Samsung Galaxy S5 and Gear Fit: Better Together

For the past week I have been using the Samsung’s Galaxy S5 and the Gear Fit health and fitness wearable. Both the Samsung GS5 and the Gear Fit highlight some of the ways Samsung is continuing to evolve. The biggest point to be made is how they are continuing to get better at software. But the other element of interest is how, as they ship hardware like the Galaxy Gear and now the Gear Fit, it allows them to learn and refine based on feedback they get. “Learning by shipping” seems to be something that is benefiting Samsung across the board.

Galaxy S5

With regard to the Samsung Galaxy S5, there are a few points I want to make.

Software
Samsung has dramatically scaled back the amount of customization of Android they have done in the past. This current version, running Android 4.4, is very clean and much closer to stock Android than Samsung has released before. While the UI itself is highly refined, much of Samsung’s software customizations are subtle and feel like features of Android more than anything else. In Android 4.4, Google has adopted some new user interface themes. For example, the main application menu is available from an icon on the left in plain view. Samsung adopted this same menu UI for all of their apps allowing for a consistent feel across all the applications.

Overall the software is very clean and highlights again an observation I have been making — Samsung is getting better at software.

Hardware
From a hardware standpoint not a lot has changed with the GS5 from the GS4. The screen has gone from 5 inches to 5.1 inches. The display is a super AMOLED display that is dust and water resistant up to 1 meter for 30 seconds. The 5.1″ screen confirms for me a screen somewhere in the 5″ range is the sweet spot for smartphones. It is pleasantly large, but not too large, yet also still usable with one hand in most key situations.

Camera
The camera on the GS5 has a few new features worth noting. The first is real time HDR. It allows you to preview your scene in HDR before taking the picture or video. Since not all pictures are needed or should be taken with HDR on, this was a nice feature to help gauge how to get the best photo. The other feature worth mentioning was phase detection auto-focus. This is usually found in high end DSLRs that focuses the lens extremely fast. When most consumers rely on the smartphone as their primary capture device, speed and consistency in quality photos are top priority. Most Android smartphones I try have terrible cameras yet Samsung has delivered a quality camera experience. I’ll add using a 5.1″ display as a viewfinder for photos and videos is extremely nice.

Battery
Samsung added a co-processor which is dedicated to controlling the display. This allows them to have several new power saving modes. One is a general power saving mode which puts the device into black and white to save battery. The other is ultra-power saving mode which brings up a custom UI with only a few applications available like web, email, phone, etc. and manages the radios much more intelligently. The use case for this mode is when your phone is literally about to die but you will not be able to charge it and need it to last. Samsung stated a phone 100 percent charged can last 12.5 days in this mode. This is likely to be a handy feature for the traveler or conference goer who frequently finds when they travel their phone dies much faster. Samsung also added a larger battery, going to a 2800 mAh battery compared to the GS4’s 2600 mAh battery. The key evidence for me? I have been using the GS5 for a little over a week, including a three day business trip, and the phone’s battery never went below 40%.

Lastly, I need to mention the fingerprint scanner. The iPhone 5s easily sets the bar as far as fingerprint scanners go. Other solutions I have tried barely work at best. The fingerprint scanner on the GS5 was more consistent than most phones I used if you operate it in a way most folks will not — with two hands. In trying to register a thumbprint while holding the phone in one hand, I had quite a bit of trouble. After a while I got it to register my fingerprint while trying it in one handed mode but it didn’t unlock often and was extremely inconsistent. However, if you registered a fingerprint while holding the phone in one hand and using your other hand to slide down the screen and over the home button, the consistency went up. It is much more efficient to unlock your phone with one hand so I consider this a necessity with fingerprint scanners on smartphones.

Samsung shared that their research indicated several key purchase drivers for consumers were the smartphone’s display size/resolution, camera, and battery life. Samsung met the bar with all three.

The Gear Fit

The Gear Fit is the best health and fitness wearable I have used so far. I say this for several reasons. First, it has a heart beat sensor that actually works and can track your heartbeat at a high BPM rate. Most heart rate sensors I try (that are not dedicated heart rate monitors) fail to track me over 120 bpm.

The other reason I say the Gear Fit is the best is because it also has built in notifications from the smartphone. Up to now, consumers have had to choose getting smartphone notifications via a smartwatch or a getting the benefits of a health and fitness band separately. The Gear Fit integrates the two of these nicely and I can see folks who value and desire the data of a health and fitness wearable liking the value of having notifications from there as well.

The Gear Fit also has the highest resolution screen of any health and fitness wearable on the market. I have a thing for bright, high resolution screens, so this was a nice visual addition to the health and fitness wearable solution.

When it came to the Galaxy Gear, Samsung’s smartwatch, I had always found several things interesting. The high resolution screen and the touch screen UI. By integrating both of these to the Gear Fit, I found one particularly interesting use case I had yet to experience on a health and fitness wearable. While it is convenient from time to time to be notified of something on your wrist device, it is even more valuable in many situations to have the ability to take action with that notification. For example, when an email comes in I find important enough to take action with, I can select the email and choose to show it on the device. Selecting this option brings the email up on the smartphone. By the time I pick the phone up or get it out of my pocket, the email was open and ready for me to take action. This was quite nice. I also like the ability to respond to text messages or incoming calls with quick message presets. Both those features exist on the Galaxy Gear but I found them to more valuable on a health and fitness focused device given the more common situations I was in, like exercising, where responding was useful.

Lastly, Samsung has built in some coaching techniques designed to help you meet your goals. Say you want to keep your heart rate above a certain BPM. The device will let you know if you need to speed up. Or say you want to keep a certain mile pace while running or walking. The Gear Fit offers many coaching options and is one of the more interesting features I used I had not encountered on another health and fitness wearable.

Conclusions

As I used the GS5 and the Gear Fit I felt a theme emerging. These two devices were better together. The tight integration between a health and fitness wearable and a smartphone was much more compelling than I previously thought. Because of this, I feel the Gear Fit is better viewed as a feature of the smartphone, which happens to exist as piece of hardware. The software working together on the phone and the wearable was very slick and I can see many who will use it will have a similarly pleasant experience.

I’ve also made a firm conclusion about wearables in general, both health and fitness ones and smartwatches. They must have a touch screen. Perhaps it is just me, but this was the single feature that increased the wearable’s usefulness overall. While I still struggle to see the killer application for both smartwatches and health and fitness wearables, I am convinced the touch element of the devices will play a role in whatever the killer application becomes.

[Update]
Late tonight Samsung released some updates to the S Health app and the Gear Fit. The latest updates to the Gear Fit offer the option for it to be viewed in portrait mode, which was an issue with landscape view given how the device fits on the wrist. It also will do sleep tracking now and has some new watch faces for portrait mode. I haven’t had enough time to write about the experience but will follow up after more time with the updates.

Microsoft’s Two Big Announcements and Their Future Impact

Microsoft made a number of announcements at their Build conference this morning. While many were related to Windows 8.1 and Windows Phone 8.1, most feature announcements were simply playing catch up. But they did announce a few things I think are interesting.

Let me preface this by saying Microsoft is in a deep deep hole. Nothing they announced or will announce any time soon will immediately get them out of it. What I am looking for are things I can point to that signal they are building a step, or a ladder, to get out of this hole.

The first and most important announcement is they are not charging any OEM making a tablet or smartphone less than 9 inches a fee for Windows Phone or Windows 8.1. The big one here is Windows Phone is now free to OEMs. Again, this announcement will not immediately get them out of this hole but several observations need to be made about it.

First, this move is geared at hoping to win over OEMs who are making smartphones for the low end of the market. This is the part of the market where the vast majority of growth will be over the next 2-3 years. My numbers tell the story that, over the course of the next 2-3 years, the market will add a billion new smartphone owners. Over 80% of these new users will purchase their first smartphone at a price point less than $150 and largely less than $100. In making Windows Phone 8.1 free, Microsoft is hoping to get a slice of the next billion smartphone owners who will be connecting to the Internet for the first time. Microsoft played a key role in connecting the first billion users via a PC, and are hoping to play a key role connecting the next billion via a smartphone.

Note this picture showing the growing ecosystem and the regions where each OEM is strong. Most of the OEMs that you may not recognize are serving the low end of the market in their respective regions.

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The second observation, which is important to the first, is most of the vendors in this screenshot are paying Microsoft a licensee fee for their Android implementation. Which means for many of these OEMs, shipping a Windows Phone will cost them less than shipping an Android phone. The problem for Microsoft is if they can not monetize a shift in the mix of Android phones sold by these OEMs, then they are losing money by not monetizing the OS. For this to work, Microsoft must have services they can make money on, to the tune of $5-12 per year per device for this to make them as much money as they make on Android per device. A key point to this observation, however, is Windows Phone requires quite a bit of processing power. An OEM likely can’t ship a phone costing less than $100 dollars, given the tech specs necessary, that runs Windows Phone. For this strategy to even be remotely possible for Microsoft, they need Windows Phone to require less resources so it can ship on a lower cost device specification wise. Windows Phone hardware, and even the software, is now truly just a shell to Microsoft services — very similar to Google in this regard. To work, Microsoft needs services these new customers value and will use.

The second announcement is a bit more nuanced but could have interesting implications. Microsoft announced their own smart voice assistant on Windows Phone called Cortana. This is the name of the cloud computer based personal assistant for the Master Chief character in Microsoft’s popular Halo gaming franchise. While most of the things this solution enables are just catching up to Siri and Google Now, this service is fully powered by Bing. When I look at many of the services Microsoft is offering, Bing is the one I believe they have the best chance at monetizing with these new low end customers — assuming they win their allegiance.

I do believe the next big evolution of the smartphone is to transition the device from what it is today and move toward a true personal assistant to its owner. Artificial intelligence will play a key role in this. While this is not necessarily something a first time owner needs or wants, it is an important foundation for Microsoft to build upon.

As I stated earlier, none of this immediately gets Microsoft out of this hole. While neither announcement is a guarantee they are building toward a ladder, these are at least a couple of the things I think make the case they are moving in that direction.

