Intel’s Challenge in the Post PC World

Let’s start with some comments on “Post PC.” If we take a step back and look at the global computing landscape, we realize two things. First, there is a “PC plus” market (people who use a PC and other devices like tablets and smartphones together) and a non-PC market where the only computer people use are smartphones. Understanding the PC plus segment is how I predicted 2014 would see some rebound of the PC market. Microsoft says 1.5 billion people use Windows every day. This does not mean there are 1.5 billion unique PC owners though. That number is much lower. Between corporate, small business, consumer, internet cafes, and point of service (retail) use of PCs, there is a healthy installed base and many of those are not going away. However, the market for the PC is also not growing and, in fact, may be on the decline. Servers remains a bright spot and a overall growth opportunity for Intel. However, a great deal of the volume in computing chipset demand is in smartphones. Intel’s lack of relevance in the massive market of smartphones, and even tablets to a degree, lies at the root of their greatest struggle.

Understanding Their Business

Intel’s business is to manufacture semiconductors. They are one of a handful of companies who own the physical space and equipment to make the millions upon millions of microprocessors necessary to bring about our wonderful computing future. The rub is Intel currently only manufactures chips it designs for the x86 architecture. Right now, those chips are only positioned well in the market for PCs and servers. The challenge as a manufacturer of silicon is you need to keep your semiconductor manufacturing facilities full in order to profit on the initial investment in psychical space and equipment. By only being relevant in PCs and servers, keeping semiconductor fabs full has posed a challenge. A question I like to pose is this: every single major semiconductor manufacturer is at or near 100% capacity except for one. Guess who it is?

The answer is Intel.

Betting on Moore’s Law

Intel has a lot riding on Moore’s Law. Intel is committed to x86 and, for server and most PC use cases, this is the right architecture. x86 has always had an advantage over competing architectures in performance. It struggles to have an advantage in power consumption. Thanks to Moore’s Law, x86 has been making strides in bringing the performance of x86 to lower powered solutions. Intel’s current processor technology is 14nm and it is the first process where we can truly have desktop class x86 “core I” chipsets that don’t require a fan. Even with the benefits of 14nm, Intel will be challenged to fill their fabs, making it tough to monetize the eleven plus billion dollars they invested in the 14nm process technology. Yet they will still need to spend double digit billions of dollars to invest in the next process node which will be 10nm.

There is good reason to keep Moore’s Law alive. But to bet so heavily on it means the economics need to be there. In fact, it is possible following Moore’s Law for Intel is more of an economic challenge than a technical one.

Investing in Moore’s Law requires investing in new process technology every few years. Currently, Intel is shipping semiconductors at a range of process technologies, but a couple of the main ones are 28nm and 22nm. Intel has also recently begun mass producing chips at 14nm. Intel’s next step in pursuit of Moore’s Law is to invest in and start mass producing 10nm chipsets. After that, they will go to 7nm. The cost to do this in CapEx is massive. To visualize this, here is a chart Intel showed regarding how they outspend competitors to keep a lead in process technology.

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This is Intel’s process technology advantage but the economics to keep it going is also their challenge. Intel mush keep those fabs filled, recoup their investment, and continue investing going forward to maintain a lead. This is what being absent in the high growth and high scale area of mobile phones, tablets, and, to a degree, the Internet of Things is costing Intel. Intel needs the scale of markets like smartphones to keep Moore’s Law working for them.

Why I’m Optimistic

Among the many benefits of advancing process technology is an increase or an approximate doubling of the number of transistors you can pack onto the silicon. Which means designers of said chips have an increased number of transistors at their disposal they can spend their “transistor budget” on in valuable ways.

I believe the future of the semiconductor industry is in the hands of those who have in-house capabilities to design semiconductors. A handful of companies have this capability. Among them are Apple, AMD, Qualcomm, Broadcomm, Nvidia, a few others and, of course, Intel. Intel sets themselves apart from the pack because they design and manufacture. While it is debatable whether they are the best chipset designers out there, they are at least in a position to make a run competing on chipset design. I feel this is exactly what they need to do if they are to compete with ARM chipset designers as well.

The other benefit of Moore’s Law is the decrease in the cost of the transistors. This is not always true but, in theory, this is the goal. Which means Intel should be in a position to offer powerful, very low energy consumption and low cost chipsets for the applications for which they are designed.

In theory, Moore’s Law IS an advantage for Intel. The problem is Intel has always told us “just wait for the next node.” After a while we get tired of waiting. Those of us who follow Intel know it is not their current 14nm chip where we will know if they are truly performance, power, and cost competitive with their ARM rivals. It is at 10nm we will know if this is true or not. For the time being, I’ll buy the pitch that 10nm is the big difference maker for them when they actually have a solution contesting the high scale/high demand mobile market. But if Moore’s Law doesn’t deliver for Intel by then, it is time to execute plan B,C, or D.

Data: The iPhone 6 vs. the 6 Plus in China

Internal data I have access to from Baidu in China allows me to see a picture of what is happening at ground level in terms of daily active users by device on Baidu’s network/app distribution platform. Baidu is the largest search engine in China both by use and revenue and their app distribution platform represents over 50% of the app distribution share and is growing. This data comes from analytics of devices that are accessing Baidu’s app platforms, not their search engine. They point out this data covers over 600m users.

There are a number of key takeaways from the most recent October data that relate to the iPhone 6, the 6 Plus, and the iPhone 5c.

First let’s look at the chart:

Screen Shot 2014-11-20 at 6.38.46 AM

When the iPhone went on sale in China at the end of September, it showed up on Baidu’s network at 0.9% of active use of all iOS devices. The 6 Plus didn’t show up at all. At the end of October, the iPhone 6 registered 2.6% of all active iOS devices and the 6 Plus 1%. Obviously, this suggests there are more iPhone 6s being sold in China than the 6 Plus–for now. Speaking with friends and colleagues in the region, it appears the shortage of availability of the iPhone 6 Plus is one of the major factors for this. I had several of them tell me customers were waiting more than a month, sometimes two, just to get their hands on the 6 Plus they ordered.

Knowing what I know about the region, I assume this will balance itself out and the anticipated 50/50 to 60/40 6 Plus to 6 split in China mix will play out. While I can’t quite use this data to interpret sales volume for these iPhones in October, I can use other means to estimate it in the coming months.

While these data points are interesting and I will continue updating this chart every few months, the uptick of the iPhone 5c may be the most interesting story line. As you can see from the chart, the iPhone 5c maintained a relatively steady flat line. But over the past few months the iPhone 5c has been gaining share in China. This seems to be counter to many of the assumptions of China as only a super premium market for Apple. Many were quick to point out the 5c was not targeted at China and thus expectations for it were tempered. However, things may be starting to change for the 5c and I believe there are a few reasons why.

One thing you realize when you study Chinese urban, and in particular, youth culture, is sometimes certain things/trends take a little while to make an impact in China. Many trends which start out global do not hit China and go big overnight. When I talked to some fellow researchers in China about this, a point was made that for the youth culture (who we believe is the source of the uptick in 5c sales) certain trends need to be established as culturally cool before they buy into it. It seems this is the common wisdom on the ground in China with regards to the 5c. It was not viewed as cool initially, since it was the “cheaper” iPhone but influences from metropolitan areas like Hong Kong have helped change the initial perception and it has become acceptible as an “entry level” iPhone. More succinctly, the 5c took a little while to be viewed as culturally acceptable since it is/was not the premiere iPhone.

If you read what I wrote about Xiaomi and Apple, you will recall I said Xiaomi’s phones are viewed as a cultural symbol for a young person who is upwardly mobile or moving up in society. From some dynamics I can see around the 5c, it seems it is also perceived now in a similar light as Xiaomi’s phones as a cultural status symbol. It helps the iPhone 5c is now also much closer in price to Xiaomi’s phones, especially the Mi4, with the heavy discounts coming to the later generation device. Given the iPhone 5c has a limited shelf life and no similar product was released last year, this dynamic may not last forever. However, I have a feeling once the iPhone 7 line come out and the iPhone 6 and 6 Plus are discounted in the region, we will likely see even greater penetration of iPhones in the exact same markets Xiaomi is looking to capitalize on. But, for the time being, it is interesting to see the dynamic of the 5c starting to play into the middle smartphone price tier of the Chinese market where Xiaomi has and continues to be quite strong.

There is one more important data point for the iPhone in China this report tells us. It relates to jailbroken iPhones. The number of jailbroken iPhones has been steadily decreasing. This is part of the reason why UnionPay being supported is a big deal. As I studied behavior of jailbroken iPhone users in China, the heaviest of whom were on the iPhone 4 and 4s, it became clear those who jailbroke their devices were not investing in Apple’s ecosystem. Which would have been a concern to Apple’s overall China strategy.

The Baidu data shows us since the 5s and 5c, the number of jailbroken devices is less than 10% of those devices, and less than 1% on the current iPhone 6 and 6 Plus models. Meaning, more and more iPhone consumers are not jailbreaking their devices and thus investing, to some degree, in Apple’s ecosystem. UnionPay helps this and both are very positive signs for Apple’s ecosystem story.

