TikTok’s Momentum

No matter how you feel about TikTok, we are past the stage where people debate if it is a fad. TikTok is snowballing with incredible momentum and growing globally about as fast as we have seen a social app grow. Even if you aren’t on TikTok, it is likely most people you know under 30 are, and perhaps a growing number of people in their 30s and 40s. If some recent app store reports are correct, the number of users on TikTok is approaching or has just surpassed 600 million people.

TikTok remained in the top 5 downloaded apps in the US in both the Apple App Store and Google Play store during 2019. Globally the story was similar, and in particular, it is extremely popular in India. In a recent worldwide survey of social app usage, that landed in my inbox, it highlighted that after YouTube, TikTok is now the second most used app to watch mobile video every month.

Celebrities are embracing TikTok, the mainstream media is talking about TikTok more regularly, and more importantly, consumers are creating user-generated video faster than perhaps any other social platform in mass. The question remains, however, as to what exactly is TikTok?

What is TikTok?
Yes, TikTok is an evolution of Vine, which is short-form video content that lends itself to memes (themes which duplicate with a user’s unique spin on it). TikTok is slightly different from Instagram in its appeal in that it is much easier to post something that goes viral on TikTok. For your post to go viral on Instagram, you have to have a large group of followers to see it. TikTok has a video feed every user sees called the For You Page. The content you post can show up on the For You Page and be shown to millions of people who don’t follow you. Therefore, many of those in Gen Z I talk to are not necessarily trying to build a huge follower group on TikTok, they are simply trying to create videos that go viral.

If you watch videos on the For You Page for any length of time, you see dozens of memes that are similar. Any user can pick up on one of these memes (content theme) and put their own spin on it and find it can go viral quickly. The appeal, for now, is the competition to make a post that goes viral. And that alone seems to have quite a bit of gravitas with everyone I’ve talked to creating content on TikTok.

Among other platforms, TikTok seems to be gaining traction seeing more consumers upload video content than others, including Instagram, where photos are still the most popular and frequently uploaded medium. This is where the potential for TikTok may be greater than Instagram, in my opinion. It’s a change in the medium and the format of content. This is also where TikTok may be the manifestation of what everyone thought YouTube would be where everyone would be a creator.

What’s interesting to watch with TikTok right now is how quickly the content is evolving, and doing so in a way, it is still unclear what TikTok will become. This is surprising when you think about a product with a user-base of 500-600 million people worldwide, and we still don’t know what kind of a media platform it is because it is still evolving. Consumers are experimenting and innovating, and as you scroll the For You Page, you see content from regular people, not celebrities, influencers, or producers, which makes it even more interesting.

The Business Model
From an economic standpoint, TikTok is growing rapidly in conversations with advertisers. I was surprised to even see ads from Apple already in TikTok. Ads feel much more native in experience and integrated into the overall video experience that it is easy not to realize you are watching an ad. Advertisers are even picking up on the most popular or trending memes and creating content to match those memes, which is brilliant in my opinion.

I’ve talked to a few friends in media and advertising, and while TikTok has entered the conversation, it is still only in the experimental budget camp. This, interestingly, is largely where Snapchat has been for major advertisers. It is my firm opinion TikTok will have a much more successful advertising platform than Snapchat, and people have been speculating ByteDance, TikTok’s Chinese Owner, maybe a front runner to purchase Snap someday.

While Instagram has been growing in social commerce (buying and selling products promoted by an influencer), it is unclear how well this will work in TikTok even though the underlying architecture is there for social commerce.

TikTok will have its influencers who gain large follower bases just like Instagram and YouTube, but I have a feeling the way you play the influencer game on TikTok will be quite different than the way they do it on Instagram and YouTube, which may end up meaning the rise of new influencers who better adapt to the new medium.

These are interesting times because we thought social media was largely settled, and no one was going to come in and challenge the FB properties. But TikTok’s upside may be higher than Instagram and YouTube, and that will make for interesting competition to watch and analyze.

Apple in 2020

Apple is off to a strong 2020 and for a good reason. iPhone sales have stabilized, and the brief worry investors had that iPhone sale would continue to decline is over. Many of us fought this narrative, explaining the dip would not be as bad as imagined, and the bigger question was where annual iPhone sales would normalize. The answer to that question seems to be in the 180-200m range annually.

Smartphone sales are not growing. Globally they are roughly flat YoY. iPhone customer remains extremely loyal as Apple has the highest loyalty rates of all smartphone OEMs globally (Apple’s 83%, Samsung’s 72%, Huawei’s 60% and no other OEM above 45%). Not only are retention rates for Apple stable, but so has the lengthening upgrade cycle of handsets stabilized. A large body of research from multiple global smartphone studies I’ve read suggests we are settling into an average age of smartphone handset that should not lengthen much more. The slowing to declining growth of the smartphone market, largely due to lengthening refresh rates have both become stable.

Regarding Apple, those two things were the main concern for iPhone and the market seems to now be stable and showing signs it will remain that way for the foreseeable future. The last six months of market data seem to confirm growing confidence in Apple as a company (even though it should have been there all along given the fundamentals of the business).

For the sake of this analysis focus of looking at Apple in 2020, I’m going to do it two ways. The stock view and then the products where growth will come from view.

Stock Perspective
While I don’t do the whole financial model thing, I do read way too many buy-side notes from some of the notable large banks. Many of those notes I read are on Apple. Most analysts had Apple’s end of year price target in the $220-$230 range. If you follow Apple stock, you know it is now hovering in the $310-$315 range. So the question is, why is confidence rising?

It feels as though confidence in Apple stock is rising the same way it did right after the launch of the iPhone 6 and 6 Plus. A time when Apple was adapting its iPhone strategy to cater to larger bases of customers. Apple saw several stellar quarters, particularly in China, and sentiment around the stock was as strong as ever.

Interestingly, the stock stayed relatively solid until Apple’s first revenue warning in late 2018. Now, while the current uptick in Apple’s stock is a bit steeper than past ones, and there may be some correcting, I don’t think the stock will take a dramatic hit due to returned confidence in Apple’s fundamentals as a business and the upside in adjacent business growth areas.

Dips in Apple’s stock have generally been followed by a continued and sustained growth streak. The question I get from investors now is along the lines of how high can it go? Can Apple get to a $2T market cap? I don’t have the answers to these questions, but if the growth areas continue to ramp, then I don’t think Apple stock is anywhere near its peak at the moment.

Product Perspective
The obvious areas to keep an eye on are wearables and services. Both businesses remain dramatically underpenetrated as a percent of the iPhone installed base. But the question then becomes, what should we expect AirPods, Apple Watch, and services to reach as a percent of the iPhone base? Investors are asking if this is an iPad growth ramp scenario or if it can, these businesses penetrate more of the iPhone base than iPad did? My hunch is they can for various reasons.

Werables. As great as the iPad is, for most of its owners, it is a luxury more than a necessity. Yes, we can debate this since I know people love their iPad, but for most, if they had to choose between their smartphone or Mac/PC over iPad, I think a good chunk would choose their smartphone and Mac/PC. Now, while we can certainly debate if AirPods or Apple Watch are luxury or necessity, I think some of the fundamental and inherent life value both products offer, they can both align closer to necessity.

The other element that sets AirPods and Apple Watch apart from iPad is their connection to the iPhone. The iPhone is still the center of consumer’s computing lives and peripheral computing experiences like AirPod and Apple Watch, which leverage and, to a degree augment the iPhone’s capabilities. My theory, for now, is those products that are companions to iPhone have a higher TAM potential when looking at how they can grow to the iPhone base of customers.

All of that to say, the growth run for Apple’s Wearables business still has plenty of room to grow.

Services are the other significant growth area for Apple, but also one where many questions remain, which may not be answered into well into 2020.

From all the data and global research studies I’ve seen, the highest any subscription service from Apple (iCloud and Apple Music) has penetrated is roughly 30% of the iPhone base. A worthy, and important, side note here is the smart global research reports I’ve read separate their analysis of services potential to first-hand iPhone owners and n-1/2 iPhone owners. First-hand owners are those who are using a brand new device, and n-1/2 are those using older devices that were either purchased new or acquired via a second-hand avenue. This is important because the data is extremely revealing around the behavior of iPhone owners who have new devices and those using older ones. This data consistently shows when users get more capabilities (features, specs, etc.) on their iPhone, they do tend to spend more with Apple. This confirms my theory that as Apple moves its base to the latest generation technology, the upside for ARPU goes up.

The other interesting data point, is as Apple’s customers get more expensive >$900 iPhones they tend to purchase Apple Care, which is also a sleeper revenue stream. When you look at services potential as more than just Apple TV+, News+, Apple Music and Apple Arcade and include iCloud and Apple Care, then you see how services as a whole is a product line as well for Apple.

Again, the main question is how deep into the Apple customer base can Apple services realistically penetrate. This is where I think having a range of options of different services, and perhaps a bundle can help this revenue stream reach its upside. I know it sounds strange to say this, but I firmly believe Apple is still learning the core behaviors of its customer base and has not yet pulled all their potential levers to grow and offer as wide a range of services as possible. Apple has several options on the table, and as they become confident about how best to provide value with things like broader bundles, pricing, and even family plans, then I think they will expand the offerings and options.

Further, as we think about 2020, do not expect anything AR glasses from Apple in 2020. And while I do think Apple will get some lift for iPhone sales from 5G devices later in this year, I think the 5G iPhone story gets dramatically stronger in 2021/2022 and we will revisit that narrative toward the end of this year.

CES Trends

When I’m at CES I always tweet out some of the weird or interesting things I’ve found. I figured this year it would be easier to compile them into a post.

The thing about CES that gets a lot of warranted criticism is how the show often houses a lot of products that never see the light of day, or never reach acclaimed success. This makes the show hard for most people to navigate. For more on this, John Gruber had a good post (Concept Electronics Show) that digs more into the challenges of product companies at CES. My view has always been to use the show to spot trends and find the kinds of things that could impact the tech landscape someday as well as look for the hidden gem of innovation. That said, CES has always been a show were a cross of products that will ship that year and future concepts are shown off. And often, many of those concepts or technology showcases do end up making it to market someday. For those of us doing this long enough, it becomes a show to see bits of the future on display. One just has to be wise enough to filter through the news to find technology that has potential.

Some years are harder to spot the trends than others, but this year seemed much more evolutionary with no real specific product buzz. It seems this year’s theme is a continuation of previous years to simply connect all the things and improve upon the things which were connected in previous years. There are always useful things and also weird things at CES.

Flexible Battery
When discussing with hardware companies and hardware manufacturers about some of the roadblocks for future foldable devices, the battery always comes up. LiBest inc, was showing off a folding/bending lithium-iOn battery that looks to bring us one step closer to solving the battery challenges in foldable devices.

Connected Walking Probe for Visually Challenged
This falls into my theme of more and more things getting connected at CES. This is a probing cane for the visually impaired that has a GPS which will guide its user to the location of their choice using haptic vibrations. It also has a sensor that alerts when people or objects are in proximity.

This is an example of a larger theme that showed up at CES this year of accessibility focused technology. Things like this are meaningful innovations and great use of technology empowering rather than hindering.

Withings Smart Watch With New Sensors
I have always liked the Withings approach with watches. If you wanted a watch that still looked like a watch but still had smartwatch benefit then Withings is a good candidate.

This year, their new sensors bring blood oxygen levels and a sensor that can help detect sleep apnea.

On this topic, I also saw some non-invasive blood glucose monitors that are not perfect yet but show us we are getting closer. All these things are sensors I expect in Apple Watch at some point.

Augmented Hearing
I mentioned some thoughts I had around AirPods Pro and how they have the potential to enhance hearing someday. I came across this product called Olive Smart Ear, which is designed to enhance hearing with a small in-ear device.

Smart Reading Glasses for Dyslexia
The Lexilens from Abeye using new lens technology that is proving to help kids with dyslexia. This is another example of the accessibility tech trend.

Portable PC Gaming
This product from Alienware got quite a bit of attention from the media. Dell has positioned this as a concept, but to be honest I would not be surprised if they shipped it at some point. It is a fantastically designed product but it would be quite expensive. I spent about 20 minutes playing PC games on it and was impressed.

I also had argued for years for Microsoft to build a portable XBOX as I knew it would be a hit. Selfishly, after using this product I know I was right and I do hope we see this product or a future variation come to market.

Tech Industry Trends to Watch This Decade

I know there is a lot of content that has been published looking back at the last decade of tech or looking forward to during the next decade. Still, I wanted to add some thoughts I’ve formed on several of the markets where I think we will see bigger gains and innovation in the next decade than what we saw in the last.

Future of Work
The future of work is a trendy term. When the term is used, it is generally used to discuss new ways to work, communicate, collaborate, be productive, etc. If you look back at the last decade, the seeds of the future of work were planted but were yet to blossom fully. Things like Slack brought a new paradigm to working as a team, and things like Zoom are making it possible to be a team from anywhere in the world. Sure, collaboration on a document, software development, design, and more became easier to collaborate due to the Internet. That being said, I think of those as expansions of existing work behaviors vs. the type of thing that can create entirely new behaviors. This is why I think the future of the work category has its best decade ahead of it.

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

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

Having spoken to several businesses for whom video calls are the norm, they can’t stop talking about the benefits of moving from an in-person only corporate culture to a video-first culture.

But with this change will demand new software paradigms to work together as a remote team in real-time. Just being on a video call together is not always enough. We will need to be creative together, tweak and edit together, use multiple inputs that aren’t just text like perhaps drawing or whiteboarding. And perhaps, brand new ways to work together in real-time virtually will be born that weren’t possible in an analog world.

