Amazon’s Strategy Deficit and Alexa’s Endgame

For the second year in a row, Amazon had a fall devices launch day where voluminous devices were indeed launched. What appears to be a throw it at the wall and see what sticks strategy may very well be much more tactical than observers realize. It is certainly true, not all of the devices Amazon launched will sell in any significant volume, the larger point to be made is about Amazon furthering their lead with Alexa and the Alexa ecosystem of consumer electronics.

The Strategy Deficit
It is no secret Amazon missing the mobile revolution hurt. Fire Phone was a decent idea, but one of the key lessons Amazon learned was what happens if you are not a player with a dominant platform in a computing cycle. Sure, Amazon could have worked with Google and shipped a smartphone loaded with Google Services, but they deemed at the time the trade-offs were not worth it. Now, hindsight being 20/20 I could argue Amazon should have done worked more closely with Google as Android has evolved to a point where it’s current implementation allows for a great deal more flexibility in third party services integration then it did years ago. Meaning, had Amazon stuck it out with Google, they may very well be in a position today to have a smartphone that played nice with Google but was still loaded with best of breed Amazon services. But, again, hindsight is 20/20, and that is not how it played out.

I’ve seen some argue, Amazon can still do this and launch a smartphone, with many voice-first features, but honestly it is too late for that. Instead, Amazon is focusing on the lesson learned of not having a dominant platform and working to make that dominant platform Alexa for the next wave of computing devices.

Rightly, Amazon knows something beyond the smartphone is coming. What that is, we have theories but still don’t know, and the reality is smartphones will be with us for a long time still. Amazon not having a strong presence on smartphones, beyond e-commerce, is the strategy deficit they are dealing with. And while their strategy is clear, try to make Alexa the default platform on all connected consumer electronics beyond the smartphone, there is a broader point about the potential for success but also the risk.

Alexa’s Endgame
Alexa everywhere is the endgame, and the default platform for voice is essentially Amazon’s strategy. Yes, a product like the Echo Loop or Frames raises questions of value proposition, but to be honest, many were not convinced a talking speaker would work as well.

The other thing to consider when looking at Amazon’s new Echo Lineup is how much of this hardware strategy is a best first customer example more than it is a volume sales example. Take their Microwave, or Oven as an example. Those products are best first customers of the Alexa platform for a cooking appliance, and Amazon’s true end goal is that all Microwaves and ovens have Alexa built-in as the default voice-first platform. That is a future I believe is highly likely. With this perspective, the broader goal of some of these Amazon hardware products is to show potential wearable technology companies the value for putting Alexa in their solution as the default voice platform. I do not expect Echo Loop or Echo Frames to sell in significant volume, but if more wearable companies come to Amazon to put Alexa in their wearable, or face/head-worn computing device then this becomes a much more productive strategy for Amazon.

What is fascinating about this is how I can see a world where this works out fabulously for Amazon and one where it doesn’t work at all and Amazon’s Alexa is not the default platform for the post-smartphone era. It is perhaps possible as well that I’m entirely overthinking this and Amazon simply wants Alexa to deepen engagement with Amazon services and commerce platform, but as of now, it seems like they have much larger ambitions for Alexa as a voice computing platform.

Google and Apple are not going to sit still, but there is no doubt in my mind the overwhelming perception by the industry and consumers is that Alexa is the leader when it comes to capabilities and how Google and Apple continue to compete and as the world begins to invest the platforms that will drive the next generation of consumer electronics.

Formed Opinions on Apple Watch Series 5

I’ve been using an Apple Watch Series 5 for almost a week now, and while there have been a few others smartwatches with always-on displays, I have not been able to try them. Apple Watch is the first smartwatch with an always-on display that I have used, and it certainly feels like a big step forward for the category.

Before Series 5, and as nice as an always-on display would have been on prior Apple Watch’s, it wasn’t exactly clear to me if the display turning off an not always visible was a gigantic pain point in my day to day life. Over the past week, it has been interesting to note my behavior change now being able to glance at my Apple Watch and see the display without having to turn my wrist over. It turns out there was more friction in a display turning off than I previously thought. That being said, I disagree with a few of the ways Apple has implemented a few things with the always-on display.

As I watched Apple announce the Series 5 and the always-on display, there was something that immediately stood out in my mind as a point of curiosity about how they would solve the problem of privacy. Being so privacy-focused, as Apple is, I was curious how they would solve the problem of someone with a clear line of sight of my Apple Watch could see who was calling or texting me.

While it would have been clever for Apple Watch to hide notifications until you look at them like they do with iPhone where the message is hidden until you unlock your phone, I quickly concluded this would be tricky with no FaceID solution on Apple Watch. I was curious to see if they even addressed this, as I was going to be quick to point it out if they didn’t.

It turns out Apple has a very clever solution to this, but its one that I think needs to have more user control than Apple allows today.

What happens, if there is anything on your screen like a phone call, message, etc., when you aren’t looking at your Watch, and your wrist is facing outward, the screen blurs out so what is it is not visible. Now in the context of a text message or phone call, something where I do want there to be some privacy, I completely appreciate this solution. However, in my week with the Series 5, I’ve come to the conclusion this is not always necessary.

For example, if you are using Apple Maps and getting directions, when you turn your wrist away from you to put on the steering wheel, for example, the screen blurs out, and you can no longer see your directions. I first noticed this pain point while driving with my Apple Watch hand on the wheel and my cup of coffee in the other hand. I was getting directions and wanted to glance at my Watch to see what I needed to do next, and the screen was blurred out so I couldn’t see it. Thus, I had to move my hand awkwardly inward while still holding the wheel in order to let the directions on my Watch to become visible.

Granted, this was what I had to do before, and it was not a pain point I realized before. Now that I knew I could, or should be able to, glance at my Watch without having to put my wrist in an awkward position while driving it was a bit disappointing it didn’t work as I expected it to in this context.

Another example was when I was out walking my dog while also holding a cup of coffee in my other hand. I was listening to music as I walked Nala and sipping my coffee having a good ol’ time. A song came on that I wanted to know the name of, and I tried to glance at my Watch, but the screen was blurred out. Holding my coffee in this hand, I was not in a position to turn my wrist all the way over in order to reveal the display fully and see the song. It was a bit frustrating.

In both those contexts of directions or music, I don’t particularly care about the privacy aspect of someone being able to see what I’m listening to or directions I’m needing. You can imagine the directions one causing some friction if you are walking in a city and have both hands occupied but can’t turn your wrist over.

It seems to me that some people may want their privacy protected at all times, which is why I think it would be nice if Apple let me determine what apps I want to blur out when my wrist is pointed away from me and which ones I don’t.

The way Apple is handling glanceable information when your wrist is pointed away from you is just the time. Which is important, because the time should be visible, but it generally is in the apps I mentioned like the music and directions screens on Apple Watch. But, right now, when you point your wrist away from you, the privacy mode makes it, so all you can glance at is the time. In general, I think this can evolve to allow for more control by the individual to determine what apps or experience are not sensitive and do not need to be blurred out for privacy as my Watch becomes visible to others.

One other thing this led me to think of is if the always-on Apple Watch display is a step closer to Apple having an always-on iPhone display experience. Something similar to many Android phones that always show the time and some general information like how many texts, or emails you have.

Apple’s Meaningful Improvements and the Industry Trend

A few weeks ago, I wrote about the tech industry at large being in a bit of a lull. What I pointed out is simply the time-proven observation of what happens with innovation in mature markets. In the early days of new technology, as we saw with PCs and smartphones, for example, we see year over year leaps in innovation. Advances that felt like jumps forward instead of little steps. Once a category matures, the advances feel less like leaps and more like iterative steps.

But in the case of both categories, a careful analysis would show a much more refined approach to innovation and one that focused more on the things that feel meaningful, solving pain points, more than enabling something entirely new. I like this perspective because it helps us understand the cycle from invention to iteration and how consumer behavior, their needs, their pains, evolve, and eventually get solved. It’s interesting, as a part of this perspective to realize that the yearly cycle of leaps forward ending up creating new behaviors that end up leading to pain points that eventually get solved in the latter part of the maturity cycle through meaningful iteration. I also see no reason to believe this observation changes with whatever innovation cycle we see next.

What’s Meaningful?
I don’t mean to make it sound like the last few years of iPhone iteration were not meaningful. But I think you could look at the last few years of devices and argue this year’s advancements were particularly meaningful. Having used the iPhone 11 Pro and Apple Watch Series 5 for a few days, I’ll talk about how I see these improvements as being particularly meaningful.

First, it’s important to note, as this will be relevant in future iPhone content I write, that I downsized from the Max sized iPhone to the 5.8″ screen-sized non-Max iPhone 11 Pro. I’ve used the Max sized iPhone since it first came out like the iPhone 6 Max and until now never looked back. I wrote at the time the 6 and 6 Max came out that I did not anticipate liking the Max more than the smaller sized iPhone 6, but I did, and I stuck with it. Until now.

Part of this was simply my maturing behavior. My logic for the Max size was how mobile I am and how much work I do on the go. I didn’t want to take my Mac with me everywhere, so the Max size let me do quite a bit of work while on the go. Now, thanks to the improvements in iPad, I bring my iPad Pro with me on the road and to meetings, and because of that, I am comfortable moving to a smaller sized iPhone. Again, the key point here was both meaningful iteration in iPad and my changing behavior with workflows that enabled me to alter my device preference. I make this point, to show that behavior is not static and what is a core computing device and what is a companion computing device can change over time as meaningful iteration happens in the market both at the hardware, software, and even cloud computing levels.

Going back to what the meaningful improvements with the iPhone 11 family, I look at things that a regular consumer will appreciate, value, and understand as a pain point. It comes down to the battery, screen (both on Watch and iPhone), and Camera.

Battery. While the iPhone XR already had exceptional battery life, the iPhone 11 should do even better in real-world testing. The biggest battery gains look to come in the iPhone 11 Pro and Pro Max. Apple touts the Pro Max as the longest battery life ever in a smartphone with 5 hours more than Xs Max and iPhone Pro with 4 hours more than Xs. I never ran out of battery with the XS Max, and I think I’m at the top in terms of mobile usage of anyone out there. My only concern with downsizing was the battery life, but with the battery life gains Apple has in the 11 Pro this year, I’m able to go a day on the 11 Pro, and I know I would not have made it a day with iPhone XS.

Again, battery life is a real pain point for the mainstream consumer. Most consumers constantly rank battery life as one of their biggest issues with their smartphone and gains in battery life solve real pain points and will be seen as extremely meaningful.

Screens: I’ll start with the iPhone screen being promoted as the toughest glass in a smartphone. This is quite the claim since. When I looked at Apple’s battery life claim for iPhone 11 Pro Max, the wording was specific and said, “longest battery life in an iPhone.” It did not say the longest battery life in a smartphone. With the screen, Apple is saying it is the strongest glass in the category, not just of all iPhones. I think Apple can make this claim for a few reasons. First, nearly every smartphone manufacturer is using Corning’s glass solution on their smartphone. Corning’s Gorilla glass is the gold standard for strength, so OEMs not using this don’t have much claim from what I’ve seen. Apple has its own custom screen collaboration with Corning, so both would know if this is the strongest glass solution to date on a smartphone. I will be very curious to see some third party testing on these screens, but Apple seems confident even using this feature as a main selling point in a recent commercial entitled “it’s tough out there.”

Living with a cracked screen is a thing, and more people live with cracked screens than you think. I’m fairly involved at my daughters High School and go to many athletic events both home and away. I honestly can’t keep track of how many kids I see using cracked iPhones. It’s amazingly common. Both my girls cracked their iPhone XS screens, and we had to have them replaced. If this promise holds for Apple, and they have a new standard in screen durability, it is no doubt meaningful to many.

Lastly, the always-on-display of Apple Watch Series 5 is a great example of meaningful improvement. I’ve been using a Series 5, and you don’t realize how meaningful an always-on-display in a smartwatch is until you try it. I guess, overall, I didn’t realize how many times I was in a situation where I wanted to look at my Apple Watch and could not turn my wrist over. It seems like a small improvement, but it is is quite large in actuality.

Camera: Yes the iPhone is not the first smartphone with a ultra-wide-angle lens. Nor is it the first smartphone with an enhanced mode for better photos at night. But for Apple customers, these are firsts, and they will be very well received by customers who get the new lineup. I’m personally finding the ultra-wide lens much more useful in day to day photos than 2X zoom and Night Mode, easily my favorite feature of Google’s Pixel phones, is incredible.

What I’ve found, personally, about both the camera system the Pro, including Night Mode, is the peace of mind that in any situation I’m going to get the photo I want. I have a multitude of options as well at any time for both the still and video modes for creativity. The 11 Pro camera system covers an incredibly wide range of photography use cases, and that is why I think it is labeled the Pro line. iPhone 11 has everything but the telephoto, which I think is incredible and why the 11 will easily be the best seller this year.

If I had to pick the two most meaningful improvements, it would be the battery and the camera solutions. Those are the things I think consumers will notice the most and appreciate in their everyday use. But it goes back to solving problems in meaningful ways and recognizing most humans will appreciate that more than a giant leap forward that causes new behavior. There will be a day when we will get there again, but its farther off than you think.