What Foxconn Making a Nokia Tablet Tells Us About the Future

Something interesting happened today. Many people missed what is perhaps a significant development when Nokia announced the N1 Android tablet. Lots of folks saw the announcement and proclaimed Nokia back in the hardware business, making and selling tablets. A deeper look reveals what the real story is.

The release states:

The N1 will be brought to market in Q1 2015 through a brand-licensing agreement with an original equipment manufacturer (OEM) partner responsible for manufacturing, distribution and sales.

So a “brand licensing agreement” between Nokia and an OEM has been established. We have since found out this OEM is Foxconn, which is technically an ODM (original device manufacturer). That is where this really gets interesting.

The release goes on to point out:

In addition to the Nokia brand, Nokia is licensing the industrial design, Z Launcher software layer and IP on a running royalty basis to the OEM partner. The OEM partner is responsible for full business execution, from engineering and sales to customer care, including liabilities and warranty costs, inbound IP and software licensing and contractual agreements with 3rd parties.

So what is going on here? Several very important observations need to be made.

Nokia has developed a tablet design. A pretty decent one at that. They have also licensed the Nokia name as well as their own design to Foxconn who will make the tablets, handle sales, engineering, customer care, etc. Basically, Nokia has handed Foxconn a cookie cutter product to be sold and marketed under a global household name. So why does this matter?

If you read much of what I write, I am fascinated with the hardware business model in the mid-to-low end segment of the smartphone and tablet market. There are virtually no margins to be made in the commoditized tablet and smartphone world we are quickly moving toward. How hardware vendors sustain themselves has always been a key question for me. Yet, I’ve concluded long ago other companies using business models other than just monetizing hardware under their brand are well positioned to succeed in this future. Foxconn’s business is manufacturing and, as long as they make things, times are good. I’ve heard for some time that Foxconn has been thinking about ways to use or develop its own brand to go to market with products. In areas like India and Brazil, there are import fees that make it very hard for external parties to succeed. Foxconn has a plant in Brazil and is well positioned to make handsets in the region, without an import tax, and do very well. Foxconn has a business model going for them and all they needed was a brand. Now it appears they have it.

It is true they cannot make phones yet due to the Nokia brand name licensing deal with Microsoft. I fully expect Foxconn to start making Nokia smartphones in 2016 when the smartphones brand agreement between Nokia and Microsoft is complete. Foxconn can make these devices and sell them at dirt cheap –commoditized–prices and it fits their business model.

Foxconn also has a similar deal with Blackberry. But they have yet to do much with it and for good reason. The Nokia brand gives them more credibility in the markets where I think they seek to enter. Sure, there will be challenges. How does an ODM do sales, marketing, and support? We will have to wait to see to get answers. But what Foxconn is doing addresses a business model problem I think businesses have in selling commoditized hardware to the next billion plus consumers.

For Nokia, this is an interesting move. They have done the design and maintain some quality control in order to protect their brand. What they are doing sounds very similar to what Polaroid tried to do. This is an intriguing move by Nokia and one that, if successful, could be quite sustainable.

Regardless if this scenario works or not, how big companies navigate the business model challenges of connecting the low income majority of the planet will be fascinating to watch.

How Worried Should Apple be about Xiaomi?

I’ve been asked this question often and feel there is a great deal of misunderstanding regarding the dynamics and strategies of the two companies. I was quick to point out during Xiaomi’s rise that they pose more of a threat to Samsung and this has proven to be true. Samsung’s issues are a combined double whammy from both Apple on the premium end and Xiaomi in the mid-to-low end. Xiaomi is on my radar first and foremost because they are building a brand. My belief is a good brand is one of the hardest things to build globally but also one of the most sustainable efforts a company can engage in, especially in the worldwide consumer market. Xiaomi is a threat for this reason. But to believe Xiaomi disrupts or threatens Apple is an incorrect assumption. Let’s look at a few data points to highlight this.

In a report from Morgan Stanley where their analysts model the iPhone 6 and 6 Plus upside, several charts from their survey data are insightful. First there is this one:

Screen Shot 2014-11-17 at 8.29.48 AM

This chart highlights repurchase intent by brand. Notice which companies decreased in “brand repurchase intent” — Samsung and Lenovo. This chart is telling of consumer sentiment more than anything else. Apple and Xiaomi remain “sticky”, while the rise of HTC and Huawei show many global consumers willing to look at new options in the Android hardware landscape.

Another chart from the survey is insightful of the dynamic between Apple and Xiaomi.

Screen Shot 2014-11-17 at 8.31.08 AM

Owners of the specific devices and brands that were interested in the new iPhones were plotted. Xiaomi was included due to the lack of intent to switch from the Xiaomi brand to the new iPhones. This is a notable data point, but it is one that does not tell the whole story.

report in the Financial Times last week had a very specific sentence that highlights an incredibly important distinction between how Chinese consumers view Apple and Xiaomi respectively.

As one Beijing-based entrepreneur puts it, “the tech grad who has worked at Baidu as an engineer for two years, that’s their target gatekeeper and prestige consumer. In China’s tier two and three cities, that is someone people look up to. People want to see what kind of phone such a guy is using.”

Creating an aspirational brand at the low end of the income scale is an accomplishment, and it is difficult to replicate. Xiaomi’s products are seen as a cross between a commodity and a luxury item, although one techie notes that while many of his peers use its phones “eventually they end up making more money and buy Apple”.

Several key takeaways from this statement back up a lot of the feedback we hear from China. Xiaomi is doing as good a job as any of creating a premium brand for the low-to-mid range of the smartphone market. Young Chinese consumers who are upwardly mobile are choosing Xiaomi as their starting point. This has an effect on the aspirational middle class at the early stages of their mobility. They are not the phone for the poor but also not the phone for the rich. The previous quote makes this clear. Xiaomi is an aspirational brand for those on their way up. Apple is their ultimate aspirational brand once they have “made it”.

External appearances and what that says about your status is central in China. A Xiaomi phone says, “I’m not at the bottom. I’m on my way up”. An iPhone says “I’ve made it.” This is a powerful and important distinction to understand at a psychological level about Chinese consumers.

Xiaomi is the Gateway for Apple

The more I study these dynamics, the more I am convinced Xiaomi is paving the way in China for Apple. I say this for a few reasons. The first is because what Xiaomi has copied from Apple is more than just hardware and software UI. They have actually copied their ecosystem. MiCloud is, in concept, just like iCloud. Store images, documents, and more in the cloud and access them from any browser. They have their own app store, messenger, TV box and interface, and more. Many of the things about Xiaomi’s ecosystem beyond hardware and software are similar to Apple’s. They are providing the Apple ecosystem but with a lower cost of entry.

At first I believed this would be a challenge to Apple but then realized it is good for Apple. Xiaomi is grooming customers to understand the value of an ecosystem with multiple touch points. Customers are getting content across a number of different screens and seeing the convenience of the multi-screen era. This is new in China and nonexistent in other emerging markets for now. Xiaomi is giving low end and mid-tier consumers a small taste of the Apple ecosystem but without the significant lock in.

Obviously, for many who can’t afford to move up or get Apple hardware, the Xiaomi ecosystem will suffice. But in China specifically, the transition of Xiaomi customers to the Apple ecosystem will increasingly become attractive due to the Chinese consumer psychology. Many Xiaomi customers may start in their ecosystem but many will also not stay there.

This “moving up” mentality of consumers is exactly what Apple hopes, I believe. Their strategy is to play at the premium tier and hope that, as emerging market consumers mature from their first device and begin to refine their needs, wants, and desires with technology, over time they will consider Apple’s full solution.

In China, I believe Xiaomi is unknowingly paving the way for their customers and leading more and more of them to Apple’s door. Those who believe Apple should be worried about Xiaomi miss the point that Xiaomi should be worried about Apple, at least in China. This is a story line I will maintain throughout 2015.

Apple Accepts UnionPay: A Huge Step for Their Ecosystem in China

Apple has just announced they have added UnionPay support as a payment option for customers in China for purchases in the iTunes App Store. This is a big deal. There are dynamics at play with regard to the China commerce market and particularly around e-commerce trends I will get into for our subscribers when I do a global e-commerce update before the end of the year. Several years ago, I began studying why there were so many jailbroken iPhones in China. It turns out apps were the answer. To use Apple’s app store, even to download free apps, you have to have a supported payment method like a credit card. While Apple in China accepts many global credit cards, there is a card they did not accept and it is by far the most dominant offline payment card method in China — UnionPay.

From Apple’s press release, Eddy Cue offered the following statement:

“The ability to buy apps and make purchases using UnionPay cards has been one of the most requested features from our customers in China,” said Eddy Cue, Apple’s senior vice president of Internet Software and Services. “China is already our second largest market for app downloads, and now we’re providing users with an incredibly convenient way to purchase their favorite apps with just one-tap.”