While the future of work may not be the sexy category, it is one that I believe will make tremendous strides this coming decade, and one of the ones I think will be considered most practical and impactful on employee satisfaction and quality of life.

Future of Commerce
Coming off the holiday shopping season, the statistics of growth in e-commerce in nearly every market year-over-year is impressive. While e-commerce shoots up during the fourth quarter as a percent of retail sales, on an annual basis, it is still low double digits in many countries.

While I’m expecting a big decade of growth for e-commerce, I’m not sure how fast it will grow. A great deal of moving from traditional retail to digital is continuing to eliminate friction. A big part of that has to do with seamless transactions and using things like Google Pay and Apple Pay. This is one reason I’m quite optimistic about the role Shopify has to play in building a new base of e-commerce for a variety of third-party sellers.

Shopify, to me, is one of the most interesting commerce platforms out there and perhaps the most disruptive to Amazon and established retail channels.

In case you aren’t familiar, Shopify is very easy to set-up and manage an online storefront, and it includes built-in support for many ways to pay. Once you have added items to your cart, you go to checkout, and you see this as an option for express checkout.

I greatly prefer shopping for brands that use Shopify because I never have to fill out any information, or set up an account, or enter my credit card. I just select Apple Pay, and checkout is quick and painless. You get quick and easy tracking to your order, and the overall customer experience as a buyer is, in many ways, even better than Amazon’s. I may be so bold to say, Shopify has the most friction-free commerce experience from start to finish than anything out there.

It is because of this that Shopify powers some of the largest direct-to-consumer brands. Couple a seamless e-commerce solution with how easy it is to get in front of prospective customers via Facebook, Instagram, Snapchat, TikTok, etc., and you have the ingredients for new brands to come in and disrupt established ones. The concept of social commerce may start to take hold in more markets than China this decade.

As we see more AR solutions for shopping or even simple AI-based software solutions that can show us what clothes or goods will look like on our bodies or in our homes, you can see this helping spur even more commerce happening online rather than in stores.

Stores will not go away, but this decade they will be forced to change much more than they had to in the last decade. And ultimately, all this new competition is great for consumers.

Personal Computing Networks
I titled this as way as an umbrella term to talk about wearables and wearable computing. The smartphone has reached its peak, and the next phase will see the accelerated growth of computers we wear on our wrists, ears, eyes, and more. What makes this trend interesting, as it unfolds over the next decade, is how these wearables are all likely to be standalone computers to a degree, but they will require working together as a network of devices to achieve their full value potential.

The smartphone was the dominant personal computing device of the last decade and will remain an important part of the next decade. However, it will be accompanied by other devices that are unique to their role and location. What makes this growth potential clear is how wearables are still less than 20% penetration of the global adult population.

In several executive team talks I’ve given in the last six months, I have referred to the need for this personal computing network to work and talk together as a symphony of computing. Each device has some processing power, a range of sensors, software, etc., and the entire computing experience means each device can use assets from another on the network that it may not have internally. Meaning the devices together function has a whole computer.

Some who have been around this industry a long time may recall the idea of a personal area network is not a new concept, but it is one that took much longer to manifest than the futurists thought. As wearable computers become more common and fill specific and complementary uses to the smartphone, this personal computing network will finally come to fruition.

There are a lot of layers in each of these trends, but at a high-level, these are some of the interesting areas where I expect to see the kind of innovation that can cause positive behavior change and add deeper value. We are still a long way off from the next major computing phase, or the next S-curve if something like that ever happens again. But the innovation to come will be pragmatic, useful, and offer tremendous benefits.

Project Connected Home, Broadcom Shopping RF, Facebook’s Hardware Plans

Project Connected Home Over IP
A fascinating turn of events in smart home standards yesterday as it appears Apple has taken the initiative to bring companies together on a standard for smart home product interoperability. The news came out on Apple’s website via a blog post.

Many of us have been pointing out the failure of a truly smart and connected home, largely due to devices not being able to work together. Some may remember an initiative by Qualcomm many years ago named AllJoyn, which got very close to pulling this off only Apple was the large holdout of the forum. But AllJoyn showed the benefits of when devices truly work together how the smart homes’ true potential could be unlocked.

This paragraph sums up the goal of the standard group nicely:

The project aims to make it easier for device manufacturers to build devices that are compatible with smart home and voice services such as Amazon’s Alexa, Apple’s Siri, Google’s Assistant, and others. The planned protocol will complement existing technologies, and working group members encourage device manufacturers to continue innovating using technologies available today.

The bottom line, this one will work where other connected home standards failed, largely because Apple is committed to it. Apple’s dominance in the US with iPhones assures that anyone playing in the smart home wants to play nice with Apple’s solutions. How deep down this path, Google and Amazon go, will have to be seen. Amazon is the clear leader in the smart home ecosystem and isn’t as reliant as Apple is on a cross-platform ecosystem for now.

Apple taking the initiative here makes sense as it will give them more say/control on the security and privacy point. I’m intrigued by Apple’s motives here because, as it stands, Siri is not the most competitive voice assistant for smart home, and if all things are equal, consumers may choose voice interfaces from Alexa or Google while still playing nicely with their Apple hardware. Plus, Apple’s strategy for the home is still emerging from a first-party standpoint. We should expect more home hardware solutions from Apple at some point in time, but for them to be successful, each Apple endpoint in the home has to work with other solutions.

Since smart home tech started ramping, I’ve been firm in my conviction that it is essential for Apple to play nicely with others and take a more horizontal (not integrated approach). I’m not sure if Apple believed me when I wrote about this years ago, but it seems they are finally moving in a direction that looks like will have success.

Broadcom Shopping their RF Business
The WSJ broke news yesterday that Broadcom is looking to sell-off it’s RF business, along with some other parts of its wireless technology. I had made comments on Twitter that I could see Apple being interested in the RF IP if it could get the right price, but Broadcom may very well be asking too much.

What this highlights, though, is a fascinating development around RF. Not the sexiest of topics, discussion of transceivers, radio frequencies, amplifiers, etc., are not the most exciting things to talk about, but when we look at 5G, and the hope to connect nearly every computer on the planet, RF is essential.

I wrote last week about how significant it is that Qualcomm has created an RF module that is plug and play for a range of connected devices. It is simply easier, and cheaper, for most companies to use something like this Qualcomm RF module than buy Broadcom’s RF business. However, the supply chain has been ripe with rumors that Apple is working on its RF and amplifier in package solution.

Currently, Apple uses a mix of Broadcom, Skyworks, and Intel for RF and pays roughly $13. That price will go up with 5G by at least double, but it is the tight integration of the RF with the modem and the tuning of the software that makes an Apple RF solution attractive.

Ultimately, Apple may not need Broadcom’s RF and the price may be too high and come with other assets Apple doesn’t want or need. Another company to watch is Huawei if they can legally acquire it. This would allow Huawei to bring more RF in-house and continue to limit their dependence on US technology.

Facebook’s Hardware Plans
A great report came out in The Information detailing Facebook’s hardware plans. I laid out my master thesis on Facebook doing anything beyond the basics of a social platform in this article Facebook and Well-Intentioned Failures. I remain extremely skeptical of the hardware successes Facebook will find in the market, with the caveat, that I firmly believe the Oculus Quest is a fantastic product and one of the most interesting tech products I have used in the last few years.

The crux of Facebook’s goals is summarized succinctly by Alex Heath, the author of the article in this paragraph.

Facebook’s determination to become a bigger player in consumer hardware reflects an underlying paranoia about the risks of depending on tech platforms controlled by other companies. For the past decade, Apple and Google have called the shots in the tech industry as custodians of the two dominant mobile operating systems, giving them extraordinary power over companies like Facebook that depend on mobile platforms.

The battle for platform ownership in the next wave of computing is starting now, even if we are years away from any kind of AR mainstream computing solution. Facebook’s desire to control its own destiny necessitates a move to a more integrated company. To that end, they are working on their own OS and developing their own silicon, which are all things you need to do if you want to control a platform.

I wanted to share this point about Facebook, and how to win in the next era they need to be more integrated because of how this, and so many other observations, challenge much of business theorists convention wisdom. Open always wins was a mantra, yet Apple has proven that it is not the case by winning in many aspects of business by being closed. Yet, now to compete in new areas like the home, or services, they need to be more open. Facebook became the largest platform, by active users, by being open yet to control their future destiny, they need to become more closed. Every major tech company, to serve more customers, must have both an integrated strategy and a modular strategy at work simultaneously, and it is market or category dependent. To my knowledge, this sort of business strategy is fairly new and is already causing new revelations on the business and strategy front. But this point is clear, the conventional wisdom on how to run your company in the fast-changing world of technology, and consumer technology, in particular, is out the window.

The Alexa Business, The Challenge of AI, The Early Stages of AI/ML

The Amazon Alexa Business
An intriguing report came out that looks at Amazon’s Alexa business and the organizations imperative to know figure out how to make money.

The report states the Alexa organization, which employs roughly 10,000 people, fell short of revenue projections north of $5.5m and only brought in $1.4m. Much of this revenue was collected off revenue generated from third-party skill and essentially tells us consumers are not yet using their Alexa’s for commerce, spending, or transactions in general.

We have been studying how consumers use their Amazon Echo’s, and Alexa in particular, so this comes as no surprise to me. In general, people are using voice assistants for basic things like playing music, setting the alarm, basic search query, etc. My thesis all along, with these devices and the voice UI, was how voice eliminated friction to do things that would require multiple steps on your phone. Saying name set alarm for 6 am is much faster and easier than using your phone to find the clock, select alarms, then choose the alarm time. A task with a voice request which would take less than 5 seconds and a task which by hand could take more than 20 seconds. Every study we have done on how consumers use voice assistants falls into the automation category.

Amazon has much more low-hanging fruit than the Alexa ecosystem when it comes to generating revenue. While Amazon has the lead in terms of the smart home share as well as the largest third-party ecosystem, unless we see significant changes in user behavior, I’m not sure how this business turns into any significant revenue for Amazon but remains an important loyalty and stickiness part of their strategy.

The Challenge of AI
We all know AI is a hot topic. And I’ve written for years that before we start talking about AI, we have to first understand and watch how machine learning as technology develops.

The desire to use AI/ML in the enterprise, specifically is high. I’ve seen several IT surveys this year and consistently the results highlight over 80% of those surveyed say they are either actively deploying some kind of AI or looking to in the next six months. But as this report highlights, it is still a difficult endeavor.

Algorithmia, which found that while machine learning maturity in the enterprise is generally increasing, the majority of companies (50%) spend between 8 and 90 days deploying a single machine learning model (with 18% taking longer than 90 days).

There are many challenges that explain this issue, plenty I don’t have time to dive into, but it is worth knowing that analytics is the most common area where companies say they have AI deployed. Most still require a team of data scientists, but this is why technologies in the works from Microsoft, Google, and Amazon to automate AI as a part of the analytics process and lessen the need for data scientists is important.

Understanding the challenges of deploying AI is also a factor in understanding why Intel purchased Habana Labs yesterday. We are nowhere near where we need to be when it comes to the infrastructure for AI. This includes the silicon, the software, the connection between the edge device and the cloud, and the way data sets are managed and preserved so the computer can be trained.

All of this to say, we are still in the early stages of AI/ML, and we have a long road of innovation ahead from every touchpoint in the system. This is also why you should expect to see quality AI startups be snatched up quite quickly by large companies due to the competitive nature and critically importance to the future that is AI.

Qualcomm 2.0

Few companies thrived as much during the wireless and mobile communications era than Qualcomm. As cell phones were going from clunky briefcase-sized devices to sleek-pocketable devices everyone owned, Qualcomm was at the center of it all. Their S-curve growth during the mobile communications era was much like Google’s during the Internet growth era. However, two decades later as smartphones sales are plateauing Qualcomm had to reinvent itself

I’ll be completely honest, and I had my concerns about Qualcomm a few years ago. I wrote about those concerns in detail as a guest post in Ben Thompson’s Stratechery Daily note. At the time, my analysis of Qualcomm was putting pieces together that outlined their struggles and how competitors were verticalizing and pushing Qualcomm into less profitable parts of the market. As a whole, my worry was Qualcomm’s silicon roadmap strategy risked them losing premium products and not having a portfolio that can serve as many markets as they need.

Luckily for Qualcomm, they made wise strategic decisions, partly helped by errors by competitors, but also by retrenching on investing in industry-leading innovation and developing a chipset architecture that is more flexible and modular than things they have done in the past.

I outlined in my subscriber note last week, as I analyzed the announcements made at Qualcomm’s Snapdragon Summit, how their new SoC, modem, and RF module solutions is a strategically smart move that enables them to attack more markets and serve more customers. But, ultimately, the main point that sets this Qualcomm up from years past is their ability to serve more customers by fully embracing both a modular and an integrated solutions approach simultaneously.

Integration is in Qualcomm’s DNA. Their integrated approach has tremendous value for a certain set of customers, but Qualcomm was not recognizing the trend of integration of their existing customers and partners and losing the ability to serve the wider market with modules. Interestingly, this is why the NXP acquisition was smart for Qualcomm, and it filled the gap that was created during their doubling down on integration strategy. NXP had many components that were companion parts to Qualcomm solutions and enabled them to serve more and new markets.

In some ways, I think their re-embracing of modular solutions is a result of the NXP deal not going through, and ultimately, this new strategy may work out even better than an NXP acquisition would have. Speculation on my part for sure, but what the acquisition falling through did was cause a shift in Qualcomm’s strategy that has quite a lot of upside, in my opinion.

