Television’s Advertising Addiction

Last week, my weekly column was “TV’s Detour” and I focused on the first of what I described as two shifts that appeared to be happening in the world of television. The shift I discussed last week was the trend away from the television set and towards other devices, though I concluded that that might have been more of a detour than a lasting move, hence my title. This week, I wanted to pick up on the second of the shifts which is the move away from traditional Pay TV providers, with a view to evaluating to what extent this too might be a temporary detour rather than a permanent change.

Disruption embraced

One of the fascinating things about pay TV providers has been that they have been slow to respond to disruption, but they have eventually responded to almost all the forms they’ve faced over time and ultimately embraced them, bringing the disruption in-house and somewhat neutralizing it in the process. The table below shows some examples:

TV embracing disruption

The left column shows some of the key characteristics of traditional pay TV, almost all of which have been vulnerable to disruption because they don’t fit with the viewer’s ideal vision of TV. As I see it, nirvana for the viewer is to be able to watch the content they want, when they want, on the device they want, pay for only what they use, while seeing as few ads as possible. Pay TV providers have, over time, seen almost all these needs met first by others – whether by TiVo and other DVRs, which allowed users to time-shift content, or by Netflix and Hulu, which provide access on a variety of devices, or by a variety of on-demand services, allowing users to watch the content they want when they want. However, pay TV providers now offer both DVRs and on-demand services of their own, they offer “TV everywhere” solutions for watching content on devices other than the TV, and some are even partnering with players like Netflix to make their services available through the set-top box. Not all of these embraced disruptions are as good as the ones they’re responding to, but many of them are good enough to have allowed the pay TV providers to have brought the disruption in-house and neutralized the threat, at least to some extent.

However, there’s one cell in that right column that remains stubbornly empty and it’s the one that relates to advertising. Despite all that cable companies and others have done to respond to and embrace the other forms of disruption they’ve faced, this is the one that remains stubbornly unchanged (at least for the better) and the continued embrace by both pay TV companies and many of their content providers on advertising as an important revenue source shares some of the characteristics of addiction.

Defining addiction

As with any word, you can find a million definitions online if you spend enough time looking, but I found a handful that are useful in outlining the characteristics of addiction I believe the television industry is beginning to display with regard to advertising. Here are four (I’ve highlighted in bold text the parts that I think are particularly relevant):

From Psychology Today:

“Addiction is a condition that results when a person ingests a substance (e.g., alcohol, cocaine, nicotine) or engages in an activity (e.g., gambling, sex, shopping) that can be pleasurable but the continued use/act of which becomes compulsive and interferes with ordinary life responsibilities, such as work, relationships, or health. Users may not be aware that their behavior is out of control and causing problems for themselves and others.”

From Dictionary.com:

“the state of being enslaved to a habit or practice or to something that is psychologically or physically habit-forming, as narcotics, to such an extent that its cessation causes severe trauma.”

From Wikipedia:

“Addiction is a state characterized by compulsive engagement in rewarding stimuli, despite adverse consequences… The two properties that characterize all addictive stimuli are that they are reinforcing (i.e., they increase the likelihood that a person will seek repeated exposure to them) and intrinsically rewarding (i.e., something perceived as being positive or desirable).”

 

From ASAM (American Society of Addiction Medicine):

“Addiction is characterized by inability to consistently abstain, impairment in behavioral control, craving, diminished recognition of significant problems with one’s behaviors and interpersonal relationships, and a dysfunctional emotional response. Like other chronic diseases, addiction often involves cycles of relapse and remission. Without treatment or engagement in recovery activities, addiction is progressive and can result in disability or premature death.”

A progressive problem

The US television advertising addiction is certainly a progressive problem, as that ASAM definition suggests. The Wikipedia article on television advertising states that:

In the 1960s a typical hour-long American show would run for 51 minutes excluding advertisements. Today, a similar program would only be 42 minutes long; a typical 30-minute block of time now includes 22 minutes of programming and eight minutes of advertisements…

As a foreigner moving to the US about 11 years ago, I was struck, even then, by the sheer volume of television advertising. Even now, when I (very rarely watch) linear TV on the rare occasions when I flip through the channels in a hotel room, I find it’s almost impossible to figure out which program is playing on any given channel because so many of them seem to be playing ads. The ad load on US networks has been rising steadily and, as a result, live television content is becoming less and less watchable. Small wonder then so many of us seek to avoid it and have found various solutions for doing so. By sticking with the model though, TV content and service providers are “causing problems for themselves and others” (as per the Psychology Today definition) – including both their viewers and their advertisers.

Adverse consequences

One of the defining characteristics of addiction, per the Wikipedia definition, is the act or substance to which the user is addicted to has adverse consequences. That is the case with the TV industry’s ad addiction. The irony is the adverse consequences are moving in two opposite directions at the same time. First, the TV industry has, over time, become increasingly obsessed with certain relatively narrow demographics — because these attract the highest ad spend at the cost of neglecting other audiences (something I alluded to in an earlier piece). However, that very demographic advertisers are so keen to target (typically 18-49 male and but often the younger end of that) is the very group most likely to be using the various disruptive solutions which solve the ad problem. As such, TV providers are focusing on stuffing even more advertising into their programming rather than reducing it, which risks simply accelerating the move away from traditional platforms and services and onto those where tracking viewership is much tougher.

Withdrawal symptoms

The big problem for the TV industry is advertising is an incredibly important source of revenue and, as such, it’s become habit forming, “to such an extent that its cessation causes severe trauma” to quote Dictionary.com. Simply moving away from advertising entirely over a short period of time seems implausible, given the high reliance on it for much of the industry. Affiliate and retransmission fees could have offered a potential way out for broadcast networks in particular as a potential replacement revenue source but instead, most companies seeing a rise in these fees have simply used them to pad their margins rather than start a transition away from ads, a move that makes perfect sense as part of a short term world view but much less sense over the long term. Meanwhile, HBO, Netflix, and others continue to demonstrate it’s perfectly possible to run a subscription video service with zero ad load very profitably, as long as the quality and quantity of the content available is sufficient. Hulu demonstrates that smaller ad loads are still more acceptable than those you’ll find in most live broadcasts and people will even pay, in some cases, to view this content instead.

A problem not unique to TV

Of course, TV is not the only industry heavily reliant on an ad-based business model – much of the Internet, relies heavily on it a well — but advertising entails compromises in any business. The content owners serve two masters and, as such, are at least as motivated to please advertisers as users, which can lead to privacy violations, feelings of creepiness as advertising becomes increasingly targeted (as it shortly will on TV and already is online), and increased ad load and ad-related technology foisted on consumers in the name of increasing revenue. The recent debate in Apple blogger circles about website advertising is symptomatic of this broader reliance on advertising as a business model.

However, TV has always made heavier use of advertising than almost any other media and advertising on TV has always been more invasive than in other media because it takes over the whole experience. If the second shift in television is to become a detour rather than a permanent change, all those involved in the traditional TV industry need to take a long look at the role of advertising, the (negative) role it plays, both in the customer experience and in the ecosystem itself, and determine how long they’re willing to put up with advertising in its current form. The risk, if they stick with it, is the one part of their model they’re unwilling to disrupt themselves becomes their undoing, as the eyeballs they so covet move to other platforms and services that don’t abuse them.

Q2 2015 Earnings Preview

As I’ve done in the past, I’m providing a preview of some of the themes to look for in the earnings reports of major tech companies over the next few weeks. Netflix and Google will kick things off later this week and Apple, Microsoft, and others will follow next week.

Hardware vendors

This quarter will likely see a continued bifurcation of the fortunes of major hardware vendors between Apple and the rest. Apple should have another very good quarter, with significant year on year growth in iPhone sales and the first modest impact from the launch of the Apple Watch. I’m still predicting around 20 million total Apple Watch sales for this calendar year and that number will likely be both front and back-end loaded, in that the launch will have seen a good number sold but the holiday season will likely also provide a big boost. It’s also worth watching Apple’s earnings call for questions and answers about the financial impact in Q3 of the Apple Music launch – I think it’s quite possible it will put a substantial dent in music sales in the quarter.

As for the rest, I wrote last week about the trends in the US smartphone market and, later that day, Samsung announced its Q2 was going to be a little softer than expected, with Galaxy S6 sales not great. In that piece last week, I suggested Samsung hadn’t done that well but I also said other vendors had done worse — in the US at least. As such, I’d expect to see a rough quarter for the other Android vendors, especially HTC, which has already reported preliminary numbers for Q2. LG may hold up better than some of the rest but probably still won’t do great this quarter. Not all of the Chinese vendors report publicly, though Xiaomi has already reported some numbers which also weren’t great. Lenovo is well worth watching – the addition of the Motorola business helped to mask some of the challenges it faced at home but, longer term, it needs to see both sides of its smartphone business grow again.

On the PC side, I’d expect Apple to continue to buck the overall trend of decline and post a decent quarter. The other PC vendors will likely mostly report further declines or at least slowing growth, with a similar split here between the top two or three and the rest of the market. AMD and others have already signaled it was a tough quarter and I continue to believe this is the shape of things to come rather than a temporary dip.

Ad-based online companies

Three of the most interesting companies to watch in this space continue to be Google, Facebook, and Twitter. Google is by far the largest but, in some ways, the one that’s facing the most headwinds at present, with the loss of two small but important partners in Mozilla and more recently AOL and the ongoing possibility Apple scales back its search relationship. Last quarter, management sought to reassure investors the mobile advertising business is healthy but, in the process, raised questions about the profitability of YouTube. My main concern about Google continues to be that it has yet to find a mobile advertising product that works as well as search did on the desktop and it’s heavily dependent on partners like Apple for what mobile revenue it does have.

Facebook is, in some ways, the golden child of this space, growing very rapidly and increasingly profitable, while also investing significantly in the future with a pretty diverse set of acquisitions. It’s also got an admirably clear and well-articulated strategy around all that, in marked contrast to Google. The main things to watch for on Facebook’s earnings call are any signs that this story is coming apart, but I’d expect another really strong quarter and many of the same themes as on previous calls. Twitter is in some ways the anti-Facebook, with a muddy strategy, faltering user growth, and management turmoil. The last couple of quarters, it’s actually posted decent financials despite all that, but has to start articulating how it’s going to jumpstart user growth again and, of course, this will be Jack Dorsey’s first call as interim CEO following Dick Costolo’s departure.

Yahoo and AOL are other major companies in this space whose fortunes have seemed closely tied for some time, though AOL is now moving under the Verizon umbrella. Neither company has had stellar underlying trends and each faces significant downward pressures from legacy businesses even as they struggle to find new businesses that will drive future growth. With Yahoo’s sale of part of its Alibaba stake and plans to spin off the rest, it needs to prove that the core business is worth valuing at more than it has been so far. Marissa Mayer has a strategy in place, but the actual performance to date has been out of whack with the story she’s telling, especially around mobile, which continues to be a small minority of Yahoo’s overall business. AOL has been investing heavily in ad tech and this is likely what attracted Verizon to it. With the acquisition of Microsoft’s display ad business, it has the potential to build some much-needed scale in that space, although Microsoft had seen declining revenues there.

Microsoft and Amazon

Microsoft and Amazon are fierce competitors in the cloud services space, but their businesses are otherwise very different. In that cloud market, it’s worth watching for continued detail about the size of their respective businesses, as Amazon broke out AWS in its reporting for the first time last quarter. The composition of the business each company reports is somewhat different, but they’re fairly similar in size, so it’s worth looking at the trajectory of both businesses.

As for the rest of Amazon’s business, the ongoing question in my mind is whether Amazon is spreading itself too thin internationally, where its business seems to be underperforming significantly relative to its US business. The biggest frustration with Amazon’s reporting, of course, is that it provides so little detail about the individual parts of its business, notably Prime, where it’s never released subscriber numbers. I’m guessing that, after the initial release of data on AWS, financial analysts will want more details about that business, so there will likely be quite a few questions about that. I’d also guess China and India, important investment markets for Amazon, will also come up on the call – they’re among the markets where I think Amazon will find it very tough to be successful long term.

As for Microsoft, some of the most important questions surround their moves from the last couple of weeks – selling off mapping imagery to Uber and display advertising to AOL, as well as writing down the value of the mobile devices business. Specifically, I’ll be curious to see what the impairment on the devices business represents and what it says about the future of that business, including the feature phones piece that’s been in rapid decline. I see lots of people reading an admission of defeat into the announcement, but I don’t think Microsoft is quite there yet. Analysts will also want more clarity on the suggestion, over the past couple of weeks, that the Bing business might finally be profitable. If it is, that’s a significant milestone, but we’ll need to wait for confirmation and clarification of exactly what that means. Speaking of profitability, the Surface line has repeatedly been profitable at the gross margin level, but presumably still has some way to go before hitting operating profits, so that’ll be another thing to watch for. Beyond that, the overall growth trend is something to focus on – the Nokia business artificially inflated year on year growth numbers since its acquisition (underlying growth was roughly zero without it) but, going forward, we’ll see more meaningful year on year comparisons and I think it’s going to be tough for Microsoft to drive overall growth.

Content businesses

This is a really wide bucket, so I’ll break it up a bit. On the TV side, we have new wave companies like Netflix, as well as Pay TV providers, content owners who supply their channels to them, and a variety of others. I’d expect Netflix to continue to do very well, though there have been some warning signs lately their US growth is slowing. Meanwhile, the costs of their international expansion continue to be covered very nicely by the ongoing profits from the legacy DVD business and it’s important that that continues – it’s what allows the company’s overall profits to remain healthy even as it invests heavily in expanding overseas. Traditional pay TV providers have done reasonably well despite the onslaught from Netflix and others, but last quarter saw the first time, according to my numbers, there was a year on year drop in pay TV subscribers in the US. That trend is likely to continue and even accelerate. Not all pay TV providers are equal in this respect – the cable companies tend to be losing subs faster, while the telecoms companies are still gaining subs, mostly at their expense, while the satellite providers are less predictable quarter on quarter. AT&T’s acquisition of DirecTV should close any day now, so I’d expect more detail about plans for that business on the companies’ respective earnings calls.

On the music side, there will no doubt be lots of questions about the impact of the launch of the Apple Music on next quarter’s results and the overall health of the industry. As I mentioned above in relation to Apple, I suspect it may cause a dent in Apple’s own music revenue for Q3, but it’s also quite possible it will cause revenues across the industry to dip during the free trial period. Pandora continues to be the one big standalone streaming music service that’s publicly traded and it tends to be losing money while Spotify continues to dribble out bits and pieces of its financial information as it suits, though it is also in the red.

Wireless carriers

Last are the US wireless carriers, which I also track closely. This is likely to be the quarter when T-Mobile finally passes Sprint as the third largest US carrier, something T-Mobile CEO has been predicting since the middle of last year, but which was postponed by Sprint’s more aggressive stance since its new CEO took the helm a few months back. It’s a purely symbolic moment, but expect John Legere to make the most of it. Meanwhile, I’ll be watching for signs Verizon and AT&T are suffering at the hands of T-Mobile’s latest moves, especially on the enterprise side. Until recently, T-Mobile had largely targeted the consumer side of their businesses but lately T-Mobile began putting the same focus on business customers and that could potentially take a toll. Sprint continues to respond more aggressively to these moves and try some of its own. It’s made good use of leasing options to attract customers and get subsidies off its books. I’m also looking for more detail from Sprint on its network upgrade plans, which were alluded to last quarter but which haven’t been fully fleshed out yet.

TV’s Detour

Waves of disruption

The TV industry is constantly going through change. Focusing just on the last twenty years or so, we’ve seen several waves of disruption:

  1. Boxes – TiVo, Slingbox, and others, which allowed viewers to take the content they traditionally had to consume where and when it aired on their televisions and move it through time and space, digitally
  2. Piracy – file sharing, YouTube, and a myriad of other sites and services made it easy for viewers to consume the content they couldn’t find anywhere else, without paying for the privilege
  3. Legitimate online services – the next wave was an increasing legitimization of online options for consuming video, as YouTube began to respond to lawsuits, Netflix began to offer streaming, and Hulu emerged as a first attempt by many content owners to re-engage with viewers.