UnionPay is so dominant an offline payment method in China it is common knowledge to global retailers that, to attract Chinese consumers, accepting UnionPay is essential. This move opens the door to Apple’s ecosystem in China in ways that were a huge roadblock in the past. Even though Apple has a significant number of extremely high end users in China and who are likely have a credit card there is, thanks to the secondhand market, probably upwards of 50m or more users who are more likely to have a UnionPay debit or credit card over anything else. I strongly believe there was a significant number of iPhone users in China who were not investing in Apple’s software or services ecosystem for this very reason.

UnionPay is also a member of the EMVCo which means the foundation for ApplePay in China is currently being laid.

There is always the question of how much software the Chinese actually pay for. We know from Xiaomi’s ecosystem their revenue comes from hardware not software and, in all likelihood, their software revenue-per-user is less than $10. However, Apple has an entirely different kind of customer base than Xiaomi — one that does and can spend. For them, UnionPay opens the door for Apple to generate more revenue from apps and services in the greater China region. This is also a boon for developers who now have a viable way to monetize their apps in China as well.

The big question will still remain around AliPay. Remember that AliPay is the leader in e-commerce in China where UnionPay is the dominant offline purchase method. The three largest online payment methods are AliPay, Tenpay, and UnionPay in that order. AliPay is likely next on Apple’s list as doing so aligns nicely with Apple’s focus and execution in China.

Overall this is another key step for Apple and their ecosystem in China. Hopefully over the next few quarters we will get data to help us quantify the impact of this deal.

BlackBerry and Samsung: Will a security partnership help either company?

Yesterday, Blackberry held an event where one of their announcements was a deal with Samsung to help add a deeper layer of security to Samsung/KNOX devices. Given the criticism of KNOX’s security, questions surrounding its integrity aren’t surprising. In my view, it’s a recognition/admission that Samsung needed help in the security arena if they wanted to be viewed as a valid player in more secure enterprise accounts.

I view this deal more as a necessity for Samsung than for Blackberry. Blackberry’s BES 12 operating system already supports Android in general, along with iOS and Windows Phone. But Android at large continues to have a negative opinion held by many IT administrators and since Samsung is hands down the leading Android vendor in the enterprise, this view carries over to Samsung to a degree. This move could help Samsung fill the void in their offerings, assuming Blackberry is successful in growing their software and services accounts of BES 12 over the next year.

While BES 12 is a cross-platform enterprise mobility management product, iOS is still standing in Blackberry’s way. iOS continues to increase its dominance in many of the key accounts where Blackberry’s value adds are relevant. In fact, I have heard from many IT managers that more and more groups inside their enterprise are using or being deployed only iOS devices for their teams. For teams where heightened security is more of a need, this is happening even more frequently. If this trend continues then it raises the question of the need for cross-platform, outside of a very general solution to cover all employees which can come from many different providers.

Blackberry is at least moving in the right direction with BES 12. By bringing Samsung along for the ride, it gives them a partner they can have deeper integration with in the hopes a higher degree of cross-platform security is needed within a specific group or company function.

As both RIM and Samsung pointed out in the release, it is about choice. Ultimately, that is the angle they hope to exploit.

Takeaways from Samsung’s Developer Conference

At today’s Samsung’s Developer Conference, they circled around four key trends: digital health, Smart Home, wearables and virtual reality. From these themes, there were a few elements I thought were interesting.

1) Voice of the Body: This theme is a blend of digital health and wearables but as a focal point it is quite interesting. The overall concept is the combination of both sensor loaded wearables and big data to interpret what and how your body is speaking to you and helping you make key decisions based on what your body is saying. An example would be if your heart rate suddenly spikes, perhaps in reaction to anger or stress, you could be notified to calm down, take deep breaths, etc. Or, some day when a sensor can do blood glucose readings, if your blood sugar is getting low or trending downwards (before you even notice) it can alert you that you need to eat and perhaps even give you diet suggestions. This concept has merit because it is where wearable sensors begin to make sense and add value.

From a digital health perspective, wearables and the sensors they encompass, should help us make better decisions about our health, fitness, diet, and more. The “voice of the body” is a great narrative to understand how this vision can become reality. Interestingly, Samsung released a developer kit loaded with a sensor called Simband along with the SAMI digital health platform. It looks like a Gear S but has six sensors in it that function independently or together to do interesting things. The platform and SDK are available for developers to create software and leverage the extensive sensors on the band to come up with interesting applications and use cases. Here is a look at the sensors and you can visit this page for a more detailed look at each of them.

Screen Shot 2014-11-12 at 4.49.06 PM

2. Smart Home: Samsung bought Smart Things earlier in the year and are looking to integrate it into many other forms of smart home applications. Samsung again is making a platform play here, recognizing they can’t build all the hardware and hoping smart home companies will work with their platform for connected home applications. There is still too much fragmentation in this space and no clear winner yet for a standard. That being said, the programmability of the Smart Things platform is interesting. One of the elements of a connected home that is of value will be automation. Meaning, when something happens, a chain reaction of other automated things happens. In essence, your home becomes a computer. An example Samsung showed was an automated task one of their developers created where, as he got near his Scotch cabinet, a light came on and a symphony of angelic voices filled the room. Kind of cheesy but you get the point. The automation of a number of connected objects working in unison is a key element still missing in many mass market connected home applications.

Time will tell how this plays out for Samsung. Especially with competing ecosystems and standards being driven by other major players.

Virtual Reality: I’m quite bullish on Virtual Reality. Samsung is looking to take it as mainstream as they can. It looks like the price of their VR headset will be $199 and it only works with a Note 4 (which they will likely sell approx. 16 million of globally in the next six months). Regardless, Samsung is looking to take the lead in Virtual Reality and it is a category worth leading. They will of course not be the only player, but leadership also means development from time to time. VR has a bright future and we need as many companies as we can developing the market for it.

They released something that may help called Project Beyond. This project uses a camera custom built by Samsung which captures immersive 3D video in HD and from every angle. They intend to set these cameras up in key locations and when you use the Samsung Gear VR headset you can tap into these cameras and it will seem like you are there. The demo I tried was of a camera set up at a park in San Francisco. You put the VR on and it is like you are standing in that location and can look around to see all the vantage points. You could imagine putting these cameras up in major tourist locations. Not everyone can travel there in person but many can see what it looks like to be there.

We are just scratching the surface with VR and have a long way to go but, as I said, it needs backers to develop the market. Good for Samsung for taking a leadership position.

Ultimately, I feel Samsung should be expanding these efforts beyond their own ecosystem. I don’t believe Samsung’s is strong enough or large enough to truly drive these advancements on their own. Their VR solution, their Smart Home platform, even their wearables and digital health platform should be extended to other platforms like iOS for example. I understand why they are locking it to their hardware but, in this case, I think it is the wrong move. If Samsung believes their future is in services then they have to be cross platform and cross hardware.

Xiaomi: Just a Hardware Company?

Whether or not Xiaomi is just a hardware company or is truly an internet company as founder Lei Jun continually emphasizes came into question with last week’s Wall St. Journal report. The statistic that surprised many was the “94% of revenue made in hardware” figure. It was generally believed Xiaomi sold their hardware at cost with little to no margin and made their profits with internet services. However, if the Wall St. Journal report is correct, then that assumption has been flawed, at least up until now.  What’s fascinating, and perhaps enlightening, about what we learned from the report is they have effectively figured out how to still get average OEM net profit margins. Xiaomi’s BOM cost of their popular Red Rice Phone is about $85 and sells for $130. Their popular Mi3 has an estimated BOM cost of $185 and sells for $270. By being able to manage the supply chain and, after other hard costs, I estimated hardware net profits of approximately $23-$26 per phone sold.

What is interesting to ponder with relation to the Wall St. Journal report is why Xiaomi’s profit only increased 85% when handset shipments increased 200% YoY. One would think, given this hardware model they are employing, profits would scale with such a dramatic increase in unit sales. Clearly Xiaomi incurred some significant costs, perhaps in CapEx, or in global expansion efforts, which offset their profit growth.

Another explanation for the discrepancy in growth was a higher mix of products like the RedMi and RedMi Note which, in a BOM cost analysis I did by looking at their suppliers, suggests this product was sold well below the average of $23-$26 estimated margin per phone and may have actually been sold at a slight loss. In fact, non-public reports I have read hint that Xiaomi initially prices their phones at or just below cost but then quickly drives costs down allowing them to begin to yield margins that weren’t there initially. Xiaomi in this case is a lot like Dell, in that they only order the phones to be made once the sales are taken in. Xiaomi manages zero inventory and only builds phones in bulk for the orders they have taken. This is one reason the order availability is capped at a certain level. By managing supply chain tightly, and driving product costs down over time while capturing those margins in real time, they have effectively been able to generate the kind of hardware revenue the Wall St. Journal report indicates. That being said, they can not simply be a hardware company. And ultimately their growth prospects are challenged with just this business model. This is why they are seeking to raise capital. A cash infusion is necessary for Xiaomi to grow and grow quickly, which they’ll need to keep capitalizing on the mind share they currently have.

