue get data on from each key region.

Does Google Care About Android Tablets? Should They?

One of the nice features of Android is the operating system has built-in functions that allow smartphone apps to scale well to many different screen sizes. As Google can’t control the screen sizes their Android hardware partners create, they needed to make apps extensible to many different sizes. With tablets, however, this has been more of a curse than a blessing.

Android developers have not felt the need to create new versions of their applications for the larger screen tablet form factor. This has been a fundamental failing of the Android tablet ecosystem. Apple’s developers have been finding success creating new/different version of their apps optimized for smaller screen iPhones and bigger screen iPads. The same has not translated to the Android developer ecosystem yet. The real question is, why not?

Is it Google’s Business Model?

One has to ask if Google is to blame for this. One thing that always sticks in my mind about Google is their business model. Google makes the bulk of their revenue from search queries that happen through a web browser on a smartphone, tablet, or PC. What are people doing when they are in an app — playing a game, watching a video, messaging friends, etc? I can tell you what they aren’t doing — searching the web. Native software via applications is, to a degree, counter to Google’s business model. More to the point, the vast majority of apps in Google’s app store are free. Which means revenue from Google’s app store, while healthy, is still nowhere near their core business in search. In the back of my mind, I wonder if Google is not pushing tablet apps because of the fear it impacts their search revenue. The point gets even more interesting when we observe how tablets are used in the same way as PCs in terms of web browsing. Google’s desktop search is still a healthy percentage of their revenue and, if tablets took away from that, it would make an impact.

Ultimately, developers are in the driver’s seat. They have to know they can make money on their apps and that optimizing their apps for the tablet form factor is a worthwhile investment. For whatever the reason, it appears this is not an investment developers feel is worth making. Yet this point is fascinating given there are more Android tablets in the world than iPads. However, developers are succeeding more with tablet optimized apps for iPad than they are with Android. If Google is serious about the tablet platform with regard to apps, then this is the first issue they need to solve.

Consumer vs. Enterprise

While the absence of dedicated tablet apps is an issue in the consumer marketplace, it is less of an issue in the commercial sector because, for the most part, enterprises are deploying their own custom applications. In this case, the enterprise is the developer and can create apps optimized for whatever screen size they choose. However, even with that reality, the iPad is still king in the enterprise. Samsung is hoping to add more software optimization to give their tablet products more appeal but, at the end of the day, the dearth in optimized applications will play a role in how consumers think about one tablet over another.

The Tablet is not a Smartphone

The key point about tablets and their upside is they are not smartphones. In my opinion, to be limited to running smartphone applications on your tablet is the same as being limited to running smartphone applications on your PC. One would not tolerate smartphone apps on their PC and one should not tolerate smartphone apps on their tablet. The tablet platform is loaded with potential and the large screen should be taken advantage of. Hopefully, Google recognizes they have an issue on their hands. If they want Android to become the tablet computing platform it can be then they must bring the Android ecosystem on board and envision a bigger picture for Android tablets and its role in personal computing.

This is a fascinating dynamic in the Google tablet story. There is mounting evidence of the severe bifurcation of the tablet market. Apple owns the high end with the iPad and many no-name vendors seem to be selling the majority share in the low end. But these low cost tablets are not being used in ways that benefit Google — rather, they are functioning as disposable pieces of glass and are taking shape as more of a utility than a computing device. Ultimately, I am not sure Google cares and, at this point, any attempt to try to create a robust development environment for dedicated tablet apps would be a fruitless endeavor.

Predictions From My Data Models for 2015

Rather than do a standard “tech predictions for 2015”, I thought it would be interesting to share some of my data models and make predictions based on them. While it is true historical performance does not necessarily predict the future, what I will do is add context to the model to make sense of the trend line as needed.

#1: Smartphone vendors will ship more units in a single quarter than PCs ever shipped in a single year

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Several interesting observations from this chart. First, it is likely, in Q4 of 2014 and for the first time ever, smartphones will ship more to the channel in a single quarter than the PC industry in the totality of the year. This is the first milestone in the post PC era I was anticipating and it almost certainly has happened. The next is when, in a single quarter, smartphones ship more units to the channel than the best year of PC shipments on record. Depending on whose accounting you like (IDC, Gartner, etc.), the number is in the ~360m unit range for the best year of PC shipments. At the pace we are going, smartphones are likely to ship more than 360m units in Q3 or Q4 of 2015.

#2: India will pass the US as the second largest market for smartphones

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The US smartphone market remains fairly flat with over 70% penetration. India is growing at a much faster pace than the US. With the entrance of now fairly decent quality $30 smartphones in the India market, my model predicts India will be the second largest market by quarterly smartphone shipments in the second half of 2015. Something to watch for (although it may not happen in 2015) is a local Indian smartphone vendor to make it to the top 5 vendors by quarterly shipments.

#3: The PC remains flat to slightly negative

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I’m not sure this is controversial but I don’t see anything on the horizon to make any major changes to the PC’s trend line. I went ahead and included the next few quarters to show the year moving forward very much as in 2014. I expect enterprise to continue to refresh. I don’t believe Windows 10 makes any real impact on the category in 2015 for consumer or enterprise. I believe the PC market is a mature category and now purely a replacement market. Which means all new devices are simply selling primarily to existing customers. I don’t anticipate Chromebooks to alter this line either, as 10m units is the forecast for 2015 and that is likely slightly aggressive in my opinion. If you are interested in more depth on my outlook for the PC category in 2015 you are welcome to download my report.

#4: Tablets return to gaining steam

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2013 was the worst year on record for the PC and, while it has a shorter history, 2014 was pretty bad for the tablet category. It remains in negative growth and will end with YoY quarterly growth averages of about -9.5%. However, I feel a dynamic shift is taking place, spurred on by the low cost tablet era. Retailers are catching on to how these low cost tablets (sub $100 and soon to be sub $50) can be used as promotions to drive in-store traffic. A theme I intend to develop in 2015 is the shift in the tablet from “computer” to “utility.” There will certainly be a segment of the tablet market that is a class of computer, a segment in which the iPad dominates, but the tablet market is not just these devices. The category includes tablets that get mounted on walls at retail, set in garage workshops as portable TVs, used by limo drivers as a sign with passengers’ names, set next to the bed as an alarm clock and streaming radio. At the extremely low price points tablets are moving to, they can be used for anything and everything and even dedicated to specific tasks. Hence, the utilitarian nature of them. As I develop this theme, I will be making clear distinctions between the iPad market and the low end tablet market. But as we discussed on this holiday retail podcast, there isn’t much going on in the space between the two categories.