Enabling Competition
After watching Qualcomm the past few years make needed adaptations to the changing market needs, is how important Qualcomm has become to enable market competition among both mature and emerging technology markets. For example, look at what is happening in VR/AR and even wearable computing and nearly every company competing in the space is choosing Qualcomm processors. Honestly, there aren’t many options. Intel is busy dealing with supply shortages and growing its data center business. Samsung doesn’t offer a full solution broadly to the market yet, if ever, and Mediatek is the closest vendor silicon competitor but does not yet have a robust solution for mid-high end VR and AR.

I made a point last week that I thought was pertinent broadly about Qualcomm’s work with their XR2 platform. If you are any company, who is hoping to compete with Apple, what chipset solution would you use? As of now, the answer comes from Qualcomm with its XR2 platform. While I maintain that Apple has a clear lead in silicon that is pushing the boundaries of what is possible in very small computers, like Apple Watch and AirPods, Qualcomm is working hard to keep innovating and helping customers compete with smaller, more powerful AR headsets.

While we are still years away from any kind of mass-market augmented reality glasses solution, the underlying work to develop the market and solve critical technical hurdles is going on now.

Interestingly, AR in the enterprise/commercial markets looks to be starting to ramp. New use cases, like wearing glasses to have multiple screens or apps you are working on, moved all over a spatial desktop. Glasses for telepresence, or examples like Spatial, are showcasing the emerging enterprise use cases for augmented reality.

You are going to see the commercial AR space begin to ramp in 2020, and I don’t see many of these running anything outside of Qualcomm for the time being. Which, even though most will be Qualcomm based, the meta point remains about how Qualcomm is enabling an ecosystem of competition among product companies.

A good example of this is the announcement on Niantic working with Qualcomm to build a pair of AR glasses that will compliment Pokemon Go, Harry Potter Wizards Unite, and any other new games. These solutions will be more focused on gaming and entertainment, but when I look at AR, and even VR, the lowest hanging fruit will be entertainment based use cases and productivity ones in commercial markets. AR/VR will continue to be built out in those segments before we can see progress around what I’d consider a general-purpose AR solution.

For the time being, I’m more optimistic about Qualcomm than I was a few years ago, thanks to a series of adjustments they made with their product and architecture approach. I wrote last year about the Semiconductor Golden Era, and the thrust of my point was because semiconductor companies were not just speeds and feeds focused but rather more focused on the total solution, including complimentary silicon that was optimized to work together as a complete whole.

The technical term is heterogeneous computing, and Nvidia CEO Jensen Huang articulated this future to me over a decade ago, and he turned out to be exactly right. Moving from homogeneous solutions (where everything core to a computer is on one chip) to heterogeneous ones where a series of chips, best designed for the job at hand, work together in a symphony is a much more efficient way to design and optimize computers. Every semiconductor company is embracing this now, and that is very good for the marketplace, competition, and innovation. Qualcomm’s embrace of both a homogeneous and a heterogeneous set of computing solutions has them well-positioned in the market.

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The Death of the PC, Intel’s Roadmap Leak, North Focals 2.0

The PCs Death
I enjoyed this article from Ed Bott looking at the predictions of the death of the PC that did not happen. Admittedly, I was in the group who soured on the PC when the tablet launched and questioned the relevance of the PC form factor in light of the easier to use tablet. I underestimated the resiliency of the PC form factor, despite my belief something like the iPad is still better suited for a mainstream, non-techie. But you can argue the software ecosystem for the iPad simply did not develop and would be PC switchers felt there was too much compromise than what they were comfortable with. My choice of word here, comfort, is a key behavioral lesson we should all learn.

I’ve written before a thesis I have on behavioral debt. Something that when a human becomes comfortable doing something, it becomes very hard to change that habit. It’s a technological observation of the saying, “you can’t teach an old dog new tricks.” While I will argue, but maybe not die on the hill, my belief that the iPad is a much more approachable and mainstream device that is more capable than many give it credit for. Young people, older people, people with no PC/Mac literacy all respond better and do more with an iPad than they do with traditional PCs. But that does not change the fact the iPad did not kill the PC, and ultimately the demand for the PC has remained consistently strong.

I do, however, think the smartphone and iPad, while not killing the PC, did absolutely change the end-users relationship with their PC. A notebook or desktop became one piece of a computing solution rather than the sole computing device. In work situations, work now takes place on any number of screens. Similarly, for consumers (in a non-work context), more of their time is spent on a smartphone than a PC on a daily basis.

Overall, Ed’s essay is correct. The PC did not die, and it is also still a healthy tech category with innovation still to come. However, the overall sentiment of the PC has largely been hit, and it’s death as the sole computing device has dramatically shifted its role in the market and the category itself. Which is as significant as an observation as those that predicted it’s death.

Intel’s Roadmap Leak
Along similar lines as above, there are fascinating dynamics of Intel in the market. Amidst surging PC demand, Intel is facing shortages. Their commentary to investors is one of confidence that these shortages have nothing to do with issues in 10nm yield and more to do with their underestimating the demand. To counter this, they are upping production by 25%.

The most important point regarding Intel’s future, in my opinion, is that Intel has lost process technology leadership. Honestly, this was something regarding Intel that many did not see coming. It was hard to imagine, actually, due to how much money Intel spent to make sure they kept process technology leadership. But now, TSMC has surpassed Intel and is now shipping in mass 7nm technology with a roadmap to 5nm that seems to happen without any issues.

That is why I thought this leaked roadmap of Intel process technology was quite interesting.

This slide is the key visual that shows their roadmap leading to 1.4nm by 2029.

While we don’t have a roadmap for TSMC and Samsung, I’m not convinced this roadmap shows us Intel regaining process technology leadership. I’m also not convinced we can believe the timeline Intel has set forth in this chart. I wish Intel was firing on all cylinders and we could believe they can maintain a steady transition to new process technology their track record with 14nm and 10nm has not been enough to justify credibility.

However, while I have not given up entirely on my last foundry standing theory, it has become increasingly harder to believe Intel will remain in the hunt as the last foundry standing. Should things economically become challenging for Intel, selling off the foundries is something the board could force, or Intel could have no choice.

As a reminder, Intel is the only customer for their manufacturing group where Samsung and TSMC have an overflow of customers lining up for their new process technology and shipping billions of chips rather than 330-350 million chips as Intel does.

Intel’s management speaks to a TAM increase opportunity for Intel, but I’m not sure that leads to a manufacturing increase for Intel, which could still leave them holding onto manufacturing assets that don’t get used.

IF Intel can navigate these waters and still come out on top, it will be a lesson for the business schools to use for decades to come.

North Focal’s 2.0
In the same time frame, a report on Magic Leap came out suggesting far less than stellar sales of the developer model, North Focal’s 2.0 were teased on North’s blog. What is most interesting to me about this product is North’s positioning as the future of eyewear. They are not saying it’s the future of computing, or even a new computing interface or paradigm. Rather they are eyewear evolved.

North version 1.0 was a pretty weak experience, in my opinion. The display was hard to see, had to be customized to your specific face, only showed a few bits of information in a very simple text format, and honestly took too much energy goes, consumer, the information displayed vs. what I get on my watch.

I’m extremely interested in how this space develops and what applications gain traction in the market. As Tom Mainelli wrote last week, Qualcomm’s XR2 platform has the potential to bring a plethora of products to market that tests the waters of AR/VR and essentially computers that sit over our eyes.

Ultimately, the face and the eyes are going to be one of the most challenging places to bring computers, and I honestly believe only a few companies are positioned to succeed here. But, I’d like to end on this point. In the same way, we thought something new was going to kill the PC, and people are fast to push smartphones to the side in favor of some unknown AR future. I think we should learn the lesson I did and not underestimate legacy form factors and their resilience in the marketplace.

The Market Upside to Qualcomm’s New Modular System Strategy

Qualcomm surprised many when they introduced their newest flagship processor without 5G integrated onto the chip. Instead, Qualcomm is continuing to develop its discreet/thin modem roadmap with the X55 5G modem. This approach has led Qualcomm to now offer customers three models that together complete the solution. The Snapdragon 865 processor, the X55 5G modem, and an RF module that handles all the necessary antenna and radio channels.

The reason this was surprising was in years past, Qualcomm emphasized integration as a critical part of their strategy. Generally, bringing the modem onto the chip during a network transition was an immediate priority. However, this strategy is much more practical and usually better strategically for Qualcomm as it opens the door to more customers and uses cases.

This move is also the effect now prioritizing Apple as a customer has on Qualcomm’s strategy. For those who know Qualcomm’s product history, they have maintained a discrete/thin modem in the LTE portfolio, but it was always a second class citizen to the modem they integrated onto the Snapdragon part. This was a key part of the conflict Apple had with Qualcomm as they did not feel the part they, and only they needed, was being developed with cutting edge premium features.

I got some clarity from Qualcomm executives, and while they hinted that next year would be the year they integrate the premium 5G modem onto the premium Snapdragon SoC, they did say the discrete/thin modem roadmap will continue which was what I expected. Again, this is to keep providing Apple with a premium class stand-alone modem that supports all the flavors of 5G on a worldwide level.

While this, what I am calling the Apple Effect on their supply chain, will end up doing for Qualcomm is to help them serve a broader market. Executives in our discussion recognized that while they still have a focus on integration with their premium components, they recognize that others in the market are integrating as well, and thus they believe both a horizontal/modular approach AND an integrated approach will help them serve more customers and they are correct.

For example, by maintaining a roadmap for the RF module and the modem module separate from the SoC, they can end up winning more PC designs, automotive, AR/VR, and a host of other categories. The need to support Apple with a dedicated roadmap of a premium stand-alone modem is actually a win-win for Qualcomm, which makes this modular approach a smart evolutionary strategy by Qualcomm.

What Qualcomm’s Roadmap Tells Us about the Future
Long-time readers know my mantra that if you follow the semiconductor industry roadmap, you can predict the future. The brains that power our devices open up new capabilities as the companies behind them design them better, smarter, and add new capabilities. What Qualcomm is showing when they release a new process is what new capabilities devices will have over the next year. Often that is more than just base performance but extends into the imaging system, display, new applications, and more. So what does the next year of smartphones have in store? Here are some things to watch for:

  • 8k Video Capture
  • 960 FPS Slo motion
  • 200 MP photos
  • Dolby Vision video capture (which will lead to Dolby vision user generated content)
  • 4k 120 FPS capture
  • Up to five cameras (macro and time of flight being a few of the newer ones to watch)
  • A new class of dedicated gaming smartphones that are console grade experiences
  • 144Hz displays
  • New foldable form factors
  • Better under glass fingerprint sensors
  • Of course 5G

What’s enabled in this new chipset from Qualcomm will be used by competitors large and small to get attention and push the boundaries with premium smartphone experiences. Interestingly in China, Qualcomm has launched quite the processor that will give Chinese OEMs a strong chance to compete against Huawei. But what stands out to me at the moment is how we may see a much wider gap between premium and non-premium smartphone experiences in the Android ecosystem. This may not last for more than a few years, but it seems there is a clear separation between what a mid-tier smartphone will be capable of and what a premium-tier smartphone will be able to do. I’m not sure the impact this has on the market, other than it will create some interesting competitive dynamics.

Having gotten a deeper look at some of the IP Qualcomm has been working on and now commercializing, I am very interested to see what Apple does next fall and how much additional Qualcomm IP they use in next years iPhones, beyond the modem, now that they are officially a Qualcomm licensee for the first time. I’m hoping I’ll know it when I see it.

Qualcomm’s Antitrust Battle Rages On

It’s been a while since we have discussed the Qualcomm anti-trust battle with the FTC, but some recent events make it worth exploring again.

Several interesting things are afoot with the US FTC anti-trust battle with Qualcomm. Since I last wrote about it, Qualcomm was granted a stay in the ruling as it is reviewed by a council. Qualcomm has made the point that, among other issues with the ruling, there would be issues of national security should the ruling hold up, and certain Chinese competitors get a leg up in the US market. Since then, Intel has also come out in support of the FTC ruling and used their exiting of the modem business as evidence. The Intel blog post and the submitted brief are worth reading for those of interest, but the crux of it is in this paragraph.

Intel agrees with the District Court’s findings. Intel suffered the brunt of Qualcomm’s anticompetitive behavior, was denied opportunities in the modem market, was prevented from making sales to customers, and was forced to sell at prices artificially skewed by Qualcomm.

I could pick apart the bulk of Intel’s argument in-depth, as theirs is not the testimony I think held the most weight against Qualcomm. The biggest issue I have with Intel’s argument is that they never created a competitive part, and it was not Qualcomm’s practices that were the issue for their lack of competitiveness.

In fact, in a totally unrelated observation, since it was about media content, I found this tweet from Matthew Ball poignant.

The fact of the matter, when it comes to competition in wireless, is that wireless is exceptionally hard. Qualcomm undisputedly makes really great modems, and others, even those who license IP fairly, can’t compete in the premium modem segment. Most companies do not have the same focus on modems or pour as much R&D into modems and wireless as Qualcomm. Qualcomm continues to attract the best wireless engineers. You get the point.

In reality, the only company built to compete with Qualcomm is Qualcomm. However, one of the more interesting companies to watch is going to be Mediatek. I recently attended Mediatek’s analyst day and learned quite a bit about their upcoming products and strategy. Besides, having a 5G SoC right at the beginning of the cycle, which is a first for Mediatek since they are usually late with an integrated product, Intel announced Mediatek would be their partner for 5G in PCs. Note, this does not preclude an OEM from using a Qualcomm modem and an Intel CPU/GPU but that an Intel + Mediatek solution may yield better optimization and tuned performance due to the collaboration.