Mobile Changed Everything

When I first started doing industry analysis in 2000, my focus was heavily on mobile computing. Our firm has a legacy of PC industry analysis and, at the time I joined, we were embarking on the major shift from desktop computing to mobile computing. Mobile computing in those days was defined as a notebook or laptop, which were really nothing more than portable desktops. That era set us up for the massive global mobile computing era we are now entering into where the shift is from notebook computing to truly mobile computing with tablets and smart phones. Reflecting on these paradigm shifts helps me appreciate not just how much has changed over the past 10 years but also how much will again change in the next 10 years. Mobile changes everything.

What’s Changed?

Mobile ended Microsoft’s dominance. The once near monopoly on desktop and laptop computing was completely broken by mobile computing. Along with Microsoft’s monopoly ending, so have the old guards of PC computing been challenged by mobile. Intel for example is still struggling to be dominant in the mobile computing era, while Qualcomm has taken their place. Once dominant PC vendors like Dell and HP now only serve a small market while Apple, Samsung, Lenovo, Xiaomi, Huawei, and ZTE are the hardware darlings of the mobile era.

Mobile saved Apple. One could argue the iPod was a key player in ushering in the mobile computing era as it paved the way for key technologies to miniaturize and commoditize. That served as a catalyst for smartphones to become possible. The iPod led to the iPhone, which is the business that drove Apple’s recovery.

Mobile could upend Google. Think about some of the most recent data from Flurry that shows how apps have overtaken the mobile web in terms of engagement. Who does this impact the most? Google. Google’s business is heavily built on the web and a web browser. Declining usage of mobile web browsers and web browsing in general is not good for Google’s core and largest business. I’m fond of the observation that Google de-emphasizes apps because time spent in an app is not time being spent using Google’s search engine. In fact, this observation explains quite clearly why Google is not pushing tablet apps the way many believe they should. Tablets still drive significant web browsing time as the usage of tablets more closely resembles that of PCs than smartphones. If Google was to emphasize tablet apps, which could possibly cause web searches from the platform to go down in favor of app usasge over web usage, then again their biggest business is hurt.

Mobile made Facebook. Facebook in the desktop era was nothing compared to Facebook in the mobile era. Facebook will be a key part of bringing the next billlion consumers into the online conversation. These customers will be mobile first and mobile only. It’s conceivable by the end of 2015 and almost certainly in 2016 Facebook could have over 2 billion mobile users. Facebook’s present and future hinges on mobility.

What’s Next?

These are just a few of the dramatic changes mobile has enabled. Many more are to come over the next two years. Will the current dominant players in mobile survive the shift from one primary mobile connected device to multiples per person? Apps took over the mobile web but what will overtake apps in the near future? What is the role of an OS or a platform in the future? Or is there one? Do apps move to the cloud or stay native? Do operating systems move to the cloud or stay native? How many modems driving connected experiences will we have per person? How many touch based interactive glass screens we will have on our person, in our homes and in our cities? All these and more are questions I like to think about.

I’ve been working in this industry since 1997. I’m also related to one of the foremost technology industry historians. I’ve been taught to view this industry as a journey. On a journey the scenery changes. Mobile has been a driving force of disruption causing sweeping changes in the dominant players from yesteryear. “Post mobile” will bring about many new changes. Crystal balls are not necessary. The only sure way to survive is to recognize paradigm shifts and embrace them when they happen. Innovation brings about change. Both are constant.

Why the Next Apple is…Apple

“Apple doesn’t need to be viewed as different. Apple needs to be viewed as much better.” — Steve Jobs at Macworld in 1997

I get a specific question frequently these days – “Who will be the next Apple?” When I dig into the context behind the question it seems many executives I talk to have concluded Apple has run its course. There must be a new Apple around the corner and, since I study the depths of this industry, I must know who the next Apple is. The trouble with this question is it is flawed.

It is flawed to believe Apple is just like any other company in this industry. They are not. Apple is one of, if not the most, vertically intregated technology companies around. Apple has a vertical (some call it integrated) operational structure. They are a hardware company and a software company equally. They are also becoming a services company. (( You could also argue they are a retail company, an ecommerce company, and even a semiconductor company)) Each part is integrated together and more intertwined than many realize. While Apple may make more money from one part than another, it does not diminish the importance of the other parts which form the company’s competitive advantage.

There are not many companies who dare take the integrated route. Many try and often fail because it is extremely difficult. In fact, in 1996, after Steve Jobs came back to Apple through the NeXT acquisition, he made specific mention of this at a Macworld Q&A. He made it very clear vertically integrated business are hard to run. He stated that, if run well, they can be extremely successful but if not run well they can fall apart quickly.

This is why most pundits, analysts, press, etc., do not understand Apple. Most people are comfortable with horizontal/modular business models. They are the ones often studied at business school. Most companes are modular so there is a larger body of work found in case studies on these types of business. Most people have worked in these types of business models so it makes sense they are the easiest to understand. The powerful nuances of a vertical/integrated company are lost on the majority. I’m not sure we will see a company as integrated as Apple again in this industry. At least not for a long time. This is what makes them unique and why its hard to say the next Apple is out there somewhere.

It is this integrated process that allows them to have an extreme focus on the product, its experience, and the customer. By controlling the silicon, the entire hardware experience, the operating system and many of the core services, Apple creates and integrates the whole so that is differentiated from the pack. They focus on the customers who values this experience and are happy leave the customers “on the table” who do not.

Apple will be the next Apple in whatever hardware categories, software, or services they choose because of this deep company wide integration. This is also why ONLY Apple can be the next Apple. This is also why wise minds won’t write Apple off.

Is There Value in Smart Glass on My Wrist?

Last week I talked about health and fitness wearables and my failure to see how they appeal to a broader market. This week I want to talk about the potentially lucrative category of smart watches. If we count Microsoft’s Smart Personal Object (or SPOT watches) as a smart watch then I have been using these kinds of devices for many years. However, even the current (or soon to be shipping) crop leaves me puzzled. I still question how big of a market the smart watch category could be but honestly, I’m on the fence.

To dive deeper, I think it would be helpful to look at a few current and future value propositions related to smart watches. We have to start with the question, “What is the value of a smart, easily viewed, small screen on my person?” Answer this and we are getting somewhere. The key is the smart watch screen is always in view. Unlike other screens – my smartphone, tablet, PC, TV, etc. – this smart object on my wrist is easily viewable throughout the day as long as I’m wearing it. To answer my question, we have to look at some things I may personally care to be notified of regardless of whether I am looking at any other screen. The key to this is context. [pullquote]Smart watches and notifications need to get a lot smarter if they are to be found useful on the wrist.[/pullquote]

Context

When am I not looking at my smartphone, PC, tablet, or TV? When I am driving, at a lunch or dinner meeting, walking around the mall, city, park, etc. There are many occasions throughout our day when we are not staring at our smartphones, PCs, tablets, or TVs. These are the times a smart watch must deliver value beyond keeping time. Currently the proposed value is in notifications. The smart watch will notify me of an email, text or Facebook message, twitter mention, incoming call, and more. Any app that pushes a notification to my phone can and does push a notification to my wrist. More often than not I find this more distracting than helpful. I get a lot of email, text messages, twitter mentions, and calls throughout the day. My wrist buzzes quite a bit, mostly with notifications that aren’t useful to me. The reason? The watch, or even my phone for that matter, does not know my context. I may not want to see all the emails but if I am waiting for an important response from a client that would be useful. I don’t want to be notified of all phone calls but only ones that are urgent – say, from my wife. This goes beyond a filter. It is all about context. The device needs to know more about me and my situation to be useful. Smart watches and notifications need to get a lot smarter if they are to be found useful on the wrist.

For example, when I am in a meeting I don’t want to look rude as I check my watch 15 times over the course of an hour every time it buzzes. But what if my phone/watch knew where my next meeting was and would alert me of any traffic issues I should be aware of that may change the time I need to leave in order to not be late for my next appointment? This is what makes some of the proposed use cases of Android Gear somewhat interesting. Google Now does a decent job of focusing on contextual data that is useful at a glance. This could be location data, traffic data, and a host of other things that can equip us to take action and make decisions. Ultimately, this type of contextual data, useful in helping us make choices, is where the value of a wrist worn smart screen may lie.

My biggest misgiving is we will experience notification overload. Even though I test some smart watches that have useful filters for which apps notify the watch and which don’t, I still suffer from notification overload. My concern is, if we open the wrist screen to notification from solicitors – trying to get our attention with deals, discounts, and coupons – we again suffer from notification overload. There will have to be an intelligent way for much smarter notifications to reveal themselves if the smart watch category is to go mainstream.

A part of me feels a smart watch is still a solution in search of a problem. Part of me also feels there is value to be found on a screen that is more easily viewed than a screen in a pocket or a purse. Many seem to believe this may be the next hot category. I still have my doubts. Mass market appeal and convenience is what the smart watch needs to find. Until then it will be a niche market.

Why Should I Care About Wearables?

I’m as early an adopter as they come. I have about every health and fitness wearable on the market. However, if you ran into me on the street today I wouldn’t have a single one on me. Why? I simply don’t find them valuable. The question I keep circling back to is, “Why I should care about these products?” When I first started using them it was novel to see how many steps I had taken or how much sleep I had the night before. But after a few days the novelty wore off. The data was simply not useful or actionable. There was no value in the data. Everything I put on my body is intentional. There is a reason it is there. This booming wearable market everyone keeps talking about has yet to produce a product I value enough to keep on.

What is strange about my conclusion is it seems as though I am the target for many of these products. I am extremely active and I am conscious about my diet. My health and wellness is a priority for me, and I look to tech to play a role in all aspects of my life. But nothing on the market appeals to me in any way, shape, or form. Oddly enough, I hear often from folks who find value in their health or fitness wearable who do have health issues. It seems if you have specific health issues that wearables address you would find some of these products more valuable than a generally healthy person–at least for now.

Perhaps it is less an issue with the product category and more about the data. What I find lacking in the data is its weakness in helping me take action with the findings. So I know how many steps I took, how does this help me? What can or should be done to change my behavior? So I know how many calories I burned. What changes should be made to burn more?

Recently, I ran into this issue with the Fitbit Aria Scale. This particular scale tracks your weight as well as your body mass index. I got this scale just before the holidays which, in retrospect, was maybe not the best time to be tracking my weight. Post holidays, I set a goal of getting back to my “tennis season” weight. I watched my weight go down and in some cases my BMI go up. I had no idea what that meant or what steps I should be taking to both lose weight and BMI – but I would have found that information valuable. All of these products lack a follow-up step to help us make sense of the data and recommend action based on our goals. This will need to be addressed before these products have mass market appeal.