#5 Apple will be the number one smartphone vendor in a single quarter

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This is my moonshot prediction, even though I could see all the ways it could happen. No doubt Apple has just had a stellar holiday quarter. I predicted a few months ago Apple and Samsung’s holiday quarter shipments would be quite close. All supply chain and retail/channel checks continue to give me confidence this will be the case. It is entirely conceivable that, by sell through data, Apple could be the number one smartphone vendor this quarter but validating that would be near impossible. Looking forward to 2015 and Apple bumping Samsung as the top vendor has everything to do with Samsung’s trend line going steeply downward, more so than with Apple trending steeply upward. Apple is likely to maintain steady growth into 2015, continuing year over year quarterly growth. I don’t anticipate this to happen in any other quarter than Q4 of 2015, unless something drastic happens to Samsung’s device sales which I don’t anticipate. This quarter is historically Apple’s strongest. If Apple keeps playing their cards right, I could see how every holiday quarter could be Apple’s to own.

These are five predictions based on what a few of my data models suggest. My models are not static but dynamic and are updated as I get new information on a week to week or month to month basis. While they are subject to change, the foundations of the models are sound and help give insight into what the next few quarters, and sometimes the next year, may hold. I’m looking forward to keeping tabs on these projections and see how they play out.

Friendly reminder, there are only a few days left to sign up for Tech.pinions Insider before we raise the prices on January 1st. All my data is dispensed much more liberally with our subscribers as well and these models will be updated frequently and shared.

My Thesis on the Mobile Internet

I believe a profound computing shift is taking place — one that is hard to see in Western countries. Largely because these countries have what I call a “PC bias”. Most internet users in the West, especially those over a certain age, grew up with a PC. The first experience they had with the internet was the desktop web through a browser. This is why, in all the usage survey data I have on the developed market, we still see extremely high use rates of the desktop web, in particular around activities like commerce.

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* Question: What device have you used to make a purchase in the last 30 days? Source: GlobalWebIndex US panel.

I have many more charts than this showing the PC bias of the west for many tasks where in mobile first countries their primary computer is a smartphone. The PC, with its large screen, offers many advantages. But I believe the world is moving away from PC literate consumers and the balance of power in usage and literacy is shifting to smartphones.

Breaking Through the PC Bias

At a fundamental level, the internet remains at the center of the interaction model for our smart devices. What we are seeing is a divergence in internet interaction models in countries and users with a PC bias vs. those with a mobile bias. The internet is simply used differently. The interaction with the internet on a PC is very different than the interaction on mobile. The desktop browser has benefits and limitations. Similarly, the primary interaction with the web on mobile — apps — also has benefits and limitations. But neither is the lesser of ways to interact with the internet. Each is the best in the context of the device. The major difference between the two is the internet on PCs is largely physically fixed whereas the mobile internet is not. It is at this point I believe all the advantages of the future interaction models with the internet skew toward mobile.

I was reading a book with many insights into China called “The End of Copycat China“. I came across this quote as the author, Shaun Rein, was interviewing David Wei, the former CEO of Alibaba. When explaining his investment strategy for internet companies, Wei explained how he segmented Chinese consumers. He shared how he focuses on companies whose products and solutions are targeting those born after 1985. Here is his reasoning:

“In my experience, people who were born before 1980 are not the real internet population of China…The real internet population is people born after 1985. January 2000 was the beginning of China’s internet.”

He goes on to explain:

“People born after 1985 grew up with the internet. They live with it. They use it for shopping, entertainment…. as for people who were born before 1985, it is hard to convince them to move away from ingrained habits..”

It is that last point that stands out to me and the one I think is an essential observation of the PC bias of the West. Wei was talking specifically about commerce, explaining how those born before 1985 still shop in traditional ways at brick and mortar stores. Young people who grew up, not just with the internet but the mobile internet, after that date now shop largely online and largely through mobile devices. The future of the mobile internet is taking place in China and it has everything to do with 100’s of millions of young consumers growing up with the mobile internet rather than the desktop internet.

This shift has yet to happen in Western and developed markets where a PC bias still exists — but it will. Most in the West still have ingrained habits that lead them to prefer the PC for many tasks. China’s internet began on the PC but went mobile extremely quickly. Sites like Alibaba, Tencent, Weibo, and many others prioritized mobile efforts over desktop ones largely because of the rapid rise and domination of the mobile internet over the desktop internet. Now, as we look at China, nearly all hardware, software, and services innovation is focused on mobile first and often mobile only. We are raising a similar “born mobile” generation in the West. However, this demographic of younger people has not yet reached a position of power or influence enough to cause the shift to happen yet as it has in China.

China succeeded initially by copying many concepts from the West. As China was getting started on the internet, the US was the teacher and Chinese technology companies were the students. I fully expect more and more western companies will begin to learn from China’s mobile internet users, thus creating a role reversal where Chinese mobile internet companies are the teachers and their Western counterparts are the students. ((I’m not saying what works in the West is an exact copy of what works in China, but that the West will increasingly use concepts and business models that are working in mobile first countries for when the balance of power shifts to the “born mobile” generation.))

A good Western example of something similar is Facebook. Facebook started and grew on the desktop web. But today, nearly all their focus and innovation is around mobile. This has to do, in part, with their global presence but also as they recognized a shift, even with Western consumers, from desktop Facebook to mobile Facebook. Facebook is increasingly adding things, like Messenger and stickers, that are heavily influenced by things that are working in Asia. I expect this to continue and for the West to begin to bring similar business models.

Follow the Software and the Money

The biggest stand out point to me, which makes clear this shift from the PC to mobile, is to follow the software. Nearly all interesting and innovative things we see in every major market from a software, as well as services, standpoint is on mobile. This is the telltale sign of where we are going. In the PCs heyday, we saw tremendous innovation in software. Now, nearly all PC innovation has moved to the cloud and very little local software innovation exists. This is true even in the enterprise. There is not a new enterprise-focused software or services startup today centering on or even emphasizing the desktop over smartphones and tablets. Any credible enterprise software platform or service must include mobile devices as well.