Mediatek’s presence in the market with a competitive modem is good for the market and competition in general. Mediatek is better positioned than any time in the last decade to jump onto a G cycle with a competitive product that includes an integrated SoC. The other interesting thing about Mediatek is many consumers have products using a Mediatek products, and they probably don’t know it. The vast majority of Amazon Alexa smart speakers have Mediatek inside, as does a number of other smart home products and many smart TVs ship with a Mediatek processor. In fact, MediaTek has quietly amassed the largest market share of US smart home/IoT products.

The point about Mediatek is interesting because they have quietly been growing their competitive force. Going back to the FTC V. Qualcomm trial, the FTC was only arguing that Qualcomm was anticompetitive during a span of a few years, and they knew they had no case about anti-competitiveness in the last few years. Taking into account that the other two licensees, Huawei, and Samsung, both decided to focus their modem work for their own brands and not sell them to competing companies which, had they chosen to sell to other companies, would have broken the FTCs argument.

I still find this entire case odd and the remedies unwarranted. There is competition again, and the remedies seemed to be based on the logic that if they are not implemented, then there would be no competition. When it came to Intel, they simply didn’t invest enough, nor did they have the talent. Apple did a great deal of engineering work for them to make their modem passable in iPhones, but it was “benchmarkably” worse than Qualcomm modems.

Again, wireless is really hard, and Qualcomm’s entire company is built for wireless competition, and no other companies are organized this way by people, processes, and products.

One could argue that if Qualcomm is truly great at making wireless products, then the remedies should not matter too much if implemented. To the degree that is true on the modem side, but the impact would come in the usage and investment in the wide range of other patents, non-standard essential, which similarly helps companies get off the ground and compete. Just look at the global smartphone space with companies like Oppo, Vivo, Xiaomi, and OnePlus. Many of those companies would not be where they are today, nor competition to the degree they are today without access to Qualcomm standard and non-standard essential patents.

On paper, it looks like the remedies would allow competition in wireless modems. However, no new entrants are going to enter the space, so nothing would change. The ruling could have adverse implications on competition; however if it impacted new entrants from leveraging Qualcomm’s broader portfolio of patents and starting new companies creating new categories and devices. That is where my broader concern continues to be.

2020 could be a defining year for this, and the overall definition of a monopoly the US can use as they look to regulate more of big-tech and the range of negativing implications that can come with them attempting to do the right thing the wrong way.

Tesla Launches Cybertruck, Who is The Market? Tesla’s Impact on Automotive.

Last week Tesla launched the Cybertruck. I’m sure you have all seen it by now, but the design is extremely polarizing, and that may have been the intent. At a high-level, I think it is a worthwhile observation that few product launches create as much buzz as Tesla. Probably only Apple’s are in the same league where everyone is talking about them. When Apple launches a product, my kids and all their friends are keenly aware by the end of the day. Oddly the same was true with Cybertruck even though they all felt it was hideous. This buzz is certainly not an indicator of Tesla’s imminent success, but it is a part of Tesla’s brand lure that I think adds a competitive dimension to their company other automotive companies do not have.

The most pertinent commentary post-launch of the Cybertruck, in my opinion, is Elon’s willingness to take bold risks and challenge the status quo. You can argue, and you would be largely correct that the automotive industry has gone stale. This happens in mature markets and mature product categories, and when someone comes in challenges the conservative nature an industry has fallen into, I think it is a good thing.

Who is the Customer?
Who is the target customer for Cybertruck is the critical question. Honestly, the market for Cybertruck is not immediately obvious. Some of you who follow me on Twitter may have noticed that I am a new truck owner. I did a great deal of research and drove every 2019 model truck and landed on the F-150 for a variety of reasons. The F-150 is the best selling truck in America for a reason, and those reasons are not the same reasons someone would buy a Tesla Cypertruck.

While there is a market for people who use trucks more like a toy than a tool or utility, I’d bet those who buy a truck for utility is much higher than those who just use it as a toy or for vacation towing. While Tesla showed off some nifty features like being somewhat bulletproof and having windows that won’t shatter (despite the demo fail), those are nice durability features, but they did not show any features of utility the average truck owner would look value. This goes back to the key question of how practical Cybertruck is for the average truck owner. That being said, maybe the target customer is not the average truck owner, and that is certainly fine if that’s the case.

Tesla’s Impact on Automotive
Taking a step back and looking at the role Tesla is playing in the automotive industry. Regardless of what one thinks of Tesla overall, they are driving industry-wide change in a few good ways. The first, and perhaps most important, is the transition to electric. If anything, Tesla proved there is a market for electric cars, and every automotive company now has a roadmap and is accelerating that roadmap in some cases. From a sustainability standpoint, as well as a healthy earth standpoint, the automotive industry can not get to electric soon enough, and this change is finally underway.

Autonomy is another area Tesla is driving change. Ultimately, self-driving cars will be safer, more efficient, and better economically for cities and consumers. At the moment, it is tough to grasp the impact of autonomous cars on our future truly, and getting there will be challenging but worth it. Tesla is helping drive this change, and whether Tesla is around in 50 years or not, its impact will be known.

From conversations I’ve heard from friends at automotive companies, or who supply components to automotive companies, I’ve continually heard how worried many car companies are about Tesla. In public, these executives put on a more confident front, but Tesla is on their heels, and they know it.

While not perfect, or even close, Tesla is a case study in how to shake up a mature market. While not yet evident if Tesla is a disruptor or innovator, its presence is positive and for consumers.

Apple TV+, Disney+, and Storytelling’s Golden Era

It was interesting observing the ramp to launch Apple TV+ and Disney+ by both companies. Both were marketing their service more than I’ve ever seen a competitor market their TV service other than Hulu and the live sports campaign. Ads were on every major network, Twitter, Facebook, and more. Having spent some time thinking about the landscape, I think a few observations are worth pointing out.

Storytelling’s Golden Era and Competition
I use the framing of the Golden Era of storytelling because it was used by an executive of the MPAA during a presentation earlier this year. I thought the point was apt, and barring any major new player, we are right in the growth cycle for original stories via TV and movies. This chart I came across in a private report visualizes not just the sheer growth of new content but also how the new emerging players contribute.

Assuming the trend lines hold, 2020 will see over 500 scripted shows, and one can argue the addition of Apple TV+ and Disney+, essentially the addition of Apple and Disney studios could increase this number faster than estimated. What I believe we are on the cusp of is a dramatic increase in competition for high-quality long-form content the likes we have not seen before. Prior to Netflix, one could argue HBO was the bar for producing routine quality original programming. Netflix and it is now ~$15 billion dollars a year on programming. Knowing that big investment in original content yields rewards, quite literally in this visualization, see the below chart I find fascinating.

Not to say Emmy nominations are the defacto way we can quantify we are in the golden age of storytelling, but just look at the growing number of nominations by network and in particular, how the newer entrants are growing. It will be fascinating to see where Apple ranks on this chart in a few years.

The big point I want to make here is competition is an all-time high. This is good and possibly bad for consumers.

Competing for Money and Time
There has already been a loud sounding bell by pundits that consumers simply can not, and will not, sign up for all these streaming services. Current research pegs the average number of streaming services a consumer will sign up for at 3. However, I think that number can go higher once they stop paying for traditional cable. Let’s just use a dollar number of $70-$80, which is the average cable bill in the US as the dollar amount up for grabs as consumers shift that budget to other things. Assuming people still need a streaming TV service (with live TV) and the front runners right now are Hulu and YouTubeTV, both services varying costs of $44-$60 per month, then it’s possible that anywhere from $10-$35 of the budget is up for grabs. This goes quickly but supports the idea of 3-4 additional streaming subscriptions.

The other thing to watch here is if consumers shift budget by season. We are already seeing this happen in certain situations where people subscribe on a month to month plan, watch the series they want then cancel. I sense this behavior could grow in popularity with younger consumers who are more savvy and creative, but if it becomes normal for a good size segment of the market, it could change how competitors think about their content strategy as well as their bundle options and pricing.

Within the broader point I just made, the biggest thing I think consumers are going to be hit with comes down to time. I know I may be making this point within the launch window of two new services from big, very good at marketing, players but I already feel overwhelmed by the amount of content/shows I like and/or am interested in and where am I going to find the time to watch. I know I’m not alone in this feeling.

This is why the CEO of Netflix Reed Hastings has always been keenly aware that Netflix’s biggest competitors are the ones that steal the most time from their service. He has used gaming/video games as his biggest worry, but he has to be concerned about Apple and Disney because both of them are not just well-positioned to deliver great content but to also better market that content than Netflix. Demand generation from Apple and Disney is absolutely going to impact time on Netflix, and Disney, in particular, has the best chance to hurt Netflix the most.

I am convinced we are about to see an explosion of high-quality content from those competing in this space, and together, between them all, it amounts to quantity. The challenge/impact on our time, especially with how good a few of these companies will market these services and create demand is going to be fascinating to watch but also a challenge to navigate for the mainstream consumer.

Nike Jumps From Amazon, Instagram Copies TikTok, The Apple Services Bundle

Nike Jumps From Amazon
It what comes as no surprise, Nike has decided to longer sell directly on Amazon. A few things stand out to me with regard to this worth offering as food for thought.

The first is the similarity in feel this move has to Netflix, or Amazon, not participating in the Apple ecosystem via in app-payments. Neither of these company’s success was built of Apple’s App Store the way Spotify was, and Nike’s success was not built of Amazon’s commerce platform. Nike has a global brand and in many ways, never needed Amazon. On top of that, the selection they offered on Amazon was never quite good anyway nor remotely competitively priced. Nike’s statement was quite telling on their strategy here:

“As part of Nike’s focus on elevating consumer experiences through more direct, personal relationships, we have made the decision to complete our current pilot with Amazon Retail,” the company said in a statement. “We will continue to invest in strong, distinctive partnerships for Nike with other retailers and platforms to seamlessly serve our consumers globally.”

While Nike has been well-positioned to control its own brand and its customer relationship for a long time, many other brands are not. Nike never really needed Amazon; they simply used it as a matter of convenience. It is smarter for Nike to continue to build out its Nike app experience and control their own online commerce destiny.

The high-level point here is the way in which companies can use platforms to build brands, then once they do that, do they pivot to their own channel. Interestingly, most direct-to-consumer brands avoid Amazon entirely and seek to use their apps, and Facebook/Instagram ads as their main way to build their brand, and there are many success stories here. But the big winner in all of this could be Shopify as it remains the favored platform for D2C brands, and if Amazon continues to create more hassles for their third party sellers than it’s worth, I can see more of them jump to Shopify and be more in control of their destiny.

In commerce, it is clear, while Amazon is a player, there is no one player to rule them all.

Instagram Copies TikTok
I admit I’m still smitten with TikTok. Largely because of how easy it is to see there and mindlessly scroll through content. This is one thing many other social companies need to learn about how discovery can happen. It’s not always great content, but it is easy to scroll through and generally pretty entertaining.

This is why it’s no shocker Instangram is moving to copy TikTok and if they succeed it will work. The biggest thing I hear from US Gen Z teens and even many adults on TikTok is how they hate to start over to rebuild their social grid. On Instagram, many have already invested many hours of time in building their social following of friends, family, etc., and this remains a major reason as Instagram copies other social platforms they will likely reap the rewards.

The trick for Instagram is not just to 1:1 copy features from TikTok but to understand why certain parts are successful. It’s a more strategically relevant move when analyzing the competitive landscape to understand what drives the behavior, not just what the behavior is. If Instagram can crack the TikTok code in this case and innovate on why certain things work in TikTok, then they have a true opportunity to slow its momentum and recapture that audiences are doing similar things on Instagram.

That being said, there is a lingering debate as to how many things a single app can absorb. Instagram may simply not be able to sustain such a complex list of features, and there may be a limitation to how much socially competitive features they can absorb. This and more is why studying this industry is so interesting because we always learn new things!

The Apple Services Bundle
Bloomberg put a report out today about a potential Apple bundle of their services. A meta point to make here is bundles work, bundles will work, and bundles are easy ways for consumers to perceive a multitude of value.

There is simply no way consumers will pay for a dozen a la carte video services. I’ve written often about how content has to be unbundled in order to refine it’s value and that is the stage we are in now. It will all be bundled again in some fashion. This market will be organized again by big media bundles. We just don’t know who or what that looks like yet, but it will happen.

In this context, an Apple bundle makes sense. Things like Apple News+, or even Arcade, are things that should come along for the ride. Apple Music and Apple TV+ are the things I’m confident will drive subscriptions and including News+ and Arcade help the strategic goal for Apple to keep people invested and engaged in their ecosystem.

Apple has all sorts of creative things they can build as a bundle, but the media/entertainment one I think exists as a stand-alone. Of course, they should keep a-la-carte options, but a bundle option should exist as well. My hunch is $20 a month for Apple TV+, Apple Arcade, Apple Music, and Apple News+ is a price that would move at scale.

Bottom line, a bundle will help Apple grow these services AND achieve its strategic objective for the ecosystem, and I’m not convinced a-la-carte only helps Apple strategic end game here.

Banking, Finances, and The Expanding Mobile Moat

The significant observation to make is because the smartphone is the most personal and intimate computer humans have ever had access to, this single device will absorb nearly every aspect of your life. This device will be the hub of communications, work, family, finances, health, social life, and more. The PC could never do this since it is constrained to a desk or lap and not your pocket. Therefore, iOS (Apple) and Android (Google) will continually look to move more deeply into orthogonal areas of their user’s lives to deepen their moat and increase the value and engagement of their customers.