Apple and Healthbook

Can Apple or Google address this? In some ways yes and in some ways no. One of my driving convictions about the wearable market is it is not a one size fits all segment. There are many different things consumers will want in these devices. It will be nearly impossible for some time to address all the needs of this market with one single product. In Apple’s case, the only way they could address this space is to make many products — all with specific appeal to parts of this segment. This is why I think the Healthbook concept, if real, could be very telling of Apple’s strategy. What if they are hiring experts in the health and medical hardware business in order to understand the vast complexity of sensors so they can support any number of configurations from third parties so these third parties can create meaningful hooks into iOS? In short, what if Apple is preparing to enable and empower an ecosystem of wearables, made by third parties, but with unique and proprietary hooks to the iPhone. Healthbook would simply serve as a mechanism to work with third party hardware, along with specific APIs, and display key data for the consumer. This makes the most sense to me. Apple would encourage and enable third party hardware companies to build value around the iPhone and make the platform stronger. Should Apple make a glucose monitor? Probably not. Should they enable the company who wants to make the glucose monitor extend the value of the device in a meaningful way to their ecosystem? Yes. This is what I think Apple is up to. Let Nike, Fitbit, Adidias, iHealth, or whomever go after market niches in the health and wearable ecosystem — but make sure they work best with iOS.

In the case of Apple and Google, this will be an ecosystem battle. Both are now looking to address complimentary points of their ecosystem in areas they may not have much control over. Some experiences may decentralize from the smartphone and some may not. Apple and Google are in uncharted territory from a platform level. However, embracing and extending their ecosystem with the help of third party hardware is a key strategic element for them both.

Data on China: Apple’s Biggest iPhone Market

We have always known China was going to be a key market for Apple. The only question was when. Our research has continually turned up evidence China was a booming iPhone market. iPhones were coming through the secondary market or being imported and brought onto local networks through backdoor channels even before they were officially available on those networks. Umeng’s app analytics has always been a very insightful data source regarding mobile devices in China. As we look at their latest data set we are able to see just how big of a market China is for the iPhone.

Some time over the past six months China has become Apple’s largest market for the iPhone. While our data suggested there were a lot of iPhones in China, I was surprised to learn there were more iPhones in China than in the United States. According to Umeng’s data, the iPhone accounted for 80% of the $500 dollar and above premium smartphone segment in China. The premium handset market in China is 27% of the install base, up from 15% in Q2 2013. This means from Q2 2013 to Q4 2013 the premium handset segment grew 12% in China. From our smartphone data of the current smartphone install base in China we conclude there are approximately 139m premium handsets in China. With the iPhone having 80% of that install base, it means there are approximately 111 million iPhones in active use in China. Compared with our estimate, there are approximately 90m iPhones in active use in the United States. In fact, China is Apple’s largest market for the iPhones.

Key Data Points: (All estimates, from my firm Creative Strateiges, Inc)

  1. Apple has 80% of the >$500 premium segment of the smartphone market in China
  2. The premium segment grew 12% between Q2 2013 and Q4 2013
  3. Apple has approximately 111 million iPhones in active use in China
  4. Apple has approximately 90 million iPhones in active use in the United States
  5. China makes up 32% of the current iPhone install base worldwide
  6. The US makes up 27% of the current iPhone install base worldwide
  7. China and the US combined make up 60% of the iPhone’s total install base

Given how different the two markets are with carrier subsidies, it is remarkable the iPhone install base in China has surpassed the US. A point to ponder: the iPhone has not been available on the single largest carrier in China and was no where near the most affordable device in China. Yet it has surpassed the US in install base. It is phenomenal in a market where the iPhone has not been on the largest carrier and is not the most affordable device is now the largest iPhone market for Apple. The cheapest iPhone currently in China, the iPhone 4, costs several hundred dollars more than a subsidized iPhone 5s in the US market.

Overall, what we observe – even without the conventional wisdom that said Apple needed an extremely low-cost iPhone in China to gain share – is the Chinese have surpassed the US market. The level of optimism for Apple in China could not be higher given this most recent data. Particularly if they do launch a larger screen iPhone that can truly fit the insatiable demand for a combined tablet and smartphone in China.

With China’s continually growing middle class, projected to be 512m people by 2015 (Chinese Academy of Social Sciences) it is becoming more clear why China is a key growth story for Apple and one they can continue to service within their existing strategy, with some additional regional focus as well.

Big Questions about the Big iPhone

I have stated publicly I believed Apple would launch a larger screen iPhone than the current 4″ model this year. The market is simply at the point of its maturity where options are necessary. As markets mature, consumers become more self-aware of their needs, wants, and desires. It’s at this point the competitive dynamics change and segmentation occurs. Form factor (screen size) options, pricing, colors, etc., are all results of consumers looking for products that suit their needs as they also refine what those needs are. This is why a range of product options is important to Apple in my opinion. It was important when they built out the iPod line for the same reasons. The difference was they eventually owned the iPod market out right. This time they own the premium market, mostly out right. But they are up against a competitor who will offer every form factor under the sun in the mid-high end segments of the market.

For Apple, the question is not whether they need to offer more screen size options, but what screen sizes to focus on. Current rumors are they are looking to offer two different larger screen form factors. Something in the 4.7-4.9″ screen size range and a 5.7″ device. I believe the 4-7-4.9″ screen size rumor to be in the ballpark. The 5.7″ device? I’m not sold on the rumor but let’s take a closer look.

The first thing we have to remember about any Apple hardware rumour is, like every other company, they build and test a number of designs. Simply because they built and tested a 5.7″ screen sized iPhone doesn’t mean they will ship one. The big question around releasing several larger screen options revolves around how many SKUs Apple wants to manage. Will their current generation lineup be a 4″, a 4.7-4.9″, and a 5.7″ screen? This is hard to believe given the way Apple has done things.

What is interesting about the rumor on the 5.7″ device is the point that they will be positioned as high-end 5cs. This would be counter to several other rumours saying the devices would specifically target the high-end, when in fact this is exactly what a larger iPhone should do. The 4.7-4.9″ screen iPhone particularly (I like the name iPhone Air) would be a premium product targeting the premium segment of the market. However, should a product that fits the design build of the 5c that is not targeting premium be in the lineup then it makes sense it would specifically target a market like China.

If a 5.7″ screen iPhone comes out it would not be targeted at developed markets like the US and Europe. I’m not saying it won’t appeal to some consumers in those markets but I don’t believe it will appeal to the masses in those markets. It would appeal to markets like China where phones with screens between 5.5″ and 6.5″ do quite well. These markets buy these large-sized phones rather than buying the combination of a smartphone and a tablet. It could be very interesting for Apple to position an iPhone as a type of “minnier” iPad. While we know there is demand in China for both iPhones and iPads, many consumers can not afford both, and many can barely afford one. However, should the two be combined at a decent price point in a single product I wonder if consumers in China or even India would be compelled to make the investment even if it costs a bit more than the competition’s solutions.

I’ve been of the opinion if Apple really wanted to take China by storm they should release a product that is China only or China first. Doing so with a product like a 5.7″ screen iPhone/iPad could be a very interesting strategic move that would do very well in the Chinese market. While I still have my doubts about the 5.7″ device offering, I believe it could make sense in the context I just outlined.

Why China is More Strategic to Apple Than India

There has been a good discussion recently on our site about Apple and India. I try to maintain as global a perspective as possible. I study in depth markets like China, India, Latin America, and more. I look for data from these markets; I search for trends, and try to get a handle on each market needs, wants and desires. With that said, I think China makes sense as the primary target for Apple for the foreseeable future.

The first thing we need to establish about both markets is their consumers are very different. Sometimes particular global markets have similarities to other ones. Other times they are very different. This is the case with China and India. Chinese consumers have some similarities to American consumers. Studies are showing large percentages of consumers in China are more emotional when it comes to purchasing. Other markets such as India, and even parts of Europe such as Germany, for example, are filled with more pragmatic consumers rather than emotional ones. The best way to understand this is these markets are filled with a majority of value for the money consumers. This is not to say they are cheap but that value is defined differently and often with less emotion. Consumers with primarily a value for the money mentality tend to look at price first and often times foremost.

Looking at both markets, Android is the dominant operating system. China has nearly 500m mobile Internet users while India has just over 100m. Depending on whose estimates you trust, there are likely five times as many Android smartphones in use in China (mostly brought in through the back door to local carriers) while there are likely 10 times as many Android smartphones in use in India than iPhones. With that context in mind take a look at these two charts showing web browsing via mobile platforms in both China and India.

China and India Web Usage via mobile platforms

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Despite there being significantly more Android users in China than iPhone users, we still see heavy usage of iPhone’s browsing the web. I continually point out web browsing is not the only metric that matters for measuring mobile engagement. Especially in China where consumers do most of their engagement through messaging apps like WeChat. But the fact that general web browsing is this high in China on iOS is a key point. It is also one that is not lost on Apple since they see most of the same data that I do.

Now let’s take a look at the same data source for India.

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India is still in the early stages of its growth curve for smartphones. Estimates are that India will just about more than double the number of smartphone users in 2014 alone. China as a market is nearing maturity. India, on the other hand, is still a very immature smartphone market. Apple has no chance in immature emerging markets. Especially those filled with first time buyers. They do have a chance in mature emerging markets. This point alone is why China makes the most sense strategically for Apple in the short run.

I don’t doubt there are many interested customers for the iPhone in India. I do believe this is a market Apple is still feeling out and gathering data around as well as experimenting in. India is an incredibly important market for any technology company. The issue for Apple is timing. I feel the timing is ripe for Apple in China and not quite ripe enough yet in India.

The Big Question

The big question is whether or not markets are lost to Apple if they are not active in the development stages of a market. Could a point come where a market is lost to Apple or it is too late for them to enter? This is the question Apple watchers and investors must wrestle with. Apple is hoping their loyalty rates among their customers is something that works in their favor. Apple’s devices will always be highly differentiated in every market they enter. Apple does not want to just sell hardware. If they were only a hardware company, we would see them act very differently. I would also be less optimistic of their future if they were only a hardware company. Apple wants customers for whom the hardware is a portal to their ecosystem. They want customers, who once in their ecosystem, will start investing in things like software and services. They want customers who value the whole experience.