The same is true from a monetary standpoint. Nearly all the money to be made in software development is in mobile. While there are some opportunities on the PC, what software work we see is designed to monetize cloud services, not necessarily the software itself. Right now in mobile there is money to be made in software. Eventually services will become a bigger deal in mobile as well. But for now, the money is in mobile and most of the focus of software innovation is there too.

The Static Desktop Web

This does not mean the internet of the desktop is dead. My belief is it is at a static endpoint. We will see little to no innovation or advancement around it. As the shift to mobile continues, we will see internet time on the PC drop in Western markets. Consumers will still use the PC for work or other tasks that require a big screen. But at a fundamental level even those tasks will be challenged as the software evolves to meet the medium of mobile. It is shortsighted to make the assumption that certain things can ONLY BE DONE on a PC with a big screen and a keyboard. Those same things can and will be done on mobile but they will be done differently as the task evolves to meet the medium. Many argue you can’t run your business on your smartphone but plenty run businesses off WeChat in China or off Instagram in India. When all you have is a mobile device, software developers will evolve the tools to meet the medium. It is ignorant to think those types of innovations will never make it to the West. ((Emphasizing, that I’m not saying the PC is dead but simply that the computer in the shape of a notebook or desktop is finding its niche as a business tool, or a specialty device in the home.))

The trend of 2-in-1 and portable desktop all-in-one PCs all but acknowledges this point. Those devices are evolving and hope to take part in the momentum of the mobile internet by making the notebook and desktop less of a fixed use device. These devices that have evolved the PC into areas it has not gone before may help evolve their role in consumer’s homes but it is my conviction that most all innovation will be heading toward small, pocketable personal computers.

I know many with a PC bias will disagree with me, but this is is my overall thesis. And all one has to do is observe those who grew up with smart pieces of glass connected to the internet that fit in their pockets to see it.

——————————————————————————————————–

For a deeper read into where I think we are headed, you can download my report on the Next Phase of Mobile. Here is the outline of the report:

– Low-Cost Hardware
– Google’s Android Conundrum
– Localization vs. Globalization
– Business Model Innovation
– The Brains Behind the Next Wave
– Embedded Security
– Consumer Packaged Technology
– Summary: The World is Going Mobile

Download the Next Phase of Mobile

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The Evolution of Search

One of the data services I subscribe to highlighted a specific trend their survey research uncovered. They called this trend “the slow death of search”. To illustrate, they graphed the following data.

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While the Y-axis is capped at 95% rather than 100%, and the bottom at 85% but the point remains. Search is happening less on DT/NBs. Given the global trend away from PCs to mobile devices, I assume that this time next year that chart will show the bottom to keep trending downward. The question was regarding websites visited on a PC. The specific question listed a range of websites — one of them was a search engine. Thus, the resulting graphed data is how many respondents (30,000+ globally) answered that they visit a search engine at least once per month from a PC/laptop. The question asked dated back over many years so the graph shows the answer’s evolution over time. What we see is a clear trend away from desktop search as a frequent monthly task.

Clearly, search is still important. No one will say they never search the web but the interaction model for search has changed and is still changing. The idea of pulling up Google and doing a search is the fundamental engagement model in question. The graphed data likely highlights a shift from desktop/laptop search to devices like mobile and tablets. I have access to similar data sets that highlight a similar question regarding mobile search and more than 65% of respondents said they perform a search of some kind from their mobile device every week. This point shouldn’t be surprising.

Ultimately, when we understand the constructs of search, it is helpful to view it in the lens of decision making. Helping me make a decision looked like a blank text box in the past but in the future, and thanks to mobile devices enabling device and contextual awareness and intelligence, the paradigm is poised to change.

What sits at the crux of this conversation comes back to a shift in interaction models. This could be something like Google Now, or elements of Siri, which create more predictive analytics to bring things to my attention that are relevant before I have to search for them. Smarter beacons, integrated with smarter local hardware, could be another dynamic that helps shift the search interaction model. However it manifests itself, it is clear the search interaction model is changing and evolving and will likely look very different than a blank text box in five years.

As we look out at who is in a good position to capitalize on these it is those both at the platform level, but also those who are gaining data to build a comprehensive anticipation engine. Ultimately I feel it is companies like Apple, Microsoft, Google, Baidu, Tencent, even perhaps Amazon and Yahoo.

A Deeper Dive on Android and iPhone in China

I’ve received a number of questions from readers about why I don’t talk as much about the US market for smartphones. It’s primarily because the US doesn’t offer any new interesting questions or problems. It’s about a 50/50 split between Android and iOS and Apple controls over 60% (and growing) of the premium smartphone space. iOS is on track to gain share into Android’s each quarter of 2014 and it will likely be more of the same in the US in 2015. However, other markets like India and China pose much more interesting questions and problems to be solved. I’ll do a few deep dives on the US market with some of our updated data sets, but what we find will likely not contain major surprises. Now, onto the iPhone and China.

First, Android Context

A fascinating data point came from Baidu yesterday. Baidu, the largest browser in use with an over 80% share in China, reported to Tech In Asia that they count 386 million active, individual Android customers. This is Android AOSP, not Google-approved Android, and a few things are unclear about the numbers. First, it is uncertain if these are smartphone-only owners. The report simply states active Android devices. Given China runs both AOSP on smartphones and tablets sold there, either device connecting to the Internet and accessing Baidu’s search engine would be counted. Through my supply chain checks, I learned that, on average, about 20m low cost Android tablets are sold in China each year. As I have discussed before, most of those are used simply as portable media players and large percentages likely do not connect to the internet. Which means, while some of the 386m active Android devices are tablets, the majority are smartphones. ((Even if the report said they were all smartphones, I would still believe a small percentage were tablets since my research there found that even 7-inch tablets in China use smartphone components; therefore they show up in analytics as smartphones.))

Baidu similarly reported last year a total of 270m active Android users. So there is impressive growth for AOSP. For some time now, I have been building a model of AOSP’s growth in China and was pleased to see Baidu’s data for Q3 2014 matched very closely to my own model.