One of the consistent themes in almost all of this disruption has been a two-fold shift:

  • A move away from the television and towards other devices
  • A move away from traditional providers of paid television services

In this piece, I’m going to focus on the first of these shifts but I’ll touch on the second briefly at the end and likely come back to it in a future post.

A permanent shift or just a detour?

The big question in my mind has always been to what extent these trends were inevitable and inexorable and to what extent they represented a temporary detour from past patterns to which users would return to in time. I’ve always favored the latter explanation myself and we recently got some interesting insight from Hulu on this point. Hulu’s Peter Naylor did a blog post about viewing habits. He shared some statistics about how and where people consume Hulu – note that what is labeled OTT in this chart Hulu calls “living room viewing” in its description:

As with many of the other disruptions outlined above, the primary vehicle for viewing video with Hulu was at first the PC. But even as early as Q1 2014, Hulu saw living room viewing overtake PC viewing and it’s now by far the dominant method of watching Hulu. All this is important, because what it suggests is people didn’t view video content on their PCs as a matter of device preference, but as a matter of availability and convenience – they knew how to watch Hulu (or Netflix or YouTube) on their PC, but didn’t have a way to do so (or couldn’t figure out how to) on their television. As such, what has appeared to be a shift away from the television over the last several years may have been – at least in some cases – a temporary phenomenon, which will fade over time as the adoption of smart TVs, connected Blu-Ray players, boxes like Roku, Apple TV, and Fire TV increase, making TV-based consumption even easier than PC-based consumption.

Mobile in the minority

Of course, the other piece that’s growing, which usually gets far more attention, is mobile. But it’s grown from 15% to 17% over the same period that what Hulu calls “OTT” grew from 44% to 58%. Mobile is important, but the vast majority of Hulu viewing (and of TV viewing in general) is happening in the living room, not while truly mobile. One caveat: Hulu’s “OTT” category appears to include something it calls “connected devices”, which might include tablets. Why would someone use a tablet in their living room rather than the TV? I see a couple of possible reasons: convenience (it’s still easier to just watch using a connected tablet than figure out how to do it on my TV), and solitary viewing. It’s the combination of that latter trend – viewing TV alone rather than in couples or larger groups – combined with truly mobile viewing that’s going to stick, at least to some extent. But the evidence from Hulu and other data suggests it’s small in comparison to the majority of people who still prefer to watch TV programming on the largest screen in the house. What you end up with then is this picture:

TV Detour

The other shift looks equally vulnerable

The other shift I mentioned was the shift away from traditional providers of paid television services. So far, the rise of Netflix in particular and, to a lesser extent, Amazon, Hulu, and others suggests we are indeed seeing this shift continue. However, we’ve also seen the major pay television providers respond to almost all of the disruptions by these new players over the last several years, though imperfectly in some cases. I’m not going to focus on this shift here but, suffice to say, I suspect the pay TV providers will hold up (and hold share) much better than a lot of people are assuming. The disruption we’ve seen in the industry has moved at a relatively slow pace and that’s given these players time to adjust their models and find ways to respond to almost all the major changes occurring around them, with one exception. But that’s a topic for a future post.

Smartphone Trends in the US

Every quarter, I talk with the major US carriers to understand the trends they’re seeing in smartphone purchasing and upgrade behavior among their customers. These conversations are on background, so I can’t share what individual carriers tell me but it enables me to build up a picture of trends that are happening with regard to devices, which helps to know what to expect during earnings season. Today, I thought I’d share some of that with Tech.pinions Insiders.

A big Q4 for upgrades is sucking the wind out of 2015

One of the key things I’m hearing – and which was somewhat evident already in the Q1 2015 results the carriers announced – is that the huge upgrade cycle which happened in 2014, and especially in Q4, is somewhat sucking the wind out of sales in 2015 so far. Though that upgrade cycle was partly driven by massive iPhone sales, and is therefore good news for Apple, it seems to be somewhat depressing Android device sales in the first half of 2015, despite the new device launches from major vendors including Samsung, LG, and HTC. In general, I suspect we’ll see somewhat lower rates of upgrading this year than we did last year, as there were a number of factors that drove higher than usual rates in 2014 and many of those customers will now not be upgrade-eligible until late 2015 or even 2016.

Some factors will mitigate all this, not the least of which is T-Mobile’s introduction of its “Jump On Demand” program, the company’s first leasing program. Sprint has seen very rapid uptake of its leasing plans and T-Mobile should also see good traction with this program and more rapid upgrades from the customers who switch to it. Those customers will be eligible for much more frequent upgrades and I’d expect this plan to become the default option for many customers over the next couple of years, with the exception of those that want to own their devices outright rather than trading them in periodically. AT&T’s Next 18 plan, which was launched in late 2013, was very popular and began to mature right at the end of Q2 and many customers will become upgrade-eligible in the second half of 2015, which should drive higher upgrades. With new iPhones launching in the fall, however, I wonder if some customers who have been on Android for the last couple of years may just wait a while and make the switch.

Android seems to be faring poorly

In general, as I alluded to briefly above, Android seems to be faring relatively poorly, despite the flagship device launches from some of the big names. HTC’s launch seems to have fizzled very quickly, with hardly any sales activity compared to previous launches and likely suffering, at least in part, from the fact the HTC One form factor hasn’t changed much over the last couple of iterations – it’s a less obvious upgrade than some of the other devices out there. Samsung’s launch likely performed the best, thanks largely to the combination of its great brand awareness and promotions alongside the new design, though that hasn’t provided as big a bump as some of the carriers were expecting. LG’s flagship launch went moderately well, benefiting from the significant investment LG made in promotions of various kinds, though even that seems to have done less well than last year’s, according to the carriers I’ve spoken to.

A continuing bifurcation of the market

One huge impact of the shift to installment billing and lease plans for devices has been a dramatic bifurcation of the market, with many postpaid customers moving to higher priced devices and even the higher tiers of these premium devices (greater storage and larger screen sizes for devices such as the iPhone), and the mid-tier of the market emptying out rapidly. The low end has seen an uptick, as the devices in this part of the market have become more appealing and as customers who don’t qualify for installment and lease plans look to buy smartphones outright. The same trend is also helping the prepaid market, which was sluggish at first in its adoption of smartphones but is now rapidly catching up, as devices in the $150 and below segment become far more compelling. As I’ve written previously, this is the part of the market where Windows Phone has enjoyed modest success in the US, even as the rest of the market has largely ignored it for the last couple of years. But Android continues to do very well here and some of the Chinese vendors continue to make their best advances in this segment, even as they continue to struggle in the postpaid market. Over time, some of them will be able to parlay this success into the postpaid market as their brand awareness improves though we’re likely still 12-18 months from that outcome.

Tablets continue to be a major focus

I’ve also written before about the importance of tablets as carriers attempt to drive overall gross and net subscriber additions. As phone growth slows, tablets provide an important additional source of growth. All four major carriers are investing in this space and the major Android vendors have been well aligned with this strategy, heavily discounting tablets sold in combination with smartphones on two year contracts and, as a result, dominating device sales at several of the carriers. The iPad continues to make up the vast majority of premium tablet sales, but these dirt cheap Android tablets are accounting for a lot of overall sales, with many priced at 99 cents or free under certain bundles. AT&T now sells its own tablet, something Verizon has relied on heavily for tablet net adds for some time now and both carriers are seeing decent usage and surprisingly low churn on these fairly low-end tablets, especially on shared data plans.

Q2 earnings will provide stronger signals

The carriers’ Q2 earnings reports are just weeks away at this point and they should provide much more direct signals of how individual carriers and their OEM partners fared in Q2. But I’d expect the trends I outlined above to broadly play out this quarter and then we’ll head into Q3, traditionally a relatively slow quarter for iPhone sales in the lull before the new device lands at the end of the quarter, an opportunity for Android devices to play catch-up. Overall though, we’re seeing a slowing of growth in the US smartphone market and an opportunity for the iPhone to gain share as the overall market stagnates, especially as more and more users are drawn to premium devices by installment and lease options.

Apple and Google’s Partners

It’s been a busy couple of weeks in tech news, despite the traditional summer lull where major news is concerned. Among the biggest news this past week has been Apple’s launch of Apple Music and Beats 1, and Microsoft’s sale of its display ad business to AOL (Verizon). I want to use these two particular items to highlight an interesting difference between Apple and Google that’s becoming increasingly clear and it relates specifically to these companies’ relationships with their partners.

Apple, Taylor Swift, and more

The obvious recent news story as it relates to Apple and its partners is the launch of Apple Music and, especially, the way in which Apple capitulated to the demands of Taylor Swift (and to a lesser extent, small independent music labels) in paying royalties. Apple sees musicians and their labels as key partners in its efforts to bring music services to consumers and has done so ever since it first launched the iTunes store a dozen years ago. These partners are critical to Apple’s success but Apple also makes clear, again and again, it wants to sustain and not disrupt these partners, to help them transform their businesses and adjust to the new realities in the music industry. First, the transition to digital and now, the transition to streaming. Though Apple undoubtedly benefits in both cases, its u-turn on paying royalties made starkly clear how committed it is to these partners and to having them as friends rather than enemies.

But Apple’s commitment to partners goes beyond music labels and musicians. Developers are a crucial set of partners for Apple, and it has made huge strides in providing, not just tools for creating apps, but an ecosystem in which those developers can actually make money in ways that don’t compromise their values. The TV and movie industries are another valuable set of partners and Apple’s new TV service is likely to reinforce that relationship. Interestingly, it seems Apple first attempted to partner with Pay TV providers, notably Time-Warner Cable and Comcast, but when those talks went nowhere, it partnered instead with the content owners and is now in the process of bypassing and potentially disrupting those previous potential partners. Yet another example is Apple Pay. Where Apple could have attempted to build its own proprietary payment system, instead partnered with banks and card issuers to create a system which they could benefit from it rather than be disrupted by it.

None of this is to say Apple has never disrupted anyone or that erstwhile partners haven’t eventually been excluded from Apple’s business or replaced by its own efforts. But, for the most part, Apple is a company that understands and leverages partnerships heavily in its business and generally treats those partners well.

Google: losing friends left and right

When it comes to Google, however, the trend is almost all in the opposite direction. Though the sale of Microsoft’s mapping and display ad businesses this week was the headline, an important part of the ad sale to AOL was that AOL would switch its search ads from Google’s to Microsoft’s. And this isn’t the first of Google’s search partners to switch sides – Firefox switched its default search provider from Google to Yahoo in the US late last year and Google has lost several points of market share as a result. Of course, there’s Apple itself. Then-CEO Eric Schmidt was on stage at the first iPhone launch event to talk about the points of integration between Google and Apple (and even jokingly suggested merging the two companies while on stage), but Apple is one of a number of companies which started out as a close partner of Google and slowly saw Google encroach on its territory and, therefore, began to distance itself. This began with the exclusion of YouTube and Google Maps from iOS a couple of years ago but has also more subtly continued with the advances Apple is making in Spotlight and Siri, both of which have switched to Bing as their underlying search engine and are pre-empting many Google searches.

But these aren’t the only partners Google is slowly losing: YouTube too, has been struggling to retain its key creative talent, as channel owners find it harder and harder to make a living on YouTube with the increasing restrictions Google is placing on monetization and they are starting to explore alternatives. The announcement Facebook would be sharing ad revenue with video content creators is yet another sign Facebook is serious about stealing away these creative types and the fact it’s gaining traction is further evidence of how Google has mistreated what should have been valuable partners.

Even when it comes to developers, which Google courts as Apple does with its annual developer conference in the summer, Google is constantly creating conflict with its attempts to get users back to the browser and out of their apps. The Chrome custom tab product announced at this year’s I/O, for example, was presented as a boon for developers, but seems like a fairly transparent ploy to get users back into a domain where Google can track them and serve ads. Its relationship with hardware vendors, too, has been thorny over the last few years as Google has attempted to regain control over Android and reduce the OEM customizations.

There are, of course, counter-examples here too, but the trend seems to be very much that Google is losing many of its most valuable partners one by one. This stems from its ruthless pursuit of its own business and advantages, often at the expense of these partners. If Google doesn’t change this behavior soon, it risks putting its business at serious risk from former partners who turn against it and sidle up to competitors instead.

Uber – Full Stack or Digital Layer?

One of the terms VC firm Andreessen Horowitz likes to use regarding many of its investments is “full stack“. Chris Dixon has defined the term as follows:

The new, “full stack” approach is to build a complete, end-to-end product or service that bypasses incumbents and other competitors.

What’s interesting about this characterization is Dixon uses Uber as an example of it, whereas I’ve used Uber as an example of what I call the Digital Layer (a concept I’ve expanded on here). In some ways, these two concepts can be seen as opposites. Here’s my definition of the Digital Layer:

What distinguishes the Digital Layer is it doesn’t displace an analog model but rather adds a layer to it in a way that has the power to transform business models while leaving many of the underlying components intact.

In truth, I think Hailo is actually a better example in some ways of a true digital layer company than Uber but, to my mind, one of the things that sets Uber apart is it doesn’t “own” two of the most important analog elements of its service: the cars and their drivers. In this sense, Uber is a purely digital company, with none of the direct infrastructure needed to deliver its service. Yes, it does seek to own an increasingly “full” stack of the components necessary to pull that digital layer off, but its model works in great part because it has refused to treat its drivers as employees and also requires them to acquire and own the cars rather than Uber owning the cars. This makes for a much leaner model and, simultaneously, shifts much of the risk and cost of running Uber as a service onto the drivers.

The big question is to what extent Uber’s future is dependent on being able to stay a full stack company in digital terms only and to what extent its business model is threatened by the increasing pressure for it to start treating its drivers as employees, with all the implications that has for compensation, benefits and the like. It’s also largely skirted laws on the treatment of its drivers’ vehicles as business assets from an insurance perspective, but there too it faces significant pressure. Would it be hugely damaging for Uber to have to truly embrace the analog, real-world elements of its stack as well as the purely digital ones? If it had to employ the drivers and own the cars? In other words, if it had to act much more like a traditional taxi and livery company rather than a digital layer startup?

This question, of course, affects far more than just Uber and goes to many other digital layer startups too. One of the key advantages Digital Layer startups enjoy is they tend not to own significant analog infrastructure and often piggyback off the infrastructure built and owned by others, either adding value to it through technology or performing some sort of arbitrage to reduce their costs and/or prices for end users. Where the assets they use are owned by other companies, the worst that can happen is those companies eventually find ways to block their usage in this way. But when the assets are actual human beings, with rights they’re capable of asserting in court and elsewhere, things get rather more complicated. On the one hand, the people who get involved in so-called on-demand economy services clearly see some opportunity and benefit in doing so and engage in them of their own free will. But the larger these groups of people become, and the more they feel they’re being exploited rather than gainfully employed, the more power they’ll gain as lobbyists for better rights and protections.

As such, I’m increasingly feeling like the digital layer startups in the strongest and most defensible positions are those that truly are purely digital, whether it’s Nest in the smart home area, Stripe or Apple Pay in the payments sphere, or Automatic in the connected car. Each of these companies adds a digital layer to an analog environment that adds value for the end user without any human intervention at all. I’m generally bullish on Uber, too, but I’m increasingly concerned the core value proposition of its model is it doesn’t own analog assets, and that it will eventually be forced to do so.

Installation: a core smart home advantage

The smart home concept is one that’s been around for quite a while but has never really taken off. There are a variety of reasons for that, some of which I wrote about in an earlier piece about why we hardly made use of any smart home features when we built a new house a year ago. However, one thing that’s becoming increasingly apparent to me is professional installation and on-site support (when needed) is going to be a vital component for mainstreaming this technology and, therefore, the companies that have that capability will have an edge. In this piece, I’m going to give three examples of companies doing this and talk about the implications for others.