Apple is targeting China because, as of right now, their ecosystem is extremely differentiated. Apple has also been investing in China from a software standpoint by making specific iOS customizations for Chinese consumers. Things like catering to their service providers for deeper integration into iOS is a good example.

With regard to India, a key market development to watch is the entry of Xiaomi. Xiaomi is looking at the market in a way I think will be competitive in India. Xiaomi has an interesting model of selling hardware at cost and monetizing their software and services ecosystem. However, it has become clear as of late when Xiaomi enters markets outside of China that they will include Google’s services in those markets. How Xiaomi competes in China with a unique experience but also by integrating the same Google services as their Android competitors will be a true test of Xiaomi’s ability to operate outside of China.

Whether or not a market is lost to Apple will all depend on the nature of the competitive market in emerging regions. We will only know the answer to this question when a particular market like India gets closer to maturity. Apple needs mature markets to compete and their entry to a market will simply be a matter of timing.

Milk: Samsung Shows its Software Chops

Samsung is introducing a new Internet Radio service called Milk. I had the opportunity to get some hands on time with the service and speak with Samsung executives about the new product and strategy. There are a number of important observations from my perspective.

The first is the quality of the software. Samsung is not exactly known as a software company. The primary public facing software work to date we can look it is their software on the TVs as well as the UI they have developed for their Android devices. Over the past few years, Samsung has added core apps incrementally to add value and to differentiate their hardware in the marketplace. S-Pen apps are a good example of some of these. However, to date, the Milk application and experience is one of the better Samsung applications I have used in terms of software and execution.

The app itself is leveraging the Slacker Radio service. However, Samsung has implemented it uniquely for a streaming music experience that is different than any I have used. The concept tries to make the experience much closer to an actual radio experience. Just in case you think traditional radio is a thing of the past in the US, let me offer a few statistics.

The following chart from Pew Research breaks down media usage of US consumers by type. Note the time US consumers spend listening to traditional radio.

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What is interesting about this breakdown, is the time spent using a smartphone vs. the time spent with radio. I wrote a few days ago about the challenge competing in the mobile market. My key point in that post, is that the challenge for anyone competing in mobile is that mobile apps are competing for time. In the case of the US smartphone owner, mobile applications are competing for just a little over an hour according to this recent data. Since smartphone screen time is limited, and divided up between a number of tasks, the challenge is be relevant during the short bursts of times people use their phones. Radio experiences are one of the the things that could potentially increase smartphone usage time.

In terms of raw numbers, let’s look at Nielsen data from their State of Media report.

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As you can see from both charts, radio is alive and well and consumers still value the experience of radio. I believe a key reason for this is that radio is produced. There is value in curation. This is the logic Samsung used Milk. The service itself consists of 200 radio channels. Each curated by a taste maker. The app itself has a dial interface and as you move the dial around the circle each station starts played instantly. If you scrub quickly around the dial, you hear the station briefly, sounding just like what happens as you change radio stations quickly.

In between each genre, as you scrub to the right or the left of it, is a series of other channels. Each category contains around 15 stations in my approximations.

The execution of this service is well done. I’ve been using it frequently over the past day and have been very impressed. The app and the service itself is free and ad free. The latter is something I think is the bigger point. I try many different Internet radio services, some free and some paid. This service from Samsung is competitive with all of them and I found the lack of ads to be quite nice. I am a paying iTunes Match subscriber and for the most part default to iTunes Radio as my preferred service. However, a few months ago, I turned the iTunes Match service off to see what ads were like in in iTunes Radio. Over the past month I noticed a sharp increase in iTunes Radio ads, sometimes being as often as every 4 songs. Listening to a number of free Internet radio services, I’d estimate the average number of ads to be 10 per hour. The Milk experience was refreshing both in its curation of each channel along with the lack of ads at no cost.

Samsung has checked an important checkbox competitively with the Milk app and service. I’ve concluded Samsung’s future in mobile lies in them being able to compete in the higher end of the smartphone segment in every market. Adding value and differentiating their hardware with software and services are key to them competing in the high-end.

In iCloud I Trust

Given the beating Apple’s cloud services often take, I am sure you will be surprised at what I am about to say. I like iCloud. I rely on it quite a bit. What’s more, I trust iCloud. My expectations for iCloud have always centered on synchronization. This has always been the killer cloud value proposition in my mind. Even during the days when many in the industry stated with confidence that the killer app of the cloud would be backup, I was confident it would be synchronization.

I was convinced of this from the first time I used Microsoft ActiveSync for email. Whenever I would get a new PC, or PDA (remember those personal digital assistants), all I had to do was input my email credentials and magically all my email would appear and stay in sync across all my devices. This was when I knew what cloud synchronization would do for documents, media, and all forms of digital data. Since 2004, I told any major player in the industry who would listen that we needed a consumer version of ActiveSync. Today, the closest thing I use is iCloud.

The thing that is interesting about the cloud and synchronization, is that it is only truly valuable when you have multiple devices you want to keep in sync. When all one owns is a single device, there is no need to keep things in sync. All the content you own and produce resides on the device and the services that device connects with. As you start acquiring more personal computing devices you begin to spread time and data across them all. Keeping things in sync is an essential part of the multi-device experience.

Most of the ways I use iCloud regularly is to keep my documents in sync. This may be one of best aspects of the service to date. Having the ability to work on a new presentation, and have it auto save to iCloud, then pick up right where I left off on any other iOS or OS X device of my choosing is refreshingly convenient. However, the other day I realized just how much I trust iCloud and this realization raised an important question.

Trust, Questions, and Possibilities

I gather and generate a significant amount of original data on the tech industry. I also present this data in the form of presentations to dozens of companies on a monthly basis. Without realizing it, I have been slowly transitioning all our data to iCloud. I use Numbers and Keynote for our spreadsheets and our presentations. As I have been creating data in both programs, I have been storing them all to iCloud. It was simply the most convenient process since I rely on that data on any number of devices. I probably have well over 100 documents of original and proprietary data, presentations, and models, that are stored in iCloud. When it hit me that I was storing all this valuable data in iCloud, I asked myself whether or not I should back all this data up. This data is extremely valuable to me and more importantly recreating it would not be impossible but would be a gigantic undertaking.

Given this data is so important to me, can I trust it to iCloud? I have had no issue yet but what if an issue comes up? Are these files recoverable if something goes wrong? What if I accidentally delete a file on iCloud? Can I get it back? These were things I started thinking about. Apple does give instructions and recommend that you make copies and archive things stored in iCloud, however, this is a relatively tedious process and could be much more seamless. Suffice it to say, I did this just to be safe.

iCloud is certainly not perfect. I’d still love to see walls get broken down between iCloud accounts so families could have a more powerful synchronization engine. I wrote about this recently and called it a “framily cloud.” I’d love to be able to start making a movie on my iPhone and pick up where I left off on my iPad or Mac. I’d love a better way to keep photo libraries in sync across my devices and my families. The same with music.

Without question, iCloud still has a long way to go. However, I still believe it is one of the more encompassing multi-device synchronization engines I have used in some time.

Chart: Android Install Base

Google recently released their latest platform numbers for each version of Android. This chart shows what percent of each platform is still in use on an Android device in the market. A couple of things are worth pointing out regarding this data. These metrics from Google only track a piece of hardware that has passed Google’s certification process and has access to Google services. What Google is showing us with this data is the number percentage of each platform, active in the market, that has access to Google’s services. This is important context because these percentages do not reflect the entirety of the Android install base. They only account for the install base of Google’s version of Android. Most the devices sold in China are not accounted for in these number from google, for example. Here is Google’s chart with a breakdown per Android version.

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I have done my own research to work out the non-public data and have come up with estimates on the Android install base of Google’s version of Android. Below is my chart.

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It is incredible to look at the install base of Gingerbread. This version of Android was released on Dec 10th, 2010 and was updated until September of 2011. Even a device updated toward the end of Gingerbread’s lifecycle is over two years old. I am at a loss at how to explain this. The only explanation which seems plausible is that these were customers who purchased an Android phone, but are only using it as a feature phone to make phone calls. This period correlates with strong sales of both the Motorola Droid brands and several HTC phones. Knowing that some manufactures were still shipping Gingerbread into 2012 may also help explain this number. Still, the fact that there are over 200m smartphones in the market, being used, that are over 2 years old is remarkable.

Report: Smart Devices and E-Commerce

E-commerce has been a buzzword in the industry for more than a decade. I have come across some interesting data points that paint a new picture of the e-commerce marketplace than one that has previously existed. Not surprisingly, this shift in e-commerce trends is being driven by mobile devices. The implications of mobile on e-commerce will be significant.

Take a look at the following chart depicting the past 11 years Q4 US e-commerce sales as a % of US retail.

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As the chart above illustrates, Q4 2013 saw the biggest jump in e-commerce growth of any past Q4. According to the US Department of Commerce, 2013 online sales grew 12% over 2012. During the same time period overall retail growth in the US was up a less- than-anticipated 4.1%. According to a recent report from Monetate, in 2012, only one in five online purchases were made on a mobile device (phone and tablet). This year, that number jumped to one in three, growing approximately 50% in one year. In many of the ways the mobile web is poised to become more powerful and more dominant than the desktop web, so will mobile e-commerce be more powerful and more dominant than desktop e-commerce.

However, not all mobile platforms are made equally when it comes to e-commerce. To understand the future of e-commerce and mobile e-commerce we need to understand how platforms and form factor trends signal how this market will evolve. For the sake of this report we will focus on tablets and smartphones.

Tablets

Compared to 2012, the tablet saw an increase in average order value (AOV) of 14.13%. This last holiday quarter in the US the tablet AOV was $162.80. AOVs on tablet map much more closely to that of a traditional PC. For comparison the tablets YoY increase in AOV was 15.71% with a total value of $167.31.

Similarly conversion rates of tablet purchases and PC purchases were similar as well. The tablet saw purchase conversion rates increase 17.75% YoY with a conversion rate of 3.16% in Q4 2013. The PC saw conversion rates jump 24.29% with a total of 4% of purchase converted.

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Understanding that the tablet and the PC have similar average order values and similar conversions is a key takeaway. Why we are more optimist these trends will continue and the tablet may even continue to grow as a percentage of e-commerce transitions is due to its mobility over the PCs. More and more consumers are using their tablets while in key modes of discovery. Using a table to read a digital magazine in bed or on the couch, or using a tablet while watching TV are all situations where the consumer may see something they may be interested to purchase. The mobility of the tablet makes it the perfect form factor for not just gathering data but also for completing the transaction.