Ultimately however, I believe Xiaomi is still laying the critical groundwork to be the internet services company they desire to be. Being in the hardware business alone is not a sustainable business for many global OEMs. I have spoken with several high-up execs at Xiaomi and was told that, as of late 2014, they are generating around $21 million USD in revenue from their app stores (game app store, mobile app store, and books app store). Which means it is likely 2014 profits should have quite a bit more balance between hardware and services. Xiaomi is on pace to again increase handset shipments ~200% — yet the WSJ report only estimated a 75% increase in profits this year. The curious variable of why profits are not more closely matching explosive YoY handset shipments is a concerning element of the overall Xiaomi story.

Can Xiaomi go international? That remains to be seen. Their sales in markets outside of China have been nominal to date but there is increasing brand awareness in non-Chinese markets. Scaling internationally will be a challenge and they have to be more than a hardware company to do it sustainably. Xiaomi is in the news a lot but I still have my doubts about their long term fate. If China is the only market they are relevant, this is not a bad thing. Xiaomi can have a strong and profitable regional business and still be successful.

Google’s Ads: Defense or Offense?

I recall not too long ago Google did zero advertising. “Just Google it” was spreading virally and Google was growing and had no need to spend money on marketing. Slowly but surely over the past few years, Google has stepped up its advertising efforts. Which, and some may disagree, I interpret as a sign of their slowing growth. Myself, along with others, have pointed out that Google’s long term growth prospects have been challenged. From internal discussions I have had with execs there it seems this is well known inside the organization. I have been observing two distinctly different advertising efforts and I have a few observations.

North American Advertising

Google has, all of a sudden, begun advertising Android in several prime time commercials in the US/Canada market. I see several fundamentals causing Google to get more aggressive in Android marketing.

  1. Samsung’s US dominance is declining. Samsung is currently in a very vulnerable position in the US. Many fail to realize Samsung’s aggressive marketing and sales commissions helped get them to where they are today in the US premium segment. Yet Apple still sells nearly ~2:1 more phones than Samsung in the above $500 wholesale price tier. Despite Samsung’s best efforts, and a massive internal effort to become the leading US smartphone vendor, they have yet to knock off the king of the hill. Furthermore, it is doubtful they will in the foreseeable future. It is not a secret that Google makes more money from iOS consumers globally but Samsung was helping them get the profitable US consumer more embedded to Google’s services. If Samsung’s growth slows or declines and it is not picked up by another Android vendor but instead by Apple, Google could be loosing key advantages in the US.
  2. Carriers backing iPhone 6/6 Plus more than other premium Android devices. In case you haven’t noticed, nearly every major carrier commercial running in prime time right now is for the new iPhones. This may very well be a part of the agreement between the carrier and Apple but the point remains. More promotion is going on currently for the new iPhones than any other US smartphone. Google must recognize Samsung alone can’t push the Android agenda forward in the US. Yet Motorola and LG are not equipped to embark on the same kind of marketing blitzkrieg Samsung can.

India

Google winning in India is not a slam dunk. I’m not sure many realize this. India is a completely green field when it comes to smartphones and smartphone ecosystems. In fact, Microsoft even has a chance in India. Google can not afford to be a minority player in India and they know it. Android One is Google’s push at getting Android deeply engrained into the Indian mobile ecosystem. Their challenge is things like Facebook, WhatsApp, and even other app stores/distribution methods, are more dominant than many Google services. Which is why Google is advertising on behalf of several Android One OEMs in India to help spread the word and drive the brand/ecosystem. I expect Google to be ruthless in competing for India. Which is fantastic for Indian consumers but may be quite challenging for competing ecosystems and even to a degree competing hardware vendors.

What Google has me thinking about with regards to their marketing strategy is a lot like Intel’s. When a vendor picked an Intel chipset, Intel offers marketing assistance as a part of that design win. Most PC OEMs do not shoulder the bulk of their marketing — Intel does. It is one of the main advantages they have had with OEMs over AMD. Intel’s chips may be more expensive but they will help/do the bulk of the outbound marketing for you. Similarly, Google is beginning to do the same. Understanding that their partners are not good at marketing nor can they afford big marketing budgets, it seems Google is willing to take on the marketing efforts for many of their partners.

What impact this has on their margins is a key metric to watch. Their growth is already stalling and they currently have the most profitable customers they are going to get to fuel their current business model. Spending marketing dollars to acquire customers who will they will reap less revenue from is both a necessity but also risks off-setting any gains.

Chart: Internet Access by Device

As our readers know, every now and then I like to post a chart and tease out the highlights. Today, I want to do that with some updated data. Across many global markets, consumers were asked which devices they have accessed the Internet on, either through an app or browser, over the past 30 days. This data is updated frequently so we can track the growth of internet access by device over time.

Screen Shot 2014-11-07 at 9.30.04 AM

Mobile/Smartphones: This is be obvious and we can expect continued growth in internet access by smartphones for the foreseeable future.

Tablets: Tablets remain the other growth area. Given the slowdown of tablet growth overall, we can make a few observations. The first is the tablet is continuing to steal internet time from other devices, mainly the PC. The second is the tablet market is actually growing. However, it is doing so by the secondary market. Meaning that many of those initial rush of iPad buyers are continuing to hand down older iPads to other family members as they upgrade their iPad. Since this upgrade isn’t happening all at once but is trickling in over time, we see slower sales but larger use of tablets. Another is the continued explosive growth we see of Chinese white box tablets. In certain markets like Russia, India, Mexico, Brazil, and to some degree China, these low cost, no name brand tablets are quite popular. Most are dedicated game players or portable TVs, but internet access at some level should also be assumed. This is happening to a degree in the US as IDC highlighted RCA being in the top 5 of tablet vendors for Q3 2014.

As I see this data on tablets and see quarter after quarter of more people say they are getting on the internet with a tablet than the quarter before, it shows us the category is still viable and still growing.

PC/Work PC: I like that these two categories are separated in the survey. It helps us get an understanding of how much larger the consumer PC segment is vs. those who use a PC at work. When you look at both numbers, it is possible to interpret their lines and believe the PC market is simply not growing. This certainly looks to be the case. We are not adding brand new PC users at anywhere near the rate we once were. Also, as I alluded above, more PC users’ internet use is likely shifting to other devices.

I point this out in many of my focused PC industry analysis reports through my firm Creative Strategies. What we discover when we study PC behavior in both consumer and enterprise environments is the device is becoming a much more focused product than a general purpose one. People use it for specific tasks and have now defined what tasks it is better for vs. others. A great example of this is Facebook. In our studies, we found over 75% of daily US Facebook users access Facebook on their phone but while sitting at their work PC. Facebook has a browser based version so why not just use it? We find people simply prefer the mobile version, so we see this dual use of a PC and smartphone at the same time. Responses we’ve heard were that it was faster, more private, more convenient, and they could use the mobile app to get a particular task done, even though they could have done the same thing on the PC. If general purpose computing moves from the PC to devices like the tablet and even more so to the smartphone, it will bring dramatic implications to the PC ecosystem.

Television: Increasingly, more people are accessing the internet from their TV. It is important to note in this data that a game console or set top box is included. This is not referring to a dedicated connected internet TV, but to the use case of connecting to the internet in some way from your TV. Clearly Netflix, online console gaming, and other use cases drive this, but the fact it is slowly increasing tell us quite a bit about the role the TV will play going forward and the internet services are poised to be monetized from the big screen.

Given this survey comes from over 30,000 responses, what the lines also show approximates volumes. The higher the percentage of the line, the more people using the device to access the internet. Like most surveys, it does not include mobile only consumers, but we can be assured there are more people accessing the internet from a mobile device than a PC, even though these lines don’t show that. What this chart sheds light on is what the internet by device landscape looks like in the multi-screen user world. The “internet embedded into everything” is the theme. What devices dominate its usage is the interesting part to watch going forward.

Understanding the Global Mobile Web

In the latest mobile focused podcast with Benedict Evans and myself, we touched on a theme that needs more fleshing out. That of a future only possible because of mobile computers/smartphones. When I detail the mobile first world in articles, presentations, and reports, what I highlight is not only the impact but the necessity of mobile to move computing forward. The PC in the shape of a notebook or desktop took computers as far as those shapes would allow. There are very few new users for PCs of that design. The PC in the shape of a tablet can take computing even farther, particularly in business environments, and that form factor gets a PC into the hands of more people. The PC in the shape of the smartphone, however, brings computing to everyone. Perhaps more importantly, the smartphone can bring the internet to everyone. More revolution will come from the PC in the shape of a smartphone than from any previous computing product in history. It is because of this, we will see countless opportunities emerge and it is a future only possible because of mobile.

The smartphone opens the door to new possibilities because it is the first time the technology industry is accessible to everyone. In fact, over the next decade or so, we will watch smartphones become a commodity. Estimates are, by 2020, quality, powerful smartphones could cost $10. The mobile web is already bigger than the desktop web and, in a few years, the mobile web will dwarf the desktop web. It is a cold hard fact, the future of the Internet is mobile. This reality brings out some interesting implications.