We see this clearly with Apple Card as a first step strategy for Apple to banking. Google similarly is moving this direction as news broke today they are looking to get more directly into banking. This comes as Facebook, the world’s largest consumer platform via active users, is similarly trying to make finance and banking a key imperative to drive growth, and loyalty. I am, however, less optimistic Facebook has much a chance here because of my conviction that the job-to-be-done of Facebook does not line up with banking/finances. But with respect to iOS and Android, managing more areas of your life does actually line up with the job-to-be-done, and therefore, new areas like banking/finances, etc., are logical areas for them to embrace and consumers to adopt.

iOS and Android have sealed up the mobile platform and therefore are the best positioned to move more orthogonally into more areas of their user’s lives. Complain about walled gardens all you like, but consumers are more protected, have easier to use solutions, and better customer experiences in them. This is why the big takeaway we are still learning from mobile that we did not learn in the PC era is mobile ecosystems will continue to absorb as many areas of their user’s lives as they can. This is even extending into entertainment as both Google and Apple continue their steps to bring eyeball time back to their ecosystem via content.

The competitive advantage iOS and Android have to continue to absorb parts of other industries is significant and as big and powerful as Netflix, Amazon, Facebook, and others are, not owning the underlying computing platform still keeps them as an outlier. They are peripheral players of value rather than the source of the value, which still remains the core platform powering the most intimate computer humans have ever owned.

It is within this framework the battle for the next computing platform will be fiercely fought. The outliers understand what happens if they remain in the fringe, and their strategic efforts to displace, not disrupt, Apple and Google’s position will be strong.

If the evolution of platforms has been with each new cycle, they get deeper and deeper into their user’s lives; then, we can assume that the next computing paradigm will go even deeper than mobile does. This is a key reason the battle will be so fierce for the next platform because the losers may have no ground left to stand on.

Disney+ Launches, Apple Card Approvals, The Productization of Privacy

Disney+ has finally launched, and Disney has marketed it as heavy as I have seen them market anything in the last few years. Every ABC network channel has been running ads, and their commercial for the Mandolorian feels like it runs once an hour during any major TV or Sports broadcast.

I’ve written about the financial expectations investors have for Disney+ as well as some research I’ve come across for awareness and intent to subscribe before, but to recap, Disney itself forecasts 20-30 million US subscribers by 2024, and their narrative to investors for that forecast included assumptions around the percentage of households with broadband they believe they can reach which is roughly 25-30%. Subscriber numbers get tricky when you build these assumptions because of family plans or shared accounts. So thinking about this in terms of households that subscribe is the right metric. However, even with that context, I think Disney may beat their own expectations for subscriber numbers much earlier than they believe.

With that in mind, there are a few interesting points to make to keep an eye on. The first is how this business is new to Disney. I know Disney is generally cutting edge with technology, but running a cloud business (which is what Disney+ is) is a different beast. Knowing how to scale, support, manage, etc., will be key for Disney as they build this out. They already see issues as demand seems higher than they originally thought, and the service is less than 12 hours old. They sent this tweet out this morning.

I love how the tweet informs us they already had high expectations, and the demand has exceeded that!

Disney is a world-class organization when it comes to customer experience, but that will again be tested here in the digital realm against a host of companies who also do this very well. I expect Disney to learn fast, but this is a new type of business, with a host of new competitors, and it will be fun to see Disney navigate these waters.

The other point is that of the binge expectation. I know Apple, HBO, and others are firm with the episodic releases of content, but I generally wonder how much Netflix has changed the consumer mindset and binge behavior. For example, after I signed up for Disney+ this morning and looked at a few originals, you only see one episode, which honestly felt like a bit of a letdown. Sure Disney has a whole back catalog, but I think most people will subscribe for original content, that is, at least what the research suggests, and if that is the expectation, then after onboarding and having only a few new things to watch could be disappointing.

Apple Card Approvals
A rat’s nest was stirred up in the media earlier this week as people were commenting on Twitter that they felt Apple Card approvals were heavily gender-biased. The initial issue was brought up on Twitter via a thread where Ruby on Rails creator David Heinemeier Hansson shared his wife’s experience applying for Apple Card. That led Apple co-founder Steve Wozniak to chime in, and the media took it from there.

I’m glad Apple and Goldman are looking into this, but this entire experience shows just how little anyone seems to know about how people are measured for creditworthiness. Which, to me, highlights an opportunity if nothing else to be more transparent, or perhaps even build a bitter solution for assessing creditworthiness. That being said, I have enough friends in the credit card industries to assure me this actually had nothing to do with gender. The factors which go into credit assessments are credit score (obviously), income level, debt to income, rolling credit, and the number of loans, to name a few of the variables.

Another factor here is that of a joint Apple Card. Apple Card does not offer a way to add another person to it, even though I suggested this idea day one, rather, each person must apply individually. This gets a bit more tricky when someone is applying, and most of their income, debt, or loan accounts may be joint with another person. I’m glad Apple and Goldman are looking into how to easily bring a family solution to Apple Card as that should have been there at launch.

Lastly, this situation also highlights something I warned about when I first wrote about Apple Card when it was announced. I argued the risk to Apple in getting into a credit card, was when something inevitably goes wrong, which may be out of their control, people will blame Apple, and the risk of negative PR or user experience was high. That is exactly what happened here. Even though this is Goldman Sachs approval process, not Apple’s, Apple is the one who gets the blame because their name is on the card, and people have high customer experience expectations of Apple.

This will not be the last time something like this happens, I’m sure, and it’s all part of the learning process for Apple as they venture more into services and banking.

The Productization of Privacy
Apple making privacy more of a product than just a feature is truly genius. Apple launched a new page at apple.com that articulates this movement to more deeply explain how privacy is central to Apple and the customer experience they seek to provide.

If we take a step back and look at the overall industry, especially the consumer category, it would be hard to deny how much privacy has entered the discussion. While we may debate the filter in which consumers use to trust, or not trust, companies based on the discussion, the bottom line is Apple is responsible for bringing privacy more into consumer consciousness.

Again, debating how much this indirectly helps Apple is fine, but from my view, the fact they have forced more companies to talk about this and be more intentional about their privacy positioning is a consumer win. We still have a long way to go, but having privacy as product building mentality is not something that existed before, and Apple is leading the charge, and I expect many others to follow.

AirPods Pro Follow Up, Apple and Housing, Surface Pro X Reviews

AirPods Pro Follow Up
Now that I’ve been using the AirPods Pro for about a week, I wanted to share a few follow up thoughts worth mentioning. The first point is about AirPods Pro vs. more expensive over the ear ANC headphones like the Bose Quiet Comfort or Sony models.

If you read much of the commentary from most reviewers, they are comparing AirPods Pro to much more expensive over the ear headphones with active noise canceling. Which, I think, is fair game because if someone is actively looking to buy active noise-canceling headphones, they are going to look at the Bose and Sony models since most believe they are the bar to measure. Just look at any flight you may be on, and you mostly see over-the-ear headphones generally from Bose or Sony. Until now, they were the best options available but come at the cost of $349.

While it is a fair game to compare the noise canceling, that feature alone is not how I think about the buying decision between AirPods Pro and one of those models. However, the fact that most reviewers are comparing AirPods Pro to higher-end active noise-canceling headphones is amazing in its own right, particularly when many of them are impressed by how close AirPods Pro comes to the higher end Bose and Sony’s.

While I have not been on a plane yet, I will test that later this week. I did run some tests in my car, driving with the windows down at higher speeds. In this test, the AirPods Pro performed on par with my Bose QC 35II and my Sony noise-canceling headphones. While others still think overall, the Bose and Sony’s filter out more noise consensus is it is very close. With that in mind, I’d like to offer a few more thoughts when comparing.

The first is the portability. Both my Bose and Sony’s are quite large, and their carrying case takes up a lot of space in my carry on. This is a huge advantage or AirPods Pro in that they are extremely easy to carry and much more portable. While I have the luxury of owning all these pairs of headphones, most do not, and the daily comfort and use, as well as portability, gives them a huge advantage.

The other area AirPods Pro have competitors beat hands down is transparency mode. Not only does transparency mode work better, but getting to transparency mode is quite a bit easier than other headphones. The ease of use comes both with how easy it is to press and hold the bottom of the AirPod’s Pro but how AirPods feel like they completely disappear in this mode. This is not the case with over the ear headphones that feel quite awkward in transparency mode. Oddly, I feel like I could leave AirPods Pro in my ears all the time on transparency mode and forget they are in. That is not the case with over-the-ear solutions.

Lastly, when you look at all those pros for the AirPods in comfort, portability, ease of use, and that they are $100 cheaper than the Bose and Sony’s AND the ANC is very close I think if you are in the market for noise-canceling headphones you can argue AirPods Pro is the best value for the money.

Apple Commits to Silicon Valley’s Housing Crisis
Apple announced yesterday they are committing $2.5 billion to the Silicon Valley housing crisis.

Apple, among other tech giants located here in the valley, is committing resources to help build more affordable housing. I commend this effort, and it is needed desperately. That being said, I’m not sure just more affordable housing alone is enough. It is absolutely too expensive for many to live in the valley. We have teachers, police and fire, and entire non-tech industries who find it too expensive to live in the Bay Area. But unless we have a sweeping change in the overall housing pricing market, I’m not sure how much good will happen.

Something I think every tech company concerned about this should equally if not more, invest in is remote work. Interestingly, most companies are not yet fully embracing video conferencing as a part of enabling remote work. This became clear with some stats that came out of Zoomtopia, Zoom’s user conference, where it was revealed that the average enterprise has less than 5% of their conference rooms set up as remote work huddle rooms.

Some of Zoom’s customers shared with us, at the conference, how transformative becoming a video-first company has been for how they work and even how they think about real-estate. The CTO of a large health care company said that they went from less than 10% of video calls to now over 90% in less than two years and that transformation has fundamentally changed how they think about work.

The more I dug into how video calls are being used, and when, the more clear it became to me that we are in the first inning of collaboration hardware and software and represents the biggest potential shift for the modern enterprise. As companies embrace remote work, video collaboration along with real-time software tools to make true remote work and remote collaboration as good as being in the same place then working from any place in the world becomes truly possible for anyone. This would have the most positive impact on solving housing, traffic, and a host of other problems coming from tech companies being concentrated in specific areas of the country.

Surface Pro X Reviews
Reviews of Microsoft’s Surface Pro X came out today, and they have been mixed. I also have a Surface Pro X and have been using it a bit the last week as a part of some of my workflows.

The reviewers love the design of Surface Pro X and the hardware/pen overall, and to that, I agree. Reviews are also focusing on Surface Pro X as a device that compares with a traditional laptop where more high-end work is being done. Essentially, reviewers are making a bit of a mistake the same way they do with iPad when looking at it through the lens of a workhorse laptop vs. one an ultra-portable computer that is entirely sufficient for all types of tasks and workflows that a highly mobile worker would do.

This gets a bit more tricky with a machine running Windows, in my opinion, because the expectation of Windows will be that it can do everything all other Windows machines should do. This is not something iPad necessarily gets into in most consumer mindsets because iOS, while capable, doesn’t carry with it the same legacy as something like Mac OS and Windows does from a laptop/desktop standpoint.

The big question for everyone who has used Surface Pro X is how this co-designed processor between Microsoft and Qualcomm will perform. In my own usage of Surface Pro X, all the normal things I do run as expected. I did not use Chrome, which the reviewers said felt slow and laggy, but this also points to why Microsoft’s new Edge browser is so important strategically to the Windows ecosystem.

While the expectation of battery life is one thing pushed hard with Arm-based devices, the SQ1 processor is throttled to 3Ghz, so I personally was not expecting the same battery life being seen in other Arm-based machines that can push 20 hours plus. That being said, the reports that only 6 hours of use is happening is not a good sign, but software updates can fix this. If Surface Pro X can deliver the 13 hours all-day battery life and users buy into the connected story, then this product will deliver for the type of customer it is targeting.

Complaints about the price are fair, given it competes with other X86 based products in a similar 2-1 form factor that is competitively priced and would run into no app compatibility issues. But, here in the hardware design and connected story come only from being able to run an Arm processor so people who want the thinnest and lightest 2-1 Windows PC are likely to consider the Pro X.

Overall, the continued competitive landscape of computers is at all-time highs, and more options than ever are available to consumers. This also demonstrates the high level of maturity of the market and why companies have to work harder than ever to gain mindshare with consumers and business buyers alike.

AirPod’s Pro Impressions, Apple’s Advantage, Apple Earnings Key Points

AirPod’s Pro Impressions
Apple has another hit on its hands with AirPods. Reviews are coming out overwhelmingly positive, and I wanted to share a few first impressions having used them for a day now, but also dive into a few technical details I learned that I think are worth highlighting.

Impressions. AirPod’s Pro two newest features are the ones I want to talk about. Noise-canceling, or active noise canceling (ANC), and transparency mode deliver on all fronts. I’ve tried a number of other wireless earbuds, some with ANC and some without, and I own the Bose QC2 and Sony WH1 both costing over $300. I was very curious to try the noise-canceling against the over-ear Bose and Sony the most, but where AirPods beat other in-ear wireless headphones is in fit and comfort.

When it came to noise-canceling, AirPods are much more in the camp of the over the ear Bose and Sony in terms of quality of noise canceling. As good as the Bose QC 352 are, I still find the Sony WH1 as my preferred for both comfort and noise-canceling quality, and while the AirPod’s came close, the Sony headphones still had the best noise canceling. But there are tradeoffs that I think need to be pointed out.

AirPod’s remain, in my opinion, still the most comfortable and versatile headphones on the market. I said when I first wrote about my experience with the first AirPods that you forget you have them in. That is not the case with all other headphones I have tried and for sure any over the ear solution. Outside of price, this comfort and the true feeling of audio freedom is why I think AirPods are the best selling headphone on the market.

Couple that with active noise canceling that is darn close to the highest end consumer products from Bose and Sony, and it’s hard to doubt the total value Apple has brought to market. While I’m still not sure AirPod’s Pro will replace my Sony as my go-to while on airplanes (a luxury I know), AirPod’s Pro will open up many more use cases where I used to use my Sony’s and will no longer need to.