5G and the New Foundation of the Internet

I’d like to offer us to think a little differently about 5G than what most of the headlines are focusing on. The absence of 5G in Apple’s new iPhone’s drove some nonsense headlines, and commentators seemed to jump on the iPhone’s lack of 5G for 2019 as a missed opportunity. While I understand the desire to market 5G as an advantage from Apple’s competition, the reality is in most major markets in the world, 5G is not ready for the iPhone.

This early in a technology transition, most global networks are simply not ready to handle the scale to 5G Apple could bring given they would ship more 5G devices than any vendor by a magnitude more in just a matter of months. Friends of mine in telecom have confirmed my suspicion that the 5G networks are just not ready for that kind of scale. Yes, perhaps China is different, and while a fair point, Apple would not make a 5G variant of the iPhone just for China. However, this is not the point I want to focus on in this analysis. Rather, I want us to think differently about why 5G is important, and why it’s better for us to think about 5G’s value less about smartphones and more about everything else.

5G and the New Internet
5G is bigger than smartphones. Yes, it will make our smartphones faster, and let us stream more high-quality video, play more games with little to no latency, and overall help us browse the Internet faster. At a global level, this matters because there are markets whose consumers are still using painfully slow wireless broadband. So yes, 5G will be great for smartphones, but the story is much bigger.

There is a much larger connected world looming on the horizon, and 5G is absolutely built for the bigger connected world. In the LTE world, our smartphones alone are clogging the near entirety of the network. There is simply no room for connected cars, smart cities, smart grids, smart home, robotics, remote healthcare, public safety, etc., the list can go on. For the vast array of billions of devices not yet connected to the Internet, 5G was built for them. And thus, this is why I am positioning 5G as the foundation for the new Internet.

What Would 5G Bring To the New Internet?
There are a number of fundamental new advantages that come with 5G. A few key points are the ones I think make up the core of the new foundation 5G will enable that was not possible in the LTE era and LTE network architectures.

  • Low Latency enables Mission-Critical Applications. The dramatic increase in the amount of data which can be pushed up and down the network with 5G at incredibly low latency is essential for the new Internet. I mentioned autonomous cars, but these are on the shortlist of mission-critical processes that benefit from low-latency. We can’t have cars that can’t visually process the elements of the road and use a hybrid on-device and cloud processing to make split-second decisions on the road to suffer from network latency. It just simply will not be possible to have fleets of autonomous cars without massive throughput at low latency, and that is not possible with LTE. 5G was built for low-latency, and the architecture underlying both at the network and on the chipsets is essential to move autonomous transportation forward. On this point, 5G was not designed just for low-latency but levels of reliability that we have not previously seen in older network technologies. For things like autonomy, robotics, even things like remote health care (remote surgery, for example) things we all believe we are working toward in the future which are mission-critical can now become possible.

  • High Throughput and Low Power. In an industry research report I read on 5G, a point was made about 5G bringing significantly more capacity for edge devices than 4G/LTE. The report’s analysis dove into the technical elements that make this possible, but analyzed how in the 4G/LTE era, any given network/tower could only support around 2,000 devices per square kilometer. 5G enables this number to move up to 1 million devices per square kilometer. Again, all with higher throughput capabilities, at lower power demands on each device.

    This point alone helps us understand why 5G was built for the Internet of things. Many forecasts estimate in the 2021/2022 timeframe we could have 30 billion connected devices. This will not be possible without 5G.

  • True Edge Computing. Yes, edge computing is a buzzword, but enabling much higher levels of computational capabilities of edge computing devices like a vast array of camera sensors, health sensors, IoT edge devices enabled by smart cities and smart grid, and more, will all require much more computational capabilities at the edge with direct integrations into the cloud computing systems they are running on.

    There is huge upside in the data center on this point alone, as well as enabling growth for the cloud providers like Microsoft, Amazon, and Google in this future and it won’t happen without 5G infrastructure.

  • Dynamic Network Slicing. This one is interesting as it will fuse machine learning at the network level in new ways. With dynamic network slicing, which is a completely new feature with 5G, carriers and service providers will be able to dynamically optimize a portion of the network, for specific use cases. Say a specific city has higher demands on the network due to smart grid, or robotaxis, a network can smartphone optimize their network for any areas specific use case thus providing the highest quality of service. Being able to tune networks, on the fly, for specific use cases is one of the more interesting features I’ve come across, and it will be interesting to see how carriers use this part of the new 5G infrastructure.

Those buckets are the ones that stick out to me as things that 5G enables that are new, and as I said, this is a much bigger story and a much bigger future than just smartphones. Will smartphones benefit? Yes, and as augmented reality keeps developing, and other core technology the smartphone will help drive, they will all be enabled by 5G in ways LTE could not. But the 5G era is critical to moving us forward into the digital future we envision. One that will bring many businesses into the digital world in ways not previously available to them. It will transform industries and create tremendous additional value for economies worldwide.

Will it be easy? No, this may be one of the more difficult network transitions simply due to the complexity and fundamental changes in the network and on devices. This may be one of the more difficult “Gs” and costly. Unfortunately, we have had in decades if not ever. That being said, it is worth it for the benefits, and many industries are moving to take a vested interest to move 5G forward.

I understand the voices of the critics and the 5G skeptics, but the criticism I hear is large because the 5G narrative has been isolated to smartphones. This is why I encourage a much larger picture to be embraced when we think about the role 5G will play and why I think we will look back on this transition like the one that enabled a fundamentally new kind of Internet.

Apple’s Services Marketing Advantage

There are a wide array of entertainment industry trends in Apple’s favor when it comes to the changing behavior of consumers and how they consume entertainment. The big shift in winds is coming as cord-cutting continues to accelerate in growth and share of wallet opens up for new digital services that consumers find valuable content with. I wrote yesterday about my optimism for both Apple TV+ and Apple Arcade and had the opportunity to speak with a few friends who work in the entertainment industry, and the buzz is strong in Hollywood as well for Apple TV+ in particular.

What I think is being underestimated at the moment is the advantage Apple has over so many others in this space when it comes to being able to market their services. This point is being entirely underestimated, in my opinion, and the more I’ve thought about this, the more I think Apple’s services have the potential to become a behemoth in its own right.

Apple’s Retail Weapon
I’ve long written about Apple’s retail strategy as a core pillar of Apple’s competitive advantage. While Apple retail itself may not be the driver of most of the sales of Apple’s hardware, it is the single physical place where Apple controls the customer experience from the time a customer enters the store to the time they leave.

I remember when Apple News+ launched, and I was in a retail store a few weeks later. Promotion of Apple News+ was the default screen on nearly every device you could see in the store. It was then I realized how powerful Apple retail stores could be in driving awareness of their services.

If you think about the two companies getting into the digital entertainment business with direct to consumer subscriptions with the largest physical presence and foot traffic, it is Apple and Disney. Apple retail sees over 500 million retail visitors each year, and Disney had 157 million visitors to their parks worldwide in 2018. You could argue that these two companies are the best positioned to take advantage of areas where they have a competitive advantage over other digital services, competing for a share of wallet.

While it is true Disney has much more established brands and franchises at their disposal, Apple has a larger retail footprint and daily touchpoint with over a billion consumers. Both reasons why I consider these two companies best positioned to accelerate the adoption of their digital services in ways others can’t.

I’m yet to see how Disney will promote Disney+ in their parks, but we know it will happen. Interestingly, even with the hugely popular franchises Disney owns, forecasts for Disney+ are in the 60m range by 2021. Now, I think those forecasts are low, but you see how consensus thinking behind these forecasts shows just how difficult it is to scale here and get customers.

Thinking about Apple retail, consider how powerful the daily touchpoint Apple has with its customers from their retail associates. Apple doesn’t just need to have their services promoted on walls or screens in their stores but can also use retail employees to help drive awareness or plant the seeds of their services. Imagine a customer buying an iPad or iPhone and the Apple employee helping the customer simply says, “have you checked out Apple TV+ yet? The Morning Show is great, and I’ve loved the series.” Or have you checked out Apple Card yet? Did you know you get three % back on Apple purchases and daily cashback you can spend anywhere? Application is free and immediate through the app.” It is common to have retailers promote the benefits of their credit cards in their stores, but how Apple can promote Apple TV+ and even Apple Arcade with the help of retail employees feels, to me, a unique advantage.

For Apple Arcade, a service I’m much more optimistic about having seen some of the games, consider how many times you walk past an Apple store and see the iPad tables full of kids playing games while their parents’ shop. Going forward, all iPads can have Apple Arcade there and kids and be exposed to all the games in the library and see the full benefit that Arcade has to offer. Again, it’s the touchpoint of over 500 million customers each year that has me most intrigued with how Apple can use their retail presence to help sell the value of their services.

Again, the scale here feels entirely reachable by Apple when you consider the largest the sheer size of their customer base, the daily touchpoints they have with devices, and most importantly, their retail foot traffic. Netflix, the largest direct to consumer streaming video service, has 148 million subscribers from their latest earnings report. Growth has slowed for Netflix, and I don’t see a sudden burst of new subscribers for them in the coming years. While I don’t think for a second the vast majority of consumers in developed markets are going to cancel Netflix to move to Apple TV+ or Disney+ because the reality is both those services would be additive to Netflix. What should worry Netflix is that Apple and Disney begin to steal time from them, and I think that is a very real possibility. Remember when Netflix CEO said the things that worry him are things like Fortnite that pose a larger threat than HBO. Apple has two things which can steal time from Netflix now in Apple Arcade.

With Netflix at 148 million worldwide subscribers, HBO with 140 million as of the end of 2018, Amazon with over 100 million Prime subscribers who have access to Prime video, it seems entirely reasonable both Disney and Apple have upside here among the same potential numbers if not more.

For Apple, I am watching how they use retail and their daily touchpoints with customers it will be interesting to see how they strike a balance to gentle promotion instead of feeling like its being pushed too hard. While I think retail is Apple’s secret weapon here, I encourage Apple to keep the customer experience front and center and preserve that even as they look to use retail to drive awareness and adoption of their services.

Apple’s Pricing Surprise

The most common question I recovered from the media and financial analysts I talked to after Apple’s event was what stood out most to me. As interesting as a number of things were that Apple released, but one thing stood out to me the most, Apple’s pricing strategy.

Hardware Pricing
Apple has bucked its own trend of hardware pricing in smartphones. The iPhone 11 enters the market $50 less than the iPhone XR, whose place the iPhone 11 takes place in the line. The iPhone 11 has notable upgrades to the XR. It has dual cameras. It also has the updated processor, the A13 Bionic, which enables cutting edge features in computational photography, graphics, and performance. Given Apple’s pricing strategy for the last few years, you would have thought that adding such features would cause them to raise the price instead of lowering it. But, Apple decided to price the iPhone 11 compellingly for the market. There are a couple of ways we can read into this that may shed light on Apple’s pricing tactics in the future.

The first way would be to point to Apple’s success in driving volume in the X and XS/XR products the past two years, and that component ramp allowed them to get favorable pricing for key components which allowed them to lower the price. If this is true, it may be an indication of a new pattern. The pattern we understand, since we now have two major new design cycles to learn from in the move from iPhone 5 to 6 design and then from 6/7/8 design to the X design and those cycles happen in four years. Basically every four years, Apple move to a totally new design for iPhone. With the 6/7/8 designs, we didn’t see too much year-over-year price increase. Then with the X design, there was enough new innovation to bring prices higher due to components and other manufacturing costs. The potential new pattern here is if Apple moves to a new design that costs dramatically more to produce, we may see higher costs the first two years of the cycle then perhaps a lowering of costs once Apple’s component cost curve comes down.

If this pattern is a repeatable one, then it means Apple’s ultimate goal is to bring costs down of the hardware, as the manufacturing costs become more favorable thanks to their scale.

While that is one way to look at this surprising change of direction from Apple on iPhone pricing, the other is Apple reaping the rewards of their services business, and looking to drive more customers to their services and as a result able to offset the hardware margins with services margins and offer their hardware at lower price points. This in no way suggests Apple becomes a services company, only that by having a healthy and growing services business it allows them to give margin in hardware and make it back in services. The result could be a continued strategy of affordable products that bring more customers into the ecosystem and thus contribute to the cycle that allows hardware to stay moderately priced.

On a per feature basis, it will be hard to ignore the value of the iPhone 11 compared to the competition which was already preparing to price against higher ASPs and try to compete on price. Apple has fundamentally taken that strategy away from competitors, particularly those who don’t have many surrounding businesses to cushion themselves as Apple does.

If you look at Apple’s pricing from iPhone 11 at $699, or keeping Apple Watch Series 3 in the market at $199, or the new iPad loaded with features at $329, even the XR $549 and iPhone 8 at $499, it seems Apple is hitting a range of price points with still competitive products in their respective markets. For customers looking to upgrade the prices have never been more attractive, and it’s a similar story for prospective new customers looking to get into the Apple ecosystem for the first time.

The bigger picture point here on pricing is to emphasize Apple is not following the path most people thought which is to keep raising prices and milk their base now that they are locked in. Certainly, understanding the global markets and price pressure is part of it, but by looking to be aggressive on price when the economics line up, Apple is able to pull levers in manufacturing, absorb margin, or look to offset with revenue growth in other areas and continue to price products in ways that competitors can not.