Global Mobile Web Browsing

There was a debate last year around the disparity between iOS web browsing and Android web browsing. It seemed a conundrum — Android had 2x the user base but much less of the global browsing share. As you see from this chart from NetMarketShare, only recently has Android overtaken iOS in global web browsing share, and it is still very close.

Screen Shot 2014-11-06 at 9.12.37 AM

When we include Android AOSP and Google’s Android, there are well more than double the active devices compared to iOS. But why did it take so long? There are many theories but there is one in particular I find insightful and adds a bit of needed clarity to the global mobile web discussion.

The bulk of Android’s growth and market share is in the lower tiers of smartphone price bands. My estimates put premium Android price tiers at roughly 15% of the global Android installed base. Meaning much of Android’s installed base globally consists of non-premium/lower price tier smartphone users. This explained quite a bit of the global web browsing paradox. Apple has a significant installed base of premium users, larger than Google’s premium users, and those customers spend more time browsing the web and consuming internet data. As I started researching the mobile web in emerging markets, it became clear one of the factors for this disparity was, because of Apple’s premium customer base, this audience could afford to liberally browse the web. Where much of Android’s installed base, having to deal with pricey and slow internet connection times, and no wi-fi at home, could not.

This insight becomes even more clear when we look at this chart from Jana.com showing the number of hours of minimum wage work required to pay for the average data plan.

Hours-of-minimum-wage-work-needed-to-pay-for-a-500-mb-mobile-data-plan-Hours_chartbuilder

Due to the infrastructure challenges in many of these markets, consumers are very aware of not only how much data they are using, but also the size of the application they are downloading. This is a fascinating quote from a post from LightSpeed Venture Partners, an investment firm focused on India.

So, what is an ideal app size, especially in markets like India with challenged infrastructure?

The ideal size is 10-15MB globally. Idea size for an app for tier 2/3 countries (like India) is below 5MB. 500MB+ is a non-starter. At 50MB+ the conversion rates fall off dramatically. On Android and iOS, conversion rates dip by 50% in tier 1 nations for non-game apps above 50MB. In tier 2 and tier 3 nations, conversion rates dip by 50% for games above 15MB.

It is becoming clear the high cost of data plans in many emerging markets are influencing how they use the mobile web and the apps they use and download.

The Light Web

Understanding this leads me to consider the role web apps may play in these markets. There is a web app called Zomato, which is sort of like Yelp for India. Zomato is a great example of a light application that is useful via a web app in those regions where light applications are necessary. It is true native apps are still dominant in these markets, however, we are still dealing with only the top 30-40% of the global mobile audience that has a smartphone and a data plan. As we extend that reach into the broader 60-70%, a healthy portion of those customers will be even more sensitive to the costs of data and size of applications they consume.

This is why the “light web” is a reality for the next billion users. Whether by lighter/more efficient native apps or, as I believe, web apps, the light web is better positioned for the next billion. Interestingly, even Uber has a robust web app. It is possible the powerful cloud and light, thin client computing paradigm is destined for emerging markets.

It is clear, thanks to PCs in the shape of a smartphone and the inevitable inclusion of robust sensors in these devices even at low prices, that we are heading to a fascinating future not only made possible because of mobile devices but empowered by them. This future will pose great challenges to many incumbents but even greater opportunities for the innovators.

Mobile Focused Podcast: A Future Only Possible Because of Mobile

In this podcast, Benedict Evans and Ben Bajarin discuss some of the slides from Benedict’s updated Mobile is Eating the World slide deck. Some important observations are made and teased out about the opportunities that we are seeing globally that are only possible because of the smartphone.

Show Notes:
Mobile is Eating the World Deck – link

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Runtime:37 min.

Research: Who’s Buying What Tech around the Globe This Holiday Season

We have some research that gives us insight into what tech products are on the interest horizon for purchase over the next six months. While intent to purchase surveys don’t always lead to purchases, it does give us an indication of what products are top of mind and more importantly how that may differ from each region across the globe. This research comes from surveys across 32 different regions and over 30,000 people in total. With as much data as I have, I struggled with the best way to display it. Since percentages did not equal 100% and were also based on sample size from each region making the percentages vary, I decided to weight the values numerically by priority. 12 is the highest priority / interest to purchase over the next 6 months and one is the lowest.

Here is the chart from a global standpoint with all 32 regions included.

Screen Shot 2014-11-03 at 8.31.48 AM

As you can see, globally tablets, smartphones, and a PC (laptop) have the highest interest level/priority to purchase over the next six months. While mobile phone numbers shouldn’t be surprising, it is interesting that, in all regions, the tablet still remains the highest priority with the PC (laptop) third. As I look at what we see happening in the market, my gut tells me there is still a large number of global consumers struggling with whether to get a laptop or a tablet. I’ve been saying for some time that, when the consumer market moves and finally upgrades their PC, we will see how the tablet and PC conundrum plays out. Still, looking at the data, one has to believe companies like Microsoft and Intel look at this and believe the 2-1 value proposition is strong if a buyer is struggling between both products.

To look at the data more granularly, I’ve broken it out by some of the larger regions by population. The sample sizes were also quite a bit larger in these regions giving us better detail of who intends to buy what.

Screen Shot 2014-11-03 at 8.43.14 AM

As you see, most regions are prioritizing the tablet from a purchase intention standpoint. A few markets like China and the US are prioritizing mobile, thanks to these two regions being extremely seasonal with mobile purchases. When it comes to the PC, it still ranks high, but only Brazil consumers have it as their top priority over the next six months. What is interesting to me is other categories on this list which can also be served by a tablet should the consumer desire. Take the e-reader for example. While lower on the priority list, a tablet can also be an e-reader. Perhaps, as a consumer gets savvy to this, it sways their decision more toward a tablet or a 2-1 rather than a desktop or clamshell? The tablet or 2-1 could also conceivably fill the role of a game console or even a DVD player where access to digital movies exists. What this highlights is my point about the tablet as a much more diverse device due to its form factor than previous heavy computing devices like notebooks and desktops. The tablet form factor can simply “morph” into so many things thanks to the software and services. As consumers become more knowledgeable, I believe the value of the tablet increases.

One point that stands out and is worth highlighting is India’s intent to buy a mobile phone. Look at the data point and you would think buying a mobile is simply not a high priority for Indian consumers. When in reality it is the highest priority among the masses from a tech purchase standpoint. Keep in mind, to take this survey, you have to be online already in some capacity with a smartphone, PC, or tablet. The online population in India is still very small in contrast to India’s population (somewhere over 200m people are actively online). So people who are answering these questions from every region are already online in some way, shape or form. Google’s head of India estimated 5 million new Indian consumers are coming online every month. Most of those are coming from mobile devices. For the unconnected, the mobile phone is the highest purchase priority since it is most people’s first computer. Looking at the data, we are focusing a bit more on what the purchase intent of the already connected is for the next few months.

Where that reality stands out is when we look at what tech was purchased over the past six months. This is a question I like because it brings a bit more clarity to the picture since consumers are stating what they have actually purchased rather than what they intend to purchase. Similar to the above chart, I weighted the percentages numerically. The most purchased product over the past six months is a 12 while the least purchased product is a one.

Screen Shot 2014-11-03 at 8.59.54 AM

Here we see the clarity of the mobile priority. As expected the mobile phone has dominated purchases over the past six months. We also see the strength of the notebook and desktop rebound we are seeing as it shows up in this data. The desktop in particular was a frequently purchased product globally over the past six months. We had a hunch early last year the PC would do well this year and we were right. Partly based on similar intent to purchase data we got this time last year. In fact, the above chart showing who purchased what was very similar to the same intent to purchase data from a Q3 2013 survey.

We know about the centrality of mobile, but what intrigues me about this data is the continued interplay between tablets and PCs. As a part of my overall industry analysis of both categories, this remains a story line and one that does not have as crystal clear of an ending as other categories. I get this data every few quarters so we will check back early in 2015 and see how the story is playing out. My guess is that Mobile is still high, but where PCs and tablets fall is the key question.

Microsoft Beyond Windows

Microsoft is going through an evolution. Microsoft has always been a “platform” company and for decades that platform was Windows. Microsoft is in the post-Windows era but they are still poised to be a platform company. The only difference is that the platform resides in the cloud rather than on billions of PCs.

Windows runs on about 1.5 billion PCs. Not every single one of those PCs is owned by a single individual. Many are in offices and never leave. Many are in screens at retail, powering point of service terminals or visual displays. Some sit in internet cafes all over the world and, of course, many are in people’s homes. The challenge staring Microsoft in the face is the 1.5 billion copies of Windows being used is not increasing and is, in fact, decreasing. To put it bluntly, Windows, as Microsoft planned it, has gone as far as it can go. That is because the primary computing form factor Windows runs on has gone as far as it can go. Desktops and notebooks are not growing in sales and not attracting first time buyers in any meaningful numbers. Computers in the shape of a pocketable device are where the growth is and Microsoft has little play for a platform on those screens. This is why the cloud platform matters. Microsoft may not be able to acquire new users for its Windows platform but it can potentially touch several billions more than Windows ever could as a cloud platform player.