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You’ll note growth is slowing, as is the China smartphone market in general. There is certainly more growth to be had as more of rural China gets online, but these will mostly be with very low cost smartphones. Where things start to get interesting is when we look at the nearly 400m Android AOSP customers in light of the total smartphone user base. A number of Chinese research firms like iResearch China and analytics engines like Baidu/Umeng came out and said over 550m smartphones were in use in China by the end of June of 2014. My model would estimate that number to be around 575m as of today. Now we turn to the iPhone.

All local app analytics sources I have access to in China, and major network statistics I see, show Android and iOS as the two dominant smartphone platforms. So, if ~386m of them are on Android, then the iPhone fills most of the gap between 386m and ~575m. Based on my model, I had estimated iPhones were likely in the 130-150m range and I have believed for some time there were more iPhones in use in China than the US. It seems Baidu’s data is confirming much of what I thought my model was suggesting was true.

However, the bulk of that iPhone active installed base is on much later generation hardware sold through the grey market. This chart is the most updated data — now containing a a month and a half of iPhone 6/6 Plus availability. Keep in mind iPhone 6s starting showing up in September in this data because of grey market imports.

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As Apple offers more models for sale in China, we are seeing the continued rise of primary market sales of iPhones. There remains a large installed base of later generation phones but, as you can see, it is actually more of a mix than domination by a few models. This data comes from Baidu’s app distribution network so it does not cover the entire market but it does cover over 100m devices. I can’t imagine the picture is much different on other app distribution platforms.

What I’m left thinking about is what will happen with the large percentage of current iPhone owners who are using later generation iPhones they bought from the secondary market for prices around $300-$400. It is hard to believe every one of those owners can afford a $700 phone but will they stay in the Apple camp and get another later generation phone like the 5s? Or will they stay in their price range and go with Xiaomi? These will be interesting questions for most of 2015. However, once the current iPhone 6/6 Plus gets discounted in China when the iPhone 7 comes out, I think Apple’s offering in China will be very competitive.

Lastly, it is worth pointing out the China smartphone market is unlike anything out there at the moment. Much of it has to do with WeChat. WeChat is undeniably functioning as an alternate or “para” operating system that runs on iOS and Android. As I look at what lock-in Android AOSP, or Xiaomi’s Android skin, or Apple’s ecosystem has, I observe the true lock-in in China is WeChat. Apple has the benefit of playing as a luxury brand; status is a huge part of their lock-in in China. But as this financial analyst correctly points out, we are hoping to see Apple continue to create more services/cloud lock-in rather than just status. Services like UnionPay integration will help with this but Apple’s services stickiness in China is a story to watch.

With Chinese consumers’ loyalty to WeChat, it means Android vendors could come and go. Xiaomi is doing a decent job building some loyalty and all on-the-ground research I get from China indicates a growing pride of Chinese consumers for local Chinese tech brands. This will continue to pose challenges to Samsung. We are watching a number of Chinese brands closely, but Vivo (charted below) is one to keep an eye on as they are positioning a number of their products to the high end.

There are many story lines to watch and analyze throughout 2015 with regard to China and I’ll keep updating my narratives on all of them.

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Tech.pinions in 2015

There aren’t many sites like ours on the web. When I started Tech.pinions a little over three years ago, I wanted to bring something different to the table. It is not every day someone in the field of Industry Analysis starts a public website to share in-depth commentary and analysis on a range of industry subject matter. I was frustrated with the general lack of critical thinking in the public domain of tech related subjects and I decided we could offer something few can. More importantly, I wanted to put together a team to bring fresh insights and perspectives to the technology discussion rather than go it alone. I’m quite proud of the team we have built — our reputation in the industry and credibility speaks for itself. Tech.pinions has grown and flourished and already surpassed my expectations. We are linked to regularly by major technology outlets and can see our content positively impact the broader industry discussion. But I think we can go even farther and that is where our focus will be in 2015.

Many of our regular readers know the business model we have chosen is to focus on our readers and not chase page views, which would be necessary if we were to focus on selling ads rather than subscriptions. We want to serve the reader first and foremost with our commentary and analysis. Having helped run one of the largest tech blogs on the web, I saw firsthand what catering to advertisers looks like and I felt there had to be a better way. This is where our Insider membership comes in. Adding more value to our subscribers will be a major focus for our team in 2015. Up to this point, I have been driving most of the content for our subscribers but now all Tech.pinions team members are contributing on a weekly basis. We have a great deal of original content lined up for 2015 and I’m quite excited about it.

To date, our model has been to charge a simple $5 per month or $50 per year subscription rate. However, we continually get feedback to charge more given the quality of the analysis — which is on par with much more expensive subscriptions for other online publications. We feel by increasing the content we publish to our subscribers by more than 2x, with roughly five to eight insider articles each week, and given the credibility of the team we have, increasing the price is warranted. So, after January 1st, all new subscriptions will be $10 per month or $100 per year. All existing subscribers will continue at their existing rate through 2015. Besides increasing the amount of content, we will also be looking to have regional events where our team can give updated presentations on the industry. Many of those will be free, or at least heavily discounted for our subscribers. For the data lovers, I’ll be doing more video analysis and podcasts, walking through some of my firm’s data models visually along with commentary as I did here. We will also doing regular “analyst roundtable” video panels where our analysts can talk trends and discuss in a more formal way than on our podcast.

The feedback we continue to get on the quality of our subscription encourages and assures me we are on the right track. While the name of our site is Tech.pinions, our opinions are deeply informed by the significant amount of research we do in our role and day job as industry analysts. I am, in fact, so confident in our content that, for the next two weeks, everyone can try our Insider program for free (details below). Our archive is so deep and full of rich content that you could spend hours digging through it.

We know not everyone can or will subscribe, which is why our daily columns remain free. And I assure you the quality of the daily free article will remain high. But if being more informed on all the significant matters of this industry than what is publicly available is of interest to you, please consider giving our Insider program a try.

To try our Insider program click this link and select the option for a free trial. You can then register and you will have unrestricted access for two weeks. No credit card details are required. Should you wish to subscribe before Jan 1st, you will be locked into the lower rate for 2015.