AT&T Digital Life – and DirecTV

One company doing this for the past year or so is AT&T, with its Digital Life solutions. The numbers are still modest around this service, partly because it’s such a departure from the services the wireless part of AT&T (which is the business unit that manages the service) has offered in the past. That means training sales reps, educating consumers, and building a set of capabilities AT&T’s mobility arm has never had. As such, it’s been making use of third party installers until now, which creates both costs for AT&T and complexity and a lack of control in how the installation happens on a detailed level. This is where DirecTV makes things really interesting, because DirecTV obviously has a network of installers for its satellite services and these can be used by AT&T to install Digital Life services too. There’s also some economy of scale and scope AT&T can take advantage of here, which it doesn’t enjoy as long as it’s only installing a few hundred thousand home security systems a year. AT&T’s own U-verse service offers another opportunity for bundling products and the associated installations which could provide some of the same benefits.

Google Fiber and Nest

When Nest announced its new products last week, one of the more interesting elements in this context was the fact Google would be running a promotion offering a $50 discount off devices along with free installation for Google Fiber customers. Along with AT&T Digital Life, the Nest is the only home automation product we have in our home and, although the product itself is very easy to use, installation can be tricky, especially if you’re replacing an older thermostat. If you don’t know what you’re doing, you can easily electrocute yourself or damage wiring or, less seriously, simply end up with a thermostat that doesn’t work properly. Google also has an army of technicians out in the field installing Google Fiber, so it can benefit much as AT&T will from an existing base of installers who can help put products in consumers’ homes and get them working. Given that many of Google’s Fiber installers seem to be ex-cable company employees (based on my experience with them) it’ll be something of a transition for them to start installing thermostats, smoke detectors, and security cameras — but it’s not a huge stretch.

Vivint and home automation

Vivint is perhaps a less well-known brand nationally than it is in Utah, where I live. But Vivint has built up a very successful business through door-to-door sales of alarm systems and an increasing range of other products over the last few years and it’s also spun off a very successful solar panel installation business. Vivint’s home automation solutions also leverage the company’s technicians, who install and offer support for their security products as a base service but can now also install and support a wider range of home automation solutions. Vivint is also moving into other home services over time and the installers are a critical part of the capabilities that allow it to do so.

An expensive proposition

Sending installers and technicians to people’s homes is an expensive proposition – in the cable and telecoms world, minimizing so-called “truck rolls” is always a key goal and there’s been a big move away from technician installations and towards self-installation for some services. However, that’s much easier to do when it’s a question of swapping out set-top-boxes or modems or plugging a new device into an existing socket than it is when you’re replacing thermostats or light switches. If home automation is going to go mainstream, installation capability will be increasingly critical, albeit expensive. That’s where having an existing workforce of installers who manage other products makes a huge difference and that’s what each of these three companies (and others) are doing. The question then becomes how companies such as Google (outside the very small Fiber footprint), Apple, and others will manage this challenge. Almost all the standalone home automation products on the market today operate on a self-installation model, which necessarily limits their appeal to serious hobbyists and those comfortable with wiring, except for the simplest products. For this market to move to the next level, we need to see a deeper investment in professional installation, and that’s going to be a hard shift for many of the companies currently in the market.

Windows Phone’s Diverging Fortunes

Following a week when Microsoft executives overseeing both its devices business in general and the phone business specifically have departed, it’s worth looking at how Microsoft’s smartphone business has been performing and where it might go from here. The reality is the fortunes of Windows Phone are diverging rapidly in different regions around the world, as shown in the chart below:

Windows Phone share in Europe and US

As you can see, based on this Kantar data, Windows Phone’s share of smartphone sales has actually been steadily rising over the last two years in four of the five major European markets and, in France and Italy, is now over 10% of sales. In Italy, there have been months when Windows Phone outsold iPhones an,d in France, the two lines are also converging over time. Only Spain out of the major European markets hasn’t seen a similar trend, in part because, in a recovering economy, Spaniards are finally falling for the iPhone in a way they haven’t previously and that’s sucking some of the wind out of Windows Phone’s sails. In other smaller European markets, the share of Windows Phone is actually significantly higher than that of the iPhone, especially in Eastern Europe.

But note, too, in the US the trend is reversed – Windows Phone’s share of sales is falling, not rising and remains stubbornly below 5%. Android and iOS make up the vast majority of the US market at this point, with 95.6% of sales in the three months ending April 2015, a pattern that has been steadily emerging over the last few years. Windows Phone capture’s the lion’s share of what’s left, but there’s frankly not much left.

What explains the differences in Windows Phone’s performance between these various markets? I think there are several factors:

  • The Nokia brand and business has remained far stronger in Europe than in North America, where it never had much of a foothold once smartphones took off. This enabled first Nokia and then Microsoft to leverage that existing brand to sell Windows Phones to people who’d previously bought Symbian devices
  • In European markets, the retail price of the phone has a much bigger impact on total spending on wireless service than it has in the US until now, which has meant cheaper phones really made a difference to the service plans customers could afford in a way the subsidy-led US hasn’t seen. This has made low-end Windows Phones, in particular, attractive in these markets
  • In some of these markets, there’s a cultural response to the dominance of iOS and Android which is leading some people to want alternatives and Windows Phone is the main option available

The reality is Windows Phone’s sales over the last two or three years at least have been dominated by the low end devices in the portfolio – the 500 and 600-series phones that retail for $200 or less for the most part. In the US, these devices are only really relevant on prepaid services, as I discussed in this previous piece. But elsewhere, prepaid is a much more significant part of the total market and low-cost devices have been very attractive to many consumers. There’s a risk here, though, that Windows Phone becomes just a low-cost brand and loses any chance it has of succeeding at the high end because the whole brand gets dragged down market (something I alluded to in this piece).

What’s so interesting to me about the timing of Stephen Elop and Jo Harlow’s departures is they come just as Microsoft is getting ready to launch Windows 10 and with it, new smartphones that take advantage of that platform. Microsoft hasn’t had a new true flagship in the Windows Phone lineup for several years and, during this hiatus, even the modest success the platform briefly enjoyed in the US has dissipated. Whereas the low-end devices are driving success elsewhere, without a flagship in the lineup that truly differentiates itself, Windows Phone’s share of the US market is destined to remain in the single digits and likely to continue to fall. At this point, Microsoft has a serious decision to make about whether it wants to continue trying to sell these devices in the US or whether it wants to shift its focus to other markets around the world. The US has become so strategically important in the smartphone market these days almost everyone feels they have to compete here, even though many of them struggle (notably the major Chinese brands). But perhaps it’s time for Microsoft to start re-prioritizing its efforts in mobile around those markets where it’s had some success and properly supporting those markets with localized services. Perhaps even launching new services there first rather than flogging what’s looking like an increasingly tired horse in the US.

Classifying Privacy Concerns

Privacy has been in the news a lot recently but, for once, not because of some egregious breach. Rather, it is Apple executives’ repeated statements of the company’s commitment to user privacy and the way in which it seeks to set itself apart from its competitors on this point. I thought it would be useful, by way of background, to walk through a classification of the major privacy concerns we as consumers seem to have and how each of these is (or isn’t) relevant to the different companies that compete in this industry. I’ve done quite a bit of research into major privacy stories covered in the news over the last few years, and most of them fall into one of these categories.

1. Sensitive personal information being exposed to other people

Description: One of the greatest fears people have is information they consider particularly personal or sensitive being shared with people they don’t want it shared with.

Examples:

  • I’m a school teacher who also has an active personal life. But I don’t want pictures of me drinking or partying exposed to the students, their parents, or perhaps even the other staff at the school where I teach
  • I’m gay but, for the time being, have chosen only to share this information with certain people and definitely do not want this information shared with others – whether family members, colleagues at work, or neighbors
  • I’m divorced and have recently started dating again and I don’t want my ex to know anything about my new life

The list could go on, but you get the picture – this fear is about personal information being shared with other individuals (not corporations or advertisers) beyond those I’ve chosen to share it with, especially in situations where I have chosen to share some of this information with specific groups or individuals but not others.

Companies most likely to cause this concern: In general, the companies most likely to commit breaches of this particular facet of privacy are those through who and with whom users proactively share certain information with other groups, which for the most part limits it to social networks such as Facebook, Google+, and the like. Facebook has certainly had several periods when its users were exposed in this way, often because default privacy policies were set too open or when policies or settings changed without due notice to users.

The vast majority of the privacy stories concerning Facebook over the last several years have been in this category, with relatively few other companies affected in quite the same way, at least not frequently. However, Google has occasionally been guilty too, as when its Buzz service first launched a few years back.

2. Personal information being “read” by computers

Description: We fear our personal information is being “seen” or “read”, not by other human beings, but by computers used by companies to personalize services, to serve advertising, and so on.

Examples:

  • My email provider has computers which view the contents of my emails to filter them into appropriate categories
  • My search provider sees all the searches I enter, and which results I click on, and slowly builds a profile of which search results are likely to be most relevant to me
  • My photo service performs machine analysis of my pictures to make them searchable.

In this case, the fear isn’t that human beings are seeing the personal information we’re sharing (though sometimes misunderstandings do occur on this point, or there may be skepticism that human beings really can’t see this information if they want to), but a vague sense of creepiness that machines are delving into some very personal information.

Companies most likely to cause this concern: On this point, it’s hard even to come up with examples that don’t sound like they’re talking about Google, which feels like the ultimate symbol of this kind of computer snooping. There’s no true breach of privacy here from a human perspective, but these types of services can create a vague sense of unease among at least some users.

3. Fear of one company knowing too much about us

Description: We fear that, even though many services may collect personal information about us, more and more of this information seems to be consolidating with just one or two companies, which are coming to “know” an awful lot about us.

Examples:

  • My email, calendar, contacts, photos, search history, and so on are all hosted by a single online service provider
  • My call records, email, calendar, contacts, phone search history, text messages, music, and books are all on my phone
  • The vast majority of my news and video consumption, most of my social connections, my interests, and my political views are all known by the social network I use.

In this case, some users may be genuinely uncomfortable about this enormous amount of knowledge held by a single company — a worry in its own right — which fits to some extent in the same category of vague unease as the previous concern on this list. However, in other cases, it may be a factor in other worries listed below.

Companies most likely to cause this concern: As a broad concern, this issue could affect any one of a number of companies, from Google to Apple to Facebook to Microsoft to Samsung. Any company which either provides a very broad range of services or provides smartphones and other devices is at least potentially in a position to “know” an enormous amount about its users. However, much depends on how data is collected, stored, and used. This is one area where Apple seeks to set itself apart from competitors, by focusing on its tendency to keep personal information on the device itself rather than on cloud servers. However, even then, there is potential for some exposure of this data, as discussed below. Companies which gather and store this data for the explicit purpose of building profiles of their users for purposes other than personalizing their services may also foster some of the other concerns listed. Google, in particular, has seen a number of stories about this aspect of its business, and especially about its decision a couple of years ago to unify its logins and data across all its services, over which several European jurisdictions are still pursuing legal action.

4. Fear of data being sold to advertisers

Description: We fear that not only do the companies whose services we use collect lots of data about us (see 2 and 3 above), but they sell this data in some form to advertisers.

Examples:

  • My search provider uses information from previous searches to allow advertisers to reach me when I make future searches
  • My smartphone vendor uses broad profile information about me to provide targeted advertising from companies who want to reach people like me
  • My social network uses information about my interests which I have provided explicitly and information gathered through my other actions on the service to serve up ads which seek to reach people with my demographics and interests

The reality is few of the companies we’re talking about here really do “sell” data to advertisers. What they do sell to advertisers is the ability to target their advertising to users based on their interests (whether explicit or implicit), and/or their demographics. The data itself is not shared with the advertisers except perhaps in an aggregated form as an indication of the size of target markets, for example. There are companies that do sell this kind of information, but they exist outside the world of consumer technology providers.

Companies most likely to cause this concern: This is a tricky one to define, because these companies don’t technically sell the information to advertisers. However, the very act of allowing advertisers to target users causes the same unease among some users as some of the other items I’ve described. There’s no breach of personal information per se, just as with 2 and 3, and unlike number 1 on our list. But there’s a sense our privacy is being invaded because advertisers are being allowed to reach us based on the profiles our providers have built up about us. This is obviously particularly true for companies which are heavily dependent on advertising business models, such as Google and Facebook, but it also applies, in a narrower way, to companies like Apple which have advertising products like iAd that allow for targeted advertising.

5. Fear of an accidental breach of security

Description: We fear that, because service providers and device vendors collect the information described in the various points above, there is always the potential this information is shared with third parties through no deliberate action on our part or on the part of the provider or vendor.

Examples:

  • My social network provider is hacked, exposing my personal information
  • There is a bug in the privacy settings on the online service I use which allows people I have no connection with to see personal information I store in the service
  • My device collects information about me which should be private but can be exposed through a loophole in the security settings

In none of these cases did the provider deliberately share information with anyone else but, in some cases, the argument can be made the provider should have done more to protect sensitive data, either to ensure its software was bug free in the most important security aspects or to protect it against malicious attacks.

Companies most likely to cause this concern: All companies are to some extent vulnerable to these issues, but those that collect the most data (even if for entirely legitimate purposes) have the most at risk if there is a breach. Google, Facebook, Apple, and others have all been the subject of stories along these lines over the last few years, whether as a result of bugs, hacking or other factors (such as rogue employees). These stories often say more about the desire of malefactors to access valued information than they do about security policies but, in some cases, they reveal shortcomings in company security that can build into a narrative over time (Apple has seemed at risk of this outcome at various times).

We’re not all the same

There are undoubtedly other facets of privacy concerns that aren’t completely captured here, but the vast majority of concerns we have, and the headlines about privacy issues, tend to revolve around one or more of those outlined here. The reality is we’re all different – each of us has a different tolerance for these different categories of privacy risk. Some of us care deeply about all of them, and are inherently distrustful of many service providers and device vendors for this reason. Others care only about some – likely 1 and 5 (or possibly just 1) but not the rest. And many more are in the middle, perhaps most concerned about a couple but also somewhat uneasy about the others. There’s likely a segmentation in any given population that could apportion users among these different groups, with the size of the various segments differing by company and culture. For example, users in China and other oppressive regimes and users with particularly sensitive personal information are likely to be more cautious on privacy than those who live in relatively free societies and those who are able to show their full personalities openly without fear. As Apple and other companies seek to stake out privacy positions they need to be aware of these different classifications and the various segments that exist. Apple’s remarks about privacy are likely to land hard with certain segments and entirely bounce off others, whereas Google’s stance is likely to turn off some users while attracting others. Each of these companies needs to bear this in mind to ensure they don’t risk alienating users who might otherwise be attracted to their products and services.

Dick Costolo’s Departure and What’s Next for Twitter

With Dick Costolo leaving Twitter, it’s a good time to think about what’s next for the company and its service. Twitter is one of the companies I’ve followed most closely over the last couple of years and I’ve been continually surprised by the inability of the company’s management to move faster in making the changes the company needs to move forward. As Chris Sacca’s recent letter indicated, there are plenty of people who have opinions on what the company should do but, for some reason, Twitter’s management either hasn’t seen what needs doing or has been unable to execute on an appropriate vision for the company. At the risk of adding another voice to the chorus telling Twitter’s next permanent CEO what to do, here’s a list of four things I think Twitter needs to turn things around.

Protect the current core experience

If there’s one thing Twitter should have learned from all its various experiments over the last couple of years, and even with the rumors of more changes to come, it’s there’s a significant group of hardcore Twitter users (including many of its most active and vocal users) who very much like most of the current experience on the service. That includes important features such as the ability to see one’s timeline live and unfiltered, the exclusion of non-followed individuals and their tweets from that timeline, the ability to use third-party clients which add either functionality or usability to the experience provided by the company’s own clients, and so on. Although I’m going to recommend several significant changes below, the company should make those changes by adding to – rather than replacing – the current Twitter experience, for those who want to keep it. One of the most worrying signs of the last couple of years has been a willingness to break this core experience for those who currently use Twitter most and Twitter needs to be very careful to avoid doing this. Because these users will provide a great deal of the value the service will provide to the next few hundred million users.