A joint research project between Ipsos and Google highlighted that the tablet was the device with the highest number of purchase conversions where the discovery process of something like shopping, planning a trip, and managing finances, were most commonly started and finished on the tablet. Where in the case of the smartphone most of the same tasks were started on the smartphone and completed on a device like a PC or a tablet.

While the traditional PC will still play a key role in the future of e-commerce, the tablet is the device with the most potential in not just western markets but global ones as well. I expect the tablet to soon be the king of e-commerce in every market.

When it came to platforms, unsurprisingly, iOS dominated with the higher AOV of any tablet platform. Below is the AOV by tablet platform for the past few quarters.

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Similarly the iPad drove the highest conversion rates of any other tablet platform. In Q4 2013 the iPad saw conversion rates of 2.72%. Android was 1.82% and the Kindle Fire just a measly .82%.

Smartphones

The smartphone presents the platform with most upside but its upside may reside less with e-commerce and more with driving new in-store mobile experiences/commerce. When it came to e-commerce the phone is still a distant platform to PCs and tablet in many respect. According to Monetate’s research the smartphone actually saw a decline YoY of 2.20% in average order values. Last Q4 2012 the smartphones AOV $136.61 and in Q4 2013 it dropped to $133.60.

Conversions of purchases from smartphone increased by 26.70% YoY to 1.18% in 2013. What the data suggests is that smartphones are valid entry points to search, discovery, and to help consumers decide what to purchase. Where the tablet is becoming the device consumers use to actually buy. This research from Monetate coincides with the data from IBM’s black Friday report where the following point is made:

Smartphones Browse, Tablets Buy: Smartphones drove 24.9 percent of all online traffic on Black Friday compared to tablets at 14.2 percent, making it the browsing device of choice. Tablets drove 14.4 percent of all online sales, double that of smartphones, which accounted for 7.2 percent of all online sales. Tablet users also averaged 15 percent more per order than smartphone users, spending on average $132.75 versus $115.63 for smartphone users.

Where smartphones may see their true potential is to drive more in-store activity than perhaps traditional e-commerce. In-store beacons may serve as the foundation for this new transaction driver. Apple is aggressively moving forward with implementations of its iBeacon technology. As more of these beacons which have the ability to send targeted and specific data base on precise location are installed in retail locations, retailers will be able to dramatically alter the in store experience. This shift will open new opportunities to influence the behavior of consumers in retail locations. If a store knows where a consumer is in their store it will make it easier for them or brands to offer them information and even promotions in real time.

Image that Coca-Cola puts a rule in place at a local grocery that if a consumer is standing in the isle near Coca-Cola products for a set amount of time, like 1min or more, to offer that person a discount on select Coke products if they purchase today. A smartphone and an abundance of strategically located beacons in stores will lead to this kind of super targeted advertising and promotions.

Technologies like TouchID also stand to impact the mobile shopping experience. This level of security depth will give merchants the ability to not just know where a customer is in store but also that they are who they say they are. Naturally, TouchID is important in the value chain of mobile purchases. This single technology has the opportunity to not just decrease the amount of credit card fraud globally but to also perhaps be a catalyst for an increase in mobile purchasing at large.

Smartphones, paired with in-store beacons, and a secure mobile purchasing mechanism all combined together make for exciting opportunities for brick and mortar stores to add value and to compete against on-line retailers or even use online retail to their advantage.

Mobile Traffic

Mobile devices are invading the PCs territory in nearly every dimension. Monetate’s research pointed out that one out of every three visits to leading e-commerce websites come from either a tablet or a smartphone. Mobile e-commerce orders grew 102% YoY and accounted for 4.22% of holiday e-commerce orders.

On Black Friday, traffic from tablets jumped 89.46% compared to Q4 2012. Similarly, Cyber Monday saw tablet traffic increase to 73.09%. Similarly Christmas day tablet and smartphone traffic was up 46.9% YoY. All data points according to Monetate.

The e-commerce trends are clear. T standout from my observations of market data and research from other and our own internal data is the tablet. You can not ignore the kind of data we are seeing about how tablets are being used in many vectors of consumers digital lives.

A Technological Worldview

Webster’s dictionary defines a worldview as the way someone thinks about the world. Everyone has a worldview whether they know it or not. This word came up often during many of my sociology and psychology classes. It came up even more often as I was studying behavioral science. When we talk about worldviews we often think about religious ones, political ones, scientific ones, or philosophical ones. As I began studying consumers when I joined Creative Strategies in 2000, I started applying this thinking to technology. I started exploring how different segments of consumers may have shaped or were in the process of shaping a technological world view.

I shared on my blog how my upbringing shaped my technological worldview in a way that causes me to look at technology a certain way. My worldview is that of an early adopter. I am an early adopter. I have a specific technologic worldview. My wife, on the other hand, is a text book late adopter. I approach technology emotionally where she approaches technology pragmatically. I have to have the latest and greatest gadget, and she will use her smartphone until it is no longer usable. Even then she will loathe the fact that it didn’t last longer. Our personality, exposure to certain types of technology, environments, and more, all contributed to each of our technological worldviews.

It can get complex when you start to peel back the onion of how, why, and what a particular class of consumer’s technological worldview was formed. However, it is extremely helpful when trying to understand consumers and how they may think about technology products. It is also very helpful in my line of work as I try to understand adoption cycles.

As of late, I have stumbled onto something that I feel is interesting related to technological world views. I have begun to gain insight into how consumers in countries like the US and Western Europe and customers in emerging markets like China, India, Africa, and others, all have come to shape a very different set of technological worldviews.

For example here in the West, most of our entry points to computing and the Internet was a desktop or notebook PC. This is the foundation for a Western technological worldview. Taking this point even deeper your preference of operating system, i.e. Windows or OS X, could also play a role in your worldview. The main point, however, is that this particular technological worldview’s foundation was set with a PC of some type. This is why so many in the west have a hard time grasping the idea that a PC is a legacy computer. And things like tablets, phablets, and smart phones are becoming more central computing devices.

In contrast, for consumers in many emerging markets their entry point to computing and the Internet is a smart phone. This fundamental point is shaping their technological worldview in very different ways than western consumers. This is the one major issue I see standing in the way of the chat apps that are popular in emerging markets attempting to penetrate western more developed markets. These applications like WeChat, LINE, and WhatsApp were born out of very different circumstances and targeting a group with very different technological worldviews. This is not to say that they can not be successful in western markets, but it hints at a point that the value proposition of these apps may need to be something other than the one that is appealing to consumers in emerging markets.

Similarly to consumers in emerging markets, we now have generations of consumers who know nothing but being constantly connected via a mobile device and are extremely comfortable with technology. My kids, for example, have no frame of reference of a world where they can not use a smart device for real time communication, information, and entertainment. This will shape their technological worldview which will open doors for new challenges and new opportunities.

Understanding the different technological worldviews and how they can be applied to classes of customers in every market of the globe can help us understand the many nuances that make up the global markets for personal technology and the consumers who will buy them.

Why Nokia is Better Positioned Than Samsung

I wrote today about why Nokia’s move to support Android is bold, risky, but also filled with potential. As I watched Samsung’s press conference, the stark contrast between the big news items of both companies was evident. Samsung chose to focus on evolution rather than revolution. This is exactly what they should be doing. They took no risks and focused more on serving the market rather than over-serving it. Samsung’s press conference made it clear to me that they have accepted their role as a follower rather than a leader in this industry. There is nothing wrong with this strategy. However, once the basis of competition shifts, this strategy could be the undoing of their mobile division. What’s more, is that Samsung is playing it safe in the saturated areas of the market–the high end. This is not a growth segment. As this slide points out:

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While Samsung continues to address all the price points in the above chart, their ecosystem is failing to lock-in consumers. This is what they hope to do with the Gear products but again those products are not focused on the low-end. Nokia, on the other hand, is going to help Microsoft acquire customers at the low-end where all the growth is going to come from for the next few years. Every ecosystem needs entry points. Microsoft has a chance to acquire new customers getting their first smartphone and bringing them into the Microsoft ecosystem with a Microsoft ID.

Nokia is including their own app store on the Nokia X as well as popular app stores from each region. This strategy will not just appeal to first time smart phone owners, but the Nokia X has appeal to existing smartphone owners at very aggressive price points. There is another interesting move Nokia has done with the X Android smartphone. They have leveraged their strong relationship with carriers and will offer carrier billing support for app store transactions with over 160 carriers worldwide. It is a little known fact that carrier supported billing for transactions can see up to 10x the conversion than when a credit card is the only purchase option. This means Nokia and Microsoft have a good story for developers looking to monetize. It is conceivable that in the near future Microsoft could have more developers in its Android ecosystem than its Windows Phone ecosystem.

Microsoft is quietly going to use Nokia to acquire customers and meet them where they are. The key word being thrown around is “embrace and extend.” This is exactly what Microsoft needs to do to begin to build a new foundation and serve new sets of customers. Interestingly, Nokia launched several other new low-end smart phones today. A feature phone and a new Asha line. Each one has some Microsoft service on it. Nokia sold over 200 million feature phones last year. This market is in decline. Still, devices such as the Nokia 230 at $49 dollars and Nokia 220 at $29 dollars will still sell massive volumes and these customers will touch a Microsoft service likely for the first time.

Ultimately Samsung is being eaten alive at the low-end. India is still one of their strongholds, but it is also a market where Nokia has brand affinity. Samsung has not created loyalty in the low-end, and this is an opportunity for not just Nokia, but Microsoft is in a position to capitalize also.

Nokia’s Bold Move Supporting Android

The Nokia x (Nokia)

Today at Mobile World Congress, Nokia announced a new family of affordable smartphones called the Nokia X. What is notable is that these devices are not coming from Nokia’s Smart Devices group which creates the Lumia and ships Windows Phone as their smart devices OS. This group within Nokia is the group that sells feature phones, hybrid feature/smart phones known as their Asha line, and now the Nokia X. This group focuses on the lower end of the smartphone market and in particular emerging markets. This group focuses on people in the market for their first mobile/smartphone.