Services Pricing
As surprising as the pricing for iPhone 11 is, the pricing for Apple Arcade and Apple TV+ were even more surprising. The consensus across a range of sources from Wall St. and even Hollywood was Apple would price Apple TV+ at $9.99, and they honestly could have and probably still had a decent conversion. No reports, or industry gossip I heard ever had Apple TV+ priced at $4.99.

For Apple, the strategy for TV+ seems to be coming into view. For more talent to get involved and want to showcase their stories with Apple, there needs to be a sizable viewing audience. While actors and storytellers like money, they also want their stories to be told and seen by as many people as possible. That is why attracting the best storytellers to Apple’s platform is not just about Apple paying more than other studios but having a much wider reach. This is where the pricing at $4.99 makes for a much easier entry point for the masses, particularly since it is a family plan for that price. The other way Apple is cleverly looking to build the Apple TV+ customer base is to bundle it with the sale of an iPhone, Mac, iPad, or Apple TV. Basically, if you buy a device you can watch Apple TV+ on then you get it for a year free.

Apple told me this is a limited-time offering, but there is no timeline for when it would expire. My gut says they offer it for at least the next six months, although, I’d encourage them to offer it for the next year. If Apple let this promotion for run for a year they would sell over 200 million of products that would get the Apple TV+ service for free, and if even 50% of those start watching the content they would have a view base almost as large as Netflix and larger than Amazon Prime in less than a year. That is a pretty compelling user base to keep attracting the best Hollywood talent and storytellers to Apple TV+.

With $4.99 being the price for a family, up to six people, it would be hard to estimate just how many individual eyeballs Apple TV+ is reaching. Apple would likely know this, and it will be interesting what statistics they share with content producers in order to keep them interested. But the pricing here certainly makes it feel like there is more subscriber upside than many initially thought and that bodes well for Apple and Apple TV+ as a service.

The other new service launch was Apple Arcade. To be entirely honest, I had pretty low expectations of Apple Arcade going into the keynote. We did some research last month, which we used as a feeler for interest in both Apple TV+ and Apple Arcade, and Apple Arcade stood out as the one with very little interest and excitement. However, after seeing a number of the games available, and the $4.99 price, I’m now much more optimistic on Apple Arcade.

The way I started to think about Apple Arcade was that Apple is in many ways doing what Nintendo has always been good at. In fact, I think internally, using Nintendo as a model is exactly the strategy for Apple Arcade. Some of the best games produced by Nintendo are a cinematic story like experiences. Zelda is a great example. Apple is presenting these games in many of the same ways that you have seen Nintendo showcase their games which have great storylines and a cinematic feel. Apple also feels like a game studio as well now, in that they are essentially purchasing these games for exclusivity and publishing as well as providing the underlying developer tools and hardware. This has long been how game consoles have thrived, and Apple is taking many of those components and integrating them for their ecosystem of hardware.

While not all the 100 games, at launch, will be playable cinematic stories, the ones Apple spotlighted did have more of the story feel. Which keeps their theme for both Apple TV+ and Apple Arcade consistent in that humans like great stories and with Apple TV+ you can watch those stories, and with Apple Arcade, you can play them.

I think Apple Arcade will do much better than many originally thought, and in particular with the younger demographic and it may as well be extremely well-positioned for Asia and China in particular.

If you take a step back and look at the whole picture, there is quite a compelling story for Apple’s products, software, and services ecosystem. There are hardware options galore at varying price points, marketplaces, commerce, and services of all kinds. From the Apple customer perspective, there is deep value in this ecosystem and whey, and I’m confident Apple’s loyalty will remain high for many years to come.

The State of Tech

I often get asked about the state of the tech industry when I share bigger picture trends with companies we work with. Up to this point, I have been articulating the tech industry as being in a bit of a lull while we wait for the next major category or paradigm of computing to shift. I have since shifted to describe the tech industry as being in transition and not necessarily a lull.

It sounds odd to describe an entire industry as in transition, but when you step back and look at the forest in the trees, it becomes clear the tech industry is moving toward a moment when technology can be labeled by a few categories or industries to when every industry and product category becomes a part of the technological whole.

Just look at how many big problems technology companies are looking to solve and how each of these are still in their infancy. Machine learning, artificial intelligence, robotics, autonomy, logistics, agriculture, smart grids, and smart cities, education, retail and commerce, health and wellness, home and living spaces, transportation, and the list could keep going. The broad point of that list is to show how little, or how immature technology is as a whole even if it exists in some of those industries.

The history of computing has focused on a specific computing product like a desktop or notebook, then the smartphone and tablet. But with those categories maturing, the much bigger world is becoming tech’s playground.

This is a good evolutionary path for what we consider technology today, but it is also one that is harder to measure, or sometimes see, and also one that will take much longer to manifest as a whole. As we think about this, there are two fundamental things still needing to happen before we could see an inflection point of the “technolofication” of everything.

Continued Advances in Semiconductors
I’ve written several articles on the semiconductor golden age, but the point still stands that needed innovation in silicon at the CPU/GPU/accelerator and overall architecture design is still needed. We still, and may never, have enough computed power to fulfill the needs of industries from a technology standpoint.

We have come a long way with semiconductors, but there is still a long way to go. A big question is if we will get there with pure silicon-based technologies or whether something like Quantum computing designs are necessary in order to lead us to the breakthroughs that bring tech to the next level.

Besides advances in process technology, for example, we are just entering the 7nm phase for core computing silicon, which will bring advances in power and performance. However, innovation and creativity in the architecture design and overall system of the silicon as well. This goes beyond just one chip and focuses more on how all the different pieces of silicon work together as a complete system. One thing mentioned here has been the chiplet architecture, which has enabled design innovation as well as faster time to market, but I still sense new architectural system innovations are still ahead.

The other critical component is 5G. I know the pushback I get from readers who still don’t see the value or need for 5G, and I’ll go into a much deeper article on this point I’m about to make at some point. But, the best way to think about 5G is that it is the way we will bring high speeds, low-latency, long battery life, and more to everything beyond the smartphone. Yes, 5G will have benefits for your smartphone, but 5G is really the first time we see a path to bring connectivity to all the other IoT products that need for mission-critical applications. Edge computing for visual processing, smart cities, and smart grids, autonomy, robotics, etc., are the things 5G is really built for.

5G is barely into its first inning. And while by the end of 2021 it will be common in the vast majority of smartphones sold, 5G is truly about enabling the broader world of computing objects and connecting them to the Internet in ways that enable computing and connectivity in ways we have not had before.

In my broader discussions on trends and my current way of explaining tech as being in a transition, it is important to set a baseline expectation that this transition may take much longer than people realize. 2025 is likely the earliest we see the fruits of the labor of work going into new silicon designs and 5G infrastructure. Even in 2025, we may still feel like we have not progressed much from today since these things move gradually.

This is not to say interesting things won’t happen between now and then but that we just went through a time when over the course of 10 years we saw significant innovation in core consumer computing product. Because of that intense period of innovation and adoption of technology, this next phase will feel rather boring, perhaps. But the point of this article, and others I’ll write over this time horizon, is to help set a baseline of expectations along with some of the innovation points along the timeline to watch for which will help enable the more obvious market solutions we can point to along the way.

Apple Expands iPhone Repair Program: Reading Between the Lines

In an interesting new development for Apple’s grand retail strategy, the company has announced an official plan to certify certified and authorized third parties to repair iPhone. There are a number of important aspects of this and a grand strategy for Apple’s customer base at play.

Addressing Customer Pain Points
First, I think it is important to acknowledge the pain points that exist for iPhone repair. In the early days of iPhone and Apple retail, it was relatively easy to get an appointment to repair or replace your iPhone is something broke or went wrong. As the iPhone installed base began to ramp, Apple kept adding stores in order to keep expanding their reach and servicing customers. It was inevitable the iPhone base would outgrow Apple retail, and that has been the case the last few years as Genius Bars are about as packed as they can be and customers often have to schedule appointments at least a few days in advance. This has been a growing pain point.

Another pain point to acknowledge is Apple’s base has become so large and stretched out into parts of the US and other countries that are outside of the reach of many Apple retail stores. I have heard stories from iPhone owners who have had to travel an hour or more by train or car to go to an Apple store for a repair or service appointment. Apple retail can’t be everywhere. And that is why Apple blessing third parties to do iPhone repairs is a strategically interesting move.

The Strategic Play
There is the obvious strategy here of Apple looking to service their broader base that Apple retail alone can’t service. And, really, this strategy is all about servicing and creating attractive value propositions to continue expanding their base. For example, if you live in a remote town with no Apple retail, perhaps knowing you are covered by a local vendor makes it more attractive to enter the Apple ecosystem for the first time.

Another part of this strategy, I think it is interesting it the way it could fuel the second-hand market for iPhones in an even more significant way. It’s a little known secret that a sizable chunk of Apple’s iPhone installed base is second hand/hand me down iPhones. I’ve seen estimates as high as 400 million second hand/hand me down devices in the market. I have not officially modeled this, but I think between 250-350m is extremely likely worldwide. It is an extremely common practice for consumers to sell their iPhones on the second-hand market or hand them down to a family member or friend. With third-party repair, and the potential competitive pricing than can be enabled by third parties, this could become an important way for Apple to boost its base even higher via the second-hand market.

Apple could also spur an even bigger third party authorized seller/repair cottage industry and increase the economic incentives for third-parties from a business perspective. This could have an impact on the overall presence of Apple third-parties stores, which, by nature, would help increase the lure of the Apple ecosystem.

Strategically, both increasing the base, further validating the second-hand market, and giving more options to customers is a related strategy to grow the iPhone installed base and keep them engaged and satisfied. Apple knows once they acquire a customer, that customer rarely leaves, begins to spend more on a YoY basis in Apple’s ecosystem, and continues to buy new hardware and accessories.

The Risk
While minimal, there are some risks in this strategy. The biggest one being the customer experience with a third-party option. Apple has an entire structure and process to keep the customer experience premium when it comes to Apple retail. Everything from the time you walk into the store is intentionally planned, and associates have been trained. This is obviously not the case when you go to a third-party seller. Without a lack of control, Apple risks having its customers have a sub-par experience when they use a third-party solution. Given Apple is officially blessing these third-party vendors and telling their consumers Apple has certified them, by nature, any bad experience has a chance to reflect poorly on Apple.

The big question is how Apple will handle the messaging and certification process to make it clear to customers which third-parties are trained and authorized to do repairs. One thing that came out of the news from Apple was that third-parties would be able to use non-Apple parts. If a third-party offer this, it has to be disclosed to the customer and let them choose if they want to use the Apple part or the non-Apple part which will likely be cheaper. Here, again, there could be trade-offs in customer experience if they choose the non-Apple part, and it doesn’t last as long or has a negative impact on the customer experience. The bottom line is consumers will choices when using third-parties, and hopefully, they are in a position to make a well-informed decision when it comes to their repair choices.

Overall, this is a smart move that I feel has the potential to create various new dynamics that make the Apple ecosystem even more attractive and sticky. Yes, there are risks, and trade-offs, but as I mentioned Apple retail simply can not satisfy the entire Apple customer base, and this seems like a smart way to extend the reach of their customer touchpoints.

Apple TV+, Disney+, and Video Services Share of Wallet

We are on the cusp of a behavioral change with how pay for video entertainment content. Linear TV is a dead man walking, with age groups under 49 cutting the cable cord at increasingly rapid rates. The baby boomer generation seems to be the one holding out, for now, to their traditional cable packages. In a recent advertising report, I read, which was referencing the latest Nielsen data point on cord-cutting, featured this great one-liner “it appears the only demographic still clinging to linear TV models is the 50+ demographic which also happens to be one of the least interesting age brackets for the bulk of advertising spends.”

Wrapped up in this conversation are three things I want to share. There is what we know about this emerging consumer behavior, what we are learning, and the key questions going forward.

What We Know
As I mentioned briefly, one of the key things we now know is that cord-cutting is accelerating. Thanks to reports sent to cable networks and cable services companies I have access to, I’ve observed a steady YoY decline in linear pay-TV subscriptions. For example, in 2017, the QoQ average in pay-TV declines were approximately 1.5%. Fast forward to 2019 and that average is now 6.3%. This line has been on a steady decline since 2015 and, at this point, it is safe to assume it will continue its rapidly increasing rate of decline.

We also know this rate of traditional pay-TV decline is highest among younger generations. According to more data from Nielson, who tracks ratings of traditional TV shows, the under 35 age bracket has seen a ~40% since 2012 and this demographic, at the moment, make up only 32% of traditional TV show viewership on linear TV packages.

Another strong data set helping us shape what we know is that households with streaming video services consume less traditional TV in terms of hours per day. And, in what should be entirely obvious, the more streaming services you subscribe to the less traditional TV you watch. A brief highlight of this data is households with no streaming video services consume 6.3 hours of traditional TV per day. Households with one streaming service consume 3.2 hours of traditional TV per day, and households with more than one streaming video services consume 2.6 hours of traditional TV per day. The key observation is here is just one subscription streaming video service cuts traditional TV viewing hours in half.

From the hard behavioral data and data facts I’m seeing, what I outline above is what we know, next to what we are learning.

What We Are Learning
While we have quite a bit of data at this point, in terms of interest and intent to cut the cord, along with reasons why I’m considering this data more in the learning areas than data facts as above. It is reasonable to assume that the data points that look at future behavior and intent are leading indicators, but to the extent is still speculation.