I need to mention a few things I learned about what’s going on inside AirPods. First off, the active noise canceling is an Apple proprietary solution. They are not using someone else technology, and instead, the H1 chip is utilizing ten audio cores to provide a dynamic, active noise canceling solution that is constantly adapting to the audio, fit of your ear in case an AirPod moves, and other factors. The chip is constantly sampling and adjusting as much as 200 times per second to deliver the best audio and noise-canceling in every situation you find yourself.

Apple included a microphone in AirPods that points inward toward your ear, and this microphone allows them to do this dynamic ANC as well as dynamic EQ. This microphone is constantly listening to the audio and how it responds and adjusting on the fly and is ingenious when it comes to a dynamic and constant quality of audio and ANC. Apple also custom developed a high excision and high-dynamic-range amp. This customized amp is also tuned to be part of the solution and plays a key role in the quality of audio.

A few of those components are pictured here in this breakout.

Lastly, the system in package (SIP) is custom to AirPods and designed by Apple to specifically fit the new AirPod’s design and form-factor. This point goes back to the absolute advantage Apple has with one of the best, the best by many insiders standards, silicon design team on the planet. With each new product, Apple seems to customize more, and more of the critical components and the rewards they reap from that investment are bountiful.

Speaking of Apple’s advantage..

Apple’s Advantage
I had an interesting discussion on Twitter with a journalist who suggested that Apple’s magic pairing process for AirPods was an unfair advantage they allow themselves by controlling as much of the hardware, software, and services stack as they do. For reference, here is the point he made.

No way for others to compete is certainly a stretch, and the danger of his position is it argues against integration, which has tremendous benefits to consumers and a companies core business. Also, for his point to stand, Apple would need to lock the iPhone to AirPods and let no other headphones work with iPhone. As long as choice exists, his point will not stand up to scrutiny.

There is nothing inherently wrong with companies owning more of the technology stack to provide differentiation or competitive advantage. Apple is not alone in this as Amazon, Microsoft, Google, and more are tipping deeper into integrated waters because of the competitive advantage it allows. There will always be choice, but in some cases, it may be easier, cheaper, or work better to go with the custom solutions a company offers.

I find the position disingenuous also because the anti-compete point is solely being made on the back of Apple’s magic in pairing. Yes, it is easier to pair AirPods, but no, it is not difficult to pair any other headphone to iPhone. It’s honestly no different on any other platform or how it has been historically. His point completely falls down when you look at HomePod, which has the same magic pairing process yet only 2% of the smart speaker market with Amazon and Google, with raising ASPs of speakers, taking the lions to share. If this magic pairing process made it hard for other companies to compete in, then HomePod would be doing better than it is. I note the price is higher of HomePod, but again, it shows that competition is possible even with Apple’s magic in pairing.

There may be areas to look into Apple for anti-compete, like App Store, but Nilay’s point about the magic in pairing is absolutely not one of them. Owning more of the stack is the advantage Apple lends itself and a key advantage that will deepen their differentiation. Apple could abuse this, but they know better.

Apple Earnings Key Points
There are a few points around Apple’s earnings that I’ll write a follow up on, but there are a few key points I want to make sure to hit today that I thought were significant.

  • Services On Track to Double by 2020
    Apple’s services business just keeps growing, and for many of my long-term readers, this is not a surprise. I’ve long written about how Apple’s platform is the best positioned to drive services and subscription revenue not just to Apple but to an entire iOS ecosystem. At the end of 2016, Apple’s services business was about $25 billion in that year. In early 2017, Tim Cook stated the goal to double that business by 2020. Apple’s fiscal year 2019, the services business was $46 billion, which makes hitting $50 billion a year in 2020 a highly likely target.

    A key point Apple management made about services on the call was that services grew YoY in all geographies, calling out China. This is a significant part of the services growth story because it signals that every market where Apple competes, consumers are spending money, and the services opportunity continues. This deepens Apple’s loyalty and stickiness in every geography.

  • Wearables Has a Head of Steam
    Wearables rev increased by 54% YoY. That’s big, and it shows how strong Apple Watch and AirPods are becoming in the market. We are not that far off from both Apple Watch and AirPods having an installed base of 100 million devices. But the key story here is how under-penetrated AirPods and Watch are as a part of Apple’s installed base.

    An analyst asked this exact question on the earnings call to try and get Tim Cook to give a number, but given the sales trends I’ve tracked, and my model of Apple’s product installed base, I’m confident AirPod’s and Apple Watch combined are below 20% penetration into the installed base. This means there is still significant headroom for growth, which means wearables will continue to be a bright spot for Apple and a means to continue to off-set flattening sales of iPhones.

  • Apple’s Hardware Lending via Apple Card. Lastly, a new announcement of a feature for Apple Card caught my attention. Tim Cook announced on the call a new feature coming to Apple Card that lets consumers pay for an iPhone over a 24 month period with 0 interest. At first blush, this is very similar to Apple’s upgrade plan. However, it is much more clever. The goal here is to shift the upgrade plan concept to Apple Card, with the benefit of 3% cashback but also driving more users to Apple Card, which is the true goal. However, where this gets interesting is that it shows us the groundwork for how Apple will start to offer to finance other Apple hardware. I’m now absolutely convinced Apple will offer similar deals for Apple Watch, Mac, etc., where Apple Card owners can finance Apple hardware, and thus Apple makes it easier for people to get the hardware they want. This, in turn, drives more Apple Card usage, deeper loyalty and lock-in, and all the strategic benefits that make Apple Card quite interesting as a finance platform. Apple Card is so much more than a credit card, and I think it is critical to understand this.

Google’s Offer for Fitbit, Spotify Earnings, AirPods Pro

Google Makes Offer for Fitbit
This is one of those synergy type deals that should have been easy to see. We have long written here at Tech.pinions about the challenges of being a one-trick pony business and how competitive threats remain more difficult to ward off when you have only one main revenue stream for your business.

Fitbit has largely been a one-trick pony as the hardware sales drive most of the companies revenue, and the services business never quite took off. It’s felt for some time that Fitbit was a company in need of being acquired where the expertise, or in this case the data they have acquired, can be used to the benefit of someone wanting to play catch-up in wearables.

Google has always made the most sense to acquire Fitbit and the teams there have expertise not just in making wearable hardware, fitness and health software and services, but also have quite a database of user data and fitness behavior trends. While many commenters panicked thinking Fitbit owners need to delete data because Google can’t be trusted with it, the reality is Google is likely interested in using this data for internal learnings as they continue to evolve Android Wear and their broader wearable strategy.

Google’s broad plan with Android Wear still remains a mystery to me, and have had multiple discussions with Android Wear partners and customers, and it seems they are similarly unsure of the total vision. Buying Fitbit from a hardware standpoint doesn’t solve this necessarily, but having more customer data and behaviors of Fitbit customers should certainly help them refine their strategy further.

It’s no secret Android Wear has not sold anywhere near the numbers of Apple Watch or Fitbit, which means this is one area Google has a data deficit, and they seem intent on looking to solve that. We will see if this deal happens, but it makes sense from many angles.

Spotify Earnings
Spotify is also a one-trick pony with only one business model at their disposal right now. It’s the main reason I’m not optimistic about Spotify and remain convinced they are a future acquisition target for someone like Amazon, or maybe Google as well.

Spotify’s business still relies heavily on freemium, which is why a good portion of their continued investor commentary focuses on its strategy to drive premium conversions. This quarter they made an interesting point that’s worth calling out.

We continue to see exponential growth in podcast hours streamed (up approximately 39% Q/Q) and early indications that podcast engagement is driving a virtuous cycle of increased overall engagement and significantly increased conversion of free to paid users. The correlations in our data sets are clearly apparent. We are working to prove causality. Overall, the business is performing strongly.

A few points to make here. The first is Spotify recognizing a higher value customer, for whom Spotify is a source of more than just background noise (i.e., music). I think this is an important point, should they prove causality, and I think they will because it will show them a behavior for additional content which garners higher-value customers to move from minnows to fish and potentially whales. For example, do they start having audiobooks? Would they get into syndicating video ever? The point here is what can they offer that moves customers beyond free, and I think they realize for many music is not the answer.

I’ve mentioned before I’m very active in my daughter’s High School and spend a lot of time talking with many teenagers. I’m continually fascinated by the division of teens who pay for Apple Music and those who don’t pay for Spotify. I can’t find many teens I talk to who pay for Spotify, and obviously, if you have Apple Music, you are paying for it. I’ve also seen many surveys suggesting similar patterns that your average Spotify customer is not paying, and from several studies, I’ve seen these customers are mostly coming from Pandora, where they also did not pay.

Spotify has to be concerned, as their investors are concerned that they grow their customer base but do not convert those users to premium at significant rates. It seems the point they made about podcasting is designed to show their potential to use higher-value content to drive subscriptions and how their ability to be wise in adding higher-value content could yield returns in premium conversions.

AirPods Pro
I’m looking forward to getting my hands on the new AirPods Pro, as I’m sure many readers area. I’ll write more on my experience once I have some time with them, but I want to make a point that I’ve made before but want to reiterate again.

This picture cements the point.

Where Apple develops a lot of custom silicon for iPad, iPhone, and Mac, what they design for wearables is a system in package. It’s essentially a custom motherboard tied together with a custom solution of chips, sensors, and other components. What we find in Apple’s wearables like Apple Watch and AirPods may very well be the most integrated component solution Apple creates, which is saying something.

The point is this. There is no company that is better at miniaturizing computers than Apple. Not even close. I don’t think many realize the advantage Apple has here with wearable computing. Apple is designing extremely small, yet extremely complex computers and to think anyone will be close to what they will be able to fit in a pair of glasses when they release seems impossible.

This is an area, the future of wearables, where all of Apple’s custom silicon and design efforts may culminate into their full potential.

Facebook’s Good Idea, Amazon Earnings, Intel Earnings

Facebook’s Good Idea
I watched most of Mark Zuckerberg’s speech at Georgetown on free speech and how Facebook plans to deal with their role in the world. While most of the commentary was pessimistic, there were a few things he discussed that I think merit more thought.

The core of Facebook’s issue is their attempt to behave, and monetize, massive user scale as a neutral platform. A fundamental challenge is that Facebook is essentially a general-purpose neutral platform, and the same Facebook we use in America is essentially the same Facebook as other parts of the world. When it comes to a global platform, Facebook may be facing issues never seen before. While we can argue, Facebook may need to be broken up, or perhaps even more specially regionalized, and perhaps each country in which they compete should be run in a way that works more closely with the specific countries. That being said, I want to focus on one specific idea Zuckerberg touched on that I think is a good start.

An idea brought forth by Zuckerberg, which related to how you place ads, was to make sure no one could create ads, especially political ones or ones that spread information without verifying their identity. Essentially, Facebook wants to make it, so accounts that are created or used to place ads need to be verified to an actual human. They plan to do this by requiring a government ID before they can place ads. The goal here is accountability, and ultimately this is the critical idea put forth by Zuckerberg.

If the spread of misinformation, damaging speech, and in general, the kind of content that is worse for society is to be managed, it starts with identity. While this alone may not completely stop the issue, at least there is a way to hold people accountable for their actions. This is certainly a better step forward and one I hope Facebook follows through with and explores more ways they can more deeply hold their users accountable for their actions. Accountability is a step in the right direction to discourage malicious intent.

Amazon Earnings
Many who study Amazon know they can pull levers within their business at any time to turn a profit or not. The commenters seem to forget this making a much bigger deal of lower than expected earnings. Amazon’s stock was down, irrationally, because they took a margin hit due to increased investments in one-day shipping. Amazon let investors get too comfortable with their quarterly profit trend, so the reaction was mixed when they decided to turn less profit and invest in some core areas of business.

Overall, Amazon’s business remains exceptionally strong. Amazon remains well-positioned to keep gaining advertising share, an area that contributed to their “other” business revenues, which grew 44%. Online stores grew 21%. AWS grew 35%. The only real negative was guidance, which management explained was due to continued investment in one-day shipping, which will impact Amazon’s commerce business to the positive once established.

On a quarter to quarter basis, the debate with Amazon will always be growth vs. investment. But Amazon’s upside remains too high to ignore.

Intel Earnings
Along with Amazon, Intel is a tech bellwether company. I don’t normally talk about Intel’s earnings, but there are some things brewing that I think could be positive for Intel and worth mentioning because they are a bellwether company.

Intel has just come off trying times. Their shift to 10nm from 14nm was a struggle, to put it mildly. That struggle impacted the PC ecosystem and to a degree, the data center. During this challenging time for Intel and their customers, both Intel and those who depend on Intel technology had to prioritize their product strategy. What that meant for Intel customers was prioritizing data center, due to demand, and a focus on enterprise PCs. Now it appears the end is in sight for Intel to be constrained with products, and as they ramp 10nm platforms, we will likely see some important new steps forward in both the data center and PCs for enterprises and consumers.

Ahead for Intel is the bigger opportunity coming to them from the smart edge computing devices, 5G, as well as their GP-GPU strategy, which, if successful, provides quite an upside to Intel to take share from Nvidia which will be the key storyline to watch.

Intel still has some execution challenges ahead of them, but as a few of their product kinks get worked out, the timing for growth may intersect nicely with some industry trends in the 2021 timeline.

China’s Gift to the Rest of the World

The trade battle between the US and China has taken some interesting twists and turns. Front and center in the conversation are the economic issues each country has been up against. Financial institutions are cautious when it comes to the public market, with fluctuations happening every time there is news of trade talks. Concerns of a US recession and overall slow GDP growth loom, and several economic reports out of China suggest their economy has slowed, and GDP is continued to be forecast downward through 2020.