Move away from the focus on following accounts

Although rule number one should be not breaking the core experience for existing users, the second most important thing Twitter needs to do is actually break this experience for new users. Though Twitter’s current user base is enormously important to its future and it needs to retain these super users, Twitter does need to make significant changes to the product, starting with the on-boarding experience. I’ve written about this a little before, and Twitter has started to tinker with the model but it hasn’t gone far enough. The biggest problem Twitter has is it’s still built around the process of following and seeing tweets from single user accounts. Even though Twitter has improved the sign up process by asking about a user’s interests first, that interest selection still leads to a screen that’s account-centric:

Screenshot 2015-06-13 18.30.46

How these particular accounts are chosen to match the interests I selected is another important question, but one we’ll leave for now. But, as you can see, I’m still being asked to follow individual accounts. If I’m entirely unfamiliar with how Twitter works, this is immediately intimidating and raises off-putting questions. What does following these accounts mean? If I follow a brand, will they start spamming me? Will my friends see I’m following these accounts? Where are my friends? And so on. The reality is, Twitter needs a topic model and not one that’s still composed of individual accounts but one that’s truly topic driven and independent of accounts. I should be able to pick favorite sports teams and, instead of being directed to that team’s account, be able to say I want to have the most relevant tweets on the topic of my team as a “channel” I can tune to whenever I’m interested. Users need to be able to follow multiple topics in this way, keeping them separate and tuning into one or all of them at any given time as they wish.

Go beyond the 140 characters

Before anyone thinks I’m proposing lengthening the character limit of tweets, that’s not at all what I’m proposing. What I am saying is Twitter needs to finally pulls the trigger on some of the things it’s been reported to be working on for some time. That includes moving some things currently within the 140 characters limit outside of them. I’m thinking principally of usernames, hashtags and the like – things that have become part of the Twitter vernacular but are both intimidating to new users and character-consuming. I almost never use hashtags both because I don’t like the clutter but also because they eat into my 140 characters. It’s often hard enough to communicate a nuanced thought in less space than a classic text message without having to trim down my message even further to squeeze in a hashtag. And yet, hashtags can theoretically be incredibly useful because they identify individual tweets with the topics I talked about above. The same applies to usernames, especially once you get four or five people on a reply-all thread. But both hashtags and usernames are really in the nature of metadata, not the payload and, as such, could usefully move out of the body of the message and into a secondary slot, freeing up characters and making them more useful in the process. Twitter has been talking about this for months but, for some reason, has been reluctant to move forward. Tags and usernames clearly separated from the tweets themselves and marked as such would be much less intimidating for new users and would free up valuable characters for old hands and newbies alike.

Get logged-out users to sign up and log in

Twitter has been talking about its base of logged out users – the hundreds of millions who visit the site each month but don’t log in – and there’s some logic to that. The base of people interacting with Twitter is far larger than those who actively sign in and Twitter wants its investors and others to begin taking that into consideration. But there are three problems with this approach: first, it’s much harder for Twitter to create a meaningful experience for these users when they don’t sign in; second, it’s harder to monetize them because these users are harder to track; and third, it suggests these users aren’t seeing enough value in the service to bother signing up and logging in. Twitter needs to do the things I outlined above (and more) to make the service more attractive but it also needs to continue to give logged out users reasons to engage with the service more fully. For example, when inviting logged out users to select topics of interest, it should be inviting them to sign up or log in to save these preferences and interests for next time. The interest options made available to logged-out users also aren’t granular enough – though there’s a subtle call to action on the right side to ask these users to sign in and create personalized timelines, it’s not clear enough what that means, or how it might be better. Twitter can do this much more effectively than it currently does.

Moving faster and further is key

This list could go on and on, but I’ll stop with those four key actions. The real key is for Twitter to begin to move faster and further than it has been. There have been signs of an increasing sense of urgency over the past year but, even then, Twitter hasn’t done some of the things it’s been talking about for a long time. It feels like Twitter could learn some lessons from Facebook, which evolved its motto not long ago from “move fast and break things” to “move fast with stable infrastructure”. The new motto isn’t nearly as counterculture as the old one, but it preserves the first half of the phrase: “move fast”. Twitter is growing too slowly and facing too much heavy criticism to continue to move at its present glacial pace. It needs to move faster and demonstrate it’s willing to shake things up in pursuit of getting back to real growth. As long as it avoids breaking the experience for core existing users, it should feel free to experiment and innovate with new features and new ways of interacting for the new users it’s going to need to attract to get as big as it clearly wants to be.

Apple is Back in Content

I did a quick post on my personal blog earlier this week called “Ten quick thoughts on WWDC” and threatened to expand on some of those thoughts in more detail in the coming days. Here, then, is the first expansion on one of those thoughts, and it’s the last one on my list: Apple is retaking control of content.

Apple adrift

In my piece earlier this week, I wrote:

Apple has been big in content for twelve years, since the launch of the iTunes Store in 2013, and continuing with major launches like TV shows and movies in iTunes, iBooks, Newsstand, and so on. However, for the last several years Apple has seemed adrift in content, a victim rather than a driver of trends, and has seen its content revenues stagnate and fall even as third party apps explode (along with the associated revenue stream for Apple).

There was a time when Apple itself was the conduit for a lot of the content we consumed, whether buying music, renting movies, or watching TV shows. When the download model dominated online content consumption, Apple dominated in the major categories. However, what we’ve seen over the last several years is the download model has been replaced with subscription and free, ad-supported streaming for content. Spotify, Deezer, Rdio and others have led the charge in music; Netflix, Hulu, and Amazon have done the same in video; and subscription and streaming models have popped up for everything from books to games. For the first several years of this trend, Apple did very little to respond and it felt as if Apple was adrift. The acquisition of Beats was the first big sign Apple intended to change this but it wasn’t until this week we really got clear signals of how it would respond.

Apps, Music, News… and TV?

The first signs of better curation actually came in the App Store over the last few weeks. Apple essentially overhauled the way games in the App Store are presented in the US the week before WWDC and the major change was the role of human curation rather than automatically generated lists. This trend of Apple re-engaging in the layer between users and their content was evident in other areas at WWDC itself, notably with the new News app and with Apple Music. With News, Apple is replacing the relatively hands-off approach it took with Newsstand (which really added no value above and beyond the underlying apps) and moving into a more direct role with its own app, dictating design and feature functionality to partners and doing the curation on behalf of users. With Music, Apple is not only providing standard subscription service features, but adding its own radio station and its own custom content destination in the form of Connect. Again, Apple is taking a more direct role in not only content curation but ownership. What we didn’t see at WWDC, of course, was Apple announce its upcoming TV service, but that will likely fit this now familiar pattern.

“For You” a significant theme

One of the other common themes in all of this is not just generic curation but personalized recommendations. Both the News app and the Music app have sections titled “For You” which contain personalized recommendations based on your explicitly stated and implied interests. One important difference between the way this works in Music and in News is, in Music the emphasis is on human curation while in News, it appears to be largely algorithmic. Based on Jimmy Iovine’s remarks on stage at WWDC, it appears Apple believes music has a strong emotional component which machines alone can’t understand – presumably the same can’t be said for news. But it almost certainly can be said for video content, which is why I suspect we’ll be seeing a similar “For You” section in Apple’s TV service when that lands. Apple has, of course, done recommendations for a long time, mostly under the Genius brand in iTunes, but it hasn’t always been effective. Whether it’s any better now will be a major deciding factor in whether Apple Music, News app, and ultimately its TV service will be successful.

Exclusive content and formats

The other big trend in Apple’s re-energized content play is exclusive content and formats. Music has Beats 1 and the Connect platform for artists and fans and News has custom formats for articles. Apple has never really been a content provider before – it’s always simply acted as a channel for third party content – so this is a significant shift. I’m particularly curious to see how this approach gets applied to its TV service, because we’ve already seen significant investments by Netflix, Amazon, Hulu, and HBO in original content over the last few years. I still can’t see Apple investing to that extent in exclusive content, but I can see Apple extending the Connect concept to TV shows and movies and allowing creatives to create and share exclusive content with viewers.

There’s still an app for that

Despite all this, Apple isn’t going to be locking out or shutting down any third party apps that compete with these services. Spotify, Pandora, and so on will continue to exist in the App Store and may even make their way to the Apple TV if Apple does indeed open up the SDK at some point later this year. Apple is more open than ever to competing apps on its platforms and this raises the bar for Apple’s own content services. While Apple has an inherent advantage with these services by virtue of being able to pre-install them on every iPhone, iPad, and Mac, that’s no guarantee everyone will suddenly dump competing apps and come running back. Apple’s content play can’t rely on the home field advantage alone but has to actually differentiate on quality. That’s the big question I have coming out of WWDC. We saw so little of how well these new apps and services will work on stage and there are so many questions remaining. We really will have to wait and see how these things – and especially the curation and recommendation side – work in practice. For now, all we know is Apple is finally ready to try to recapture our content attention, but we still don’t know if it will work.

Apple’s Music Business Today and Tomorrow

This piece will be published the morning of Apple’s Worldwide Developer Conference keynote, so I thought I’d provide something of a companion piece to Ben’s from late last week, which was on the state of the online streaming music industry today. This is also, in some ways, a follow-up to my own piece from a few weeks ago on what I think Apple’s new music service could look like. What I’ll focus on here is the role of music in Apple’s business today and the revenue potential for a streaming music service, which will likely be announced today.

Apple’s music business to date

Apple has made a fairly significant amount of money from the music business between the launch of the iTunes store back in 2003 and now. A year ago, it announced it had sold a total of 35 billion songs since the launch of the store and, at an average rate of a little under a dollar per song, that’s a good $25-30 billion in revenue during those eleven years. However, if we were to plot that revenue, it would have a very steep curve during the first few years, when Apple went from selling a few hundred million to billions of songs per year, but then would slow in a fairly pronounced fashion over the last couple of years and then begin to decline. The trend in Apple’s music revenue recently is decidedly downward, as this compilation of statements from Apple’s SEC filings indicates:

Apple SEC filings and digital content

The turning point came around the end of 2013, when total digital content sales were flat year on year and things accelerated in the subsequent quarters, when music sales began to fall. Since then, total digital content revenue continues to fall year on year, likely led by a loss of music sales but likely also impacted by video sales. In other words, though the music business has been very good to Apple over the last twelve years, that’s starting to change pretty rapidly.

The potential for subscription music

While we don’t know yet exactly what Apple is going to announce, I’ll make some assumptions for the sake of this exercise. It’s likely Apple will charge somewhere around $10 per month for its unlimited streaming service, and this service will be pretty compelling for Apple loyalists and possibly others. Given Apple has somewhere around 450 million iPhone users today, some significant subset of that base is likely to sign up. I think Apple could easily pass Spotify’s current total of 15 million paid users within the first year, if not by the end of 2015, and I think the longer-term upside could be closer to 50 million subscribers. At that run rate, Apple could generate gross revenue of $6 billion per year. Of course, its net cut would be far smaller, just as it has been on the 40 billion or so songs it has likely sold to date.

However, in the grand scheme of Apple’s revenues, that’s not that much. Certainly, it will help to offset the inevitable decline in Apple’s music sales business and that’s a good thing. But $6 billion in the context of the $200 billion or so Apple might generate in annual revenues this coming year is 3%, and the incremental bump in revenues (accounting for the fall-off in sales) will be far smaller.

The strategic rationale, and other content

Though it’s important financially Apple stem the drop in its music revenues, I’ve argued all along it’s actually far more strategically important Apple continue to have a role in the music business. Music is arguably one of the two most important forms of content people consume, along with video, and certainly one of the most emotionally engaging. Music can set (or turn around) our mood for the day, it enhances the emotions associated with being in love or breaking up, it takes us back to bygone days or helps us feel connected to our friends today. It’s such an important form and, together with communications, content is what drives our usage of the various devices we carry. Apple needs a role in music, and preferably a defining one, which drives loyalty to its products and services and keeps people buying iPhones, regardless of the direct revenue impact.

But from a purely financial perspective, I think there’s enormous upside in video, which I’ve also written about quite a bit over the last several months here. A TV service from Apple would sell not at $10 per month, but $30 or more and would be a much better fit with how people consume TV in the US (and to a lesser extent elsewhere) than its current sales and rental model. Tens of millions of subscribers on such a service would do far more than offset the decline in video sales and rentals and provide a much more meaningful boost to revenue. It sounds like we’re not going to see this service announced at WWDC, but it should still arrive later in the year. From a financial perspective, it will be significantly more meaningful than the music service. But it will also be a great fit with the music service, as Apple makes the transition in two giant leaps from principally selling content to selling subscriptions.

Ecosystems and Control

As we near the end of developer events, with Build and I/O behind us and next week’s WWDC, there’s been a lot to digest from what are often thought of as the big three ecosystem and platform companies. Each of these companies uses these events to enhance its various platforms and the ecosystems associated with them and to set a foundation for growth — both of the ecosystems and the revenues and profits associated with them. At the same time, however, there are increasing signs these ecosystems aren’t created equal and, in some cases, others may supplant them.

Defining ecosystems

In a technological rather than biological sense, ecosystems are the collections of products, services, and companies which grow up around a particular item, feeding off it and, in turn, feeding value back into it in a symbiotic fashion. These ecosystems have often grown up around platforms, typically operating systems such as Windows, iOS, or Android, with the applications developed for the operating systems and third party devices that run them forming major parts of the ecosystem. However, this needn’t be the case. What an ecosystem really needs to be successful is the following:

  • Compelling products and/or services, which can attract users
  • A large base of users attracted by those products and services and themselves attractive to the various players in the ecosystem
  • Cohesive forces which keep the ecosystem together rather than allowing it to fragment – standardized development tools, app stores, and software licensing models, for example
  • A strong sense of identity for the ecosystem itself, such that users associate positive facets with the ecosystem rather than with other players such as OEMs or app developers
  • Control over users’ time and attention while they’re on the platform

Not all operating systems qualify

As I mentioned, it’s often assumed operating systems are the focal points of these ecosystems, but that isn’t necessarily the case – not all operating systems necessarily beget cohesive ecosystems, and not all ecosystems are built around operating systems. For example, I’d argue there are significant cracks in Android as an ecosystem – though it has very many users, it lacks the cohesion and the consistent identification of the positive facets with Google and Android itself rather than with partners. The positive associations people have with their Android phones are as likely to be attributed to Samsung or another OEM as they are to Android. In addition, Google is increasingly struggling to maintain Android as a cohesive ecosystem in the face of several threats. In China, where Google’s services can’t operate fully, others take their place, reducing the value of Android as a Google-owned ecosystem. Elsewhere, parties such as Amazon have forked Android and used it for their own ends in consumer products, and Cyanogen intends to create a version of Android with all the Google parts stripped out and replaced with elements from Microsoft and others. Though Microsoft’s is by far the smaller operating system in the mobile world specifically, its ecosystem is arguably stronger in many ways if you combine the Windows PC installed base and the range of apps and services Microsoft is layering on top of other companies’ operating systems.

Google is obviously keenly aware of this, as its various attempts to regain control over Android over the past year or two demonstrate (something I first talked about a year ago in this piece). Google Now is an interesting effort which seeks to reinforce Google’s own services rather than third party apps as the centerpiece of Android. The advances showcased at I/O under the “Google Now on Tap” banner take this effort much deeper, potentially layering Google Now on top of apps even when users are in them. At the same time, Google seems to be working increasingly hard to spread its own services beyond Android, especially onto iOS, but it’s also uniquely threatened by some of the work Apple appears to be doing to squeeze Google out of its products.