We appreciate all of our readership and support as we continue to create something unique. 2015 is going to be a fascinating year with many new questions, debates, categories, and more to shape the landscape for the global technology industry. From all of us here at Tech.pinions, we are looking forward to serving you in 2015.

The Danger of the $200 PC

There have been rumors of the return to netbook pricing in the PC market. We believe this could have an irreversible impact on overall PC prices. When we study the PC market, we see a high degree of health in the higher end segments of the market. Companies like Apple and other vendors who have legitimate premium offerings have secured their slice of the PC pie with a sustainable hardware strategy. Our concern on the Windows front is, if the price of Windows PCs drop significantly, those price points will become the “new normals” and eliminate any real chance of premium offerings by other Windows PC vendors. Currently, the ASP of notebooks is approximately $700 and desktops approximately $550. But those high ASPs are because of Apple’s Macs. The ASP of a strictly Windows PC is about $430 which is about as low as a full featured Windows PC has ever been (excluding netbooks). At that price, it is already difficult for many Windows OEMs to make much money on hardware. They are all currently looking for more software, services, and accessories revenue as a point of emphasis.

Competing with Apple is hard enough for vendors in the Windows ecosystem. A significant drop of ASP will likely eliminate any chance of premium offerings by them. There will still be an enthusiast Windows community but that community is already quite small. The build-it-yourself PC community and the hard core PC gaming category, while extremely healthy, are still too small to sustain the ASPs of the entire Windows PC market. So as of right now, this is a look forward forecast of the ASPs of certain categories.

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However, given this article I posted a few days ago on low cost tablets, I’m already due to update my outlook for tablet ASPs in 2015. Should the notebook and desktop space truly become a race to the bottom, then I will have to adjust the 2015 ASPs of notebooks and possibly desktops to trend more into the negative than I think is healthy for the category.

Part of the drive to bring down the ASPs of PCs is to kick start the broader upgrade cycle in consumer markets and perhaps compete more with tablets in the entry level PC space (first time PC/tablet buyers). There is some sound logic to this. However, with “good enough” computing established in these markets, the concern would be that nearly the whole market would gravitate to these lower cost PCs and cause a sweeping shift in price points to the lower end where margins will be even further squeezed for the OEMs. Overall, our concern is the destruction of the “value and premium” segments of the market with “good enough” options being offered in the <$400 PC market.

Using my viewpoint of what happens with low cost tablets in consumer markets, I feel it would be smarter if vendors left the bottom to those tablets and focused on features and functions that will remain “valued” by end users. I can see a scenario where consumers start to gravitate to desktops in their homes instead of notebooks. They can use the tablet or their smartphone as their mobile PC and pair it with a desktop for their fixed PC usage. Due to the lengthy refresh rates, our research indicates consumers would spend more on these PCs because they intend to hold onto them because they want to them last longer than previous upgrade cycles. Those who need notebooks because they are traveling or are mobile workers will still utilize and spend on the product because of its value to them from a productivity standpoint. Bottom line, I believe there is still money to be made in PC hardware if Microsoft and the vendors can avoid letting certain players collapse the ASP of the PC category. Should the race to the bottom happen, even those who would pay more because of the intrinsic value the PC provides will no longer have to since they can get the same features as mid and even high end PCs at rock bottom prices.

Eventually, I can see the PC market going one of two ways. Either it becomes a race to the bottom and only a few current vendors are left standing or value can remain in the category. Ultimately, it is up to Microsoft and the Windows OEMs to decide which future they want.

The Implications of the Low Price Tablet Era

I’ve been tracking nuances of the global tablet market since the origins of the category. As I emphasize in my analysis, we know not all tablets are created or used equally. I’ve also been adamant about explaining that, when I look at tablet usage data, we essentially have two tablet markets. Tablets with a brand on them from companies like Apple, Samsung, Lenovo, Dell, etc., and a huge market of white box tablets made by no-name brands, sold at prices in the $100 range.

Our usage research shows these low end tablets, counted in the category labeled “other” in data reports, are essentially being used as portable media players — larger pieces of glass to watch videos and play games. Very little web browsing or downloading of apps is done. However, with the price of these white box tablets, it is time to start thinking differently about their usage and ultimately the role they play in consumer’s lives and homes.

For much of the last three years, essentially the short life of the tablet category, these low cost white box tablets have sold in massive numbers in markets such as China, India, Russia, and a few others, but not much in developed markets like the US or UK. Last quarter however, something interesting happened that may very well signal a changing tide.

According to IDC, RCA joined the ranks of the top five global tablet vendors by shipments into the channel in Q3 2014. Here is the chart of the tablet model.

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How did RCA go from essentially zero in shipments to the number five spot out of nowhere? To begin, we need context. I discovered RCA’s shipments were entirely to Walmart and the US market. To be clear, a US retailer amid heavy promotions propelled a new entrant with virtually no tablet market credibility to the number five position globally for Q3 2014 quarterly shipments. ((RCA was long sold off but a company named Venturer Electronics has the rights to the name for products like tablets and is the maker behind these devices.)) Here is the full lineup of RCA tablets.

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Walmart offers the 10″ with a keyboard case for $129.99 and the 7″ with a keyboard case for $59.99. Here is my take on how this happened. Firstly, these are rock bottom prices. Knowing quite a bit about Walmart’s typical customer, they likely saw the tablets at these prices and, having a general interest in tablets to begin with, recognized the RCA name and figured they couldn’t be that bad. These are likely used in many of the same ways as white box tablets in emerging markets. For games, video, and some internet. And at these price points, these products essentially become disposable. Now this is where the point gets interesting. As these prices become the norm in retail outlets everywhere, why not just buy several and stick them in every room in the house? Put one next to your bed to be used for your bedside web browsing tablet and alarm clock or use it as a portable TV for the kitchen or the bathroom while getting ready for work. Take it outside to watch video by the pool or garden. Put three in the car and leave them there. Coffee table tablets, one for every child in the home, multiples in every room just laying around waiting to be used by whoever. At these prices, why not? If it breaks, just get another one. There is very little downside to treating them as disposable pieces of smart glass to be used in any number of fairly simplistic ways. Believe it or not, prices will keep getting cheaper and from more brands and in more retail outlets than Walmart, thus making the barrier to entry even lower and increasing the availability of these low cost tablets. Cheap, numerous, disposable pieces of smart glass in every US home. A fascinating and potentially disruptive change of dynamics could be around the corner.