The new lineup of Nokia X devices is competing in one of the fastest growing price bands of the smartphone market. The market for smartphones around the $100 price point is growing at 4X. Let’s look at the growth bands of price tiers for smartphones here is a look at my firm’s estimates.

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The lower cost segment is the growth area and where the bulk of the next one billion new smartphone owners will come at this price segment. Nokia is targeting the X family right at this growth area. This group within Nokia has mobile distribution deals in place with over 90% of the world’s markets giving them one of the broadest carrier distribution networks of any global brand. At prices between $89-109, the Nokia X has a massive opportunity.

AOSP vs. Google

What makes the Nokia X family discussion worthy is not necessarily that it is running Android but that it is running Android with Microsoft’s, not Google’s, services tightly integrated into the platform. This sounds like a risk and to a degree it is, however, it is a risk that could pay off. The key question in my mind is not whether Nokia should have shipped AOSP but rather are Microsoft’s services competitive with Google in markets where Google competes. What intrigues me about this move is that Microsoft has stepped right onto Google’s turf, with their own software, and decided to attempt to compete with them on services.

The Nokia X comes with a service comparable to nearly every service Google offers. Outlook for email. Here for Maps. Skydrive for cloud storage, Office 365, Skype, and the Bing search engine. The big question everyone will ask is about apps. To solve that problem, Nokia is shipping their own Android app store as well as the top 5 most popular app stores in certain regions. The Nokia X devices also support side loading of apps that is another popular, yet little talked about, way that emerging market customers get their apps. It is common in many markets to go back to your carriers store and get apps installed or side loaded onto the device all without the need for an app store.

Most Android .apk applications work out of the box with no modifications on any AOSP Android platform. The last stat I heard from an AOSP platform provider was 70% of all the Android apps out there will work today on any AOSP Android device.

A Series of Firsts

The Nokia X is an interesting play in the market. It is targeted at a price tier that is catering to first time smartphone owners. The build quality, and the look and feel of the customized OS are highly differentiated from a part of the market where there is no differentiation. When you look at the market for products in the $100 dollar range, they are rectangles with a mix of plastic and glass that all look the same. The Nokia X will stand out from this pack at the same price range. This is significant.

While the Nokia X is an attractive product for first time smartphone customers, also known as the next billion mobile customers, there is a more significant first that could play out if these devices are successful. Nokia will successfully bring potentially hundreds of millions of new customers into the Microsoft ecosystem by giving them their first Microsoft ID.

An iTunes account was the hook Apple used the iPod and then the iPhone to acquire. Once customers got an iTunes ID and invested in the ecosystem they got a degree of lock-in. Google similarly used the hook of Gmail to get people into their ecosystem. If Nokia does well with the Nokia X, it could help Microsoft acquire their next set of customers. This is the most important strategic objective in my opinion for Microsoft. As I said before, Nokia again sits at the heart of Microsoft’s comeback. Forking Android and going after the next billion smartphone customers may just be crazy enough to work.

Samsung and their Fragile Relationship with Google

For Insiders I wrote a while back about Samsung’s precarious position in the market place. Samsung finds themselves between a rock and a hard place. It is not surprising that a bit of news surfaced stating that the next version of their Galaxy Gear will run Tizen not Android. Tizen is a joint venture OS between Intel and Samsung. Several other big name firms are involved with Tizen as well but Samsung is the largest to date said to actually take it to market.

Samsung’s move to run Tizen on their smart watch platform, if it does indeed turn out to be true, would not be a surprise. As many PC OEMs will attest shipping someone else’s software can only take a hardware company so far. When the day comes where a segment of the hardware industry becomes a commodity it makes life for hardware companies difficult. Samsung is a hardware company who desperately needs to become a software and services company. If history is our guide then it favors software and services companies. Facebook’s acquisition of WhatsApp emphasizes this point.

Samsung is not in a position to control their own destiny. Samsung’s challenge is that they struggle for customer loyalty. Currently, there is little reason for a customer to choose next years Samsung phone when they upgrade. If there is a better Android device on the market that catches their eye they are equally going to consider that device as well. What Samsung, and other Google Android OEMs, do is help drive loyalty to Google and Android but not necessarily to their brand. Apple does not suffer from this problem since their loyalty is built on more than their brand but on their ecosystem of not just hardware but software and services. This is why Samsung appears to be teetering on the edge of going vertical as much as they can without fully leaving the Google Android ecosystem. Samsung needs Google. Yet they need to not need them for their mobile group to thrive.

A Tizen based Galaxy Gear could be a step in this direction. If Samsung were to release an SDK around this Tizen Galaxy Gear product and get a critical mass of developers and apps creating applications for a product unique to Samsung then it could be the foundation for a Samsung ecosystem. It is worth noting that Samsung does not run Android on their Smart TVs. These Smart TVs do have apps but a critical mass of apps or developers exist for the Samsung Smart TV platform. Mobile is inherently where Samsung needs to have a critical mass of developers. If Samsung can’t figure this out and destined to be stuck in the rut of a hardware company then very troubled times are ahead for their smartphone and tablet operations.

Samsung does not have a services business to support forking Android. Amazon does. Xiaomi does and both have been successful at taking Android and building a services platform on top of it. Similarly, Microsoft could have a strong business case to layer their services on top of an AOSP implementation of their own. I’m yet to see something similar from Samsung. Which leaves them in a position to have to “platformize” Google’s version of Android as best they can without over stepping their boundaries as a Google certified OEM.

What we must watch with regard to Samsung is how they make steps in this direction on devices for which they don’t have to go through Google’s certification process. Products like their TVs, Smart Watches, or even new product categories, that are ecosystem boosters, are where they can start to lay a foundation to grow and foster their own platform.

Facebook, WhatsApp, and the New Era of Platforms

What is happening with messaging apps is a big deal. In fact it is probably the biggest thing that is happening that is underestimated and has implications on many. Facebook just announced that they have acquired WhatsApp for what is looking like $19 billion dollars. To put that into perspective that is more than Google paid for Motorola and Nest combined.

On the shareholder call Mark Zuckerberg pointed out that he believes WhatsApp is on a path to a billion users. All mobile users mind you. Facebook has over a billion users with the vast majority of them being mobile only or primarily. So why this deal? Well Facebook realizes that WhatsApp is their path to the next billion users.

There was a time when Facebook was the driving reason for people to get their first smartphone. WhatsApp as well was a part of that conversation but now in many emerging markets everyone talks more about WhatsApp, WeChat or Line than they do about Facebook. That is why this is a big deal and central to Facebook’s growth story. What many fail to realize is that while we are adding approximately 300-500m new smartphone users annually, Facebook itself has seen slowing growth. While WhatsApp continues to see tens of new customers adding to their platform every month. Facebook buying WhatsApp is their way of getting a piece of the next billion smartphone users in ways the Facebook platform may not have. The number may seem steep but Facebook had to act and could not risk being left out of the next billion users.

Only what gets glossed over is that these platforms are much more than messaging. Right now WhatsApp is a messaging platform plain and simple. However to get a sense of where this is going we need only to look at WeChat and LINE. Both have messaging as a component but that is just the entry point. In the case of WhatsApp, users can shop, bank, message, flirt, hail a cab and a whole lot more. WeChat is more than a messaging app, it is a platform. Similarly, LINE has messaging as a component. But it also has games, sponsored media, sponsored sticker packs, commerce and is growing the capabilities of its platform quickly. These two companies highlight the power of the mobile platform and the para-platforms which can be created on top of them.

The messaging apps are at the center of the real time communications and more importantly at the center of the primary engagement on mobile devices. Platforms like LINE and WeChat, as well as WhatsApp to a degree, are adding features and services to their platform that increases the engagement of their users within their app. What Facebook has come to grips with is that the future engagement models are not the current Facebook model but rather something different.

What is still missing for Facebook + WhatsApp to become what I believe these apps ultimately are, fully enclosed walled garden platforms, is a mobile payment system. I’m keeping my eye on this space and will write more detailed analysis on it when I am comfortable with the research.

All of this, however, should be very concerning to Google. If you read what I wrote last week about AOSP and you couple it with these messaging app para-platforms you have the foundations for a bear case for Google. Time spent using other people’s services, and other people’s apps, is time not spent doing the things that make Google money. Specifically searching the web and viewing their advertisements. Google can not afford to sit still and idly watch watch is happening and be left out of what is now the primary engagement model. Search was the primary engagement model for the desktop web. Mobile messaging is the primary engagement model for mobile devices. Google must adapt.


For further reading on messaging apps, I strongly suggest these posts. One from me and two from my colleagues. Coincidentally all are named Ben.

Messaging Mobile’s Killer App: Ben Thompson of Stratechery

Interaction, canvases, and ecosystems: by Benedict Evans

Trojan Horse Messaging: by Ben Bajarin

Google, Android, AOSP, iOS and the Global Smartphone Market

Hopefully you have read several posts I have posted this week. This one on Microsoft and Android and this one on Google vs. Android. These posts are building blocks for a foundation I am laying to help our readers understand critical things about this market going forward. The smartphone market is the single largest product market in terms of annual sales so it is important to understand.

As I articulated in the article about Google vs. Android, we must understand Android as a platform that enables the creation of other platforms. OEMs may take Android AOSP and build relevant things on top of it. This is what Amazon and Xiaomi do and expect others to follow suit in 2014. While Android AOSP means Android Open Source Project the reality is that that what is open is not the Android code base but rather the services layers. Therefore I would define it more as the Android Open Services Project.

To start off what we need to know is what the projections are of price bands as a percentage of forecasts for the next four years. Here is what that looks like.

Screen Shot 2014-02-13 at 8.00.47 AM

The most important observation is that we are adding the vast majority of new smartphone owners in the mid-range and the low-end of the smartphone segment. More than half of the next billion new smartphone users will come from devices costing less than $200 wholesale. The mid-range will grow and is growing. Those consumers who are in replacement cycles now are often going up stream. The issue is there is still a limit to the price band they can afford. This is why I pointed out in an Insider article a few weeks ago that should Apple continue its path of staying in the high end of the smartphone market their TAM will simply be smaller than if they addressed the mid-range.