With all that is happening, there is a long term observation that I find quite interesting related to the supply chain. The trade tension is shifting manufacturing out of China due to the tariffs in the US. The US market is so important to many companies that their priority has become getting manufacturing out of China and into other countries. This is what I’m calling China’s gift to the rest of the world.

The Supply Chain Shift
I have close contacts at several OEMs and speak with folks in the tech component supply chain frequently. The sense of urgency of shifting the supply chain out of China has accelerated the last year and is a primary focus at the moment. With the pressure China is putting on Taiwan, ODMs based there are also looking to move.

I have read three different private studies and reports on what is happening here, and the latest report shows accelerated timelines to move core manufacturing out of China. According to the study, which includes interviews with many of the main tech manufactures and supply chain players, 63% have already moved at least some of their production volume out of China. 57% said they are still planning to move even more production out of China and into other regions. How much manufacturing can be moved out of China is a big question for many. At the moment, the sweet spot seems to be between 30-40% of their production is moving or planning to be moved to another region.

The biggest benefactor has been Vietnam, but a fascinating emerging benefactor is India. See this chart from a CFO survey of ODM and supply chain companies.

Vietnam and India rank atop the list. Interestingly, the US in the YoY data from this survey declined in the number of respondents saying the US was a candidate with only 10% of respondents considering moving to the US, which is down from over 30% the same survey a year prior.

This question was on the planned move, again noting many have already made some manufacturing moves out of China. Looking at the data on countries manufacturing companies have already made investments, Vietnam, India, and Malaysia rank atop the list, in that order. In terms of the countries, other than China, the same CFOs said they currently have production moved to, atop the list was Vietnam, Korea, India, Malaysia, and Japan in that order.

It seems momentum is favoring these countries and Vietnam and India in particular. While it won’t surprise too many that countries in SE Asia are on this list, the most interesting one for me is India.

India’s Potential To Benefit from China’s Shift
Since the early 2000s, I had studied China from a few different lenses. Having been there and spoken at tech conferences and supplier-customer events, the culture and hard-working, determined nature of their people fascinating me from the moment I got there. China’s work ethic was vastly different than many other European countries I’ve visited, and that stood out. China’s people’s work ethic is a core reason they have become what they are as a manufacturing hub and will be a core reason for whatever else China evolves into in the future.

China’s sheer scale was another competitive factor. With well over a billion people in a growing class of consumers entering the financial conversation, and being highly ambitious, China’s scale of driven people was a large part of their success. The first time I was in China, one of the executives we were working with who lived there remarked: “I’ve never seen a more capitalistic people that are unfortunately held back by communism.”

I make the two points above because India shares a lot of the same dynamics that China does. India has a huge population and a growing economic class of customers entering the financial conversation and driven by ambition. While I’ve never been to India, I have close contacts there who help me stay informed on the economic and consumer trends. Years ago, I wrote about how an uprise in successful Indian CEOs, like Satya Nadella, was helping to inspire and motivate Indian culture. Having followed the Indian market for many years as well, and watching their ambition play out and grow, I’m beginning to think India has many opportunities to compete in the way China did on a global scale but in a very different way.

Ultimately, this acceleration is not just manufacturing, but also the opportunity for India has come because of the trade war. The surveys I mentioned from supply chain CFOs have been going on for years, and prior to the US trade war with China, there was little sense of urgency to move anything out of China. Now that is happening at a rapid rate, and what I’m not sure the Chinese government understands is that once the dust settles, the manufacturing that was moved out of China is not going back.

India has been trying to get more local manufacturing for years as well, making it hard for importing tech companies by placing tariffs on goods with a percentage of the hardware not made in India. Apple, of all tech companies, has likely been hit the hardest given the already steep cost of their hardware. Yet, we are just now seeing the fruit of Apple’s labor moving manufacturing to India with photos of locally made in India iPhone XRs.

Obviously, Apple wants to be more relevant in India, and local manufacturing, as well as continued investment in the Indian economy, is essential for Apple’s long term strategic play.

Lastly, the recently elevated narrative of China, communism, and their censorship stance will only continue to fuel more global businesses to be more diverse and have core operations, including manufacturing, outside of China. Essentially, while China’s tactics are designed to lower their dependency on companies and technologies outside of China, these efforts are also causing the rest of the world to lower their dependency on China.

Facebook and Well Intentioned Failures

The business lessons being learned around Facebook on a regular basis are fascinating. The company has achieved once in a generation, or longer, user scale. We have never seen a company with the reach Facebook has, and we may never see it again. I know never say never, but the possibility we never see this scale again is worth pointing out.

When it comes to Portal and Libra, which to me, represent the broader struggles Facebook has had launching new products, there are a number of interesting observations to be made. But the big picture to see with Facebook is the position they now find themselves in will make launching new products or services extremely difficult even if they are well positioned on paper, and well-intentioned.

I’ve said this from the start, Portal is a really great product and had Google, Amazon, Apple, Microsoft, etc., launched this hardware it would have done much better. Portal, despite narratives from FB executives, is not selling well, really at all. I know this for a variety of reasons, but the main one is coming from component providers I know who make components in Portal. Volumes are low.

But what strikes me as the most interesting part of this story is how on paper Facebook seems exceptionally well-positioned to deliver Portal, and the solution lines up almost perfectly with the job to be done (the reason people use the product or service) of Facebook. In fact, if you were inside Facebook and did a job to be done analysis of the service and used that analysis as a basis to create the next product launch, you would almost certainly arrive at a product like Portal. Yet, no one seems to want it.

Factors for its failure to sell can include many things. For example, humans are still not comfortable with cameras in their homes yet. However, that seems to be slowly changing. Most people video conference on their PCs, tablets, or smartphones and may not see the need for dedicated video conferencing hardware. Or it could just be people don’t want such a product from Facebook.

While many points can be made about other factors, other than it’s from Facebook and user trust is an issue, I do think the heart of the matter is that Facebook has lost people’s trust to the point that Facebook may never evolve beyond what it is as an online place people see stuff from their friends. Basically, a social wall.

Again, this is fascinating on many levels about business, product, customer behavior, and more. Facebook should, on paper, be successful with a number of products they have tried or will try, but the reality is that ship has sailed, and this gets very tricky for Facebook going forward.

Libra, like Portal, looks great on paper. It makes absolute sense in the context of Facebook’s scale, yet it may very well fail. I’m sure by now you have seen the reports that founding members of Libra are leaving the consortium. Despite the exodus, Facebook remains committed, as I would have expected, but the fate of Libra is still up in the air.

This is again an example of something that, on paper, Facebook is exceptionally well-positioned to deliver. Here, by direct nature of their user scale, touching ~2 billion people on a monthly basis and well over a billion people on a daily basis. You would think a company with that user scale has an opportunity to disrupt banking.

If you have followed the narrative, and executive commentary on Libra, moving to bank into the 21st century and helping to bring the unbanked into financial inclusion are the main goals. Facebook’s entire position was no other solution that could satisfy Facebook’s scale needs, so they felt they needed to get involved.

I thought this note from investor Fred Wilson on Libra was telling.

It is fashionable to be negative about the Libra project right now. And it is equally fashionable to call it “Facebook’s crypto-currency project.” Both are understandable under the circumstances.

But yesterday was the beginning of an independent effort, one that Facebook does not control, one where Facebook is one founding member among many, and one where Facebook has one board seat out of five.

But even more important is Libra’s mission to create a stable cryptocurrency that can operate at sufficient scale such that Facebook and others can use it as a means of exchange/payment system in their applications.

No one will disagree with the promise of Libra. Yes, banking needs to change and potentially be disrupted. Yes, we want to bring the unbanked into the conversation and strive for financial inclusion. But, whether Facebook controls it or not, their platform will play a critical role in delivering the solution, and that is where I think the solution breaks down.

There are so many economic theories out there, and only if governments get involved would something like this move forward. But, to the point of the Bitcoin proponents, controlling currency is something governments want, and it is not in their best interests to adopt a neutral global standard.

Facebook has reached such a scale that they are perhaps more powerful than they realize. That scale, power, and influence, has created a significant state of skepticism among not just businesses, governments, but also their users.

I don’t expect Facebook to give up, but what concerns me more at the moment is Facebook’s management’s inability to see these patterns playing out. I’m not sure they genuinely understand the underlying systemic problem that stands as a thousand-foot wall impacting their ability to move beyond anything but a social feed for people to peruse when they are bored.

It is within this vein that I’ve named these efforts well-intentioned failures. I believe Facebook has well-meaning intentions behind these products, but there is a bigger reality facing them that makes these well-intentioned new products a struggle from the start. Digging into the systemic issues facing Facebook and the corner, they have been stuck into seems to me to be the most worthwhile effort at the moment. Because if they don’t the underlying issues, I’m not sure how they move forward.

Apple’s Rumored 2020 AR Glasses and $399 iPhone

I had been getting a lot of questions lately about some of the latest rumors surrounding Apple, so I thought I’d address them to add my two cents.

AR Glasses in 2020
Let’s start with the most interesting rumor from a future-forward perspective. Noted Financial Analyst Ming-Chi Kuo issued a report saying he expects Apple to release their AR headset in the first half of 2020. The report claims, what many believe, and I agree with that this headset will be mostly an iPhone accessory. There are a number of points I want to make about this headset that I think need to sit in the back of our minds.

To be frank, I think the first half of 2020 is a bit early for Apple to release an AR headset. Apple usually waits until there are somewhat acceptable products on the market then delivers a complete solution that defines and sets the bar for the category. Outside of HoloLens and perhaps Magic Leap, there aren’t many players in the space, and both of those are so pricey they are outside the range of a consumer market. North Focals by Polar are not a rich media AR experience but simple text and notifications, I don’t consider them an AR headset.

With the market being much more immature than Apple usually likes before they enter, I’m quite skeptical we see this product in 2020.

There is also the market of what problem do these AR glasses solve? Even with Apple Watch, the latest product to analyze and put under a microscope on how Apple launches new products in new categories, they came out with some specific problems they were looking to solve. AR has some potential applications, but most consumers would not feel gaming, directions, notifications, etc., a large enough pain point yet with their current devices that a head-worn computer would solve.

At Creative Strategies, we do quite a bit of research on augmented reality, and that research continues to convict me that this form factor will be even harder to drive adoption than Apple Watch. The face/eyes are going to be an extremely difficult place to convince people to put computers in mass.

Another element to consider is the lack of significant smoke in the supply chain about such a product. At least with the rumored $399 iPhone SE, there is a lot of supply chain smoke and enough to know something is coming. With these glasses, there is little to no supply chain chatter suggesting large orders of glasses displays, chips, or other components that would likely go into this form factor. This point does not mean it is not happening, but it does mean there is nothing in the quantity being made. So if this is released, it will be released in an extremely small volume.

One part of this discussion that could be interesting is if Apple would consider doing a developer launch of these glasses like what Microsoft did with HoloLens 1 and Magic Leap has done with their first release. These products were not designed for shipping in volume but for providing developers with working hardware so they can start developing apps. I wonder if this is not a bad idea, even though unprecedented, for Apple. This would get them some positive feedback from developers, maybe even media, and start to plan the seed something is coming even if not what developers get is final hardware. Given how early this market is and how immature the technology is, even if Apple ships something in 2020, only early adopters, media, and developers will get one so it will function as a beta anyway for them to get feedback and build a market. But, the hard truth is, there is no market for AR glasses, and anything Apple releases in 2020 will have to make a market, and that is not the route Apple usually takes when launching new products.

I still remain skeptical we see this product in 2020, as much as I would like it to happen.

Apple’s $399 iPhone SE 2
Another rumored started by Ming-Chi Kuo is about an updated less expensive iPhone, that could be an update to the SE 2 coming next Spring. As I mentioned, there is more than enough smoke in the supply chain to confirm something is coming. The rumors suggest a new iPhone in the first half of 2020 that will be more aggressively priced. It has been pegged as an update to the iPhone SE, although the report suggests it will look more like iPhone 8 than the iPhone SE.

What is interesting about this product, if true, is what the positioning of such a product would be in Apple’s lineup. Is this lower-priced iPhone designed to go after emerging market consumers in SE Asia or India? Is this product targeting consumers who have held off upgrading because of the price? These will be questions to address whenever/if we see this product released.

For the question of emerging markets, the biggest challenge a product like this could face is if it is competitive with flagship Android devices with larger screens, faster specs, and more for the same price. For the laggards with aging iPhones, it’s not necessarily the price that has hindered their upgrade but more their understanding of themselves and not need the latest and greatest. This group will upgrade eventually, and I question if they will go for a lower-end, less expensive iPhone when they do. Having studied this demographic quite a bit, they tend to get something more new in the hopes it future proofs their purchase and lasts the 4-5 years they hope.

Overall, I’m not convinced Apple needs to play the price game at all. I don’t think it the price of iPhones that are normalizing sales at just shy of 200 million a year. It is more that customers seem content with what they have, and the price isn’t going to change that sentiment.

I know I’m coming off a bit more pessimistic than many of you are used to, but in my mind, I’m trying to be realistic about the state of the market and with what I know about Apple’s customer base. As with anything, these are just rumors, and the in-depth analysis will happen when/if we see any of these rumors become true. But, given they are hot topics, I wanted to throw my analysis into the ring.

Gen Z and Their New Found Love of TikTok

GenZ and TikTok
I consider it one of my responsibilities to keep you all informed on the latest with Gen Z. I’m in the fortunate position to have two Gen Z daughters but also access to larger groups of teenagers I speak with often around the Bay Area at different High Schools. As of late, TikTok has been one of the more interesting conversations, and it is at the point we need to discuss some observations.