That being said, intent to cut the cord is high. Again, the proof will be if these segments actually do or if their cable/pay-TV provider incentives them to stay. However, among households who stream between 10-20 hours of streaming TV per week, intent on cutting the cable increases dramatically with 24% of that segment signaling intent to move away from traditional TV.

Earlier this year, we ran our own media services research study and found, in total, 43% of consumers have considered in some fashion cutting the cord and going all-in on streaming. Barriers include the deal they get in cable, or worries about missing out on content, but of that 43% who have considered cutting the cord, 33% indicated they are strongly considering making the switch.

When it came to which age brackets have the strongest intention, it should be no surprise, it is again the 35 and under demographic with the strongest intent and consideration to cut the cord.

What we are learning about motivating factors is also important, since it feeds into the broader debates about the future. As of now, the sweet spot for the number of video subscription services is 1-3 with 72% of consumers in our research panel indicating that range. I’ve seen more granular research reports that back up these findings and indicate very few households subscribe to four or more streaming services. In those reports, it appears two streaming services is where the bulk of the market has landed today.

I include this in what we are learning part because I don’t personally believe 1-3 subscription services is where the market will settle. It looks like that if you just use today’s data, but I’ve been arguing that as consumers cut the cord, it will free up a budget which will then go to other subscription services. I could do a deep dive on the data around customer satisfaction for pay-tv services, and consumer sentiment where they don’t feel they get what they pay for, but for the sake of this piece just know the average ARPU for Pay-TV services is $90 per month, with low satisfaction.

My argument is consumers will still be willing to spend that $90 a month on video services they feel they value and get value from. This means there is room for Netflix, Disney+, Amazon Prime (even though it isn’t a la carte but a bundle with Prime), and Apple TV+, from a share of wallet perspective. This is why I don’t think these services compete in a winner take all scenario. However, they will be competing for viewing time.

The Key Debates
I’ll leave a few bullets as the key debates to simply offer where I know the major questions are circling for providers.

  • How many services will consumers subscribe to in the future? We know it isn’t infinite, so the question is just how many.
  • What will be the sweet spot in pricing? While it seems pricing may vary, and promotions will come in especially in the case of Disney + building Hulu, and ESPN, etc., there is likely to become a standard pricing scheme that consumers can wrap their head around. We simply don’t have that yet.
  • Will a master bundle still be attractive or will it simply be a la carte services? A big debate is around subscription fatigue, which some consumer studies seem to suggest is already setting in. Knowing we will all still have to pay for broadband, there is a debate around bundling broadband with these services in an attempt to bring back some kind of bundle since bundling is a tried and true value proposition for consumers.
  • Can customer acquisition costs stay lower than traditional Pay TV? One assumes the answer here is yes since cable and satellite companies pay upwards of $350 to acquire customers. But the marketing spends to drive awareness, will add costs and these costs will be higher for some companies. One could argue the way cable companies acquire customers with the cost is low cost to free hardware. Which requires massive upfront costs to the provider. Similarly, streaming services cost to acquire customers is largely based on original content, which is extremely expensive. Therefore, where cable companies use hardware, streaming companies will use original content. Original content costs more in RND, and I’d factor that into customer acquisition costs.
  • These are the main debates I think have the most relevance. There are others, and still more to observe and learn as this shift takes place.

Apple Card Launches, Survey Says?

Last week we ran a study looking at a variety of Apple Services, some launched and some launching soon. With details and public reports about Apple Card out, we thought including Apple Card in the study would be useful. The goal was to understand better who was interested and why or why not.

Before diving into the results, it’s helpful to know why I charted specific segments of respondents the way I did. Having done primary research for many years now, I’ve always found it more helpful to dig into how segments of a market respond to our questions rather than only look at the top-line results. I’ve broken out our data by three segments for this purpose. The first is a dedicated panel of highly engaged Apple customers we call the Apple Core. This group is more engaged in the Apple ecosystem, has more Apple devices, and spends more money in Apple’s ecosystem than your average Apple customer. The other group is early tech adopters, which we create based on profiling questions answered at the beginning of the survey. The last group is your average Apple customers, a segment I named Mainstream iOS.

Seeing the differences between the three segments was fascinating. My early thought was the Apple Core would be more interested and more likely to want to apply for Apple Card immediately and sign up for Apple services. I was wrong, and upon further investigation, this deeply engaged customer in Apple’s ecosystem is also one of the more skeptical, informed, and intentional in the reasons they want things from Apple or not. As you can see from the chart below, the category of early adopters was the group that had more interest in Apple Card.

Throughout this survey as a whole, seeing how the Mainstream iOS segment responded was very telling. In most cases, this segment proved to be an extremely hard sell for Apple. Not only were most not aware of pretty much every Apple service we tested, but interest was also severely low among those who were aware. This makes a broad point for Apple that marketing these services will be the challenge but also the opportunity. Luckily we all know Apple is as good as any company at marketing to consumers and creating demand. Which, will make tracking the adoption of their services fascinating because if we see slow to low uptake of certain Apple services over time, it will say more about the service in my opinion than Apple’s ability to market them.

When we dug into the features that most interested consumer about Apple Card, a few things stood out. First, note for this chart, I isolated answers to those who were aware of Apple Card meaning I took out the responses from consumers who said they had not heard about Apple Card.

Tim Cook’s brief tweet on the day of the Apple Card launch emphasized Apple building this card with security and privacy at the forefront. For Apple most engaged customers, as well as those more early adopter consumers, Apple’s message of privacy and security with Apple Card resonates. Quite interestingly, Mainstream iOS customers are less swayed by the privacy and security aspect and more on Cashback, no fees, and low interest. This chart brings some clarity to some of the different priorities and mindsets that exist between the largest group of Apple customers worldwide, being a more mainstream consumer.

For those who were not interested in Apple Card, we looked at the reasons why as you can see the answers varied. Most people just aren’t interested in another credit card. Which is reasonable; however, I also take this point as one where Apple’s marketing challenge and product opportunity is clear. We can speculate that the more a consumer users Apple Pay, and even Apple Pay cash, the more opportunity there is to bring that consumer to adopt Apple Card. But, with nearly 30% of Mainstream iOS customers indicating they still aren’t comfortable putting their credit card information on their smartphone, the barrier to smartphone-based contactless payments is still high. While this study did not focus on penetration and usage of mobile contactless payments, we have done studies in the past, and I’ve read recent reports that support most consumers in the US are still not using a mobile wallet of any kind yet.

The last point here is also a broad one of Apple’s services and product rollouts. While the US is the second-largest market for Apple by device installed base, China being the first, the US is Apple’s largest market by revenue. It makes sense they roll products or services out in the US first in most cases. But the key for services growth will be available in all regions and generally sooner than later is better. A large portion of early adopters in our research panel indicated Apple Card not being available in their region as a core reason for lack of interest. This sentiment is likely consistent with other Apple Services like Apple TV+, for example, where consumers may have a desire for it at some point but not being available in their region means they don’t put much mental effort into figuring out if they want or not yet.

We have plans to follow this survey up later in the fall once we know we can get a critical mass of respondents who have tried Apple’s newest services like Apple Card, AppleTV+, and Apple Arcade and dig deeper into what people like and don’t like and why. But for now, this study serves as a baseline for us to build upon but also highlights how marketing will be one of the bigger challenges for Apple. But when it comes to Apple Card, the media excitement and buzz has been interesting to see. There have been YouTube unboxing, and pictures of people’s cards as well as videos of the truly fantastic setup process. Apple Card is easily the most talked-about and buzz-worthy credit card to ever be released, and so from a marketing standpoint, it seems off to a good start.

My iMessage Twitter Thread and My Time as a Green Bubble

I like Twitter threads. For whatever reason, when done right, and a narrative exists, they are quite compelling, and I find myself more focused and reading more vs. skimming an article. Not sure how to explain it but well done Twitter threads can be effective and compelling. Ok, enough about that.

I recently shared a brief thread based on a conversation I had with a boy at my daughters High School. Here is the text of that thread:

Talking with a boy at my daughter’s school, I learned even more about how deep the iMessage lock-in is for US teens.

A brief thread on US Gen Z and the iMessage Lock-In:

I was talking to one of my daughter’s friends, male 16 yrs old, and I noticed he made the switch to iPhone from Android. Having spoken with him before I knew he was an “Android guy” by self-identification, so I was shocked he made the jump.

When I asked him why he made the jump, he sounded a bit remorse. It all came down to being left out of group chats. His quote verbatim, “we would start a new group chat, and the group would realize I was the reason it was green, and they would start another group chat without me.

I had a hard time believing this because often these group chats are used for school, as a part of a class. Kids will have a group chat just for that class with their friends to talk about homework, projects, etc. However, he assured me he was being left out of group chats.

Specifically, he was being left out of group chats because he was on Android and turned the thread green.

Hard to believe sometimes, until you hear it, but the iMessage lock-in is real.

Ultimately there were things he liked about iPhone, but he did miss his Pixel 2.

Thanks to the help of some of my friends with even larger follower bases than myself, this thread has gone quite viral. As we speak, it has over 2.3 million impressions. When a tweet gets that much reach, it generally solicits a lot of comments. To my great joy, the comments in my mentions have been civil and often quite insightful. This thread and the ensuing comments sparked a few thoughts on this subject I thought were worth pointing out.

This is a US Thing Largely
Thanks to Twitter being global, I’ve had many comments pointing out what I already knew, which is iMessages dominance as a whole and not just for US teens, is primarily a US market thing. iOS has solid penetration in the UK, and a number of people from that market commented they see similar dynamics with teens in the UK, but overall, iMessage is a dominant platform in the US and especially among US teens.

Many other parts of the world seem to be standardizing on WhatsApp. Which makes sense, but obviously has implications given it is a Facebook asset, and there are questions of privacy and monetization to address that one could argue may threaten WhatsApp’s dominance in other markets at some point.

Another question here is how much of an opportunity is messaging for Google? To me, this is the most interesting question and a huge lingering question as to why Google has not cracked messaging with a service that is as good as iMessage or WhatsApp. I certainly like the concept behind Telegram, and there may be a broader opportunity for them, but I’d give the edge to the default players like Apple and Google if it came down to it.

I’d love to see Google get more aggressive here since messaging is a critical part of the smartphone experience. But, I’d also like to see Apple take some bold leaps to attract users in other parts of the world better to use iMessage more. Especially from a strategic perspective around lock-in.

The main point here I have taken away is there is an opportunity for Apple and Google outside the US for messaging, but neither has cracked it yet. WhatsApp may very well be vulnerable at some point and if/when that happens, both companies should be ready to strike.

Why is it Difficult Being Green?
Some of you may recall, I had an issue with my iPhone, which made me switch entirely to a Google Pixel 3 and 3A (both of which I really like) for about two weeks. I’ve always liked Android, and there are many things I still like about Android and wish Apple would steal. But, if I’m entirely candid, iMessage is the main reason I went back.

The exact day I switched, I had an experience that allows me to relate to the boy in my thread completely. A group of my friends I’m still close with from High School has a group chat. On that day, one of the guys sent our group a text, and upon my response, they all noticed it went green. It became hostile, in a friend making fun of friends kind of way, but they put up with it. But the point I had not fully embraced about this cross-platform messaging is the features that go away once SMS enters the thread. There are a lot of media-rich and multimedia features in iMessage, and I can understand why kids like those which go away when a thread goes green.

My kids didn’t want to text me anymore, so I had to talk to them in Snapchat. And my partner, Carolina, hated texting me so much she threatened to start calling me instead of texting when we needed to chat, which is pretty much all the time. This was an effective strategy because she knows how much I hate talking on the phone.

Many comments came back at just how much iMessage users hate the color of the green bubbles. I find this fascinating because, while I have zero evidence of this, I’d wager a strong bet the group at Apple who designed this did extensive research on the most off-putting color of green in existence and chose that for the green bubble color. There is some psychology at play here for sure, and that was brilliant by Apple’s iMessage team.

Message Collaboration and The Future of Work
Lastly, I need to make a point about how the current/future of the classroom extends to the future of work. Within US teens, it is a standard part of their school workflow to set up group chats related to a specific class and groups they work within that class. Discussions here can range but are largely related to the class and the homework/project work associated. These chats often expire once the class is over and I’m told this is common in college as well.

Getting to observe first hand how US teens use apps and services for their personal and education-based workflows is extremely helpful in understanding the base of experience they will bring to the workforce once they enter. Messaging being critical as a part of the workflows and collaboration practices is a key point. The fact it’s happening in a messenger and not something like Slack or Teams is interesting but could be a natural carry over, or not, once they enter the workplace.

When I started my analyst career in 2001, I spent a great deal of time studying millennials. It was clear then millennials would shake up the workforce once they moved on from college. Now being a parent of Gen Zers and studying Gen Z, it is clear this group will shake up the enterprise even more once they enter it.

How messaging platforms evolve will be crucial, and I still see a great deal of opportunity there ahead.

Privacy Invasion in a World of Immature AI

Recent reports have come to light that Facebook, Apple, Amazon, Google, and Microsoft all have teams dedicated to listening and transcribing users voice recordings from voice interactions with smart assistants. I thought this information created an opportunity to discuss and critique of the immaturity of AI.