Given what is clear now about Android, the question has to be asked if the handset makers who are focusing largely on the devices costing less than $200 and the consumers who will buy them even care about Google’s services. An interesting report came out today in the Wall St. Journal (behind the paywall) articulating the hardware restrictions Google places on OEMs in order to receive certification. This is nothing new and Microsoft has done this with PC OEMs for some time. Google wants to make sure there is at least a minimum bar when it comes to specs to run their version of Android. They want an experience to be preserved and they need to keep a limit on the hardware varieties that enter the market for their software developers. But those OEMs from China and India who are looking to enter high growth markets like Latin America, and Africa, will be looking to cut costs. This does not favor them jumping through hoops to meet Google’s Android certification tests. That is why AOSP is becoming a competitive platform to Google.

Take a look at this chart that I have compiled using both public and private resources to generate the per quarter share of Google’s version of Android vs. AOSP for the past 5 quarters.

Screen Shot 2014-02-13 at 8.10.42 AM

What you will notice is that AOSP is gaining as a percentage of the install base against Google’s version of Android with their services integrated. I only expect the mix of AOSP to grow given the growth of the low-end in key markets. Here are some important points about AOSP by the numbers.

  1. In terms of quarterly run rates, it is the second largest platform
  2. In Q4 2013 AOSP outsold the iPhone
  3. In Q4 2013 AOSP sold more than the total install base of Windows phone each month
  4. Google’s version of Android sold 573m units and AOSP sold 175m units in 2013
  5. AOSP is growing faster per quarter averaging 55% quarterly growth compared to Google’s Android average of 23%

Given everything I am seeing these are fascinating trends. It seems as though everyone believed Google has no competition in core services like search. Yet their own platform is being used to compete with them as local companies take advantage of Android and create or integrate their own services for their region. So where does this leave Apple?

During Tim Cook’s interview with the Wall St. Journal he said something very telling.

I look at the mobile phone market as having three kinds of phones: feature phones, smartphones that function as or are used as feature phones, and real smartphones. I care about the market share of the last one. I don’t care how many feature phones are sold. The more that are sold I look at as good because those are all potential future customers for real smartphones. The same thing goes for the second category. I’d like to convert as many of those as possible to real smartphones.

Now, while phones like Xiaomi, ZTE, Huawei, Micromax and even Samsung’s mid-range phones are actually real smartphones and used as such, Cook’s statements point out something about how Apple views competing for new customers. The key is in one single word that he used–convert.

It would be a mistake for Apple to attack the low-end. It would even be a mistake for Apple to attack the lower tiers of the mid-range price category. What is clear is that Apple will target a price bar that they believe is low-enough to compete for customers who are mature smartphone owners in a replacement cycle, but priced high-enough to capture the ones who view what their experience and ecosystem as valuable. The key for Apple in emerging markets is to set their targets on the segments of the market who are existing mid-range owners (the blue bar in my first chart) and compete to convert them in the replacement cycle.

The reality in China is that Apple is competing with AOSP Android not Google’s Android. A bear scenario can be created from this due to the implantation of AOSP devices being more tightly integrated with local Chinese services than iOS. Apple is playing the long game in China and other emerging markets. As long as Apple’s focuses on supporting and in some cases integrating Chinese services providers into their version of iOS for China then they are on the right track to do well in that region. Perhaps their strategy in China can also be used as a template for other markets.

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Google vs. Android

One of the more interesting narratives that is starting to become mainstream is the knowledge that there are versions of Google’s Android operating system which compete directly with Google’s Android operating system. Google offers to the world a clean, and updated, version of Android as an open source code base (AOSP). There has been an increase in coverage by the media to explain how and why Android should not be forked at this point.

What I have continually articulated publicly is that the best way to understand Android is to think of it as a platform for which others can create platforms. Google has taken the basic AOSP code base and integrated their services on top of it and offered this version of Android to be used by anyone who they approve by passing their device certification requirements. Amazon and Xiaomi are top tier examples of companies who have taken AOSP Android and used it for their own benefits by differentiating the platform in unique ways that fit their core business model. A commenter on a recent article, who states they are on the Android team eloquently explains what Android actually is and why is exists. I encourage you to read the whole comment but I have chosen these quotes:

AOSP is far more than the basic bones of a smartphone operating system. It is a complete smartphone operating system. The examples you provide for what it includes are very misleading — what about the launcher, contacts app, dialer and phone app, calendar app, camera and gallery and on? The fact is, if you build AOSP today and put it on a phone, you will have a pretty fully functioning platform.

AOSP is a fully functioning platform.

The thing you don’t have is stuff related to cloud services, and this is not an evil secret plan of Google, but a simple fact we have been clear about from the initial design of the platform: Android as an open-source platform simply can’t provide any cloud services, because those don’t run on the device where the platform code runs. This is a key point that seems to be completely missed. If you want to understand what Android is, how it is designed, and how the pieces fit together, you must understand this point.

Google’s services do not run on vanilla AOSP. Google takes AOSP and creates a new code base for which their services run. What becomes critical in the narrative is the word services. Software platforms are at their very basic core a mechanism to drive services. Windows was/is a mechanism to drive Microsoft’s services. Android is a mechanism for Google and others to drive their services. iOS and OS X are mechanisms for Apple to drive their services.

The data point gets voiced in the anti-forking Android narrative that Google’s services are so deeply relevant that it makes no sense to fork it. This is both true and not true at the same time. It is true in markets like the US and the UK that Google’s services are deeply relevant. You can even make a case that they are relevant in markets like India, and some other emerging regions, but this argument is less true in the same ways it is true in the US and the UK. Case in point.

Screen Shot 2014-02-12 at 9.27.48 AM

On this Wikipedia page someone has taken all the regional data points publicly shared by Google about Play store for regions where customers can buy paid apps (column 1), developers can sell paid apps (column 2), and the following columns the types of content available (i.e magazines, books, music, tv, movies). The UK and the US are the only regions where all of the services Google has to offer a fully available. Worth mentioning, China is not even listed by Google as a region. *Thanks to James King for making me aware of this.

Now for comparison I took the whole of the Google Play availability for mentioned services and compared them iTunes((Here is the iTunes availably link. http://en.wikipedia.org/wiki/ITunes_Store)) since both mentioned in the global services conversation. Here is what it looks like. Green means a particular services is available and red means it is not.

itunes_vsgoogle

What you see with regard to the Google Play services availability is the biggest issue facing Google. It is one that is forcing, in a good way, local companies in those regions to create and bring to market services of their own to support their region. China is the best example of this do date. Granted China’s Android ecosystem is a bit messy with over 100 different app stores but the region is quickly fixing these issues and consolidating.

The fact that Android is being used as an open source platform is not necessarily a bad thing for Google. What is challenging is that they are not making the impact with their services the way they need to be in many of these regions. Their competition in this case is not from the likes of Apple or Microsoft necessarily but from savvy startups looking to solve a problem in their region and doing it better than Google can thus keeping Google out of regions they may wish to compete.

Microsoft and Android

According to this report Microsoft is pulling in healthy revenue from Android. We knew that Microsoft was holding on to patents which many Android OEMs are using and now paying Microsoft a fee. Microsoft may very well be making nearly as much and in some cases more than Google off Android.

Microsoft makes money off Android devices Google does not. Since Google’s services are not present in China, Google makes virtually nothing off Android devices in the largest global market for smart phone. Microsoft makes money per device in that region since most the major players in China like Huawei, ZTE, and Samsung all pay them a license fee for their Android devices. Microsoft benefits from China off Android the way Google may never be able to.

Ultimately, Google is dependent on not only devices with their services integrated to make money off Android but also the engagement of users using those services. ((Of course, with Google capturing data from Android they benefit in ways to their machine learning business. My point is tied to direct revenue from Android devices.)) Which seems somewhat problematic given that Android has become the standard OS for the low-end of the smartphone and tablet market. A segment that makes up the majority of the Android install base is also the less likely to be engaged buying apps, searching the web, and doing all the things that help Google make money off Android. While Microsoft makes a minimum fee off Android of at least $5, and sometimes more, Google’s revenue off an Android device varies and is dependent on the end user where Microsoft’s is not. I’d argue that Microsoft is able to monetize the low-end of the Android ecosystem magnitudes more than Google can. And certainly they can monetize the Chinese Android ecosystem in ways Google can not. Add it all up and it makes sense why there is good reason for Microsoft to not only support the Android ecosystem but to also continue to foster it.

In a recent Vector podcast, Ben Thompson articulated how if Microsoft was to move only into the services business that they would be a much smaller company. Ben highlights that Microsoft employs 100,000 people currently and is adding another 30,000 people with the addition of Nokia. He points out that if Microsoft was just a services business, that they would likely be a 50,000 person company. All of this is used to point out the most significant point for a company Microsoft’s size. They must attempt to capture value (dollars) from as many people as possible in as many ways as possible.

Windows alone is no longer a viable way to bring Microsoft’s backend services value to the mass market. If they can make money off a piece of hardware (like Surface, Nokia handset, or XBOX game console), off a services subscription from a consumer or a commercial customer, off an Android device sale, off an app store, off software (apps), off entertainment content, off accessories, and more, then you can make an argument that they may not just not shrink but that they may actually grow.

Attention Tech.pinions Insiders: We Have Some New Features

As we continue to evolve our Industry Insider analysis service, we continue to get good ideas. Insiders has grown already much faster and much larger than I could have expected from when we launched the service. Thanks to everyone who has signed up and given us great feedback.

Given the rather diverse audience of our members we wanted to make sure we tackle subjects and provide deeper analysis on areas of interest to you. So we have added the ability to submit a topic. Please use this liberally and hit us with everything you are interested in us diving into with our market and industry perspectives and data.

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This box allows you to read all our insider content within these popular categories. We have added the button to submit a topic to this box. Again you have to logged-in to see this box. To submit a topic now you can use this link.

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We have many new features lined up for Industry Insiders for 2014. So stay tuned and thanks again.

    

        
        
    

    

        
        
    

    

        
    

Amazon’s Long Game With Hardware

Amazon has been a fascinating company to watch. My perspective with Amazon has always framed them as a retailer who fused technology to retail in brilliant ways. Only Amazon’s retail strategy was not in physical space but in the digital space. And their mechanism for commerce was to turn our computers into a cash register. With this backdrop, it is fascinating to analyze Amazon’s Kindle Fire initiatives.