The Line Ends at Services

Study the technology industry long enough and you start to recognize patterns. One pattern that is consistent, and I believe remains consistent in modular ecosystems ((A modular ecosystem is one where many critical parts of the stack are owned by many individual players. This differs from an integrated ecosystem where a single player controls the key parts of the stack and thus defines the ecosystem unilaterally.)) like Micosoft’s, is how the value chain always ends at services. In the early stages of a segment, the value starts in hardware, then quickly moves to software (once the hardware is good enough), and, finally, all the opportunity shifts to services. This is why, at the end of the day, services companies are the best positioned for the future in modular ecosystems (which generally encompass the largest user bases).

We have quickly moved out of the hardware value cycle, which is why we are seeing ASPs of things like PCs and smarpthones rapidly decline. Software is also mostly commodity and all the upside is quickly moving to services. Understanding this is essential. Because, at a fundamental level, services are not easy and not everyone can do them well. So there is an opportunity for a cloud platform player to emerge as a service enabler for a broader ecosystem. This is where I believe Microsoft fits in and where their greatest upside lies. By being a cloud platform company, Microsoft can create products and services that transcend local platforms like Windows, OS X, Chrome, Android, Windows Phone, Blackberry, Firefox OS, Tizen, and any other local platforms that may show up.

A great first example of this is the Microsoft Band — a purpose-built fitness tracker specifically designed for the health enthusiast market. The hardware itself contains 10 sensors, all specifically integrated into the bigger story of Microsoft’s health platform. The Microsoft Band is simply a front end to the data. It is hardware and, more importantly, sensors as a service. Microsoft is building a health platform that gets smarter and better the more data it has about you and others. Jawbone, Fitbit, and many others could benefit from this service and simply provide the hardware and software front ends to a bigger data story. They are examples of companies who need to be investing in services and Microsoft could be a great partner in this.

The Health example is one of many where Microsoft can invest in cloud platform services and help other companies with their necessary services strategy.

It is my firm conviction that, for many hardware companies, their future success and revenue depends, not on monetizing the hardware, but in monetizing the services. In similar ways the early PC companies went to Microsoft to license Windows in order to deliver hardware value, the next generation of hardware companies can go to Microsoft to license their cloud platform to enable the next generation of hardware and services. Few companies are as well positioned to capitalize on this shift from hardware to services as Microsoft. They still have a long road ahead of them and they need to build trust with these next generation companies that they are a true partner and not a competitor. Nonetheless, I like where Microsoft is sitting with a focus that resides in the clouds.

Video Analysis: Samsung’s Fall From Grace by the Numbers

In this video analysis/padcast I take a look at some of the numbers behind Samsung’s steep revenue and profit decline.

If you have the Perspecive iOS app from Pixxa, then you can click this link and watch my story on the app, pause it and interact with my charts and data yourself should you please.

Video length = 7 Min.

[fluidvideo url=”//player.vimeo.com/video/110544905″]

Podcast: Discussing Disruption Theory

A few weeks back Horace Dediu of Asymco and I were having dinner and we got to discussing some of this updated thoughts on disruption theory. One bit in particular was how the luxury tech market was causing him to evolve some thinking on the theory as it relates to consumer markets. I thought it would be great to have him on and we could chat more about disruption and the role it plays in the technology industry in the 21st century.

Runtime: 1:07m

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Tech.pinions Insider Reader and Feedback Survey

The Tech.pinions team is putting things in place to begin investing even more time and effort into our Insider analysis service. We started this service just over a year ago and the response and feedback has been better than we could have imagined. Our goal was to make quality industry analysis affordable so more readers could be educated and informed in a deeper way than what most sites do publicly. As we look to invest more time and effort into our service, we would  like your feedback.

As a part of this investment, we will have more articles, research and analysis on the major industry movements. Because of that, we need to further grow our resources. From the persistent feedback we hear from readers that we should raise the price of our offerings, we are considering this option. But it is important to know that, if you are a current subscriber, the rate you pay will remain the same as any price increase will only impact new subscribers. So please, help us make our Insider analysis service better by giving us feedback.

As always, if you have any questions or concerns, you can email me at ben@techpinions.com.

Thanks again for being a reader and a subscriber and making it possible for us to keep writing for you. It is an honor.

— Ben Bajarin

The Consumer Tablet Growth Opportunity

A great deal of my tablet market analysis has been spent exploring opportunities for a PC in the form of a tablet. Opportunities not fulfilled by a PC in the form of a desktop or laptop. As I explained here, the enterprise or commercial tablet market’s upside is still quite large. But the question about the tablet opportunity for the consumer market looms.

Tablets grew faster and were more widely adopted than any previous electronics device in history. Continued triple digit growth was simply not sustainable. The tablet market slowdown was never a question of if but always of when. As you can see by the following chart, that time is now. ((I’m keeping iPads and the overall tablet market separate due to the extremely high sales of white box, low cost Android tablets sold that are used for nothing more than portable TVs and game players.))

Screen Shot 2014-10-23 at 8.23.07 PM

The tablet market, like all markets before it, is normalizing. Growth rates have slowed and now we can wrestle with the question of how much more growth is to be had.

Replacement Market vs. First Time Buyers

I find it helpful to focus on the question of whether the tablet market for consumers is a replacement market or if there is still a market for first time buyers. If the tablet is only a replacement, then it has peaked. However, I don’t believe that has happened. Apple keeps informing us 50% of iPad sales are to first time buyers. Which gives us an indication there are still new owners to be had. So how may that growth in first time buyers be had? I see two possibilities.

The first could be price. My friend Stephen Baker at NPD gave us some insights and holiday outlook for the tablet market. As Stephen points out for the US market, price could be a driver. I think it should be safe to assume that price war offerings for iPads and other tablets will be fierce in Western markets this holiday. Retailers use this pricing to get customers in stores where they hope they buy a plethora of other items. I’m guessing retailers will hope to leverage Apple’s new lineup with this strategy in mind. I believe Apple has a strong lineup from the original iPad mini to the newest iPad Air 2 covering many price points and giving retailers pricing flexibility with their offerings. In general, other branded tablet vendors have been seeing decreasing sales and Samsung in particular. It’s reasonable to assume Samsung tablets will see steep discounts this holiday at retail.

The second growth area is replacements and additions. It is very hard to predict when consumers will replace their tablets and more specifically their iPads. ((I point out the iPad specifically because it is the tablet brand that has the largest installed base by a healthy margin.)) As often is the case with Apple products, iPads are often handed down to other members of the family or to friends. In this scenario, the new iPad replaces the current owner’s device but another person gets their first iPad. Ultimately this is good because it builds the iPad owner base, who we would assume will be added to the future replacement opportunity. Continuing to build a large installed base will yield rewards. Whether the new lineup drives this upgrade and hand-me-down cycle we literally have no idea. But should it hit this quarter, it could be huge. While the iPad 2 is still a perfectly fine device, it has the highest installed base of all iPads. My firm’s estimates for active iPad 2s in use is over 60 million. We believe this base will upgrade at some point in time — we just don’t know when. It could be this quarter or it may not. But, given the price aggressiveness we assume we will see this holiday season, I’m guessing many iPad 2 owners may be enticed. Realistically, there is no better quarter to find deals than a holiday quarter. So this large installed base of iPad 2 owners would be smart to upgrade this quarter or risk waiting another full year. Given the channels I track, I should have a decent sense of what is happening before the quarter ends.

Stealing PC Owners: I still believe the traditional notebook and desktop form factor is overkill for most mainstream consumers. The decent sales numbers of PCs we are seeing are largely coming from enterprise and commercial markets such as education/students. The consumer market has yet to move in mass to upgrade their PCs. We believe at some point in time those consumers will make the move. And the wonderful unpredictability of many consumers leaves us guessing at what they will buy and when. Will they buy another PC? Or will they move to a tablet? This is the tension we will have to live with until we see a market indication of what is happening. The tablet will still have the price advantage this quarter and I suspect Windows 8 is still a hinderance. I do expect Macs to have a very strong holiday as well and, with the new iPhones in the mix, there is a lot competing for consumers’ wallets this holiday.

These are a few of the scenarios I think about when I look at the upside for consumer tablets. This quarter seems very hard to predict right now for nearly everything but for the  smartphone market. For the first time in a long time it’s hard to say with any accuracy how the consumer market for PCs and tablets is going to play out.

The Myth of TV Disruption

I, along with many other people, cannot wait until the day TV is disrupted. It continually shocks me that the single worst piece of technology I have in my house is my cable TV box. I’ve played out scenario after scenario about how TV gets disrupted and still I land in the same place. It is much farther out than any of us want. This realization was further confirmed this week as I was at a conference and got to spend time chatting with the heads of digital media for ABC, CBS, Fox, WB, as well as the VP of Dish Networks. Suffice to say, if I was going to get a handle on if or when the disruption of the cable operator business would come, there was no better group to speak with than these executives. The subject on my mind was the possibility of un-bundling network content from the cable subscription.