Not all ecosystems are built around operating systems

Conversely, not all of the powerful ecosystems that are emerging are built directly around operating systems. In some cases, they’re being built at a layer above the OS, as in the case of the Asian messaging apps I discussed a few weeks ago in a piece for Tech.pinions Insiders. Interestingly, many of these have had the most success doing this on top of Android, something made possible by some of the openness inherent to that operating system, much to the detriment of Google. In Asia, these messaging platforms are, to a great extent, taking the place of Android as platforms and building their own ecosystems in competition with Google’s (these messaging apps also exist on iPhone, of course, but it’s less susceptible to being usurped because of its more closed structure and because of the iPhone’s strong, cohesive ecosystem).

The other big non-OS player creating a powerful platform and ecosystem of its own is Facebook, especially with the Messenger plugins announced at F8 earlier this year. Facebook is the closest equivalent to an Asian messaging platform outside of Asia, though it’s far less developed than they are. But it has all the key elements needed to build an ecosystem – well over a billion users, compelling products that keep those users engaged and spending time in them, an increasing ecosystem of partners (whether media companies, video producers, game makers, or messaging add-on providers), and a cohesive experience that now spans several Facebook-owned apps and yet is being increasingly tied together.

A battle few can win

Although some cracks are beginning to show in Android as an ecosystem, it still clearly qualifies as one in my book, and the main trend at the moment is one of proliferating ecosystems rather than consolidation. But these things tend to go in cycles, with every expansion followed inevitably by a contraction, as winners become clear and losers get weeded out. I think we’re entering an interesting period when we might well see some new winners and losers and a change in the shape of the market as a result.

Context for the Big Pay TV Mergers

With AT&T’s acquisition of DirecTV due to clear regulators shortly and Charter having announced its planned acquisition of Time Warner Cable and Bright House, it’s useful to understand the context in terms of the overall shape of the Pay TV market at present. Here are some charts and numbers to help understand how these mergers will impact the industry.

The big pay TV operators today

The largest pay TV operators in the US today are a mix of satellite, cable, and telecoms operators, as shown below:

Pay TV subscribers

Among these, Comcast is the largest (one of the major reasons why it wasn’t allowed to get even bigger by buying Time Warner Cable, itself number four on the list), DirecTV is second, and Charter is down at number seven (Bright House is a smaller operator and privately held, so we don’t have exact numbers for its subscriber base). The dynamics here are worth noting too – the cable operators’ TV subscriber bases are dwindling over time, not because of cord cutting per se, but because the telecoms operators (principally AT&T and Verizon) are eating into their bases.

A new landscape once mergers close

After these two major mergers, the TV subscriber base will look more like this:

TV subs post mergers

As you can see, AT&T-DirecTV would be the largest by some margin after its merger, with Comcast now in second, and the new Charter in a strong third place. DISH would be the only other provider with over 10 million subscribers, while Verizon and Cablevision (and a plethora of smaller providers) would be considerably further behind.

But pay TV is the secondary service now

Having said all this, for all but the satellite providers, the primary service is quickly becoming broadband, rather than pay TV, as broadband adoption continues to grow strongly, while TV penetration stagnates and even begins to fall. The chart below shows total subscribers for the major cable and telecoms operators (but not the satellite providers):

TV vs broadband subs

As you can see, these companies now have significantly more broadband than pay TV subscribers between them and the gap is continuing to widen. Broadband is the universal service, whereas pay TV is becoming increasingly optional. Total pay TV subscribers have been largely flat in the US over the past couple of years but there are signs the industry is beginning to shrink as cord cutting finally takes hold.

From regional to national providers

One of the major drivers behind all the mergers (both failed and proposed) has been an increase in scale and regional scope. Today, all the cable and telecoms operators are essentially regional players, with the telecoms operators tending to have reasonably contiguous footprints as a result of the Bell System breakup in the early 1980s. Whereas the cable operators tend to have more patchwork service areas across the country. But all of them would like to get closer to being able to provide national service. By acquiring DirecTV, AT&T will supplement its national wireless footprint and strong regional landline footprint with a national TV one, which will give it a unique set of assets in the US. Charter, on the other hand, though its footprint will grow significantly, will still fall far short of a national footprint. A major question for regulators has been whether they should allow these companies, which generally don’t compete directly, to consolidate. Competition isn’t lessened, as such, when cable companies merge because they have non-overlapping footprints. But power and market share is certainly concentrated in fewer players and that’s been the major concern. AT&T, as a smaller TV provider (though a large voice and broadband provider) may well be allowed to acquire DirecTV, a large TV provider but not a player in the voice and broadband markets. But AT&T’s combined subscriber base at the end of the process will still be impressive:

AT&T subs post merger

Consolidation is inevitable

Regardless of the outcome of the two mergers still on the table (and, on balance, I expect them both to be approved), consolidation in this market is inevitable. Scale matters enormously and there are likely far more players than the market can sustain long term. Regulators are likely to continue to view consolidation among the largest players with skepticism, but rollups of the smaller players (some of which we’ve already seen on the telecom side) seem more plausible. European operator Altice has already acquired one US asset (Suddenlink) and apparently has ambitions to acquire several more, which might well be the way this happens. One thing’s certain: there will be fewer, and larger, players a few years from now than there are today.

The Power of Personalities at Tech Companies

This week’s promotion of Jony Ive to Chief Design Officer at Apple was a useful reminder of the degree to which a portion of the world will go nuts over any announcement relating to Apple and of the power of at least some of the individual personalities at major tech firms. So much ink would never have been spilled over a change in job title at any other company, a testament to both the interest in Apple as a firm but also to the significance of Jony Ive to Apple’s success. But that impact is broader than just Jony Ive and broader than Apple too. It’s a principle that applies across the tech industry, where powerful personalities help shape their employer’s brands, for better or worse.

Personalities as brand ambassadors

Jony Ive has always been part of the mystique of Apple, all the more so since the passing of Steve Jobs. More than anyone else, these two personified what made Apple special and, though Tim Cook has done a phenomenal job running Apple since Jobs stepped down, it’s Ive, not Cook, who still represents the magic that makes Apple what it is. Though Tim Cook has increasingly become the face of the company at keynotes and in the press, it’s Jony Ive’s face (and voice) that help define how Apple sees itself and how others see it. Ive is therefore emblematic of the first of the trends I want to talk about: these powerful personalities as brand ambassadors. What’s interesting about Ive is he’s never been much of a public personality – he’s often seen only in canned videos and quoted in printed interviews, but rarely seen speaking candidly on camera or on stage at a live event. Other personalities who served this role as brand ambassadors include Steve Jobs himself, of course, but also Elon Musk, Bill Gates, and others. These individuals all became the public faces of their brands and it’s no coincidence these three all filled this role as both founders and CEOs of their respective companies.

Personifying the company

In other ways, powerful individuals at tech companies (again, often the founding CEOs) can come to personify the company. They give shape and form to the company, which otherwise exists solely in its products or services. Mark Zuckerberg, in his hoodies and jeans, seems to personify the generation with which Facebook came into being and still represents the culture of Facebook – youthful and slightly irreverent. Zuckerberg is also arguably the best known tech company CEO in the post-Jobs era, as a brief survey of my less tech savvy friends confirmed (I think the Social Network movie likely had something to do with this). Others too, seem to personify their companies, for better or worse – Uber’s Travis Kalanick as the energetic, aggressive, perhaps slightly chauvinistic, head of the company that’s equally aggressive and has sometimes appeared to downplay issues affecting women. Evan Spiegel, too, with his youthful indiscretions, seems to perfectly sum up the very need for Snapchat.

Lieutenants as public personalities

Many of these prominent personalities are the CEOs and often also the founders of their respective companies. While this makes them both formal and informal figureheads, it can also concentrate both power and attention on single individuals. For all the attention paid to Steve Jobs during his lifetime, however, one of the things he did best was create a succession plan which not only allowed Tim Cook to take over in a way that gave him ample time to prepare and gain credibility, but also allowed others to emerge into the limelight following his ascension. Jeff Williams spoke this week at CodeCon, representing Apple rather than Tim Cook and Jony Ive himself has been the subject of various profiles and interviews in recent months. Craig Federighi and others have taken a greater share of keynote time at recent Apple events. But others too, play important secondary roles to prominent founders and, unlike the ranks of major tech company founders and CEOs, some them are women; Sheryl Sandberg at Facebook, Julie Larson-Green at Microsoft, and Regina Dugan at Google. However, even there, most are still men, with the aforementioned Apple executives, Sundar Pichai at Google, Joe Belfiore at Microsoft, and Hugo Barra at Xiaomi. These lieutenants serve an important role as alternative figureheads for their respective companies, though few are known outside tech circles in the world at large. But these companies are missing an opportunity to show the diversity of their employee bases by having mostly men represent them in the world. Lisa P. Jackson’s emergence as one of the more interesting and more public figures at Apple in recent months has been a welcome sign and I still hope we’ll see more of Angela Ahrendts too.

Assets and liabilities

These prominent individuals can be enormous assets for companies, humanizing them, giving people a personality to associate with companies that can otherwise seem monolithic and inhuman. But they can also be liabilities, as when these individuals get themselves into trouble, whether legal or merely verbal. As well as personifying the best traits of their employers, they can do the opposite, as both Kalanick and Spiegel have demonstrated, and as other less well known but nonetheless prominent executives have done. It can be tempting, therefore, to put straitjackets on these executives, ensuring they’re always on their best behavior and, although that can seem desirable, it significantly lessens their ability to serve as positive brand ambassadors, too. People want these executives to be human and their fallibility (within reason) confirms that humanity. Sometimes it’s easy to forget these individuals have private lives every bit as important to them as ours are to us, as we were reminded in the saddest possible way recently with the death of Sheryl Sandberg’s husband, Dave Goldberg.

Back to Ive

I’ll end where I started, with Jony Ive and his promotion. I’ve written about the promotion itself elsewhere, and won’t go into that in detail here. But the hubbub over the promotion and what it might mean for the future of Apple, is a helpful reminder that these prominent personalities can take on outsized roles in our visions of these companies. Yes, Jony Ive is absolutely critical to Apple’s success over the past 15 years and I hope, along with many others, he sticks around. Designers perhaps seem particularly hard to replace because their talents are so unique – few of us likely doubt that Jeff Williams could take over from Tim Cook to the same extent we might doubt Ive’s lieutenants could take over for him. One operations guy is much like another (we might think) but designers are all different. However, whether Jony Ive stays or goes over the next few years, what’s certain is Apple’s design will be in good hands. We might not get exactly the same products from Ive’s successors we would have got from Ive himself, but we’ll almost certainly get equally good ones. A helpful reminder that these outsized versions we create of these individual executives sometimes blind us to the fact all these companies go far beyond their individual founders and CEOs and even their lieutenants.

The Unpleasant Economics of Free-to-Play Games

Games have dominated the App Store charts for quite some time, to the extent some companies who track the app stores have started splitting games from the rest of the offerings just to see the bigger picture more accurately. This is especially the case when it comes to app store revenues, where games are often in the top grossing charts as well. Within games, however, there’s one category that’s come to dominate — the so-called “free-to-play” games, which are free to download but rely heavily on in-app purchases for monetization. The reality is these games rely heavily on a small number of paying users, with the vast majority of users paying essentially nothing most months, some users spending a higher amount on average and, within those groups, those who spend an extraordinary amount and essentially make or break a game’s success. I’ll run through each of these below, focusing on three of the major publicly traded game companies that rely on the free-to-play model: King Digital, Glu Mobile, and Zynga. At the end, I’ll come back to some conclusions about the sustainability of this model.

Many players, few payers

These gamemakers have several very popular game franchises, with many players. King is by far the biggest, driven by its Candy Crush franchise, with over 500 million monthly active users in total, while Zynga is considerably smaller, at around 100 million, and Glu has about half that, at just over 50 million. The average revenue per monthly user, typically measured on a daily basis, is fairly small:

Daily bookings per active user

As you can see, this chart is showing cents per user per day and the range is from about four to 12 or 13 cents per user per day. Over the course of a month, that might be one to five dollars in total. But the reality is the vast majority of these users don’t pay anything during a given month:

Paid users as percent of total users

In any particular month, only around two percent of monthly active users are also monthly unique payers. That is, 98% of users who play a game during the month don’t pay anything. It’s possible the particular users within the base who pay one month don’t during other months, but it’s likely those who do pay are the same users who cough up at least some money every month.

The few spenders spend a lot

On average, these few users who do pay spend a lot of money on these games:

Monthly bookings per paying user

As you can see, the lowest number here is Glu, at under $10, but King’s paying users are spending over $20 per month, and Zynga’s users are spending over $30 per month. Given very few games on any of the app stores cost anywhere near $20-30 for a one-off purchase, these users are spending far more each month on these games than they ever would for the more expensive games outright, giving the lie to the “free-to-play” moniker for these users.

The really high spenders spend huge amounts

These averages, though, are still understating the skew towards those users who spend really huge amounts on games, as opposed to those who make occasional in-app purchases. You’d be forgiven for thinking even Glu’s paying users were a modest bunch, forking over $5-10 per month. But the reality is some of them are spending far in excess of this. At its recent analyst day, Glu broke out this base of paying users in more detail and I found the numbers pretty shocking. This is a chart from Glu’s investor day presentation:

Glu investor day slide

What the chart shows is the percentage of revenue from users who spent certain amounts over the period from August 1, 2013 to May 5, 2015. That’s 21 months of spending, though some of these games likely haven’t been available all that time, so in some cases it’s a shorter period in reality. However, even if this represents a full 21 months of spending, only the $100 spend corresponds to the average monthly spend of around $4-5 we saw above. Every other category is spending more than that per month and the top category, spending $2500 or more over those 21 months, is spending over $100 per month on a single game. In the case of a couple of these games, that’s 5-10% of the revenue coming from these very high spending users. So, even within the spenders, there are those who spend a great deal more than the average. Revenues are therefore skewed first of all towards those who pay at all and then, within that base, to those who spend a great deal. It’s hard to escape the sense these users are addicted to the games and are willing to spend the equivalent of a higher-tier Pay TV subscription each month to continue to play.

How long can this category last?

It’s hard to know exactly how much of app store revenue comes from these free-to-play games but, based on their prevalence within the top-grossing charts (Minecraft is one of only two apps and the only game in the top 100 grossing chart on the iOS App Store that doesn’t offer in-app purchases), it’s likely these games contribute a great deal of total app revenue in the major app stores. Yet, the kind of behavior the statistics above imply suggests this isn’t an entirely healthy state of affairs, either for the game makers, which rely on fairly manipulative tactics in some cases to get people to spend money, or for the users, some of whom are spending significant amounts of money. Apple appears to recognize this, and has recently changed the “buy” button label for free apps from “Free” to “Get” in recognition that many of these apps aren’t exactly free beyond the initial download. Regulators in various countries have expressed concerns about these games, too, and I wonder how long the category can last without some regulatory intervention and potentially even serious limitations on this model. If that happens, it could have a significant impact on the overall health of the app stores and the associated revenue streams for the major platforms, especially Apple’s and Google’s, which now generate significant revenue for those companies and their developers. At this point, all the players who benefit from this model (and their investors) should be thinking very carefully about the future and the implications should it ever come under threat.

The Challenges Google Needs to Deal With at I/O

We’re now in what’s arguably become the most significant period of the year for three of the largest consumer technology companies in the world — the developer conference season. The developer events for Microsoft, Google, and Apple now end up shaping much of what’s to come from these companies in the next year, from new versions of their operating systems to new products and services and, in some cases, new hardware. We’ve already seen Microsoft’s announcements around Windows 10, HoloLens, and more at Build, and next on the docket is Google’s I/O developer conference. As it approaches, there are three key challenges Google needs to grapple with if it’s to maintain its momentum.