Of course, our readers will start asking what does this mean for Apple. I have several thoughts. I still believe the iPad is being used to do something very different than what I have outlined. However, as much as I like the new iPad commercials, they highlight things that CAN be done with the iPad but that the majority DOES NOT do with an iPad most of the time. Unfortunately, the iPad is used to do simple things by simple users to do many of the tasks I’ve mentioned. The iPad is undoubtedly 300% more capable than all the low end tablets. However, my concern is the mass market has either not fully utilized those capabilities or more worryingly, has no real intention to do so. The tablet’s ultimate mass market appeal may very well be to simply have a general purpose piece of glass laying around for every person in the house to use for any number of very simple, mostly entertainment-based tasks. In this case, these low end tablets may outnumber humans per household. Which makes the tablet market number much larger than many have projected. But, for Apple, fighting the “good enough” battle with these low end tablets is a strand of thought worth working through.

These are still early days and I’m providing our readers with some observations to discuss. This could be something or it could be nothing.

The Day I Rubbed Shoulders With will.i.am

The feel of Apple’s September launch event was both familiar and unfamiliar at the same time. Familiar in the way all Apple events I have attended since 2001 have felt. A similar format with many familiar faces but also unfamiliar because of the dramatic increase in the number of attendees. A casual observation by any regular Apple event participant would have seen a more diverse crowd from events past with even a number of high profile celebrities in attendance. There was also the feel something big was in the air because of the energy and buzz of the crowd.

After an hour or so of mingling with friends and colleagues, we filed into the Flint Center. Usually, at events like WWDC or Google IO or other large scale events, the media is allowed to get very close to the front to make a mad rush for the best seats before anyone else. These events have a very “running of the bulls in Pamplona” kind of feel. However this year, the same immediacy to get in was duplicated on the way out. The primary reason was because Apple had just announced and shown the Apple Watch minutes before.

As most of the crowd sped out of the Flint Center to get their pictures and “hands on” experience, I casually made my way outside to do on-camera interviews with some of the major news networks. After I completed them, I finally got a chance to experience the Apple Watch for myself. Which proved to be more difficult than I imagined.

The crowds surrounding the tables where the Apple Watch could be seen, held, and demoed were five rows deep of people. On the edges of the crowd, people were standing on their toes, or holding their cameras up as high as they could reach to snap pictures. People were pushing their way forward just to get close to the Apple Watch. I joked that seeing these crowds must have been what it was like observing people trying to see Jesus. Knowing the odds were against me, I decided to make a go and hope I didn’t have to wait an hour to get a demo.

I picked the least crowded table I could find and tried to get close. I was still at least three layers of people deep but at least I could see the Apple Watch and some of the demonstrations. As I watched intently, I felt another person press up against my back and lean over my right shoulder. At first I didn’t think anything of it until they started leaning on me with even more force. I turned to see why they needed shove their way to see the Apple Watch so badly. When I did, I recognized my inquiring compatriot as will.i.am.

I turned to look at him and his gaze intrigued me. The only way I could describe it was a stare of simultaneous shock and awe. He was mesmerized and fixated on the Apple Watch. He seemed so infatuated with it he didn’t noticed I had been staring at him for at least ten seconds as I tried to figure out the look on his face. I assumed he must have been simply amazed and marvelling at the quality and craftsmanship that would bridge technology and fashion for the first time. His intense gaze fascinated me because it was a look I have rarely seen on another person. As I talked with others after the event, I made mention of rubbing shoulders with will.i.am and how much he seemed to like the Apple Watch.

puls-will.i.am-smartwatchFast forward about a month and will.i.am takes the stage at a conference put on by SalesForce.com and announces a smartwatch of his own. It was a device that, while decent in concept and vision, it was left wanting in design. As I watched the news and saw the image of will.i.am’s smartwatch, I recalled our bumping into each other and the look on his face — it made perfect sense. He was looking at a product that had just made his smartwatch obsolete. He knew he was going to be on stage in a month and release a product that couldn’t hold a candle to the Apple Watch. If I were him, I would have had the same look on my face. A look I misinterpreted as shock and awe was was really a look of defeat.

What this story reminds me of is how difficult hardware is. More specifically, how hard it is to create mass market hardware products that are at the “intersection of technology and liberal arts”. Those who look well positioned to accomplish this because of their ties to entertainment, fashion, and culture are, in reality, not necessarily equipped to do so. It helps us appreciate what Apple has accomplished in creating mass market technology products that truly are at that intersection. Perhaps those in entertainment and fashion will learn the lesson that not just anyone can be a hardware/technology company and reconsider future aspirations.

Why Chromebooks Have No Consumer Market Future

The question of whether Chromebooks will have a future in pure consumer markets is an intriguing one. There’s no question Chromebooks are well positioned for education markets where they are selling in volume. But I don’t see Chromebooks being successful in pure consumer markets.

At a fundamental level, we have to understand consumers do very little “heavy lifting” with their current PCs. While it is true consumer do quite a bit of basic web browsing on their PCs and this is a primary point for Chromebooks in consumer households, that activity has largely shifted to their smartphones or tablets, which now have over a 53% household penetration in the US. Other devices currently serve consumers with the same value proposition of Chromebooks and offer even more. As larger phones increase penetration, it hurts the Chromebook consumer proposition even more.

The other challenge is the form factor. A Chromebook is a clamshell which means where and how it is used is limited. Things like phones and tablets are more easily carried and used in more convenient ways around the house to browse the web and more. It is the clamshell form factor I also believe is not attractive to general consumers.

Lastly, there is the issue of software. If we step back and look where ALL the software innovation for consumers is happening, it is on smartphones and, to a degree, tablets (meaning the iPad). There is simply no software value proposition on Chromebooks that consumers can’t get on their existing PCs or even their smartphones and tablets.

Even with a fundamental leap in consumer-facing cloud software/apps, I believe the pure consumer market has largely moved past the PC. All the innovation happening in native apps for mobile is accelerating this shift not just in time but priority, with value being placed on mobile computing devices and not “fixed” ones like notebooks and desktops.