HBO recently announced they will take HBO direct to consumers in 2015. Previously, to get access to HBO content you had to be a subscriber of a qualified cable service. HBO will now let consumers subscribe directly to them should they choose. News headlines position this move as a focus on cord cutters and it certainly is. However, the feasibility of cutting the cord remains an option for only a small number of consumers, not the masses.

Similarly CBS is getting in the a-la-carte game but offers significant restrictions in the service. What gets missed most often is how costly contract rights are as well as the production costs of proprietary shows. When you add all these up, the economics for a network to offer a-la-carte options don’t add up. The VP of digital from ABC told me if they were to offer just ESPN and ESPN network shows as a subscription they would charge upwards of $40 a month and, in some cases, $60 for all access. But the real kicker for me in this conversation was the contract rights for sports.

Every major sporting league has just finished wrapping up new contract rights for live events. As the media execs explained to me, those deals are now secured by the major networks for the next decade and longer. Meaning, the networks can offer all the a-la-carte services they want at whatever prices they want but their offering will not include live sports. Hopefully, I don’t need to convince anyone how important live televised sports are in the United States. Cut the cord and you don’t get live NFL, MLB, NHL, NBA, Tennis, Futbol/Soccer, NASCAR — nothing. This will be true for at least the next ten years if not longer.

When you think about how many channels you get and how much you pay for your bundle, your cost per channel is no more than a few dollars per channel and for many customers it is a lot less. When you consider a subscription to only a small handful of networks’ a-la-carte offerings would likely end up costing you the same amount you pay for hundreds of channels today, it becomes clear that cord cutting is actually not the best value. Sure, a small few can pay “less” if all they watch is a handful of shows but that is not representative of the mass market US cable subscriber.

As I look at the market today, and speak with execs in media companies, it becomes clear we are nowhere near having the cable companies disrupted. Should a tech company like Apple or Google or Amazon want to embark on such a task, their only option would be to buy the networks or a cable/satellite company. Which seems unlikely. I have no doubt smart set-top boxes will evolve and a small few customers will be happy cutting the cord. Anecdotally, I don’t know a single person who has cut the cord who hasn’t gone back, largely because of sports.

Another point that came out, was how the smaller networks would be crushed if unbundling became the norm. How would they be discovered? Discovery, Animal Planet, and the many niche networks would have a hard time in an unbundled world.

Unfortunately for now, the disruption of the TV market remains a myth.

The iPad Air 2’s Huge Upside

I’ve had the privilege of using the iPad Air 2 for a little less than a week now and, despite the “sky is falling on the tablet market” themes we hear, I wanted to put the iPad Air upgrades into perspective. There are two ways to look at the iPad Air — a consumer angle which I will touch on in a later post and a less talked about enterprise angle to explore.

What most miss about the new iPad’s upside is the opportunity to extend computing to areas where it was not prevalent before. The PC, in the shape of a desktop and notebook, is an efficient design and has evolved to be specific to its purpose. Those two form factors are the best computers for deep work done sitting down. The PC in the shape of a tablet is not specifically designed to replace the desktop or notebook for those who sit down all day to work. There is, however, something the iPad is designed to replace that mobile field workers use frequently–the clipboard.

Building Inspector Looking At New Property

When we talk to companies deploying iPads or interested in deploying iPads, a primary observation stands out. iPad’s are largely being utilized by workers who did not previously use a computer regularly in their day job. This is because their job function requires them to stand or be moving most of the time. In essence, most of these workers carried around a clipboard along with some paper process as a part of their routine. This could be a safety officer or inspector on a job site who made notes and filled out forms just to go back to a desktop PC later in the day and enter data. Public health and safety workers have similar processes. Construction workers are using iPads loaded with blueprints and can interact with them digitally, even marking changes or updates to a design in real time. I’ve heard stories of iPads in use to interact electronically with manuals while working on an aircraft. I could rattle off dozens of stories from IT managers and CIOs who have shared with us the creative ways iPads are being deployed in the enterprise. The common theme among them all intertwines mobility with eliminating  inefficient paper processes with more efficient digital ones.

With that understanding, it makes sense Apple continues to make the iPad thinner and lighter. To use this “PC in the shape of a tablet” all day while on your feet, it has to be light. It has to be easy to hold and operate for long periods of time. Touch ID is another essential element for the iPad to fulfill its enterprise purpose in this context. These mobile field workers spend much of their time outside the four walls of the corporate office. They are the most likely to have their mobile devices lost or stolen. Security is crucial for these deployments and Touch ID, which works as flawlessly on the iPad Air 2 as on the iPhone from my experience, solves a critical pain point for enterprise deployments that previous iPads did not. Apple also made an improvement to the display essential for field worker deployment. If you go outside to use the iPad as part of your job, eliminating the glare is a valued feature. From my experience, the work Apple put in to make the iPad’s screen less reflective lives up to the promise.

From the perspective of how and why iPads are gaining ground in the enterprise, you can see why the newest improvements of the iPad Air 2 will be not just attractive but also necessary. The iPad’s head room for growth is significant. Based on the types of jobs that are extremely mobile and work done out in the field frequently, we estimate there are upwards of 300m jobs, and growing, where computers are not used today because they were in the shape of a notebook or desktop. Yet this is where the opportunity lies to bring a computer in the shape of a tablet.

My Apple vs. Samsung Conspiracy Theory

The Samsung issues we are seeing has me thinking about something. It’s a conspiracy theory with zero evidence but something that strategically intrigues me. Tim Cook said in a recent interview with Charlie Rose that Apple could have made a bigger iPhone years ago. So the question is, why didn’t they? The writing was on the wall that larger screens were trending upwards. The pundits read this as Apple’s inability to see market demands and hailed Samsung as the rising star who will dominate forever and ever. Apple must have known that all they needed to do to shut everyone up and crush Samsung in the high end Android camp, where it would really hurt them and Google combined, was to release a larger iPhone. Well, my theory is they did know this and they let Samsung and perhaps even Google have their time in the sun intentionally. In the art of war, this tactic is referred to as a feigned retreat.

A feigned retreat is a military tactic whereby an army will pretend to withdraw or that they have been routed in order to lure an enemy into a position of vulnerability. Feigned retreats are one of the more difficult tactics for an army to undertake, and require well-disciplined soldiers. This is because if the enemy presses into it, undisciplined troops will lose coherence and the rout will become genuine.

Samsung knew the large screen iPhone poised the greatest threat. Yet Apple had no sense of urgency. I recall many conversations with Samsung execs who asked with genuine surprise, “What are they waiting for?” Over time, I heard them convince themselves Apple just must not be interested in larger phones. That the one handed operation conviction will trump where the market is going. All the while Apple was sitting back patiently waiting to employ their thermonuclear war that had less to do with the battlefield of the courts and more to do with the battlefield of the market. Knowing that, once they released larger phones, they would gain share in the premium smartphone segment mostly at the expense of Samsung. From every data point I see globally that is exactly what is happening. In fact, I just read a report from Baidu today in China that highlighted data from a survey they did. Over 40% of current high end Android buyers are planning on switching or strongly considering switching to the iPhone 6 Plus. 21% said they would absolutely plan on buying it and 21% said they would strongly consider buying it. All primarily because of the larger screen.

Obviously this is just a theory. I could poke many holes in it with counterpoints. Perhaps I’m giving Apple too much strategic credit. Nonetheless, I thought I would put it out there to spur some fun conversation.

Did Apple Do Enough?

At Today’s Apple’s Event, I got a question over and over again. I thought I would share my thoughts on it. First off, the question, “Did Apple do enough?” is the wrong question. The correct question is, “Did Apple release a better product than they did last year?” Of course the answer is yes. A smart fellow once told me, “If it is worth doing, it is worth improving.”

We can view product enhancements and demand the revolutionary without realizing that revolutionary requires evolutionary improvements. Leaps in innovation don’t happen without the evolutionary cycles that come before them. But what matters is that each year’s product is better, in a fundamental way, to meet the needs of current and new customers.

I have a core thesis that Apple does not really have any competitors. I know many disagree and we can debate this from a business, strategy, and market standpoint, but from a product standpoint I believe this is true. In fact, I believe Apple’s primary competitive product benchmark is last year’s model. This is why the correct question is whether or not Apple released a better product compared to last year’s version.

Is the new iPad Air better? Yes. Is the new iMac better? Yes.

Getting that out of the way, let’s look at why it matters to today’s announcements.

Today’s Announcements

iPad. In my mind Apple did several important things for the iPad product family. The first is Touch ID. While it may seem like an obvious upgrade, it is also significant for two reasons. In enterprise accounts, where the iPad is nearly universally deployed in some way at Fortune 500 companies, Touch ID is an extremely important improvement. We can debate whether the iPad has peaked in consumer markets but one area I am absolutely certain it has not is in enterprise. What is key to understand about the iPad in enterprise accounts is it is not being deployed to replace notebooks or desktops in most cases. Rather, what it is doing is bringing a computer to a field worker who used a simple handheld device or no computer at all.