All the aforementioned companies have made adjustments to this process by ending it entirely or letting people opt-out but the fear of privacy invasion, even by extremely privacy-minded companies, is still lingering in the public mind. This information coming to light brings up a few interesting points about the immature state of AI and how companies can be even more privacy-minded during this immature stage.

Immature AI
This entire concept of technology and Artificial Intelligence is incredibly immature. Long-time readers of my writing know that I have articulated how we are still in the stage of training machines, which is the precursor to actually having something I would consider artificial intelligence. Because we are still training computers and doing so mostly manually by humans, we get the kind of situations where big tech companies need to have humans involved to help train the intelligence they are trying to build into their platforms.

In many contexts for machine learning, computers still need to learn from labeled data. For example, to train a computer to recognize a dog, humans had to find thousands of pictures of dogs, and label them “dog” before they could insert that training data to the machine. People in ML/AI research have long articulated this world of machines still needed labeled and structured data in order to learn. In some interesting cases, like autonomous cars, for example, it is possible to create graphics simulations of roads and cars, which my nature will be labeled, and use that to train machines. This, however, does not work in every context. There are still many situations were labeled still image data is needed to train machines.

In the case of voice, which is probably the most relevant place humans are still heavily needed today, it is understandable why big tech companies can’t automate training their machines for voice-first systems. A computer simply needs help understanding when it transcribed a humans voice correctly or not, or processed a request correctly or not. Humans are needed to tell the machine whether they heard the user right or transited voice to text correctly. Whether they are training based on the sentiment, I’m not sure, but the voice is the area where humans are still heavily needed.

We are still a long way off from having humans involved in the machine learning process, but the broader question of how to do this with even more privacy-conscious approaches remains.

More Privacy Conscious Approaches
The big question here is whether there is a better way. Yes, these companies anonymize the data, or voice recordings so it can never be tied back to personal information and I trust that take that process seriously. But even the most privacy-conscious companies can do better at coming at privacy from every angle.

I found this article in Slate quite interesting. The article brings up some interesting questions, and frames the human need in machine learning as well, but also asks if better ways to protect user privacy could exist.

The one way I thought was most interesting was to mask the voice of the user. There are many automated ways these companies could have put a distortion filter on the recordings, so the person listening didn’t hear the actual real voice of the user. This is clever, and a great idea as well as a great compromise for this problem.

This is one of those, why didn’t the companies in question think of this first scenarios. This is where the total industry mindset of privacy still needs to change. In order to deliver better services, we the consumers will need to be ok with companies like Apple, Microsoft, Google, and Amazon (I’m intentionally leaving Facebook off this list) using our behavioral data to provide us with better services if you are not interested in that opt-out plain and simple. But history tells us consumers are more than willing to trade-off some levels of privacy for better services.

In this blog post by Apple at their Machine Learning Journal, they set the bar on this subject with the concept of machine learning at scale with privacy in mind. Had Apple introduced this concept of distorted voices, they could have again set the bar for the industry with this challenging problem of voice + AI training. Rather than Apple ending the program, I’d rather them use solutions like this along with a more distinct user opt-in process, so that Siri can continue to get better.

Voice assistants will play a critical role in our future actions with technology. Knowing humans still need to involved in the process; this is a key challenge to overcome in order to compete in voice assistants but still respect user privacy holistically. I’m optimistic the industry can keep moving forward here, but it goes back to protecting user privacy from every angle and having that mindset as a part of every process where user data/information is used to train machines.

Snap Spectacles 3 and the AR Generation

Snap announced their latest Spectacles today called the Spectacles 3. To no one’s surprise, the prior two generations sold in extremely low quantities and the jury is still out if Snap can ever succeed in hardware. That being said, there are some interesting features that are showcase some of the fun parts of Augmented Reality worth highlighting as well as Snap’s positioning with Gen Z, who may likely be the first demographic to truly embrace AR from a consumer standpoint.

The Hardware
Spectacles 3 are still an evolution in design. This generation 3 is still awkward looking and certainly focusing on a certain design aesthetic.

The biggest addition in generation 3 is the addition of another camera specifically to capture depth. The addition of the second camera for depth is where Snap will be able to integrate their augmented reality filters that are no so overwhelmingly popular with Gen Z. The short video promotion for Spectacles 3 shows some AR features for the first time that are very Snapchat in design. Things like having animations, filters, and even AR objects in the world. While simplistic, at $380 Spectacles 3 may likely be the cheapest way to get your hands on a glasses first augmented reality experience.

Given the rising popularity of filters on Snapchat, it is becoming clear that Snapchat is the home, today, of the most active user base of daily augmented reality experiences. Let’s call it an early lead as an AR platform for Snap.

Let’s not miss the broader point here around Spectacles. Yes they are ugly (subjective opinion), yes they are pricey for what is essentially still a toy, yes they will not sell in volume. That being said, Snap is learning by shipping, and that is a key strategy for them as they build out their platform, and build it out specifically around AR. While Snap may ultimately not be in the hardware business long term, it is important they continue to build the third party developer part of the Snap platform and prepare those developers and Snap’s developer tools for the future of head-mounted computers.

This is baby steps, and I see it as a viable strategy for Snap as they keep preparing for the AR future.

The AR Generation
In case I don’t say it enough, I am the parent of two Gen Z girls. I also have exposure to dozens of Gen Z kids on a daily basis thanks to my involvement with my girl’s high school. Not just from my daily interactions with this generation, but from many different research reports, it is hard to ignore the fact that Snap has such a captive and engaged audience as generation Z. Most teens and pre-teens time is spent on either Snapchat or Instagram. And when I really observe their behavior, it seems Snapchat is more highly used than even Instagram, but in particular, used for very different things.

But what becomes clear is how comfortable this generation is becoming blending the physical and virtual realities. They do this regularly in their video chats with friends in Snapchat, where filters are applied, and the digital and physical world collide. It is safe to assume as more of these AR experiences become available within Snapchat they will adopt them quickly. I already see my girl’s social circles light up whenever one of them discovers a new filter and they all rush to try it (not unlike the FaceApp brief craze from a few weeks ago).

I’m becoming increasingly convinced this generation will be the first to adopt augmented reality glasses and do so quickly broadly. Which makes Snapchat’s/Snap’s near-universal grip on this demographic interesting, especially in the US but broader global trends seem to be emerging as well at least in the developed world.

I believe Snap feels a generational shift could occur once Gen Z becomes one of the more powerful demographics. One that could help them compete if a platform opportunity emerges post smartphones. Snap could feel they are in a position to be the AR platform and possibly displace Apple or Google due to Gen Z’s deep engagement with the Snapchat platform. While I still think Apple sits in the best position out of the gate with AR, nothing is set in stone, and there is a debate to be had about Snap’s role if a platform shift occurs. Especially if we believe Get Z is the AR generation, then I do feel it opens the door for competition a bit more than previously thought.

Yes, I’m going to look ridiculous, but I plan on getting Gen 3 Spectacles, for research purposes of course.

Wrong About Roku, Uber’s Losses, Apple Card Approvals

Wrong About Roku
One of the more interesting companies and stocks to watch has been Roku. In all honesty, I’ve been wrong about this company as my core thesis for the company was more on the negative side. Roku is interesting because, for now, their primary value proposition is the user interface. We can argue they are a platform, and that may be accurate as well.

If Roku had been stuck to streaming TV hardware like a separate set-top box, or HDMI stick, then I don’t think they would have anywhere near the success they have. What has changed Roku’s fortune has been their integration with TV brands where essentially they are becoming the default smart TV UI for a number of major TV manufacturers. The bullish view for Roku is that they are the Microsoft Windows or Google Android of Smart TVs.

While TV manufacturers may still offer some platform choice like Apple TV, or even Android TV, my gut tells me those hardware companies may still prefer to work with Roku because Roku is not playing favorites and being willing to customize and heavily partner with OEMs. Apple and Google have a specific agenda with their TV OSes while Roku’s agenda is available to be more partner and customer-centric since it’s essentially neutral.

Roku’s CEO Anthony Wood has been vocal that they are in the best position to benefit from the cord-cutting trend, and I’m beginning to come around to his position. I cut the cord earlier in the year and have had an overwhelmingly positive experience moving away from traditional cable. I tried this experiment in 2011, and it was miserable. This time is completely different.

I have an Apple TV. I use my streaming services on, and a TV with Roku integrated. They both have their advantages, but the different between Roku’s approach and Apple’s is quite different. While I still like many of the UI features of Apple TV, there is no doubt that Roku’s integrated software as the primary TV OS is much more clean, simple, and quick to get to the apps I want.

This gives me hope that as Apple can do deals with TV makers that they will see more success with tvOS. Even then, I think Roku is better positioned than I originally thought as they focus on being the smart TV platform which plays nice with everyone.

Uber’s Losses
Uber’s earnings made headlines on the back of their losses. No one who studies the fundamentals of Uber, or ride-sharing in general, is surprised that Uber is still losing a significant amount of money. Their strategy to subsidize the cost of a ride in order to be cheaper than traditional Taxi is no secret.

This strategy is critical to scale as they seek to acquire new users and provide a better service, including lower prices, to customers. While in Vegas for work recently, I took a taxi from my hotel to the airport just to see how much it would cost compared to Uber. Before getting in the Taxi, I looked at Uber to see what it would cost my estimate was just over $11. With the Taxi, I had no idea how much it would cost since the meter goes up as you travel and fees are added along the way. In the end, I ended up paying $24 dollars for the taxi ride to the Las Vegas airport. That was quite the price difference and enough to convince me never to use Taxies again.

The long game with Uber, or Lyft, or any rideshare, is a belief in Robo taxis. As rideshare companies eliminate human drivers, they will not lose as much money subsidizing the cost of rides and may even make money still being extremely cost-competitive against taxis. This is ultimately the death blow to taxis as those companies will likely not succeed moving to Robo taxis. Again, this is the long view of Uber and Lyft.

The data is positive though for Uber. Looking at research and customer behavior data, I have access to for Uber a few things stand out. Across Uber Rides, Uber Bikes, and Uber Eats the average customer is using Uber 6 times a month with a steadily increasing average cost per transaction now nearing $16 dollars. Customer retention is one of the more interesting data points as Uber customers spend more money with Uber the longer they are a customer. Dollar retention has been on a steady uptick from returning customers. Uber has also recently crossed the 30% mark of the population of US citizens who have used the service at least once.

The data suggests, Uber is well-positioned if they can just acquire the customer. That user growth, and costs to acquire new users, will the data points to keep an eye on going forward.

Apple Card Approvals
This morning CNBC published an interesting article digging into some more details of Apple Card. The report details Apple’s goal to make Apple Card available to as many of its customers (above the age of 18) as possible. That includes ways to approve customers with lower credit scores.

The report details a customer who did get approved with a FICO score of 620 who got approved but only for $750 with an interest of 23.99% which he said was lower than other credit cards. This is a really interesting approach and will be fascinating to see how it plays out. The potential here is that these customers are able to improve their credit scores and hopefully make better financial decisions. The downside, however, is what happens if poor credit customers end up being late regularly or possibly defaulting and then get hounded by debt recovery companies or painful experiences if their account goes delinquent. The risk is an experience like that turns a customer sourer on Apple because even though Apple is working with Goldman Sachs, they are still the front brand and may be blamed for negative experiences around Apple Card.

The report goes onto detail an earlier credit card concept Steve Jobs was involved in but ultimately didn’t do because he didn’t want Apple customers to face rejection over an Apple product. This attempt with Goldman Sachs seems designed to get as many approved as possible but, as I point out, that is not without risks.

This is one of the more interesting products to watch from Apple due to both its rewards, and potential upside, but because it also carries more risk than other products of Apple’s.

Apple’s Strategy with Apple Card

I’ve had the opportunity to use the Apple Card as a part of a private invite/preview since Friday. While I don’t intend for this to be a review, what I do want to discuss is the strategic opportunity for Apple with Apple Card that living with it has caused me to observe.

Why a Credit Card From Apple?
Casual observers of Apple will remark that releasing a credit card is out of character from Apple. I disagree as forming an opinion on this matter depends entirely on what you believe Apple is as a company. Is Apple a computer company? Services company? Product company? Technology company? In my view, and I’ve written extensively on this, Apple is a customer experience company. If you view Apple as a company, who strives to look for product opportunities where customer experience is lacking, and they have an opportunity to solve some pain points for consumers, then any product category is not off-limits. This certainly extends to technology, but technology is simply an ingredient of the overall Apple process.

Apple Pay was always an interestingly positioned solution within Apple’s products because making payments are a part of daily life. The opportunity for Apple to insert themselves with their emphasis on customer experience into payments was clear with Apple Pay and extending into the banking arena is a natural progression.

The Strategy
From my own usage, having an Apple Card made me more intentional about using Apple Pay. While I was already a heavy Apple Pay user and the vast majority of places I shop take Apple Pay, I still did not use it 100% of the time. For whatever reason, at certain stores that accept Apple Pay, I still pulled out my credit card. Perhaps just a creature of habit. All of that changed once I got Apple Card. The 2% cashback on Apple Pay payments was the first start but seeing that daily cash show up on a daily basis was even more psychologically rewarding. Those two things have caused me to me only use Apple Pay now.