Some things I think could be very interesting from Google’s ChromeOS are tablets and smartphones. I think media consumption as a large percent of time spent with mobile devices plays into a future where thin-client and heavy back end server computing can come together nicely. I still feel ChromeOS may be the future of Android but that is just speculation. Where I have a strong opinion is that ChromeOS has little to no future in pure consumer markets in the shape of a clamshell PC.

Apple’s Huge and Profitable Niche

After reflecting on discussions I had regarding my article on disruption of last week, another train of thought began. I captured the fundamental concept in this Tech.pinions subscriber article called “profitable niches.” As pointed out in the comments on my article, in every market, even heavily commoditized ones, a premium player(s) can always exist. The difference between the premium and the commodity player is one of scale. In examples I used — automotive, food, fashion — the premium player’s total market and overall volume are not that large. Which is why we call them niche players. The word carries with it an assumption they are not a large or majority player. However, thanks to mobile, Apple has blown this assumption apart.

Apple is playing as a niche player. Meaning, they are not the market leader in smartphones and they likely won’t be. However, their niche is gigantic. And if we add up their endpoints in terms of potential market sizes of Macs, iPads, and perhaps even Apple TV (I don’t include Apple Watch yet until it becomes a standalone product that does not depend on the iPhone) then Apple’s user base gets even larger. The sheer scale of personal computing means Apple is a niche player in one of the largest niche markets we have ever seen. More importantly, their position is one of influence, even though they are not the market share leader, they are the market leader.

But there are still interesting dynamics of this reality to tease out. Not only does Apple have a large, profitable niche, they also have very loyal customers.

Marc Andreessen tweeted:

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He followed up a few tweets later, saying he knows many don’t agree with this point but it is his belief. The tweet caused me to reflect on something Ben Thompson wrote earlier today about Apple’s focus on being the best. While I don’t necessarily agree entirely with Marc’s tweet, I do believe there is a percentage, no idea how large, of Apple’s existing base for which that may be true. Apple has a huge loyal fan base. How big, I’m not certain, but it’s likely there are some on the fringe when it comes to the technology adoption curve for whom Apple still must compete for them each product cycle, a small percent who could be swayed by good enough. In the US, carrier subsidies help level the playing field when it comes to the cost of a device. But in other markets people pay upwards of $600 for Apple’s products because they feel they truly are the best.

What is interesting about Marc’s tweet is that, even if it were universally true, I would not be worried about Apple. Primarily because I believe Apple sees themselves or last year’s Apple as this year’s primary competitor. Last year’s product is the bar to beat. Apple’s culture, people, process, and priorities all validate their commitment to being the best in the areas they can choose. That means Apple’s commitment to being the best would be unchanged whether their user base was 1 million or 1 billion. Apple’s customers know Apple is moving forward and not backwards. That next year’s product will be better than this year’s product. That even if they aren’t perfect in areas, like the cloud, they will make progress.

Apple’s niche is huge. It sounds silly and contradictory but that is the fascinating point. Looking at niche players across the board, you realize they are hard to disrupt. Usually because their values and priorities reflect that of a user base with similar values and priorities. What’s unique is how big this niche is for Apple and, more importantly, how profitable and influential.

For reference, and because it is a good read, here is the full tweet storm by Marc Andreessen @pmarca
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Takeaways From IBM’s Black Friday E-Commerce Report

Recently, IBM released their post Black Friday analytics report. As always, it includes some interesting takeaways around devices and platforms used for Black Friday e-commerce. Before digging into the report, I thought this tweet from Benedict Evans was insightful in context.

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Tablets functioning more like PCs in the home rather than mobile devices should be obvious for those who use them. However, this observation has some interesting implications. In particular, it further validates that tablets are more like PCs than smartphones in many aspects of usage. This chart is one I’d like to dig into a little more.

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Note that tablets represent a fairly small percentage of website traffic compared to smartphones. Yet, they have higher conversion rates and much higher average order values. Furthermore, more consumers made a purchase on a tablet than a smartphone. As a percentage of sales tablets made up 16% of purchases where smartphones made up 11.8%. Both the conversation rate and the average order value of tablets are more in line with PCs than with smartphones. The picture this data paints is how that many users do quite a bit of browsing/research on their smartphones but then move to their preferred purchasing platform — either the tablet or the PC — to complete the transaction. The low percentage of traffic from tablets is perhaps representative of the smaller installed base vs smartphones and PCs in the US. It also could suggest that, after consumers decided what they wanted, they moved to the tablet to complete the purchase.

While the picture painted from Black Friday of tablets and smartphones is interesting, I’m not sure this dynamic continues forever. By next year, I believe Touch ID-equipped smartphones will have a larger impact on the Black Friday device e-commerce landscape. Apple is working to eliminate payment friction in both the physical and the digital world and, by next year, my sense is the large US installed base of Touch ID-equipped iPhones may shift this picture quite a bit.

For now, the IBM report paints a non-surprising picture of iOS vs. Android users when it comes to online purchasing.

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It’s worth noting the above chart is not a breakdown of iPhone vs. Android smartphone users but the platform as a whole. Which means iPad is playing into these statistics as well. Some key stats from the report:

  1. Average Order Value: iOS users averaged $121.86 per order compared to $98.07 for Android users, a difference of 24.3%.
  2. Online Traffic: iOS traffic accounted for 34.2% of total online traffic, more than double that of Android, which drove 15% of all online traffic.
  3. Online Sales: iOS sales accounted for 21.9% of total online sales, nearly quadruple that of Android, which drove 5.8% of all online sales.

One other stat that stood out was that average page views on Android devices were higher than on iOS devices. This is interesting because the installed base in the US of iPhones and iPads is quite a bit higher than Android phones and tablets. While on a monthly average basis iOS leads Android in US in web browsing, it didn’t on Black Friday. Some have suggested this means Android users are more “window shoppers” than iOS users. While that could be true, it could also mean more iOS users were out shopping at physical retail stores, thus spending less time browsing. The disparity between Android purchases and the high average page views could also suggest Android customers are a bit more calculated, possibly even frugal, than their iOS counterparts. Meaning, they are more selective in what they purchase, even though they do roughly the same amount of research.