The iPad is being deployed to many mobile field workers who are generally on their feet all day. Public safety, construction, employees doing truck rolls or installs, compliance officers running routine safety checks on oil rigs, power plants, etc. These mobile field workers usually use a clipboard and have may never have used a computer regularly in their day job. Desktops and notebooks are designed to be used while sitting down, not walking around in the field. This is the enterprise use case for which the tablet form factor is best designed. But because these workers are mobile, they are also the more likely to lose or have their work tool stolen. This is where Touch ID is critical. Enterprise has been clamoring for Touch ID on iPads for the security elements they enable. The upside for the iPad in enterprise is still large and Apple’s partnership with IBM will greatly enhance this.

Enterprise sales alone won’t continue to drive annual iPad growth. So what is the current story for consumers?

Apple has shared a statistic over the past few quarters. 50% of iPad buyers are new to the iPad. This is a key metric. Rather than look at Apple’s lineup and wonder if it will drive upgrades, look at it and wonder if the current lineup is inviting to first time iPad buyers. Here is the full lineup.

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From beginning to end, Apple has an iPad for nearly every price point. By keeping the original iPad mini in the mix at $249, Apple has an attractive price across the board. This is a key story when we think about first time buyers. Not everyone needs the current generation iPads. Last year’s models serve a purpose in helping fill price gaps and giving consumers more options.

The challenge of thinking about upgrades is we still have literally no idea what the consumer upgrade cycle is. We have estimates about how many Gen 1 and iPad 2s are still in use and it is a significant number. But we have no read on if those consumers will upgrade at this point. Because of that, predicting the consumer upgrade cycle is near impossible. It could happen one random quarter and catch everyone off guard or we may get early signs. But right now, we don’t know. So in my analysis, I’m focusing on the story for first time buyers. And that story is strong with the full iPad lineup.

Retina iMac. Lots of interesting things about this computer. The first is I joked Apple made a 27″ 5K TV for $2499 (less than a 4K HDTC) that just happens to include a computer. The display is something to behold when you see it. With this product, Apple continues to cater to their bread and butter customers – the creative professionals. This is a product a creative professional will see and say it is NEEDED not it is just wanted.

Whether you make movies, TV shows, create graphic arts, edit photos, etc., there is literally no better option than this 5K Retina iMac. I expect significant demand for this iMac and let’s hope Apple can keep up with it.

Tying it All Together

Again Apple has emphasized the story of their ecosystem. During the event I tweeted:

The hardware story, iOS 8 and OS X Yosemite with features like Handoff and Continuity strengthen the ecosystem. No other company is addressing the full lineup from desktop, notebook, tablet, smartphone, and soon a smartwatch, to work together this harmoniously from a user experience standpoint. If you are going to own any combination of computers from PCs, tablets, smartphones, and eventually a smartwatch, Apple’s seamless ecosystem is presenting itself with the strongest offering across categories. This is the heart of the “only Apple” narrative.

India and the Digital Age

When it comes to the computing products I study — TVs, smartphones, tablets, PCs — I tend to talk primarily about what is happening in China and the US/Europe. Mostly because, for most consumer tech products, China and the US are the largest markets by population for consumer technology. While there is a great deal of competition and technological activity in the US and China, these markets are quickly becoming replacement markets for most tech products and not a green field. Because of this reality, growth rates in these regions for things like smartphones, tablets, and even PCs in many cases have slowed dramatically. India, however, is a completely different story.

India will be the world second largest market for smartphones. With a population of just over 1.2 billion, India has nearly as many people as China. Yet, unlike China, smartphone penetration is still extremely low in India. Consensus installed base estimates for smartphones in India are in the 110-120m. Total mobile subscriptions in the country is over 900 million. Over 70% of the population has a mobile subscription and roughly 10% of the population has a smartphone. With the vast majority of consumers in the country still using a feature phone, the upside growth for India is massive. Several years ago, many of us in the analyst community kept highlighting China as the growth opportunity. India is currently where China was a few years ago when our focus was on China. India represents the next big growth opportunity — yet it will also come with many challenges for global players looking to compete in the region.

As I’ve studied China, the US, and India, it becomes clear each of these populous regions are very different when it comes to consumer tech. Each country’s unique culture plays a role in how local consumers view technology and how it impacts their desire to purchase and use certain products and services. This is fundamentally why local hardware companies are gaining specific advantages over foreign ones due to their understanding of the local consumers needs.

As I pointed out in this analysis of smartphone regionalization trends, India is still anyone’s game from a hardware standpoint.

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The model predicts Micromax, a local India brand, is poised to overtake Samsung as the number one smartphone quarter by the end of 2014 and quite possibly has already done so by the end of Q3. Watching local brands rise to power in both China and now in India is truly fascinating.

While China is also a relatively price sensitive region, India may be even more so. Not entirely due to economics but largely because Indian consumers have what is called a “value for the money” mentality. They tend to not pay more for something when a lower priced product is more value for the money. This value conscious mentality is more prevalent en masse in India than many other regions we study. Parts of Europe such as Germany and Spain show similar value-centric mentalities but obviously the scale of India is much larger than Germany and Spain.

Indian consumers, like many consumers, don’t want cheap products. Their focus is on finding value. Good specs at a good price is the major theme. This will be a key metric as smartphone vendors look to convert the large user base of feature phones to smartphones. Android One will play a role in driving feature phone to smartphone conversion. Google is aggressively looking to gain a foothold in India and Android One has a key role in that strategy. Currently, Android One has a number of hardware restrictions in order to keep the price down. Over time I believe this will change as Google continues to keep Android One hardware both price and spec competitive.

What becomes clear, and is common in both India and China, is how hard it will be to make money on hardware in these regions. Instead, companies will have to look to monetize services more than hardware. As I look at where, and how, revenue opportunities are going to present themselves in this region, I am increasingly convinced it will not be in hardware.

Companies looking to compete in India will have to take a services driven approach. This is why Google could be well positioned but also perhaps Xiaomi. What is interesting to me about Xiaomi’s model, which I outline in this video analysis, is how so many of the ways they make money are similar to Google. Xiaomi makes quite a bit of money from app stores and content stores for books and games. I have a hard time believing they will give up these revenue drivers and give that revenue to Google instead as they look to enter India. Given the green field that is India, Xiaomi’s services model, which is many ways competes directly with Google, has as good of a chance as any to gain a foothold.

Apple in India will also be challenged. There are likely only around 10-12m iPhones in use in India based on my estimate model. Older generation iPhones seem to be perceived as higher value for the money than current generation iPhones and appear to move in more volume than current generation iPhones. While Apple may not find great success with current generation products in India, it seems their later generation products could be their angle to grow in the region.

Outside of Xiaomi and Apple, Motorola is the other foreign brand that I’m keeping an eye on. Motorola has been catering strongly to the value for the money mentality and seeing steady growth in sales from India.

Ultimately, this is exciting for both the country and the technology industry. As we saw with China, as pocket computers gain in popularity, a tech boom emerges. I believe we will see perhaps even more interesting innovation, particularly in software and services, come from India.

So what is beyond India? I get asked quite a bit about what other markets have my interest. Right now it is Brazil and Indonesia. Each very different as well from all other regions I study and equally fascinating from a consumer tech standpoint. I’ll likely do a highlight on these countries as well in the future.

Video Analysis: Mac vs. PC With Some iPad Help

Thanks for the feedback on my last Padcast on Xiaomi. This will likely be the last one I do for free for a while. I will do more of these for our subscribers on key industry points. If you liked these and are not a subscriber I encourage you to subscribe to our industry insider analysis service.

In this video analysis/padcast I took a look at some data related to growth rates of the PC industry and the Mac. I added some points, I think are interesting, about iPad’s mixed in with Mac Sales as well. If you have the Perspecive iOS app from Pixxa, then you can click this link and watch my story on the app, pause it and interact with my charts and data yourself should you please.

UPDATE: I realized after I used the wrong number for Apple’s share of PC sales in 2013 and YTD 2014. I talked through this on the last slide. This is the correct slide. Apologies.

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Video length = 5 Min.

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Video Analysis: Xiaomi in Focus

I have the ability to record and broadcast presentations I give through my primary presentation tool Perspective. So I thought it would be interesting to try something different and create a quick analysis of some of my data and add make some points around a particular focused topic. To start, I thought I would focus on Xiaomi. I’d love any thoughts or feedback on this as it is something I’d like to do more of, specifically for our subscribers, but wanted to test it out broadly first.

If you have the Perspective app (it’s free) you can use this link and watch this in the app which is a higher quality experience than the video. As I do more of these, it may be a good idea to get the Perspective app (available on iOS for iPhone or iPad) since I may do more of these live and be able to take questions. All of that can only be done in the app. If you use the app, you can also pause these stories and interact with my charts yourself. If you have iOS I encourage you to try it.

The one is 11m long. I’d like to keep them shorter in the future.

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