I’ve also moved all my Apple iTunes purchases, and subscriptions over to Apple Card to get the 3% on the >$100 a year I spend on app purchases, and subscriptions facilitated by Apple. Here again, the psychological benefit comes through as I started thinking about moving all my subscriptions, even ones I’ve set up outside the App Store, to go through the App Store so I can get 3% on a range of other subscriptions to news or media services. All of this is designed to incentivize me to go through Apple as the marketplace for commerce and services as much as possible.

Last quarter on their earnings call, Apple announced they now facilitate over 420 million subscriptions. While this number will continue to go up without Apple Card, I can imagine the portion of Apple’s base who do get an Apple Card will only help drive this number higher faster.

Ultimately, however, strategically, Apple Card is less about making money (on services) for Apple. The real strategic play here with Apple Card is driving customer loyalty even higher, creating more stickiness, and ultimately adding more customer value.

Apple likes to do things that send messages to their customers that staying, and investing in their ecosystem, will bring you exclusive advantages. Apple does a number of things that I view simply as software, or services, whose sole function is to increase customer value. These things aren’t about making money and more about providing a unique, differentiated, and exclusive customer experience. Apple Card falls into this category for Apple.

Apple’s Long Game and Financial Disruption
I firmly believe, Apple feels the old systems of banking are poised for disruption. I have a lot of friends who are investors in FinTech companies, and the more I dig into this space, the more I’m convinced that huge holes in the market of finance and investors are open to innovative solutions. Banking, commerce, transactions, investing, etc., are all on the cusp of being disrupted by technology that solves the major pain points that are glaringly obvious for many consumers.

The relationship with Goldman Sachs is an interesting one. This is not the company I would have expected Apple to partner with here, nor is it a company most consumers think about when they think about banking of financial products relevant to them. Both companies, Apple and Goldman Sachs, are playing a long game here as Apple (as I’ve long predicted) starts inserting themselves more directly into financial services, and Goldman Sachs wants to start to great more brand affinity for future consumer products and services[efn_note]Thanks to Apple’s privacy stance, Goldman Sachs is keeping all your data private and not selling a profile as some credit card companies do[/efn_note] . If my words here don’t make this glaringly obvious, at least on Apple’s part, just see how they position it on Apple’s own website.

Going even further, Apple is directly highlighting Goldman Sachs as their partner and positioning them in a positive way.

Every credit card needs an issuing bank. To create Apple Card, we needed a partner that was up for the challenge of doing something bold and innovative. Enter Goldman Sachs. This is the first consumer credit card they’ve issued, so they were open to doing things in a whole new way.

This wording is a demonstration of how Apple is planting the seeds for future disruption of financial services. And, one of my favorite sayings, that serves as a helpful barometer for disruption is “wherever unhappy customers are, the potential for disruption exists.” While a consumer may be content with their banks or financial services, I can’t imagine customer satisfaction is at all-time highs in that sector. There is much to be desired, and Apple Card feels like a step in the direction of raising the bar for customer experience and satisfaction when it comes to financial services.

The Apple Card Customer
What makes this play interesting is Apple is willingly competing with the points and rewards system with Daily Cash. And to be honest, for a lot of mainstream consumers that makes sense as a perk. There will certainly be those frequent flyers and travelers for whom airlines reward cards make the most sense simply due to how much they travel. But knowing most consumers in the US, balance multiple reward or points cards for different things, I would not be surprised if Apple Card becomes one of the cards consumers keep at their disposal to use in the scenario that gets them the most value.

Apple Card fits Apple’s underlying product strategy. While it competes with other credit cards, which offer similar things, it is the total experience and the sum of its parts that separate it from the pack. It is a fully integrated experience, something Apple does very well, and its deep integration with iPhone is a differentiator.

But ultimately, I think Apple will raise the bar here, and other credit card companies will likely feel pressured to step up their game. This, I think, is positive whether or not Apple gains a critical mass of customers for Apple Card. If they can help shift the industry to better practice, including privacy and security, and help create a better more inclusive financial experience for the consumers, then its a big win for consumers in general.

Apple Earnings: iPhone Stability, Wearable’s Future, and Services Ebbs and Flows

There are important trend lines to note as we unpack Apple’s latest earnings. Perhaps one of the more interesting observations was a dynamic I had not fully internalized before, which was the degree in which a good quarter for Apple impacts a number of other tech stocks. I read several investor notes that hinted at this but did not show exhaustive evidence, that when Apple does well, it seems to lift investor confidence and tech stocks, and sometimes the overall index seems to see a lift. This could be due to confidence, and Apple viewed as a bellwether for tech as a whole, or for other reasons, but I find that fascinating. A health Apple is helpful to a healthy tech ecosystem.

A few points are worth analyzing related to Apple’s latest earnings.

iPhone Stability
For iPhone, there were a few things that are worth noting. The first is what most news outlets pointed out which was iPhone revenue being less than 50% of Apple’s total revenue for the first time. This simultaneously a story and a non-story. It’s a story because it is notably the first quarter in many where this has happened. But, this will also only likely be a habit of a mid-year quarter. The Dec quarter will be a large iPhone quarter revenue-wise, as will the March quarter. The June and September quarters will see dynamics similar to this one where iPhone is closer to 50% for the foreseeable future.

The worry, I see, is the potential narrative to distort the incorrect narrative that Apple is the iPhone company. I’ve never viewed Apple this way, as I see Apple more as a customer experience company which can manifest itself in the shape of any number of products. The iPhone is simply the biggest hit Apple has had to date, but not necessarily its only massive hit. I worry when December and March quarters come around that the focus goes back to largely on iPhone and then we are back into confusing public narratives. The iPhone is great, but it isn’t the end of the story.

Taking the long view on iPhone, for a moment, it looks as though after a period of hyper-growth followed by an overall market slowdown, iPhone sales are stabilizing. This was the main thing I wrote about to watch when all the sky is falling articles were written as Apple reached peak iPhone. We knew it would decline, and the question was what number of annual sales would Apple stabilize at for iPhone. It looks like Apple’s annual iPhone sales will stabilize in the 189-200 million unit range for at least the next two years. This would indicate roughly a quarter of their base upgrading each year and around 4 to 4.5 years to refresh their base to modern technology and the average Apple user standardizing on around a three-year refresh cycle.

The only material possibility to change this is if some dynamics around trade-in or another stimulus from Apple can move their base to upgrade on a shorter cycle regularly, but I do not see that happening for the bulk of their customer base. From the data and sales trends we see now, it seems as though the nearly billion iPhone users out there have settled into predictable buying patterns and that is a good thing.

Wearables are the Future
I’ve been long Apple wearables since day one that I tried Apple Watch. It was clear to me back then Apple has a future with computers we put on our bodies and the wrist was the first bit of body real estate Apple tackled. AirPods are Apple’s play at the ears, and sometime in the next five years, we may see their first attempt to bring computers to our eyes. My theory all along is all these Apple wearables will create a complete system (or computer) and work as a synchronous whole going beyond even where iPhone could go.

Apple’s wearable business saw 48% growth with AirPods continuing to penetrate into Apple’s base and Apple Watch now on a continued growth trend. The one stat that stood out to me the most with Tim Cook’s commentary was how 75% of Apple Watch sales in the June quarter were to brand new Apple Watch owners.

We have studied Apple Watch owners greatly and know they are a loyal bunch, who also hold onto their Apple Watches a long time. Series 4 was the first Apple Watch that materially moved the base to a new Watch, so it is encouraging a good portion of quarterly sales are to new customers. The Apple Watch installed base is likely in the 60 million range by now via my model and growing.

With wearables, Apple is laying a new foundation for a new paradigm of computing.

Services Ebbs and Flows
Commentary around Apple’s services growth-focused more on it being a bit “light.” A key debate here is whether services have seasonality like much of Apple’s other product lines or whether we should assume some level of a bell curve trend. This clearly depends on the quality of Apple services and ability to compete, but beyond those things like overall subscription billions (now over 420 million) as well as the continued growth of iCloud an Apple Care will likely steadily contribute.

Apple didn’t seem to give us much about Apple News+, but I take the lack of commentary around conversion rates to suggest Apple News+ is not off to the start Apple hoped. When Apple Music came out, management was quick to give us some numbers around subscriptions and with the Apple News+ absence of that I take it as a negative.

We know Apple Card is coming out in August, and Apple Arcade and Apple TV+ will be launching in the fall. Commentary strongly suggests these will be paid services, likely charged a la carte to start, which is not a surprise. The service I am most interested in is Apple TV+, and beyond Apple Music, TV+ has the most potential upside of all Apple’s services in my mind. Consumers simply love entertainment content and video in particular.

Modeling services are going to remain tricky, and given the huge investment producing a quality, video is, we should assume Apple’s services gross margin will go down as they grow the video platform.

Lastly, on services, the points I made about iPhone stability and Apple’s commentary the installed base continues to grow, is important to the services narrative. iPhone customers continue to go deeper into the Apple ecosystem of products and services the longer they are customers. Which means as Apple grows its base, they have a highly engaged and easily accessible addressable market in their user base. This is not a dynamic I see of any other consumer tech company.

The biggest question for me is how far Apple takes their services beyond their ecosystem. As I pointed out last month, Apple’s inroads to India may be through their services, but those services need to all run on Android. Tim Cook’s commentary seemed to suggest, for now, that some Apple services will be cross-platform and others will be tied to their devices. I think this is the correct approach to start, but I’m not convinced this is the best strategy for the long-term. But again, this is a key debate.

The Fortnite World Cup and The E-Sports Tipping Point

For many of us not in the Gen Y or Gen Z category, it is hard to relate to the growth of E-sports and the commentary that E-sports will be as big if not bigger than other sports categories. As hard as it may seem to believe, this image will help cement why this is a likely tipping point for E-Sports players.

This post details the winner, 16-year-old Kyle Giersdorf who only started playing the game two years ago and currently spends 7-8 hours a day playing Fortnite. But given the size of the winnings, and the sheer size of Fornite’s player base is going to turn heads and continue to draw attention to E-sports tournaments.

The Global Scope
One of the main themes I’ve been writing about the last year is the true digital global platform that is emerging for video games and as a result, E-sports. I’ve noted the cross-platform trend of games to allow gamers everywhere in the world, on any hardware and software platform, to play together is a relatively new development. That theme is going to extend to every game, and there will be no world where platform exclusives make business or customer sense any longer.

The result of developers taking advantage of the cloud to bring their game to gamers on all platforms is the sheer size of their market opportunity. This market opportunity opens up financial scope not seen before in the video game world which, as the $3 million purses for the Fortnite World Cup proves, means even larger financial winnings.

As if Epic, the owner/developer of Fortnite, is not already making more money than they know what to do with, once a game reaches this scale they can make money off the entry fees, which 40-50m people participated in qualifying games, as well as the tickets to watch the final. All similar business models exist for E-Sports as do with other sports genres just at a completely different scale.

Fortnite will be used as the template for success for many developers and publishers, and that model is the way forward when it comes too gaming.

Race to a Billion
The only other sport that has the global scale of E-sports, currency, is soccer. The FIFA World Cup is a global event and draws ~1 billion viewers. I have no doubt that E-sports will catch the world cup in viewership at some point, and ultimately surpass it. But the same fundamentals that help the World Cup achieve its scale apply to E-Sports.

Soccer/Futbol is also the highest paying sport for its athletes. Another dynamic I think will come to E-Sports in the not too distant future. Again, the economics of global scale in the digital age is just simply larger than any physical sport can achieve and as the young generations get older and gaming becomes more a central part of the world, it is likely its popularity surpasses non-digital sports.

Fortnite’s success and the Fornite World Cup is the tipping point that in ten years, we will look back on as the thing that fueled E-sports to whatever size and scale it becomes.

The Sports Debate
The last thing I want to mention is the criticism I hear the most, which is E-sports should not be considered a sport. I’m sensitive to this, and I see the arguments on each side. While the physical side of E-sports, meaning the strength training, conditioning, physicality, athleticism, and other elements of physical sports are not a part of E-sports, one could argue the mental side is as challenging.

But the bigger point, despite how one feels about what should constitute as a sport, is why E-Sports enables a similar dynamic is the rarity of humans who can make up the small percentage to be the best at any given E-sports title.

Scarcity is valuable, and there will be this dynamic in E-Sports just as much as there is in physical sports. That alone justifies the similar dynamics and economics that will be enabled with the E-Sports genre.

Apple’s Plans and Needs for Intel’s Smartphone Modem Business

It’s official. Apple is buying Intel’s smartphone modem business. Note, Intel still has their modem business for products like PCs and tablets and the IP they were selling was specific to smartphone modems. Apple has been working with Intel for years now integrating their modems, so they had a very good sense of the underlying technology and if they could build on it over the long-haul.

This was relatively predictable. I started writing about this possibility in 2014 and then kept hinting at it even as Intel and Apple got closer in their joint modem efforts. It became very clear, quickly, that Apple would be Intel’s only smartphone modem customer and Intel was bleeding cash trying to keep up with Qualcomm and failing. It simply did not make sense for Intel to keep investing in smartphone modems, really modems overall, in my opinion. The only question I had, with regard to Apple buying this business, came after their license and chipset deal with Qualcomm. Apple appeared to be in a position to utilize Qualcomm technology, which is better than Intel’s, and it’s unclear if Apple can develop a better solution than Qualcomm. Their partnership with Qualcomm came off as a win-win for both companies.