Retaking control of Android

One of the big themes from last year’s I/O was Google’s attempt to retake control of Android. This imperative has, if anything, become more urgent over the past year. The combination of Chinese OEMs building Android devices based on AOSP, Cyanogen mounting a brazen attempt to wrest control of Android from Google (now with Microsoft’s help), and the continuing attempts by both OEMs and wireless carriers to layer their own services on top of Android all mean Google is in danger of losing control over the platform it created. Google doesn’t make money from Android per se – only from using Android as a vehicle to put Google services in front of end users. To the extent the versions of Android end users experience either don’t include Google’s services or promote other services more prominently, Google’s major strategic objective for Android falls flat. Yes, it foiled Microsoft’s (and, in the end, Apple’s) attempts to dominate the smartphone world, but if Android doesn’t serve as an effective vehicle for Google services, it fails in its secondary objective also. Last year’s I/O included several attempts to rectify this situation, including new flavors of Android that allow for very little customization by OEMs (Android Wear, Auto, and TV), and the Android One initiative, designed to replace AOSP versions of Android with stock Android in emerging markets. At this year’s I/O, Google needs to use both carrot and stick to get OEMs to buy into the vision of Android as Google sees it, with Google services intact, while feeding their need to differentiate themselves in meaningful ways in a world where price is becoming the most compelling differentiator for many.

Defending the web against apps

One of Google’s most significant challenges as a company is the shift from a browser-centric desktop internet to an app-centric mobile internet, because its business models are so heavily predicated on web-based advertising. Google has recently sought to defuse speculation that mobile ads are less lucrative for the company than desktop ads, but the reality is Google faces far greater competition in mobile. It also suffers from a lack of good native mobile platforms that can replicate the success of its desktop search dominance. In a world of apps, search is something that happens behind closed doors rather than on the open web and Google has been working for several years to rectify this. The rise of products such as Facebook’s Instant Articles intensify the pressure on Google to find ways to remain relevant in search. At last year’s I/O, Google talked about “app indexing” – allowing search to reach deep inside apps to reach content not traditionally searchable from the web. But it’s heavily dependent on app makers to buy into this vision and, while some smaller ones will, many others will want to protect their content from disintermediation by Google and keep it exclusive to their own apps. As Google still seems determined to use its search graph to surface content without taking you to websites, developers will rightly be skeptical that Google will treat them any better. Google needs to reassure them.

Convince developers Android users are worth targeting

Last year, Google shared numbers of both the total number of Android users (over a billion) and the amount paid to developers over the previous year ($5 billion). While both numbers are impressive on their face, they combine to give the impression of a platform which delivers only relatively small spending per user and which is likely to skew increasingly to the low end of the global market as premium users switch to iPhones and new users come in at the bottom end in markets with much lower disposable incomes and poor payment options. Google badly needs to convince its developers it’s worth developing for Android first or at least in tandem with iOS. But, as long as the monetization options on Google Play are poorer than those on iOS, this will be a tough sell. Google needs to ramp up its work with mobile operators to offer carrier billing more broadly on a global basis, especially in markets with low payment card penetration. But it also needs to talk up the profiles of Android users in mature markets and help developers find more diverse ways to monetize their usage through more than just advertising.

Take Android beyond personal computing devices

To date, Android has been designed largely with smartphones in mind, with tablets an important secondary form factor, and recent versions for TVs and wearables added to the mix. But many companies have used Android over the years for things it was never intended for, from meeting room displays, appliances, Internet of Things deployments, and others. Android is free and flexible, but it’s not optimized for these use cases. With Android Auto, Google has created an Android overlay for the car, but it’s still not an option for the car OS itself. One of the things Google should be doing and communicating about at I/O, is creating optimized versions of Android for things other than personal computing devices (tablets, smartphones, wearables, and so on). Optimizing Android for these other environments will make Android attractive for more than just its price and flexibility. But this means making Android a far more reliable platform in some of these environments too – industrial, automotive, and other settings have far lower tolerance for faults and bugs than smartphones do. I think we might well see car support specifically as part of the M release of Android, but Google should go far broader.

Demonstrate a clear value proposition in TV

At last year’s I/O, Google showed off Android TV, the latest in a series of unsuccessful efforts to participate in the TV space. Though it promised broad support from some OEMs, and some products have indeed shipped, Android TV as a platform remains a tough sell to consumers. What does an Android-TV-based television do uniquely well? As Sony, Apple, and others work on providing TV services which can be tied to their TV-connected boxes, how does Google play in this arena? If Google wants to make its TV offering more compelling, it needs to create a TV service as the headline attraction. Unlike Apple and Sony, Google is uniquely well-positioned to use tracking and targeting to provide advertisers with the insights they want when going after TV subscribers, and will have few of the qualms that make Apple’s entry into the TV space challenging.

Continue to unify Android and Chrome OS

Some time ago, Google put both the Android and Chrome (and Chrome OS) products under Sundar Pichai, and the hope since has been he would start to bring the two together. Android is by far the more adopted and flexible of the two and so it’s always seemed, in some ways, the logical choice for unifying developer platforms across devices. But all the signals in the past couple of years suggest Chrome OS is here to stay. At last year’s I/O, Google showed off the potential for Android apps to run on Chrome OS, although relatively little has happened with this effort since and it remains more of a test than a fully-fledged, large scale effort. Google needs to start providing a clearer roadmap for how these two separate platforms will come together over time. Will Chrome OS continue to exist as a separate entity, with the Chrome browser becoming more powerful as its own platform on Android devices? Or will Google eventually extend Android to the laptop world too?

Differentiate against Amazon and Microsoft in the cloud

As principally a consumer technology analyst, I’m less focused on Google’s cloud initiatives, but they took an important role at I/O last year and are a major part of both Microsoft and Google’s overall offerings for developers. Apple’s approach to cloud services is focused exclusively on its own platforms, with offerings like CloudKit, but both Google and Microsoft compete head-on with Amazon in the broader cloud computing space. As the basic offerings become commoditized and prices continue to drop, it becomes increasingly important for cloud providers to move up the stack into more differentiated services. Amazon is attempting this by moving into the productivity sphere, but I think it’ll be challenged there. Microsoft already has a more diverse set of cloud offerings, including Office 365. But Google hasn’t yet defined its unique differentiators well in this space, and needs to begin to articulate these more clearly.

These won’t all be solved at I/O

Needless to say, this is a long to do list and not all of this can be solved at one developer conference. But Google at least needs to demonstrate it understands these challenges and is planning to deal with them. We should see at least basic attempts to address many of these challenges during I/O. If we don’t, it’s a sign Google underestimates the challenges it’s facing.

Messaging Apps as Platforms

Recently, I did client work regarding some popular messaging apps, particular those from Asia. I thought I’d share some of the findings of my research with Tech.pinions subscribers. My research focused primarily on three messaging platforms: WeChat, Kakao, and LINE.

Offerings that go way beyond messaging

The most interesting thing is how broad these messaging platforms are, well beyond their original focus of messaging itself, and how they’re using this diverse set of offerings to monetize even as messaging itself doesn’t really generate revenue for the most part. The chart below shows monetization strategies for these three players, with WhatsApp thrown in for an interesting comparison (note: this characterization is accurate to the best of my knowledge – with these messaging apps, it’s often particularly difficult for Westerners to fully explore the functionality):

Messaging app monetization

WhatsApp makes for an interesting contrast because its business model to date is essentially the reverse of all the others, with red cells where the others have blue, and vice versa. The only way WhatsApp has ever attempted to make money is through a usage fee — a dollar either on a one-off basis or a recurring annual basis. Conversely, the Asian messaging networks don’t charge at all for messaging itself, but monetize through a wide range of other features and functions. Only some of these functions have a direct connection to messaging itself – in other words, they leverage the social network within the messaging app. A number of them actually have nothing to do with the social network per se. For example:

  • Merchandise – as far as I can tell, LINE is the only one of the three major Asian messaging apps that monetizes in this way. Selling toys and other physical goods is obviously unconnected to who you know on the network
  • Corporate/brand accounts – these also bear no relationship to the friends and family you’re connected to on any of the services but monetized through the brands that want to reach you and/or celebrities you’re interested in enough to want to pay to follow in an exclusive fashion
  • E/M-commerce – in this sphere, tying into the connection with friends and family can actually backfire, as one story I read indicated (a Chinese woman taking advantage of her social network to promote her m-commerce store quickly found herself unfriended)

The revenue streams from these strategies are diverse too, though none of these companies breaks out its revenue sources in great detail in its reporting:

Revenue sources for messaging platforms

Some of the newer revenue streams not captured in my relatively generic breakdown of monetization strategies are particularly interesting. WeChat has moved beyond payments to money market and other banking products, while LINE has taxi and music services. What’s most striking is that what these messaging platforms are creating looks very similar to what major technology companies such as Apple, Google, Microsoft, and Amazon are creating in the West. We appear to be heading toward a world where many large technology companies build very similar sets of offerings for consumers, but do so coming from very different starting points – in the US and Europe this will often be from smartphone platforms or other software or hardware heritage, but in Asia it appears the starting point will be messaging platforms.

Increasing regionalization

As Ben has written recently, this is another reflection of the increasing regionalization of technology, not only by continent but by individual country. WeChat’s usage is dominated by its home country of China, Kakao’s usage is similarly dominated by domestic Korean usage, whereas LINE is the only one of the three that has found significant audiences in other countries, though its “big 4” (Japan, Thailand, Taiwan, and Indonesia) make up 78% of its user base:

Users by country for Asian messaging apps

It’s also interesting to note where these companies came from and when:

  • Kakao was launched in 2010 as an independent company but was acquired by/merged with Daum in 2014
  • LINE was started following the Fukushima nuclear meltdown in 2011 and has always been part of Naver
  • WeChat is part of one of the Chinese Internet giants, Tencent, and was also first released in 2011

None of these companies is more than five years old and yet each has become fairly dominant within its respective markets.

Lessons for non-Asian messaging platforms

What does this mean for Western-heritage messaging companies that want to recreate the success of these Asian peers? I suspect some elements of their success can be recreated in messaging apps outside of Asia, especially those tied to the social graph, such as person-to-person payments. But I believe those that are less connected to the social network itself will fail among non-Asian users, who expect their smartphone vendor or OS vendor, not an app vendor, to provide this kind of service. Facebook Messenger is an interesting case study here — it has broadened into payments already (though it isn’t directly monetizing them), but I’m curious to see whether it can break out into some of these other categories.

The TV Industry’s Lack of Imagination

It’s often said we live in a golden age of television, with more quality content than ever before, consumable through a variety of channels and services on the devices of our choosing. What’s not to love? But the reality is, although there’s been a boom in funding for original programming and arguably an expansion in the range of subjects these programs tackle, there’s one area where there’s still a shocking lack of imagination: family programming.

TV-MA is the rating of choice for original programming

What’s most striking to me when I look at the original programming funded and launched by major players such as Netflix, Amazon, and HBO is the ratings, according to the TV Parental Guidelines system, these programs receive. Because some of this programming doesn’t appear on traditional television, not all of it receives such a rating, but the vast majority of it does, and the rating they receive are incredibly consistent:

TV parental ratings – fixed

As you can see, the vast majority of original programs commissioned or licensed by these TV services over the past few years has either received a TV-MA rating (or would have done so if it received a rating). Just one of these programs received something else and that was a TV-14 rating. Now, I’ve excluded from this listing those programs explicitly aimed at children, of which both Amazon and Netflix have commissioned a few each. But among programming not aimed at children, everything else is very much adult programming. This isn’t surprising in a way for HBO, which has always had a reputation for racier and more adult content, both in the movies it screens and in the series it commissions and licenses. But Amazon and Netflix have no such heritage – they’ve always carried a wide variety of content in their catalogues. But when it comes to originals, they’ve very much followed the path blazed by HBO.

Family programming is missing

What’s fascinating to me is, in a world where there’s now virtually free rein in content formats and other aspects of television, all this programming has stuck to a standard 30 minute or one hour format and adult fare pioneered by HBO on cable TV. What’s missing entirely from these slates of content is family oriented programming. What I mean is content consumable by families composed of parents and younger children, watching together. There’s content aimed explicitly at kids and there’s very adult programming, but there’s nothing for parents to watch with their younger children. There’s also nothing for parents (myself included) who tend to favor PG or PG-13 rather than R-rated content, even after the kids have gone to bed.

But let’s focus on the family programming angle for a minute. Why is this content missing from these services’ original programming slates? I think the question is actually broader – why is it missing from standard broadcast schedules too? When I was growing up, there were programs we would watch together as a family, because their appeal crossed over between kids and grownups. But there’s essentially nothing aimed at this combined demographic on broadcast TV these days (just this week, ABC announced it was bringing a version of the Muppet Show (one of the staples of my childhood family viewing) back to TV, but this time it’s a version targeted at an adult audience). Why is this? I suspect the reason is twofold: advertisers prefer to target narrower audiences and those audiences exist: the proliferation of both targeted cable channels and SVOD services have made it possible for each member of a family to watch his or her own programming, independent of other members of the family. iPads, phones, PCs and laptops, and Netflix on the TV mean the six year old, the twelve year old and Mom and Dad can each watch exactly what they want to. Watching TV has become a less social and more isolated experience in recent years and perhaps programmers simply don’t see the point in trying to reach a mixed audience. To the extent television is social anymore, it’s more often so only in a virtual way, with viewers connecting with each other over distances, via Facebook or Twitter.

PG and PG-13 content is missing too

I want to return to the point I made briefly in the preceding section: the other thing missing is adult programming (by which I mean programming targeted at adults, rather than programming with adult content) that’s not heavy on sex, violence, and swearing. HBO, Netflix, and Amazon’s original programming majors on this stuff and it’s undoubtedly found an audience. But though I was excited by the business model innovation inherent in the launch of HBO Now, I wasn’t excited about any of the content. I did sign up for the free trial period just to try the service out, but my early experience confirmed my sense that much of HBO’s programming simply isn’t for me. My wife and I tend to watch pretty tame fare and HBO is a poor fit. But neither Amazon nor Netflix is catering to this audience either, which is bigger than you might think. Though our ratings system tends to be geared towards parental guidance, many others use both the TV and MPAA ratings systems as basic guidelines to the content of TV shows and movies for themselves. And what you notice as a consumer of both movies and TV shows is the middle ratings – the stuff between G at one end and R at the other – are sparsely populated among the biggest budget offerings.

Some innovation is happening at the edges

There is some innovation and originality happening here, but it’s not happening among the big name broadcasters or SVOD services. Instead, it’s happening as more of a grassroots effort, outside the traditional spheres. Various companies have developed and sold technologies that filter DVDs for what the viewers consider objectionable material, for example. This isn’t a great solution – these services and devices often cost a significant amount on top of the cost of renting or buying the media to be consumed – but it’s often the best solution for people who find little of the available content suitable out of the box. Another area of innovation is the Roku Channel Store, which offers a variety of channels you won’t find anywhere else, including several that cater to the kinds of audiences I’m talking about, including lots of faith-based channels and several targeted specifically at families watching together. In many cases, the audience itself is creating content it wants to watch on behalf of other like-minded people. Many of these channels likely have tiny audiences today in the grand scheme of things, but some of them do quite well on Roku’s list of most popular channels. There’s a big audience out there for this kind of content and some of the bigger names would do well to cater to it. Given all the variety that’s springing out of our brave new TV world, it would be great if that variety would begin to extend to ratings, too.

The Growing US Smartphone Base

In my job, I have to keep track of many different data sets. Among them are the numbers regularly put out by big analyst firms as well as specialists like Comscore and Kantar Worldpanel. Comscore in particular puts out one of the few data sets which is intended to quantify the base of smartphones in the US on a regular basis, but it has always seemed to be a little off. As well as these various data sets, I also track the US wireless operators closely and that provides a different way of looking at the US smartphone base — which ends up being quite a bit bigger than Comscore suggests.

Comscore’s figures

Comscore regularly reports the number of smartphones in use, the total number of mobile users, and the penetration of the total market by smartphones. The featurephone and smartphone numbers from these reports are shown in the chart below:

Screenshot 2015-05-08 17.07.52

The trend here is absolutely correct: the overall number of phones isn’t growing that much (though it is growing more than Comscore suggests), but smartphones make up an ever-increasing proportion of the total. Comscore has total phones at around 243 million as of the end of March.