Three months ago, when I asked a bunch of teenagers about TikTok, they all said it was stupid, and they, as well as their friends, all considered it a waste of time. I asked if anyone they knew was on TikTok, and universally their answer was “no one cool.” At that time, their social media investment of personal time and effort went into Instagram and Snapchat primarily. It’s important to know the differences in how both those platforms are used, and I’ll get there in a moment.

Fast forward until about two weeks ago, when I noticed some of the girls and their friends putting a lot of effort into producing a video. I noticed this because there was choreography, multiple scenes, and music, and I knew this was not for Instagram or Snapchat. I assumed this was maybe for something for school, but I thought I’d ask. When I inquired about what they were making, they all yelled a TikTok. To which I immediately said, “I thought you said TikTok was stupid?” To which they replied, “well, it’s not anymore.”

So what happened? Apparently, an awful lot changed for these teens in a short amount of time. The first was their realization of dancing and music (things they all seem to love), which seems to be a good portion of trendy TikTok videos. Most of them were on Musical.ly and used Vine, so it seemed TikTok should have taken off sooner, but it didn’t. When you ask them what TikTok is, they quickly explain it is basically Musical.ly and Vine. But what changed was their peer group, mainly High Schoolers, got on TikTok and upped the production value of the content. This was one of their biggest criticisms of Musical.ly, which was the production value was low because it was largely used by pre-teens. Apparently, High Schoolers and college students make better videos they feel worth watching. Really, I think it is about seeing kids their age use the platform, and that has now happened in a significant way.

Over the last few weeks, I’ve noticed a dramatic shift in my kids’ times using TikTok vs. Snapchat and Instagram. All three platforms offer something different, but the most significant difference is the time, thought, and planning they put into a TikTok video. Snapchat has evolved into mostly a chat app for all the teens I talk to. Even they largely admit this that their primary use for Snapchat is to message friends. Instagram is where they have the most friends, for now, but it is also a shorter production for most of them. Yes, many Instagram influencers put a lot of production time into their posts, but most teens use it for quick sharing of a life moment. TikTok interests me because it seems to be combining several things that I thought were interesting about Snapchat and Instagram.

When Teens used to use Snapchat for, when they posted more publicly, it was what I considered more fun and whimsical content. It showed a different more fun side of them, while Instagram showed a more refined side of them. TikTok appears to have a bit of both with the addition of some clever tools to help edit videos in a way that goes beyond what Vine offered. This is why I observe their TikTok videos taking quite a bit more time and practice as well as many takes to get it right. They want to show their fun side, but it also has to be produced in a way that they appear the way they want. I had to video one of these for a group of them, and it took more than a dozen takes to get it right. I know..

TikTok seems to be cementing itself as the third platform. TikTok is very meme friendly as trends emerge of types of videos, and the kids pick up on it and duplicate it in their own creative way. I’m also noticing that, like Instagram, TikTok already has a lot of diverse users on the platform. Snapchat is largely a US phenomenon, but you see people of all ages, races, and genders, on TikTok already.

TikTok already seems to be monetized in a more relevant way than Snapchat, in my opinion, or at least quite similar. I’ve noticed ads for very Gen Z specific products and ads that clearly learned best practices from Snapchat and were ready to add TikTok to their ad spend quickly.

The last observation I want to make on this topic, for now, is how most videos on TikTok are either a meme or a video being used to promote someone’s Instagram account. For the teens I talk to, their goal is not to become famous or get tons of followers but simply to have a video go viral. That appears to be their primary ambition for now. As TikTok evolves as a platform, it will be interesting to see what it becomes. As of now, Influencers use it to promote their other platforms, but whether TikTok can become a primary platform of influence or just a compliment to Instagram is still unclear.

From the data I’ve seen, it seems TikTok is just now ramping in the US and parts of Europe. Six months to a year from now, it could be a very different place, which will make tracking it interesting. But the main point I want to make is how different it is from the other social platforms, as well as the reality that it is here to stay, so expect to keep hearing about it.

Microsoft’s Silicon Influence

Easily, one of the most interesting parts of Microsoft’s Fall devices launch event was the news that Microsoft had been working closely with Qualcomm and AMD on co-developing, or using somewhat customized Silicon, for their newest Surface products. Microsoft is certainly not going down the road Apple has been on developing their own custom silicon, but rather took a path to collaborate with AMD and Qualcomm to do some unique things for their hardware. There are several important takeaways that are positive for large screen computers going forward, as well as the broader ecosystem for Microsoft and their partners.

A Positive Influence on Silicon
Long-time readers know I’m fond of saying that understanding the trends and roadmaps for Silicon is the easiest way to predict the future. This is one reason I stay so close to the semiconductor industry. It shows us what is possible from a computing standpoint and helps us shape the perspectives of the new things humans can do once they get more capabilities in their hands.

In my analysis of the Surface event last week, I articulated how, for decades, Intel had been the influencing force for the PC ecosystem. I talked about how Intel created many reference designs of new form factors of computers in order to try and move PC OEMs forward with new ideas and categories. One positive byproduct of this was Intel’s ability to troubleshoot problems in advance as they learned by shipping new classes of devices. One of the most relevant was the early work done on 2-in-1 devices where PCs first saw a touch screen come to the form factor. There was critical work to be done on both the processor as well as the software that Intel and Microsoft had to do in order for this to work. The early reference designs help them work out the kinks, and ultimately touch-based Windows machines just ran better on Intel silicon because it had already been optimized. Intel used these references designs to influence but also stay ahead of the market and use that learning to impact future roadmaps.

Happily, the world of computing is now much more heterogeneous than it used to be. We can now see true silicon diversity across a range of categories, and this is good for everyone. As much as Intel would love the world to not just run on X86 but to run on Intel Architecture, this is not a great future. It is in this context I’m intrigued by what Microsoft is doing with AMD and Qualcomm.

For the broader computing ecosystem, Microsoft is a better influence overall than Intel, which makes Microsoft now co-investing in silicon efforts with AMD and Qualcomm all the more important for the future. When I look at the opportunity here, it stands to benefit AMD and Qualcomm a tremendous amount as Microsoft will be helping both these companies with their overall roadmaps as well through these efforts.

The influence Microsoft can exert, which will help Qualcomm and AMD better orient themselves for future computing products from laptops, to gaming rigs, to low-cost PCs, to foldable computers, etc., is one of the most significant elements of Microsoft starting to have influence and input on the Silicon landscape.

The other part of these moves I find interesting is the opportunity for Microsoft to further tune their software and services to the silicon roadmaps of Intel, AMD, and Qualcomm. A tighter relationship and guidance on silicon roadmaps means Windows, Azure services, and a range of other offerings from Microsoft stand to get better and more tightly integrated as well as a whole. Not just for Surface products but for the whole of the PC ecosystem and all forms of computing devices that come from Microsoft partners.

Interestingly, this extends beyond Windows as Microsoft is now working closely with Google as well to bring the best of Microsoft and the best of Google to an Android product. The Surface Duo is based on the Qualcomm 855, and while Microsoft had no direct influence on the 855, it will be interesting to see how their collaborations with Qualcomm extend beyond just a few products but perhaps impact the broader Android ecosystem positively. I see these moves as positives for Microsoft and the broader software ecosystem and will benefit many involved for years to come.

While we are not sure the exact amount of customization that Microsoft has done with Qualcomm and AMD, the broader point is whatever has been done today is just the beginning.

The Surface Effect

In case it is a helpful context, I attended the original launch of the Microsoft Surface in Los Angeles. Microsoft moving into hardware has been one of the most interesting developments within the Windows ecosystem and Windows hardware of the last decade. I followed Microsoft’s Surface journey from the start and listened to the PC OEM complain and share their outright disdain for Microsoft’s efforts with Surface because they believe Microsoft is stealing hardware customers from them, which they are to a degree. But the Surface effect on the PC industry has been more positive than most OEMs realize, and in hindsight, the PC industry may very well have been in worse off shape had Microsoft not helped give the market a boost with Surface.

Should Microsoft Be in the Hardware Business?
The debate around whether or not a company that sells software or services should be in hardware is an interesting one. If you look at both the Surface hardware business as well as Google’s Pixel business, you conclude they are relatively small businesses, but their impact on the market is quite large. The Surface business will likely be a $10 billion dollar business for Microsoft by the end of next year. Microsoft sells under 10m Surfaces a year, but I remain convinced market share is not the goal of Surface for Microsoft.

It is certainly true that the presence of the Surface does, in a way, compete with Microsoft partners. This is the tension that exists with the OEMs who are living in much smaller overall margins than Microsoft, and, Microsoft’s partners worried that Surface would get special treatment and preferable features of Windows. However, the Windows team treats the Surface group just like any partner. Meaning any special functions of Windows that are unique to Surface are things the Surface team had to do on their own the same way any OEM could do if they please.

So, then, what exactly is the role Surface plays for Microsoft?

Surface Sets the Bar
My overall observation on the role of Surface is to set the bar and be the physical manifestation of hardware innovations that help fuel more innovative hardware functions from Microsoft’s PC OEM partner. Unbeknownst to many, Intel used to do this but in a behind the scenes way. When Intel wanted to see hardware innovation or show the PC OEMs what new innovative hardware could be possible, they created a series of reference designs with the ODMs in an effort to showcase hardware innovation and hope the PC OEMs adopted some new ideas. Sometimes they did, and sometimes they didn’t, but Intel was aggressive in trying to push hardware innovation in PCs since that drove demand for new processors that utilized new hardware innovation. It was a cycle-dependent on each other, and OEM complacency in hardware is the worst thing that could happen to both Intel and Microsoft.

Microsoft knew they could not let OEMs get complacent since that was bad for the Windows roadmap in the same way it was bad for Intel’s silicon roadmap. Enter Surface as the piece of hardware that sets the bar for the rest of the category, as well as new categories and as the best first customer for Windows.

What I have always appreciated about the Surface was the hardware focus on unique innovations and experiences that led up to the total experience. I’ve long said, and it’s true, that if I was a Windows user as my primary notebook OS, I would be a Surface customer in a heartbeat. I’ve always loved the hardware, the keyboard, the Pen experience, and the overall look and feel is super-premium. From what Surface does with the display, to hinges, to material, etc., it all adds up to a premium experience and Surface has consistently been the bar for a premium PC experience.

To accomplish premium hardware innovations, Microsoft’s Surface team has looked to control more of the stack, creating unique things for Surface that sometimes were adopted by other OEMs. Things like the smart keyboard connector, or specific hinge designs used for the kickstand. Now with Surface Duo and Neo, there is a uniquely designed hinge that helps the device fold elegantly and smoothly. But their latest move to control more of the stack came with the ambition to influence more the silicon that powers the Surface by co-developing a custom chip with AMD and with Qualcomm.

This turn of events is quite fascinating, and we can be certain this is the beginning of Microsoft’s efforts to more greatly influence the semiconductor components in Surface going forward. Microsoft is not going to become a chip design powerhouse like Apple is, but Microsoft is able to benefit from the extremely clever foundational architecture innovations from AMD and Qualcomm that made their solutions flexible enough to give Microsoft, and other customers, a wider range of options to tweak the underlying architecture. AMD and Qualcomm thought about this flexibility in their architecture long ago, but Intel has recently created a similar approach with Lake Field. Intel was late the flexible architecture game, but they are now there as well, which means we should not be surprised if we see Microsoft work more closely with Intel as well to co-develop some Intel solutions for Surface products going forward.

I could write an entire article on this fascinating development, where all three primary Silicon providers are allowing for more rich customization and co-designing of specific chipsets, but from a hardware development standpoint, this could be a fascinating area to watch as it will likely help create more specialized computing products in the future.

The last thing I want to mention about Microsoft’s Surface hardware lineup and strategy evolution is how the core strategy has evolved. When the first Surface came out, it was all about Windows. The device featured a hardware form factor Microsoft wanted to see get adopted as well as pen and touch on tablet design. The first Surface was absolutely a key strategy to try and slow down the momentum of the iPad. While I never thought the two were real competitors, the reality was Surface benefited as consumers (not enterprise customers) looked for a tablet that could also handle heavy productivity tasks and leveraged existing workflows. iPad requires a change of workflow for most productivity minded humans, and the Surface/2-1 form factor never required a workflow change. This is why Panos Panay, who runs the Surface group, focused much of his commentary on keeping the customer in their “flow.” The workflow between different form factors is consistent when you use Microsoft software or services, and this is a relevant gap to understand for Apple since the workflows between Mac and iPad are actually quite inconsistent when you consider their target customer.

I encourage you also to read my colleague Carolina Milanesi’s write up on the new Surface Duo and Neo hardware, but this line in particular in her column is apt to understand how Surface has evolved.

This week, we witnessed the role of Surface devices move from being the best implementation of Windows to being the best implementation of Microsoft. This shift does not mean that Microsoft is no longer a software company, but it does mean that software does not define and limit the value that Microsoft can bring to its customers.

When I said earlier that Surface was the best first customer of Windows, it was true of the time, but that is no longer the case. Surface is now the best first customer of Microsoft. This includes Windows in some cases but is not limited to Windows. This now includes the Azure cloud, Microsoft apps, and a wider range of services. This profound strategy evolution is best seen in the Surface Duo, which runs Android and not Windows. Android is the default mobile OS for everyone, but Apple and for a device that has communications at its core running Android is critical. Yet Duo, just like other Surface hardware, is now more about Windows and more about everything Microsoft is and wants to become. Knowing this strategy shift is a helpful framework to think about the future of Surface, along with the future of Microsoft and how the Surface effect is more than just a business for Microsoft but a way to elevate the broader ecosystem and thus help Microsoft and their partners in much more meaningful ways.