When Amazon jumped into the e-book reader market it made a great deal of sense. Amazon had a differentiated advantage due to their massive investment in gaining digital rights to many of the analog books they were selling. The Kindle readers, tied to the Amazon ecosystem, dominated the e-reader space. During that time nearly every CES (Consumer Electronics Show) I attended grew in the number of fast followers trying to jump on the e-reader bandwagon. None did as well as the Kindle readers and it was simply due to Amazon’s ecosystem. Amazon had a clear differentiated advantage that translated into consumer value with their e-readers. So does that same differentiated advantage apply to their Kindle Fire strategy?

The Kindle Fire has not turned any heads with its sales. While we don’t know for sure how many Kindle Fire sales, the best estimates I’ve seen estimate them to be around 55m to date. Not bad but not incredible compared to the iPads sales over the same time period since the Kindle Fire launched. The issue, as I see it, is that the Kindle Fire does not have the same differentiated advantage that the Kindle e-readers did. With the Fire, Amazon is competing against the likes of the iPad which offers all the same experiences of the Kindle Fire and then some. So why is Amazon in the hardware business?

There are several ways to look at this. My initial belief when Amazon launched the Kindle Fire’s was that Amazon would tightly integrate their commerce experience on the Fire tablets. Thus creating the best shopping experience within Amazon’s ecosystem on the market. This did not happen. The Kindle Fire has been more a media tablet than a commerce tablet for Amazon’s ecosystem.

In fact, interestingly, the Amazon tablet in general is driving less e-commerce spending than other tablets on the market. Data from a 2013 Monetate survey reveals that Amazon Kindle Fire users spend approximately $95 a quarter in digital transactions from the device while the iPad average quarterly spend is approximately $124 dollars. Now we can attribute some of this to the fact that there are way more iPad’s than Kindle Fire’s in the world. But I do think the this is still an important point to watch strategically for Amazon with the Kindle Fire.

Fire in the Enterprise
Amazon has recently added a number of enterprise specific features to the Kindle Fire. This, is actually fascinating and indicative of the types of usages we are observing with Kindle Fires. There is no doubt the Kindle Fire is a great media tablet but the idea that people are wanting to check email and perhaps even review documents is interesting.

We had heard that IT managers were noticing Kindle Fire’s were being brought in by consumers to use to watch video or play games during breaks and lunch. Often times these same customers were interested in checking email during these times as well. This is where we believe the enterprise friendly features Amazon built in were born from.

Without question there are better tablets on the market for doing things like productivity which is why we see iPads and Samsung tablets higher up on the IT managers support list. But it has been interesting to see how this has developed for Amazon.

The Hardware Strategy
With regard to the Kindle Fire, I have concluded that this business is important to Amazon but not essential. Like all of Amazon’s investments in businesses there is a long term goal. The Kindle Fire right now is playing more of a data gathering tool than anything else for Amazon. They are learning how tablet customers and more specifically Amazon customers using tablets are doing with regard to e-commerce, media consumption, and app usage / web browsing.

In fact, if the tablet market is hitting a slow down period then this will impact Amazon quite a bit given their strategy. It is likely that as of now, Amazon is stuck in the middle from a hardware standpoint.

This will have benefits in the long term as Amazon can continue to customize their offerings uniquely for their customers. Amazon exhibits a similarly valuable trait to Apple that continually gets mis-understood by investors and main stream media — patience.

The Sky is Falling!

If you read too much of the tech media you sometimes get the impression that the tech world is ending. The PC industry is in decline and many are quick to declare it dead. Now, our love affair with tablets are over according to many recent articles. Smartphones growth is slowing. We are in a tech bubble. I could keep going with apparent bad news. The media has to do what it needs to do to survive. Bad news sells. But the end of the technology industries growth period and innovation is hardly over.

Mature, Maturing, and Green Fields

Something I think gets largely missed by most who observe this industry relates to its maturity. Is the technology mature or is it not? If it is not mature it will act one way. If it is mature it will act another. What makes the answer to this question fascinating is that it is both mature and maturing at the same time. In developed markets the technology industry is mature. This is why we see competitive dynamics like differentiation, segmentation (in both product mix and price tiers), and more savvy consumers to their needs, wants, and desires for the products they shop for. Some may look to segmentation as the biggest indicator of a mature market but I choose to look at consumers themselves. Once consumers start becoming self aware to the point that they are specifically selecting this product over that one for reasons only they have worked out that are important to them, then we know we have a mature market.

Mature markets, and in this case industries, are what lead to new technologies to be adopted very quickly. In the case of the tablet, its success and rapid adoption was a direct result of consumers being familiar with PCs and smartphones. When the iPad came out it was easier for consumers in mature markets to grasp its value. This is why the tablet has been the fastest adopted consumer electronics device to reach 500m install base which it achieved in 2013. This point, of a mature market, was one of the underlying points we used in our logic to forecast the aggressive tablet volumes we did in 2010.

The mature market dynamics also explain why the segment is slowing as well as its now fully established seasonality. Note the peaks at each Q4 for tablet shipments since 2010.

Screen Shot 2014-02-06 at 9.34.44 PM

Now Let’s take a look at a few other charts showing certain products in a mature market with full swings in seasonality. Note the shape and the peaks.

devices

What you notice about the two charts above is the ramp up and then a peak. We have reached peak desktop notebook form factor. This market is no longer growing and in fact it is contracting. The PC as we knew it–a desktop or a notebook–has passed its peak. This market will remain since a good many people still need a device they can sit at a desk to do long form deep work like spreadsheets, create CAD documents, write software, make a motion picture, edit professional photographs, etc.

Unlike the PC market, the iPod is fading into irrelevance. The capabilities of the iPod have been integrated into the smartphone. Now while I believe there is a market–just a rather small one–for the desktop and notebook form factor, it is interesting to think about what core features that were unique to the PC are now integrated into the tablet? ((This was the core of my article from yesterday) In many of the same ways the iPod was the only device for music, the PC has been the only device for other use cases which have now started to be taken over by the tablet. Web browsing, watching videos, using social media, and many other things were once desktop use cases and have now been integrated into the tablet.

The other key thing to point out with regard to the PC chart is that not only did we pass peak PC, the device itself shifted to longer life cycles. During the highest growth period of the PC the refresh rate was every 2 years. Now, the average is 5 years and growing. All the above is useful to understand what is happening with the PC market. It is not dying, the market is simply correcting itself. The PC over served the needs of many consumers and once they got a netbook or tablet they realized it. The PC still exists in their home but they don’t use it as much. Stock markets correct themselves as investors settle at a valuation that seems to be accepted. So the PC market is correcting itself and it too will settle into a degree of steadiness in annual shipments.

The tablet is undergoing a continued growth period but is also experiencing much more seasonal swings than the PC did. The lifecycle of the tablet is still also unknown. When we look back in 2-3 years at these updated charts for tablets, I believe we will see patterns that have shades of both the quarterly data points of the PC and the iPod. Yet, we are no where near peak tablet.

As interesting as mature market dynamics are to observe, the real question is where do we go from here. If you follow my analysis you know that I have thrown the stat out from our research that 90% of current tablet owners also own a PC. That leaves about 5.5 billion people who don’t have a PC or a tablet. The install base of smartphones either has passed that of PCs or will pass any day now. Bringing computing to the next 5 billion plus is going to happen and it will likely be a 20 year journey, or longer. However, the key thing to remember about being on a journey is the scenery changes.

What Kind of a Computer Is That?

photo

This is the question I get asked most when I use my current iPad set up in public. ((The case is the iPad Air Folio case from Zagg)). People see my iPad and keyboard set up and assume it is some new type of computer they haven’t seen before.
   
From the first day I started using the iPad I have used it with a keyboard and tried to use the solution for my day to day computer needs.  With each new iPad, version of iOS, and with each new keyboard solution, I noticed the iPad + keyboard combo beginning to get closer and closer to being used as a substitute for the vast majority of both my personal and my commercial computing needs. 

A Look Back at Commercial Computing to Personal Computing

I think it is often forgotten how Windows rose to dominance.  Microsoft, and their ecosystem partners, won over the enterprise by catering to those responsible for deploying and managing PCs in the workplace. Windows became the computing standard for the commercial market.  Then, as consumers began to want a PC of their own for home or personal use they purchased a Windows based one because it was the one they were the most familiar with. They brought Windows home with them you could say. It is worth bearing in mind that Windows was what they had to use at work not necessarily what they choose to use at home due to a genuine limit of choice. ((The Mac did not support many of the software platforms and consumers were familiar with and was too expensive to be mainstream.)) This is an important distinction that helps us understand what is happening in the market today now that consumers do have more personal computing choices available to them. 

What is in question today is not computing, or the future of computing, but Windows role in the future of computing. We are not watching the PC market contract because people don’t want a computer. Rather, consumers are choosing other products than traditional PC form factors to serve their basic computing needs.  

Note the below slide of my firms outlook for the next few years in these categories.

Screen Shot 2014-01-29 at 9.58.27 AM

What is fascinating about what is happening with tablets is that consumers may not be choosing them as a PC replacement. In fact, I am certain this is not the case for most consumers, at least not yet.  They are choosing them for the very reason that Microsoft wants to mock them for.  They are choosing tablets because they primarily want to use them for consumption and entertainment.  Tablets are easy to use and they have fun and relax while using them. But what happens when they realize they can also use them for more productivity and creativity tasks? What happens when they realize the tablet is capable of the tasks they used to depend on their PC for?  What happens when they become aware, as I did, that a keyboard option (if you need it) can actually start serving their basic computing needs? What happens when they realize the touch interface and the software built for it is actually easier to use? Will they start doing more with this tablet? I believe the answer is yes.

I can’t talk about personal computing and not think about Microsoft’s role. The setup I am using could very well be considered a Windows based 2-1, like a Surface, by usage standards. In fact, often when I show people my iPad and keyboard setup they ask my why I didn’t choose a Surface. The answer is because I don’t need Windows for either my work or personal life.  How many other tablet owners have come to the realization that they don’t need Windows any longer? They already have a capable computing OS in their hands in the device they choose primarily as a consumption device.  When this settles in it could be industry changing for personal computing.  

What all of this hints at is that while there is a clear commercial computing application for the time being for Microsoft based solutions, there is a waining value proposition in personal computing (consumer) markets.  As more and more people find that their tablets with alternative operating systems to Windows meet most of their needs, the role–and value–of Windows diminishes.

During Microsoft’s rise, consumers brought Windows home with them. What should concern them about their future is that consumers are bringing iOS and Android devices to work with them.