Figures derived from the wireless operators

Meanwhile, the US operators, in their financial reporting, provide a rather different picture. They don’t all explicitly report the number of smartphones they serve, but they do provide enough information we can get very close to an accurate figure. I track the four largest operators in particular: AT&T, Sprint, T-Mobile, Tracfone, and Verizon Wireless. My estimate for the total number of smartphones and feature phones on these operators is shown in the chart below:

Screenshot 2015-05-08 17.12.12

As you can see, the broad pattern is similar, with limited growth in total, and smartphones growing steadily as a proportion of the total. But the total number is quite a bit higher than Comscore’s number, as you can see when we set the two smartphone data sets side by side:

Screenshot 2015-05-08 17.02.17

The difference is around 40 million smartphones, a fairly significant discrepancy between the two. And, although these five operators account for the vast majority of US mobile subscribers, they don’t account for all of them – we need to add a few million more for the various smaller carriers in the market.

Why so different?

What’s behind the difference in these two data sets? A look at Comscore’s methodology helps to illuminate the situation. Here’s the methodology statement from Comscore’s latest press release:

MobiLens data is derived from an intelligent online survey of a nationally representative sample of mobile subscribers age 13 and older. Data on mobile phone usage refers to a respondent’s primary mobile phone and does not include data related to a respondent’s secondary device.

First, Comscore’s data is survey-based. There’s nothing wrong with surveys per se – they’re often the only way to discover certain patterns. But it’s always a proxy for the real thing, which is of course what the wireless operators report. The wireless carrier data doesn’t give us breakdowns between operating systems, but it’s a great way to arrive at an overall market size. There can always be flaws in survey methodologies, including leaving out certain populations and thus under-representing them. Second, Comscore’s survey only includes those over 12 in the US population. Given that kids are getting phones younger and younger, that certainly doesn’t capture the whole US mobile population. The US Census Bureau indicates there are 20 million kids aged 10-14, of which roughly 60%, or 13-14 million, are likely 10-12 years old. Not all of these have smartphones, obviously, but some proportion does (and some even younger kids do too), so this may be part of the problem. Third, the Comscore survey only asks about users’ primary phone, which means it undercounts all those devices which are secondary devices, whether that’s a work device, a cheap smartphone for use in the car, or some other phone used in addition to the main one. Given how many people use both work and personal devices, it’s entirely possible this also significantly under-represents the overall phone (and smartphone) population in the US.

Does this matter?

The question, of course, is whether this matters? Should we just throw out the Comscore data as defective? Or can it still be useful? The shortfall is certainly an issue. If you were relying on Comscore’s data to forecast the total iPhone market in the US, for example, you’d end up with about 80 million users, while there would be just under 100 million Android users. But we already know that Comscore is under-counting the total smartphone market by around 35-40 million, so each of these numbers might be 15-20 million higher in practice. That’s important if you’re trying to get an accurate gauge. The next question is whether the split between operating systems is accurate, or whether that’s defective too. That’s harder to ascertain through other sources and Kantar and other data seems to bear out similar trends in broad terms, so I’m inclined to believe it’s fairly accurate. But I take it with at least a pinch of salt on the basis that I know the overall data is flawed. I think the key, ultimately, is not to rely on any one data point, but rather to find as many data points as possible that either corroborate or contradict one another, then synthesize and aggregate them to arrive at the best possible picture of reality. That’s an ongoing challenge and it will never produce perfect results, but it’s the only way to do this properly. Relying on a single data source, especially one with significant flaws, is always a dangerous business.

Amazon’s International Growth Challenge

When Amazon reported its financial results recently, foreign exchange fluctuations played a big role. They caused a roughly $1.3 billion hit to “International Revenues”. However, even without the impact of those foreign exchange movements, International would have continued the pattern of growing more slowly than the North American business:

Screenshot 2015-05-06 17.08.50

This pattern has been going on for some time and it’s all the more worrying because it’s not like Amazon is failing to invest in this business, or capturing margins at the cost of growth. It’s losing money too:

Screenshot 2015-05-06 17.09.42

Whereas the North American business has positive operating margins almost every quarter, the reverse is true for the international segment, which loses money almost every quarter. Given that Amazon’s business is so much smaller internationally, with even more headroom for growth, this combination of slower growth and lower profits is rather concerning. So what’s behind this?

Density and proximity are key factors

One of Amazon’s key strategies in its e-commerce business has been getting closer and closer to its customers so as to be able to offer more and more competitive features. Amazon now has a business increasingly different by geography, with many of its newer services and features exclusive to particular geographical areas, even within the US. The diagram below illustrates this pattern, with the size of circles representing the geographic reach of different products:

Screenshot 2015-05-06 17.27.45

A number of these services depend on building accompanying infrastructure, especially Amazon’s own distribution and fulfillment centers. They also rely heavily on deals with partners such as retailers (for Amazon Locker) or the US Postal Service (for Sunday and same day deliveries). These services are therefore increasingly tough to scale outside local delivery areas and especially to scale to new countries where those partners may not have any presence at all. Amazon’s fulfillment network is particularly critical here. In the US, it has over 60 fulfillment and distribution centers, with approx 50 million square feet of space, dwarfing its presence in any other country (Germany and China are next, with under 10 million square feet each). Whereas in the past, Amazon was able to differentiate solely on the basis of its massive online selection and low prices, its differentiation going forward increasingly depends on getting very close to customers and only its scale in the US enables the kinds of innovations it’s deploying here. Elsewhere, it can’t justify building the infrastructure necessary and, as such, its lack of scale and market share in other countries is actually a vicious circle that will likely prevent it from ever being able to match the services it provides in the US, while local competitors with better scale and infrastructure in-country will march ahead.

Amazon should refocus to a handful of countries

The reality is Amazon’s revenue comes predominantly from a handful of countries. It doesn’t break out every country in detail, but its North America region (made up of the US, Canada, and Mexico, but dominated by the US), Germany, the UK, and Japan make up around 95% of its revenues. It’s likely these are the only countries in which Amazon can ever hope to achieve the kind of density and scale it has already reached in the US, and it might well be served by focusing more explicitly on building scale and density there rather than spreading itself more thinly. It’s investing heavily at the moment in China in particular, and to a lesser extent in India, but given the strong local competitors in both countries and the high bar of regulation there, it’s unlikely to succeed in a meaningful way in the long term. It’s already investing essentially all of its cash and profits back into the business, including its current expansion plans, but on an international basis in particular it really doesn’t seem to be paying off. The more thinly it spreads itself, the less effectively it is able to differentiate in any single country outside the US, and so this strategy is likely counterproductive.

Amazon’s land-grab mentality

The problem here is Amazon senses it has a limited window of opportunity to establish itself in key markets before others become too entrenched. It hints at this problem in its most recent quarterly filing with the SEC as part of its risk factors disclosure:

Our international activities are significant to our revenues and profits, and we plan to further expand internationally. In certain international market segments, we have relatively little operating experience and may not benefit from any first-to-market advantages or otherwise succeed. It is costly to establish, develop, and maintain international operations and websites, and promote our brand internationally. Our international operations may not be profitable on a sustained basis.

This land grab mentality leads to Amazon’s strategy of spreading its investment thinly across many markets rather than focusing on a few. However, the reality is that, in many markets, it’s probably already too late to establish the kind of dominant position in online retail Amazon needs to succeed. Perhaps a better analogy is of a military commander who tries to fight battles on numerous fronts at once, sending small battalions of soldiers to each, rather than using a concentrated force in one or two key locations. Using this strategy, both the military commander and Amazon risk leaving themselves exposed and failing to take a decisive victory in any single spot. I think it’s time Amazon started to recognize this.

Diving into Apple’s Retail Store Data

When it reported its earnings for the quarter ending December 2014, Apple stopped providing detailed information on its retail stores. Retail revenues, which had previously been separated out from the regional splits it provides, were now put back with the regions they came from and we lost visibility on one of the most interesting parts of Apple’s business. The reasons for this change is ostensibly that Apple manages its business this way internally but I suspect two other factors also played a role.

First, Apple is making more of its online retail store, especially in countries like China where its physical retail stores can’t yet reach much of the population. Second, with the launch of the Watch, non-Apple retail stores are playing a bigger role. With Angela Ahrendts now in charge of all forms of retail, it makes sense to stop splitting out Apple retail stores.

However, there’s still some really interesting data out there about the retail stores (not least, how many Apple has open at any given point in time), so I thought I’d dive into some of these numbers for Tech.pinions Insiders today.

Splits by global region

One of the interesting things to look at is how Apple’s revenue divides up by region versus how its store presence is split by region. The percentage of each of these represented by each region at the end of the first calendar quarter of 2015 is shown in the chart below:

Apple revenue and retail splits

What you can see is the splits are pretty different in every region – in some, they’re misaligned in one direction and, in others, it’s the opposite. About the only region where the splits are fairly similar is Europe. Another way to look at the same data is below – this is the ratio of one split to the other, so you can see how misaligned some regions are:

Apple retail to revenue ratio

Again, Europe is closest to parity, the Americas region has a far greater share of retail stores than of revenue, and the three other regions (all in Asia) skew in the opposite direction. No wonder then Apple is investing so heavily in building retail stores in China – it’s an enormous market, but it’s also under-penetrated with stores compared to its share of revenues. Even once Apple hits its target of 40 stores, it will still be nowhere near parity with China’s contribution to revenues. Interestingly, Japan is the next most misaligned region, but Apple isn’t making a similar effort there. Why not? I think part of the answer is – for whatever reason – retail has never been very effective for Apple in Japan. When it switched its reporting standards last quarter, it became clear Apple made hardly any profit on its Japanese retail operation, compared with good margins elsewhere. Something about Apple’s retail model doesn’t seem to work as well in Japan. I asked a Japanese Twitter contact for his take, and he pointed out the large number of very big and successful general electronics retailers in Japan, and the strong role of the carrier channel in selling phones in particular.

In general though, Apple is investing far more heavily in retail stores outside the US than inside the US – it’s added less than 20 new US stores in the last three years (11 of them in the second half of 2014), compared with 72 in the rest of the world. The rest of the world is clearly the major focus for its current investment in stores and perhaps the current level of US penetration is a good guide to where Apple might like to get to in other regions over time. Interestingly, the other countries with the highest penetration relative to population and the highest number of stores after the US are all English speaking countries: the UK, Australia, and Canada. As I’ve often observed, Apple tends to do particularly well in English speaking countries.

The US retail business

Another interesting exercise is drilling into the US store presence. The map below is color coded by the number of stores in each state in the US, with the darker colors representing states with more stores, and the lighter colors those with fewer. White states have no stores.

image-2

You can see the most populous states are those with the most stores – in order, California, Texas, Florida and New York (California by itself has more than any other country Apple operates in, with 52 versus 39 in the UK, the country with the most stores after the US). The six states which don’t have stores yet are Montana, North and South Dakota, Vermont, West Virginia and Wyoming. All six rank 38 or lower by population among the 50 US states, with West Virginia the highest ranked at 38 – four of them are clustered together in the sparsely populated area northeast of Utah, and four of the six also have populations of fewer than a million people. Aside from population, it’s likely Apple takes into account incomes in these markets and West Virginia is the second poorest state in the nation as measured by GDP per capita, ahead of Mississippi, which has two stores.

All this is to say Apple seems to be very well represented across the US at this point, with the exception of a handful of states with either small populations or a low propensity to spend money on Apple products. But a combination of carriers, other third party retailers, and online retail cover the gaps very well. As a result, I’d be surprised if there were a dramatic increase in stores in the US in the coming years and this pattern from the last few years is likely to continue to hold:

New Apple stores

The role of Apple retail

Having gone through the numbers, I want to end by talking about the role of Apple’s retail stores. Of course, the stores are fairly new – for the first 20-plus years of its history, Apple didn’t have its own retail stores and it’s only in the last five years or so they’ve become a significant presence. Of course, Apple has always used third party retailers and, since the launch of the iPhone, carriers have become a very significant channel in certain markets like the US and Japan. In China too, the availability of the iPhone through China Mobile over the past year or so has been a major factor in the adoption of the iPhone there as well as the growth of Apple’s business. However, carriers don’t tend to do a good job selling Apple’s other devices – iPads with cellular modems are about the only other product most of them sell and those tend to sell poorly in comparison with the tablets Android OEMs increasingly bundle at heavy discounts with their phones. In China in particular, the Apple retail stores can serve a useful function in broadening the iPhone’s halo, a major factor in the resurgence of the Mac in recent years. As people buy into the Apple brand for the first time (once with the iPod, now with the iPhone in most cases), they are more likely to buy other Apple products, and the Apple retail stores are a great way to enable this. With the launch of the Apple Watch in particular, the retail stores will be very important channels since few other retailers will carry them. This, I think, explains as much as anything Apple’s heavy investment in China despite the fact the carrier channels are already doing very well there.

The Last Piece of Apple’s TV Puzzle: Local and Sports

Apple CEO Tim Cook said on this week’s earnings call:

I think we’re on the early stages of just major, major changes in media that are going to be really great for consumers, and I think Apple could be a part of that.

Two weeks ago, I wrote about Apple’s potential to change the subscription music market. But, given these remarks were made in the context of HBO Now, I suspect what Tim Cook was really referring to was the expansion of HBO Now and Apple’s potential to do a TV service. I’ve written several pieces about this already on Tech.pinions. For a quick recap, see:

The last piece about this, for now, is regarding local TV and sports content. This is easily the hardest part of Apple’s TV service and has a few implications for what Apple might build.

Local broadcasting market structure

The big challenge here is, whereas cable networks are single entities and for the most part owned by single companies, the value chain and market structure in local broadcasting is more complex. Although the major national networks do own some local broadcasting stations themselves, many others are owned by independent companies such as Gannett, Graham Holdings, Clear Channel, and Sinclair. The owned-and-operated stations are the simple part of this equation, but the stations held by independent companies are where the complexities come in. The national networks only supply a portion of the programming these stations broadcast each week, with the rest filled in with local content, re-runs, regional sports, and other content that doesn’t come from ABC, NBC, CBS or Fox. This is why CBS, which now runs its own over-the-top TV service in the form of CBS All Access, can’t provide it nationally. As you can see from this page, one of the first things you have to do when you try to sign up for the service is enter your zip code, so CBS can check whether it can provide the service to you (where I live, in Utah, the service isn’t available, because the local station is owned by Sinclair Broadcasting).

I go into all this because it’s critical to understanding the challenges Apple will encounter in launching a Pay TV service along the lines of what people are used to. As part of the classic pay TV bundle, people are accustomed to getting all the live local channels as part of the basic tier. But this is only possible because their local pay TV provider has contracted with the local broadcasters to deliver this service. If Apple were to provide a national rollout for its TV service (and I’d assume it would want to), it would have to sign contracts (directly or indirectly) with all the local broadcasters wherever it wanted to provide service.

There are over 200 CBS affiliates alone around the country, only 16 of which are owned by CBS itself. A number are obviously owned by groups such as Sinclair, but it still means doing lots of individual deals and managing the streams from all these providers across the country. And that’s just for CBS. It could potentially deal with these groups and with CBS as intermediaries, but that only makes the problem slightly more manageable.

Sports rights another wrinkle

Another challenging problem is sports content. It appears Apple has a deal in place (or at least in the works) with Disney, which would likely provide ESPN channels as it already does to Sling TV. However, a great deal of sports content in the US is fragmented across many other channels, including local broadcast channels, other cable networks such as TNT and TBS, and regional sports networks in many individual markets. Traditional NFL TV rights alone are complex, split between the four major national broadcasters, some of their affiliates (in the case of preseason broadcasts), ESPN, and the NFL Network. Baseball, basketball and other sports are even more fragmented because their audiences are more localized. Certain mobile rights for the NFL are owned by Verizon Wireless, which further complicates the picture for any service that is to be available across platforms and devices.