The picture painted here of iOS vs. Android users is not surprising and likely the gap in spending between iOS and Android users will increase over the next year and should be evident in the data this time next year.

Lastly, the dominance of the PC for e-commerce still shines. It led in every category for online purchasing. This shows the trust and comfort level many in the US have in making purchases on the PC. While this isn’t terribly surprising, what struck me is how different this picture is with regard to the PC and e-commerce in the US vs. other regions I study, particularly markets like India and China. E-commerce from mobile devices is dramatically higher in those markets than the US and I believe it has everything to do with, for now, the high PC penetration and comfort level with PCs in the US. Which, as I will flesh out more at a later time, is potentially a roadblock keeping the US from progressing to the mobile reality the rest of the world is living in. Perhaps this is just a matter of time, but the centrality of the PC in the US may be a negative compared to innovative things happening in markets where the mobile is the center of consumer’s universe.

Connecting the Next Billions of ‘Things’

In a presentation I have given at different events and to industry executives, I have been highlighting two major themes. One that I write quite a bit about here at Tech.pinions is the connecting of the next billion people to the internet via a pocket computer. The other is the connecting of the next billion “things”. Both are a piece of the major trend I have been talking about — connecting the unconnected. Nearly everything is going digital and we are well on our way with this massive shift from the analog world to the digital world.

Bigger Than We Think

I remain convinced the number of connected devices is much larger than many estimates. Initial estimates were 25 billion things would be connected by 2020. Then it jumped to 50 billion, then to 75 billion. The number keeps growing because the scale of connected objects is happening faster than those doing the estimating understand.

When you dig deep into the semiconductor space, you see the effect Moore’s Law is having on this shift. We are quickly getting more capable microprocessors and sensors at increasingly lower prices each and every year. Soon, it will add such small cost to an object to include connectivity that electronics companies will do it because there is no good reason not to. My overall conviction is if it plugs into a power source, it is likely to be connected. How and why we may want a coffee pot or washer/dryer or refrigerator, and more, to be connected will be up to the imagination — but it is going to happen.

However, it is not just the connecting of things that require power that is most interesting to me. It is the connecting of things that previously we never thought of plugging in.

Bringing Analog Digital

As microchips and sensors get smaller, more powerful, and draw less power, we will see them come to things we may never have believed would be connected. My favorite example is my Babolat Tennis Racket. This connected racket, only in its first generation, gives me analysis of my game. The data gathered, thanks to a microprocessor and a few sensors, helps me learn more than any video or coach could ever tell me about my tennis. That data is then translated into drills I use to improve my technique, leading to more wins and, ultimately, a competitive advantage. This technology will come to every tennis racket sold in the very near future. Over time, racket companies will be able to embed this technology and add nearly zero cost to the racket. How many tennis rackets are sold each year?

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Another favorite example is this connected street lamp. It has over a dozen sensors such as proximity image sensors, Wifi connectivity, climate sensors, and more. This smart street lamp has benefits for a city and its citizens. How many street lights are replaced or added each year?

Microchips and sensors adding connectivity and machine-to-machine (M2M) interaction of previously unconnected things will drive the number of connected devices even up faster than many realize. It doesn’t stop there.

I’ve seen concepts of connected golf clubs, connected apparel, connected beds, smart shoes, connected pet feeders, connected cars, the list goes on. How many of these things which will inevitably get connected are sold each year? You get the picture. It all adds up and it adds up to a number much larger than I believe many realize.

The analog world is going away. The writing is on the wall. It will bring implications for network infrastructure both in and outside of the home. Security and privacy will be a central theme and central problem to solve as well in this connected world. This massive shift from analog to digital will have some hiccups and we, as an industry, will have to take licks and learn lessons. Challenging as it may be, the direction is clear. Our unconnected world is rapidly getting connected in every way, shape, and form.

Here is my full presentation on connecting the unconnected.

Disruption Theory Need Not Apply

The biggest challenge I see facing disruption theory is an understanding of when it applies vs. when it does not. Several posts lay the foundation for truth.

  1. Ben Thompson’s What Clay Christensen got wrong
  2. Jean-Louis Gassee’s Clayton Christensen becomes his own devil’s advocate.
  3. Disrupting Disruption Theory – by me.

A few weeks back, Horace Deidu and I had dinner and were discussing holes in the theory. That dinner led to he and I doing a podcast on the challenge of universal application of the theory. Jean-Louis Gasse re-opened this can of worms and, in a twitter conversation, Horace made an important point.

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Hence, my initial point. The greatest challenge to disruption theory is in understanding when it is applicable and when it is not. This single point will lead many to make false assumptions based on the academics of the theory and could have massive unintended consequences. For example, companies can go out of business chasing the wrong strategy.

The most glaring flaw today comes to Apple. We see disruption theory get misapplied to Apple by folks without the domain or market knowledge to understand it does not apply to them. I addressed this point in an article on why Apple is immune to disruption theory. In a fascinating and shining example of the misapplication of disruption theory, many fell into the trap in applying the theory to Apple when, in reality, it should have been applied to Samsung.

At a fundamental level I strongly believe disruption theory needs to also include an element of behavioral science. Here again, behavioral science need not be applied in all case studies, like the original hard disk drive study in Clayton Christensen’s book “The Innovator’s Dilemma”, but it absolutely needs to be applied when the consumer market is in play. One of the greatest flaws with the theory is how it handles buyers of a more emotional nature than a pragmatic one. The billions of individuals who make up the consumer market have very diverse and nuanced processes that impact their decisions on making a tech purchase. Perhaps my favorite example from this came from a post where I wrote “Familiarity is just as valuable a feature to some consumers as cutting-edge specs are to others“. Getting in the mind of consumers is hard work and not everyone has the ability to do it. But those who can have an edge in knowing how to apply disruption theory properly in pure consumer markets.

Like all theories, there is an evolutionary process. What has been lacking, until late, has been a more open and approachable discussion from an academic sense on disruption theory. I hope the many smart folks writing publicly will continue to play a role in the refining of disruption theory and pushing it forward in both academia and every day applications. It is still a useful and valuable theory. I used to warn investors more than two years ago that Samsung wasn’t in a sustainable position and Apple was. It serves a purpose but wisdom is knowing when it applies and when it does not.