In this article, I’m going to cover two points. The first being Apple’s long game here for building their own modems, including how 5G fits in. The second is what it means for Qualcomm.

Apple’s Long Game
The main point I want to make here is that Apple is yet to ship a product that includes a modem on their own designed custom A-series processors. Apple has always had to include a thin-modem (a dedicated chip to just modem) in all its products containing A-series processors like iPhone, iPad, and Apple Watch. There are great benefits to having a complete SOC (system-on-a-chip) that includes CPU, GPU, modem, and other things. The modem was the big missing piece, and Apple can get a number of benefits by building a total chip solution that includes the modem and fine-tuning their hardware and software for this new fully integrated chip.

Things like battery life, connectivity optimization, even security, and more are all benefits to tuning a system with a complete SoC. Qualcomm sells a complete solution to everyone, but Apple (they just sell Apple the thin-modem) and Qualcomm always highlights the benefits they get in overall system performance by having a completely integrated SoC. In fact, many of Apple’s competitors benefit from this same dynamic, and now that Apple has the capabilities to integrate their own modem designs onto their own SoCs they will get a great deal of system optimization and performance benefits. I’m not saying Apple’s modem will be faster than Qualcomm’s, only that they can tune the system better than they could before.

This is the reason why I’ve known for a long time that Apple’s end goal was to build their own modem. But you don’t just wake up one day and build a modem from scratch since baseband patents, and IP has the whole industry covered. With Intel’s IP, Apple is now able to forge a path to do their own modem designs with minimal license and IP fees to other companies. More on this in a bit.

Will Apple’s First Internal Modem be 5G?
No, I don’t think so. Primarily because Apple has other products that are low-hanging fruit for 4G/LTE. Particularly iPad and Apple Watch. Both these products do not need 5G in the next few years but would also benefit massively from a fully integrated Apple chipset with a modem integrated onto the SoC. Apple Watch, in particular, is my likely bet for the first product to see an Apple-designed modem, but it will be 4G/LTE, not 5G.

About Apple Watch, the products I’ve always figured were the primary reason Apple was working on designing their own modem is their wearable product line. Not just Apple Watch but AirPods and whatever else Apple has in the five-year pipeline. Remember I said Apple needed a separate chip for their modem connectivity. This separate chip takes up valuable space on the motherboard, and when you are talking about shrinking electronics to small sizes that we will wear, you need all the space on the motherboard you can get. Integrated the modem onto the SoC is essential for Apple’s wearable business and product roadmap. This is the ultimate endgame for a fully integrated Apple SoC.

Where Does this Leave Qualcomm?
Apple buying Intel’s smartphone modem business and IP is not necessarily all bad for Qualcomm. The deal Apple struck with Qualcomm includes a multi-year chipset license and a long term deal to access Qualcomm’s IP portfolio. The chipset deal is likely 5G modems for iPhone until at least 2022. And the license to IP is where Qualcomm may have some technology that Apple can use to build its own 5G modem.

Intel was nowhere close to building a 5G modem. In fact, I’m not even sure they would have got there anytime soon. The deal Apple made with Qualcomm is because, at a technical level, Qualcomm is the only 5G game in town for the next few years. Apple may not even be able to do a 5G modem on their own, and having a licensing relationship with Qualcomm can help them fill the gaps. Obviously, if what I’m suggesting pans out, Apple relationship with Qualcomm could be a long one, but it also won’t be as financially lucrative as Qualcomm would like.

During this 5G transition, Qualcomm is well-positioned and a strategic partner for Apple. Come to the 2023-2025 timeframe, 5G will be quite mature, and perhaps this is the proper timing for Apple with their own designed modem for iPhone. The bottom line here is Qualcomm still has some of the best wireless technology in the world, and Apple has a long-term license deal to that technology. If for whatever reason, Apple can’t do better than Qualcomm’s IP then I’d like to see them still leverage it somehow.

The last point, I’m watching Apple to make a move on an RF antenna provider like Qorvo or Skyworks. RF is critical to modem design, and Apple has worked both these companies before. Verticalizing on RF could help Apple even more efficiently optimize and tune their hardware, software, and services.

Competitive Potential in Social Media

With the record-breaking, yet also only a financial slap on the wrist, of $5b Facebook-FTC settlement along with the still strong earnings report from Facebook, they look ever stronger as an entrenched incumbent. Facebook also disclosed the FTC is opening another probe into their company around their position as an anti-competitive market player. Facebook has the largest social network and seems to be moving toward having the largest ad-network of any company in history. From the outside looking in, it does feel like competition is ever harder in social media and the idea that Facebook will ever be challenged feels doubtful.

I’ve written quite a bit about what how some companies become a monopoly by default, and Facebook is undoubtedly a prime example. But that does not mean there are no significant cracks in the foundation, and the competitive moat has not been weakened. Several things over the past few weeks show how competition to Facebook and even Instagram are possible.

Snapchat and FaceApp
The two things I mentioned are what we saw with FaceApp and some new details from Snapchat’s earnings. I wrote about FaceApp last week, in a negative context due to the privacy issues it raised and the observation that many consumers didn’t even consider their privacy at risk. But there is a positive take away specifically to the idea of social media competition.

While we have no exact numbers of how many people downloaded the FaceApp app, it gained enough steam to be a viral sensation and a large enough group of people downloaded it simply to use a few minutes to try the age filter that it got national attention. Apparently, all you need to have as an initial hook is a fun camera filter to get potentially millions of people to at least try your app.

Similarly, Snapchat saw significant growth thanks to their transgender filter. While it is tricky to estimate how many of their new quarterly users joined just for the transgender filter, what is notable is Snapchat reported much more significant new user growth in the second quarter than was expected. They said they added 13m new users vs. 2m estimate. I’d wager to guess a lot of that new user growth was from people just wanting to try the transgender filter.

FaceApp proves a simple feature, like an interesting filter, can drive significant downloads, so it is not a leap to think the same dynamic played out for Snapchat with their transgender filter.

Competitive Potential
My takeaway from these two examples is further evidence of how fast an app can virally spread into the mainstream public. We have to look at this as the potential for competition to Facebook and Instagram. Granted, the challenge something like FaceApp or Snapchat have with their viral growth is how to keep those new users around. The stickiness of the solution is a big part of how someone would potentially compete with Facebook and Instagram, but the significant amount of viral growth indicates that gaining a large initial user base quickly is not a problem.

I mention this point because the key to any social media platform is an audience. If a platform has no users, it isn’t as interesting as one the has a larger social base. Therefore, the ability to quickly gain a critical mass seems to be an important dynamic of competing and it is one that both FaceApp and Snapchat show us can happen quickly if you have something that gets the attention of the mainstream. While competing is not easy, my overall point is recent events should give us confidence, it is at least possible.

The anti-trust probe and potential regulation around competitive tactics for Facebook should also help open up opportunities that may not have existed before. One interesting thing I observed the past few years was the lack of interest, so many VCs I work with had in any startups looking to compete with Facebook or Instagram. The common thought was why invest in something Facebook will just copy and kill if they feel it is threatening.

I already see renewed interest in by VCs in some more socially focused startups, which means the tide is potentially turning. However, entrepreneurs need to come around to the idea that competing in social is possible and that venture money may again be interested in helping them scale their company to compete.

That being said, and I’ll end on this point even though it needs more fleshing out in the future, but the future is niche. What I mean by that is Facebook’s scale and reach is a once in a generation type event. I’m not saying a single company won’t amass a 2-3 billion person user base, but I am confident it will be a long time until we ever see it again. Which means a potential TAM of hundreds of millions, rather than billions, is the reasonable user base goal. The good news is niches can be extremely profitable.

Substack’s Funding, The Journalism Unbundling, The Newsletter Challenge

Last week it was reported that Substack closed a funding round of $15.7 million. I have been watching Substack with interest, and have a number of friends in journalism who have Substack newsletters. Substack is a platform that allows anyone to create and distribute a newsletter for free or for a fee. Having been running a site, with a newsletter as part of the service since 2012, I have some broader thoughts on the opportunity and the challenge.

Journalism Unbundling
Netscape co-founder Jim Barksdale famously coined this phrase, “there are “only two ways to make money in business: One is to bundle; the other is unbundle.” The continuous cycle of bundling and then unbundling and then bundling again, repeat, seems to have been accelerated thanks to the Internet. This idea of going direct to consumer is made easier thanks to the Internet. I spend a lot of my time studying D2C (direct to consumer) companies because it is one of the more fascinating trends of our time. The Internet has given anyone direct access to consumers without the need to aggregate, and in this case, it applies to news, analysis, and the individual voice.

Newsletters are becoming the de facto way journalists are going directly to the consumer, or perhaps direct to reader, with their style of reporting. It is interesting to subscribe to a number of journalists newsletters, and they are often much more interesting to read than what they write for a major newspaper or publisher. This is likely due to the lack of an editor, or a limitation of their style in a major news outlet, but more personality and unique commentary often come through in their newsletters than it does in their mainstream published articles.

Substack offers them a platform, the backend service, as well as a way to monetize should they choose. These are all things I had to invest in to build to start Tech.pinions in 2012, and thankfully I didn’t have to build it from scratch, but it did take a lot of work customizing and integrated many different components. This was a barrier for many that are now gone thanks to Substack.

When I started Tech.pinions in 2011, and then the subscription service in 2012, it was because of the extremely poor state of journalism at the time. At least, in my opinion, much of the writing as new upstart publishers/blogs were started was headline-driven and rarely covered the key parts of a story with any real insight or interesting commentary. My goal was simply to add more voices to the public landscape and get better quality technology content and analysis in front of more people. From my viewpoint, anything that makes it easier for better content to go mainstream. I’m all for this idea, and Substack has this potential.

That being said, the challenge of unbundling journalism will still exist, and this is the harder part as voices try to go independent.

The Newsletter Challenge
As more journalists, writers, and content producers looking to go direct to the reader, several things happen which add complexity to the market. First is there becomes quite a bit of competition. Competition for time, attention, share of wallet, etc. One of the biggest pain points I regularly discuss with readers of our Think.tank newsletter is how they often struggle to read everything we write on a weekly basis. On average, our newsletter open rates are 65% on the first day with that same newsletter reaching nearly 85% by the end of the week. My interpretation of that is that most of you read it on day one, but still, 40% or more take a few days to a week to get caught up. I note that email inboxes can be overloaded, often with higher priority emails fighting for your time every day.

Here, then, lies one of the bigger problems for newsletters going forward. Email is not the best RSS tool, but that is exactly what email newsletters shaping up to duplicate. Email is such a key part of everyone’s daily workflow that newsletters are often a distraction even if valued. Certainly, it is possible to sign up with a non-work based email and just check it later, but I’d wager most people use unified inboxes now and most are checking all their accounts frequently. Any newsletter distributed to email is competing against daily work based workflows and often timely communication from colleagues and bosses. Honestly, not the best place to distribute news, journalism, or analysis but it is the best option we have today.

Websites serve as great aggregators that allow people to get caught up on the news on their time. I already get eight newsletters to my email, and I struggle to read all of them each day. There is some value to bundling, in this case, that gets lost with newsletters, and I maintain that will be a challenge as more journalists looking to go on their own.

Of course, that may not be a goal. Maybe they just want a direct line to their readers and still plan to write for their newspaper and make a living that way. But for those who wish to go out on their own, and make their newsletter their primary business, my hunch is many of them may struggle.

This is one of those situations where I completely understand the desire and the opportunity, but I’m not sure we have solved the best way forward yet. While not perfect, something like the Athletic is something I think that makes the most sense. Largely because all my favorite sports writers have moved to the Athletic and I enjoy being able to curate my experience to just the sports teams I am passionate about. Yes, it is an aggregator, but it is also one that has the best voices, and passion-fueled content customized to the reader’s interest.

I’m arguing for a bundle yes, but a completely different kind of media bundle. It really is about bundling and unbundling, but the consumer convenience of media bundles is so high I struggle to see how we get around this for the mainstream consumer.

Netflix’s Miss and Looming Competition

There were mixed reactions to Netflix’s earnings yesterday, largely on the news they missed their own internal subscriber growth forecast as well as losing US subscribers for the first time. For the bears, this news signaled the trend they have been predicting. For the bulls, they buy Netflix’s story that the price hike and global climate were the reasons for the miss. Management is staying bullish for Q3 that they will hit their global growth estimate of 7m.

Services Potential for Seasonality
With all the pros of on-demand subscription services, a potential negative could be the seasonality. Particularly, the concern that any service is only driving interest and loyalty for a few shows, and after fans watch those shows, they cancel their subscription. This is the argument for HBO’s strategy to release shows weekly vs. Netflix’s to release a show all at once. The all at once, binge potential means a fan can subscribe, binge their show, then unsubscribe quite easily.

Looking at some metrics research, it looks as though HBO had just this seasonality dynamic hit them around Game of Thrones. New subscribers of HBO Now were up 53% in April and then steadied out the following months. This suggests consumers subscribed for GOT and then canceled when it was over. This was not a massive wave of people. However, it was enough to show up in the data tracking research.