The role of live

Overall, consumption of live, linear content is in steady and rapid decline. Once the totality of traditional TV viewing, it’s now dropped to less than half and is likely to continue to fall. Two factors drive this: the convenience of watching at a time of one’s choosing rather than an arbitrary air time, and the ability to skip advertising. Advertising is the one element of the traditional TV business which hasn’t been officially disrupted despite all the other changes which have been forced on the industry as it has first seen threats such as TiVo, Slingbox, and piracy emerge, and then slowly adapted to provide some of the same value propositions. The TV industry is addicted to advertising, but there are several major alternatives to traditional TV now which eschew advertising, including Netflix, Amazon Instant Video, HBO Now, and of course electronic sell through offerings such as Apple’s own iTunes. Despite all this, the traditional TV industry remains heavily dependent on advertising as a revenue stream, as I demonstrated in this piece. However, these advertising revenue streams are under threat as viewing shifts from live to delayed and on-demand, where there are lower ad loads (or ads are skipped), and where the audience often can’t be accurately measured or monetized. Apple can help with measurement and monetization, but live viewing is the one form of TV where ads can’t really be avoided. This is where we come back to sports – other than a handful of reality TV shows with live voting and news programs that fewer and fewer people watch, sports remains the major form of content people still watch live. Even as everything else moves to DVR, on-demand and online viewing, sports refuses to be time-shifted.

Possible strategies for Apple

Now that we’ve reviewed some of the challenges for local, live and sports programming, let’s look at some possible ways Apple could address all of this:

  1. Exclude live TV. The HBO Now model is interesting because it doesn’t include a live component. Other than the occasional boxing match, HBO’s content isn’t particularly time sensitive, so this doesn’t matter a great deal. On-demand is fine for essentially all its content and it typically makes shows available through the app almost immediately after they begin airing, which is almost the same as live. One possible model for Apple to pursue is to create a bundle of similar services, as I hinted it might in my piece on the HBO Now announcement. Thus, instead of the classic bundle of channels with live TV being primary and on-demand and DVR functionality secondary, on-demand would be the only method to watch something and the service would differentiate itself to content owners on the basis of allowing them to properly measure and monetize that viewing, which in turn would require unskippable ads on most channels. Given the shift to on-demand viewing, this would fit many people’s existing patterns but it wouldn’t get rid of ads, as many other services do, nor provide a back door for skipping them such as a DVR. The other big downside is it would have to leave out sports which, as noted, was the major category of live viewing that’s resistant to time shifting.
  2. Exclude sports. Of course, one way to overcome this problem is to provide packages that simply don’t have a sports component, instead leaving the sports element of the bundle to existing apps such as MLB TV. This is an imperfect substitute given blackout policies and other limitations on viewing through those apps but it might be a somewhat adequate way to fill in at least some of the gaps.

    On the other hand, for people who don’t care about sports, which is the group most likely to cut the TV cord anyway, this likely doesn’t matter. However, if Apple wants to do a deal with Disney, excluding ESPN from the bundle seems like something of a deal breaker, especially given the current spat between Verizon and ESPN over just this issue.

  3. Offer regional rather than national service. One possible solution to the local channels problem is to regionalize the service and roll it out by local market. This is the strategy Sony has adopted with its Vue service and I suspect the difficulty of getting local channels on board was part of the reason. This would be a major departure for Apple, since it has always provided its products at least on a national basis in the US (in contrast to Google and Amazon, which each have certain services or features only available in certain geographic areas). Instinctively, this feels like an un-Apple thing to do, but it’s one of the few options for overcoming the enormous challenges associated with providing live, local, and sports programming.
  4. Bite the bullet and do the deals. Despite all the obstacles, given the problems associated with each of the other approaches outlined above, Apple may just decide to bite the bullet and do the deals necessary to provide national service from day one, including local, live, and sports programming. It’s obviously been done before by DISH and DirecTV, which both provide services nationally, unlike the other pay TV providers which operate only on a regional basis. But this approach would be a heck of a lot of work and it will become increasingly difficult to keep the details under wraps as more and more parties become involved. But I have to think that, on balance, this is the most likely route, which may well be why we’re hearing about the service despite the fact there’s no sign of an imminent launch.

I continue to be fascinated by the potential for an Apple TV service. There are challenges aplenty, as I’ve outlined in my various pieces here on Tech.pinions over the last few weeks, but I think there’s a huge opportunity no company but Apple from outside the traditional pay TV space can likely tap into.

Windows Phone and Prepaid in the US

Alternative title: Cricket is saving Windows Phone in the US

I’ve written quite a bit about Windows Phone previously, but I have a slightly different angle this time around — the impact prepaid is having on Windows Phone in the US and, in particular, the impact AT&T subsidiary Cricket is having on Windows Phone sales in the US.

I’m going to draw on a couple of different sources here:

  • Comscore’s regular monthly updates on smartphone installed base market share in the US. I’m using these primarily to measure the size of the installed base for Windows Phone in the US. The latest data as I write is for February 2015.
  • AdDuplex’s data on the Windows Phone installed base, based on its ad analytics software. Its latest numbers are for March 2015. I’ve used these numbers before for other purposes and Nokia in the past has occasionally pointed at them as well, which leads me to believe they’re generally pretty accurate.

Windows Phone in the US is growing

The headline from the recent Comscore data as it relates to Windows Phone is that the platform is growing, at least a little bit. The chart below shows the percentage market share number Comscore reports, as well as the installed base of devices this implies, based on Comscore’s overall smartphone market sizing:

Screenshot 2015-04-26 08.50.21

What you can see is that market share is somewhat static, perhaps rising a tiny bit over time. But because the overall smartphone market is growing, the installed base this represents is also growing over time, from around 5.5 million a year ago to 6.6 million in January 2015 (the slight dip recorded in February likely isn’t meaningful). Given that Windows Phone is in a bit of a lull at the moment, since there hasn’t been a new flagship in quite some time (and isn’t likely to be another until Windows 10 launches later this year), where is this growth coming from?

As elsewhere, the low end is driving growth

The answer is pretty simple: as in other markets, from a device perspective, the growth is all coming from the low end. Here, we switch to the AdDuplex data on the Windows Phone installed base. AdDuplex only reports the top 10 devices in every market, so we don’t have a complete picture of the base, but we do know what’s selling best:

AdDuplex Windows Phone US by device

As you can see, what drove growth through the second half of 2013 and much of 2014 was the Lumia 521 and, to a lesser extent, the Lumia 520. Over the last six months or so, it’s the Lumia 635 that’s driving growth, with the Lumia 630 doing fairly well, too. The 500 and 600 ranges have been the lowest priced devices in the Lumia range, but they’re vastly outselling anything else right now both in the US and elsewhere.

The role of prepaid, and especially Cricket

So far, so predictable. But what’s particularly interesting in the US is the role of prepaid and especially the role of a single provider, Cricket. One of the nice things about the AdDuplex data set is the company breaks out wireless providers in the base, and one company that’s appeared to come out of nowhere over the last nine months is Cricket.

The history here is a little complicated, because today’s Cricket is actually the combination of two separate businesses: Leap Wireless, a CDMA-based prepaid operator which AT&T acquired, and Aio Wireless, a prepaid subsidiary which AT&T merged with Leap when the acquisition closed. Aio had a couple of Windows Phone devices before the transition, and the new Cricket launched its first Windows Phone handset, the Lumia 1320 phablet, in June 2014, followed in July by the Lumia 630, with the 530 and 635 landing later in the year. But, during that time, Cricket has gone from zero to over 20% of the base. The chart below shows that meteoric rise over a period of roughly nine months:

AdDuplex Cricket data

What gets really interesting is if you translate that share into a number in the installed base, based on the Comscore numbers. It’s a bit of a tricky calculation, because AdDuplex technically only breaks out Windows 8 devices by operator and there’s likely some number of Windows Phone 7 devices in the US base still, albeit a small one. But based on the combination of AdDuplex and Comscore data, it’s likely Cricket has between 1 and 1.5 million Windows Phone devices in its base, which is a fairly significant chunk of Cricket’s overall base, perhaps as much as 25%. Secondly, remember the overall Windows Phone growth numbers we looked at earlier? There was net growth of about 1 million Windows Phone handsets in the base during that same nine month period or, in other words, the difference between those that left the platform and joined it was 1 million. Given Cricket likely added around 1 million during that period, it’s possible it accounted for the vast majority of that net growth.

Windows Phone is disproportionately prepaid

Cricket isn’t the only prepaid brand where Windows Phone is big, though. It’s hard to get a full postpaid/prepaid breakdown from the AdDuplex numbers because, for the major carrier brands, the two aren’t separated. But even if we just focus on MetroPCS, Cricket and a phone only available on AT&T’s GoPhone prepaid service, these three add up to around 40% of the total base in the US. Add in a few percentage points for other prepaid sales on the major carriers and we could be getting close to half the Windows Phone base on prepaid, compared with about 25% of the total US phone base on prepaid. In this sense, Windows Phone is the anti-iPhone, with the iPhone well underrepresented in the prepaid market, just as Windows Phone is well over-represented.

The big question for me around Windows Phone remains whether this disproportionate emphasis on low end and prepaid phones will end at some point. The launch of Windows 10 in the coming months provides the best near term opportunity for Microsoft to re-engage with the premium end of the market, so these numbers will be well worth watching over the next year or so.

Google Project Fi: an attempt to control the stack

Yesterday, Google finally announced the wireless service that’s been reported for months. Named Project Fi, it acts as a somewhat unique MVNO, piggybacking off both Sprint and T-Mobile’s networks as well as making heavy use of around a million WiFi hotspots. Reporters have been covering many angles of this news and I’ve talked to a few of them. Today, I thought I’d share a little of how I view what’s actually been launched. Incidentally, we talked about Google’s MVNO ambitions on the Techpinions podcast back in January and a transcript of my remarks can be found here.

Limited by design

First off, the Project Fi service is limited, by design, in several ways. It’s only available on one device, the Nexus 6. This device has a tiny market share today but, if you wanted to, you could buy one from Google’s Play Store for $649 and up, or Google will finance it for you as the carriers now typically do (interestingly, something I foresaw here). But it’s also an enormous device, far larger than most phones ordinary people carry, especially in the US. As such, the addressable market is hemmed in. But it’s limited to this one device because the service requires compatibility with both the Sprint and T-Mobile networks and no other device supports both. In theory, Google could launch additional devices over time to run on the service, but it may have a tough time getting OEMs to build devices just for the service when it has very few subscribers. Neither Sprint nor T-Mobile is likely to launch such devices themselves, so Google is basically on its own here. It has neither a track record nor the infrastructure to sell large numbers of devices, so I’m skeptical it can grow.

Google is also using an invite-based approach to signing up users and captures both a Gmail address and Zip Code during the application process. This means it will both roll out the service very slowly and in such a way users are likely to get good coverage where they live. Sprint and T-Mobile have the worst coverage of the four major operators in the US, but combining their networks is a clever way to fill in gaps. I see Fi at this point as being something like the early betas of Google’s other services such as Gmail. Many of those services stayed in beta mode for quite some time and, though it doesn’t have the label officially, I can see Fi doing the same, opening up only slowly to customers. That’s likely a good thing – it takes a lot of back-end infrastructure to run a mobile operator, even one without a network, and that infrastructure has to scale with customers.

Pricing – simple but not necessarily disruptive

Project Fi’s pricing is a little different from standard wireless pricing – it’s simple, but not necessarily cheaper, especially for certain users. Partly because there are no subsidies or other complications and partly because Google only does single-line plans, the pricing is simple: $20 as a base price for unlimited talk and text and $10 for each gigabyte of data. The model also provides credits for using less than the planned amount. This makes it, in some ways, more like traditional metered plans than anything on the market today, as this table shows:

Screenshot 2015-04-22 16.35.49

There’s a reason we moved away from metered pricing some time ago and it’s that metered pricing tends to inhibit usage. Unlimited is the most freeing model of all, because it removes all worries about incurring overages or having to curtail usage. But it’s impractical on most networks because of the potential for abuse and most carriers have tended to focus on tiered pricing, which provides a compromise between predictability and network management. Google Fi shares some characteristics of both tiering and traditional metered usage – at the end of the day, the results will be more like metered usage, but the presentation feels more like tiering. It’s an interesting compromise, but I’m concerned it’s going to be tough for customers to know how much data they’re using at any given time, especially since Fi tends to hop onto WiFi.

For anyone who’s used to multi-line plans, Google’s service pricing will be less attractive, because it provides no discounts for additional lines. As such, a family using an average amount of data is likely to find Google’s pricing relatively uncompetitive. And that’s not surprising – because Google is piggybacking off Sprint and T-Mobile’s network, it’s paying the very companies it’s competing with and they’re never going to enable it to undercut them significantly on price. That’s one of the fundamental rules of MVNOs.

Why is Google doing this?

Given the limitations I’ve described above, the question becomes: why is Google doing this? I think there are a couple of reasons:

  • first, there’s an element of experimentation akin to what it has done with Google Fiber
  • second, this is Google’s attempt to create a full-stack experience on mobile.

The first point is simple. Google Fiber has done two things for Google: it’s enabled it to experiment in a very cost-effective way with new broadband and TV services on a very limited scale and learn something about user behavior in the process. Second, it’s provided a much more aggressive form of competition to the local duopolies that provide broadband in many places around the US. The latter has caused incumbents to up their speeds and/or lower their prices to compete. But it’s only happened on a very localized basis, because Google Fiber is only available in very few places. In some ways, Google Fi is similar in it’s a potentially disruptive model, but offered on a very limited scale. However, unlike Google Fiber, which can at least have a big impact on a local level, it’s hard to see Google Fi having any sort of significant impact on the US wireless market – it’s simply going to be too marginal, at least for now.

The other reason is more interesting and it goes back to something Sundar Pichai of Google said at Mobile World Congress earlier this year:

The core of Android and everything we do is to take an ecosystem approach and [a network would have] the same attributes.

This was before we knew the details of Project Fi, but it’s a clear signal of what Project Fi has ended up being: an end-to-end, full-stack, Google approach to a smartphone. To understand how significant that is, it’s helpful to understand how Google operates today in the smartphone market. This is illustrated in a simplified fashion in the diagram below:Screenshot 2015-04-22 16.54.19

When it comes to Android, Google is like a parent sending a child off to college – it has done its best to prepare them for the real world but has very little control over what they actually get up to once they walk out the door. Google licenses Android to OEMs, which in turn customize the OS and layer on their own services, features and UI elements, and then, once carriers get involved, they often force further customization and pre-installed apps of their own. By the time Android reaches consumers, it can be very different from what Google created and it has very little control over all that, though it’s been trying to rein in some of the customizations lately. Apple, by contrast, controls the experience from top to bottom and largely dictates to the carriers in terms of how the product is packaged and sold.

An Apple-like level of control over this stack is appealing, because it allows the company to manage the experience its customers have to a far greater extent. Part of Google’s challenge is carriers embraced it in the early years precisely because they saw it as something that could be molded to fit their needs and they’ve largely used it in that way. Whether to fight off the iPhone, to offer lower-cost smartphones, or to push their own apps and services. All this goes against Google’s real mission for Android, which is to put in consumers’ hands a Google ecosystem, which takes us back to Sundar Pichai’s remarks. Android was created as an ecosystem, but it largely exists within OEM and carrier ecosystems and its appeal and effectiveness as an ecosystem is limited by their involvement. What Google Fi does for Google is to free it from these encumbrances and allow the user to have an all-Google experience on their smartphone. It’s interesting to put this in the context of the various efforts by companies to control elements of the smartphone stack:Screenshot 2015-04-22 17.06.17

As you can see, Google is the only company here that’s working all the way up and down this stack in various ways. In the case of Project Fi, it controls the hardware, the software (stock Android), apps and services which are unique to Android and to Project Fi, and now the wireless connectivity around it. This is, for better or worse, an all-Google experience out of the box, for the first time. And Google, of course, also controls the retail channel for all this. The big question for Google – as it was for Amazon with the Fire Phone – is to what extent people want such an experience, and whether they want it badly enough to justify putting up with the current limitations of the service. It’s an interesting experiment in the short term, but I’m just not convinced at this point it can achieve any sort of mass appeal or adoption unless some things change pretty dramatically.