Seasonality is something services like HBO Now, Netflix or any other subscription service need to worry about. It’s just as easy to cancel as it is to sign up, and if consumers are only interested in a few shows, then seasonality could become an issue. This should also concern Netflix given they are losing Disney, Friends, and the Office. As networks decide to create their own subscription services, it is likely they will not renew the deals with Netflix for their most popular shows in order to have them for their own subscription service.

Netflix understands this is, which is why they are investing in an attempt to have 1-2 new original content productions launch each month. Netflix knows it always needs to have something new for its customer to watch if it wants to become the dominant streaming entertainment service.

Looming Competition
Netflix’s letter to investors did not seem to be too concerned about competition. And I’d agree that was not a factor here, yet, and it is an open question as to how much competition impacts Netflix if at all. Early research from UBS suggests interest in Apple TV+ and Disney+ is extremely high. Forecasts for Disney Plus+ is to get to 60m by 2023. Netflix has 60m US subscribers right now, and that equates to roughly ~70 of US households. Basically, Disney+ will have the same number of US subscribers by 2023.

My conviction remains consumers are not going to ditch Netflix to subscribe to things like Apple TV+ or Disney+. These will all be additional subscriptions to Netflix as a part of a broader set of services consumers subscribe to. Our first research study on consumer subscriptions services revealed high interest to switch away from cable or satellite TV bundles. We found that 48% of US consumers are spending $80 a month or more on cable or satellite TV bundles. My conviction is consumers will shift that $80 or higher budget to other subscription services as they move away from cable bundles not look to switch to in order to lower costs.

The benefits of this are you get more value for the monthly money you spend since you have handpicked the things that matter most to you content-wise, when we looked at consumers, who had already canceled cable/satellite and moved to stream services on average spent more and subscribed to more services than those who still had a cable or satellite bundle.

Given Netflix’s high household penetration in the US, growth is going to need to come from other markets. However, the budget opening and upside for other services like Apple TV+ and Disney+ seem clear. The main question is which, and how many streaming services consumers will find value with, but I have little doubt Netflix will remain one of the primary ones.

Looking at Netflix data in Second Measure, which tracks a large portion of their user base via credit card transactions, it shows that overall Netflix’s customer retention is extremely high. Average transaction value is increasing, meaning even as Netflix raises prices, customers stay loyal. But it does show the last two years new customer growth in the US has slowed dramatically. Which does tell you they have nearly saturated the US market, and the only way to grow revenue in the region is to keep raising prices.

With the budget shift dynamics I explain, I’m not sure that will become as big of an issue as long as they keep their content frequency and quality high. For Netflix, they need to cement themselves as the service where most TV and movie content is consumed, and if they do that they have more share of wallet, they can acquire.

The Privacy Paradox

In the past few weeks, we were again reminded of the privacy paradox. Privacy, as a concept, sounds good, and people will always say it matters. Yet their behavior often contradicts their statement because for many privacy is not a core principle or decision guiding conviction. There is a subset of people for whom privacy is a guiding conviction, but for the majority of consumers, it is not.

FaceApp and Privacies Paradox
I wrote about FaceApp when it went viral a few years ago, putting it into the bucket of augmented reality. The app seems to have gone even more viral as of yesterday with people all over social media showing pictures of the apps feature that using some machine learning to estimate how you will look when you are old. I won’t go into why what they are doing is more like a parlor trick, but perhaps that is for a different article.

By the end of the day yesterday, I had personally seen the vast majority of friends on Instagram and Facebook post pictures of themselves as older people using this FaceApp feature. This happened fast and went viral, and a lot of people put their privacy at risk without even thinking about it. This is the privacy paradox.

The vast majority of the market will so easily compromise their privacy for social show, which means to join in on the social trend and show it off on social media. Yes, the feature was fun and got a few laughs, but the question of privacy was largely never raised I’m sure by many. I wonder how many people would have at least paused from using FaceApp if they had read the following excerpt from FaceApp’s privacy policy.

You grant FaceApp a perpetual, irrevocable, nonexclusive, royalty-free, worldwide, fully-paid, transferable sub-licensable license to use, reproduce, modify, adapt, publish, translate, create derivative works from, distribute, publicly perform and display your User Content and any name, username or likeness provided in connection with your User Content in all media formats and channels now known or later developed, without compensation to you. When you post or otherwise share User Content on or through our Services, you understand that your User Content and any associated information (such as your [username], location or profile photo) will be visible to the public.

You grant FaceApp consent to use the User Content, regardless of whether it includes an individual’s name, likeness, voice, or persona, sufficient to indicate the individual’s identity. By using the Services, you agree that the User Content may be used for commercial purposes. You further acknowledge that FaceApp’s use of the User Content for commercial purposes will not result in any injury to you or to any person you authorized to act on its behalf. You acknowledge that some of the Services are supported by advertising revenue and may display advertisements and promotions, and you hereby agree that FaceApp may place such advertising and promotions on the Services or on, about, or in conjunction with your User Content. The manner, mode, and extent of such advertising and promotions are subject to change without specific notice to you. You acknowledge that we may not always identify paid services, sponsored content, or commercial communications as such.

It’s actually not a bad privacy policy because it is so clear on what you agree to. I’ve seen so many that are quite vague because they don’t really want you to know what they are up to. FaceApps is pretty clear, and they are taking your data and your images and doing whatever they want with it.

As I said, had every person who just got the app to just try the age filter and then likely never use the app again (not delete it) read this part of the privacy terms I wonder how many would have still proceeded. I had the opportunity to ask a few friends and their families who were with me the last few days, and they looked at the privacy policy and had several responses. One of my well-intentioned friends read the policy and concluded that it was ok to use the app if he did not post the image to social media. Several others seemed to agree, while two of my other friends, both lawyers, said they would not use the app. Once I explained the image they took of themselves was being sent to FaceApp’s servers to process the filter and that image falls under the (they do what they want with it) part of the privacy policy, they all agreed they would not use the app with all that information.

So, a small sample, but one that demonstrates how even a clearly written privacy policy can still be misunderstood and misinterpreted.

Platform Owners Can Do More
The question then turns to what can software platform owners do to continue to give consumers all the information they need to make a decision. I understand this is a fine balance of how much information is too much to handle and do you run the risk no one downloads apps anymore if this gets too complicated. However, Apple, in particular, has been architecting their platform with security in mind, and even notifies a consumer when an app wants to use their location informing them of what that means so they can make an informed decision. I wonder if something like this needs to also apply to apps that use our photos. In particular, when an app like FaceApp asks for access to my photo roll, a reasonable thing to ask in case I want to use a previously taken picture from my camera roll.

Matt Panzarino from TechCrunch brings this up in a recent post.

One thing that FaceApp does do, however, is it uploads your photo to the cloud for processing. It does not do on-device processing like Apple’s first-party app does, and like it enables for third parties through its ML libraries and routines. This is not made clear to the user.

I have asked FaceApp why they don’t alert the user that the photo is processed in the cloud. I’ve also asked them whether they retain the photos.

Given how many screenshots people take of sensitive information like banking and whatnot, photo access is a bigger security risk than ever these days. With a scraper and optical character recognition tech, you could automatically turn up a huge amount of info way beyond ‘photos of people.’

So, overall, I think it is important that we think carefully about the safeguards put in place to protect photo archives and the motives and methods of the apps we give access to.

I’m not sure if it’s possible within iOS for an app, which has access to my camera roll, to upload all of them to a server in the background, but Matt’s point about using ML to scrape for banking information or anything else I may have taken a screenshot or picture of is a great one.

Honestly, the camera roll should be as sacred as location and treated as such by the operating system. I agree 100% with Matt that more safeguards need to be in place around the camera roll and I’ll look for Apple to lead here and hopefully start to address how to better inform their customers around privacy risks with their photos when trying an app like FaceApp.

Services are Key to Apple’s Emerging Market Strategy

From a hardware standpoint, Apple has appeared to have saturated their developed markets. While there can still be some minimal growth (low-single digits) for the foreseeable future, there is not a great deal of hardware growth ahead for Apple. When I discuss this with investors, and even contacts of mine in the supply chain related to Apple products, they question of Apple’s growth in emerging markets continues to come up.

On this matter, and by emerging markets I mean markets like India, SE Asia, and someday parts of Africa, I have concluded hardware growth will be much harder to come by than Apple, and others realize. With India being pegged as one of the larger short term growth opportunities for Apple, I’ll make some broader points specific to India in this analysis.

Apple’s Hardware Challenge in India
There are several important factors to understand when thinking about Apple’s iPhone strategy in India. Firstly, Apple has an extremely low market share in India. Most estimates have iPhone share at less than 10% of the installed base, but it is likely lower than 5%. There are roughly ~400 million smartphone owners in India and that number is expected to pass 700m by 2022. It is a market with as sizable as China but with extremely different cultural constructs which will make Apple’s hardware positioning much more difficult in India than it has been in China.

Price is much more of a factor in India than it is in China, and Apple’s strategy has never been to compete on price. I don’t expect a change of strategy here, which is why I’m less optimistic about Apple’s hardware growth strategy in India. Also, India is a market Google/Android has a stronghold on. With >95% share, India cut their teeth on Android and has been continuing to deepen their dependence on the Google ecosystem. I view the challenge here somewhat similar to Apple’s challenge to penetrate the greater Android base in the US. While Apple has seen favorable switching rates at times, the reality is not being on Verizon day one with the iPhone launch let Android gain a foothold in the US and clawing that back has been a great challenge. For that reason, the US market largely remains a 50-50 split of smartphone OS between iOS and Android. The last point I’ll make here is multiple global smartphone reports I’ve read indicated Android itself has an extremely high loyalty rate. While no Android branded phone has iPhone level loyalty rates, Android itself does with varying loyalty rates between 78-83% depending on the market.

While it is true, Apple is working to be a bit more price-competitive by manufacturing phones in India, they will still be competing against phones with similar specs and lower prices from other Android brands. This, plus the high Android loyalty rates in India in particular, is going to make gaining switchers a challenge.

Services, not Hardware, Is Apple’s Revenue Opportunity in India
Landing on the conclusion that hardware is not an immediate hardware opportunity for Apple, I believe services is the right strategy for Apple to start to develop customer relationships in India. My thesis here is much like the iPod strategy. A little appreciated strategic factor for Appel’s iPod was how it was the mass market entry product to the Apple experience. Up to that point in time, most consumers had never owned an Apple product and thus never had a chance to experience the quality of Apple product and the overall Apple experience. The iPod paved the way for the iPhone for the mass market by offering customers an easy way to enter the Apple ecosystem and experience the Apple brand.

In India, I think services can play a similar role. While I explained how hardware is going to be challenging for Apple in India, I think services could be a much easier sell. A fascinating dynamic of India, today, is how a large part of the Indian culture is to value frugality. Or more specifically, they value the deal and the pursuit of getting value for their money. The iPhone is not well-positioned in India in the value for the money equation; however, Indian’s value media in a much more balanced way than they value physical goods. In some cases, they value rich media more highly than they do physical goods. Bollywood itself is a great example, but broadly speaking Indian’s desire for media content has always been high.

In the early days of cheap tablets, I recall hearing stories from friends who live in India, how a trend was emerging for Indian consumers to purchase extremely cheap tablets, less than $70 USD, and then go to a corner store and pay nearly half the price of the hardware to load their tablet up with movies, games, and other video content. This is a great example to highlight how the value equation between hardware and rich media is quite different in India than other parts of the world.

This is a key part of my thesis as to why I think Apple has a broader short term revenue opportunity in India with their services than with hardware. However, doing this may require a bit of a strategy shift for Apple as it relates to emerging markets.

Cross Platform and Regionalization
American media, particularly movies, are popular globally. However, any effective services strategy requires regionalization and customization of content to the region. This may be even more important in India than in China. However, China is similarly growing in its localized media. While we do not know much about Apple’s cross-platform strategy, for Apple TV+ specifically, it is unlikely said service is available on Android out of the gate.

This is a fantastic debate to have, whether Apple needs to embrace Android with all their services sooner than later, but not one I’ll flesh out here. What I will say is that Apple has no chance with services in India if it is not available on Android. This is critical in my thesis that Apple’s services is their way into India strategically, and would require a bit of an India specific approach assuming Apple is hesitant to bring all their services to Android in other markets.

Apple would also need to continue to invest in India specific media, and if this is done right, it could be seen as hugely valuable by the Indian market.

While I understand the broader argument that brining Apple services to India could hurt their hardware strategy, there are serval ways to think about this point. Firstly, if Apple is extremely strategic here, they can create an experience that hopefully has a path back to their hardware from a services entry point. This does not mean to cripple the experience with Apple services on Android fully, but that they create some experiences that may still be better on Apple hardware. This could be things around AI/ML, or deeper integration and ease of use, etc. The second way to think about this is services being cross-platform is Apple’s opportunity to get a customer who may never have been a customer, to begin with. In every market, there is a huge opportunity for Apple to sell their services to customers who they will likely never get as hardware customers. When you think about the broader services business opportunity, and the potential for pure growth for Apple, the reasons to be a cross-platform start to fall away. Especially if there is a clear strategy to bring a hardware value proposition on the back of those services.

Ultimately, this last point is the one of most interest to me in an era of flat to slightly declining hardware revenue for Apple and a much larger customer opportunity with Apple’s services. How Apple plays the cross-platform game will be a critical part of their growth strategy, but one that does need to be attached to a long-term hardware roadmap.