Author: Jan Dawson

Jan Dawson is Founder and Chief Analyst at Jackdaw Research, a technology research and consulting firm focused on consumer technology. During his sixteen years as a technology analyst, Jan has covered everything from DSL to LTE, and from policy and regulation to smartphones and tablets. As such, he brings a unique perspective to the consumer technology space, pulling together insights on communications and content services, device hardware and software, and online services to provide big-picture market analysis and strategic advice to his clients. Jan has worked with many of the world’s largest operators, device and infrastructure vendors, online service providers and others to shape their strategies and help them understand the market. Prior to founding Jackdaw, Jan worked at Ovum for a number of years, most recently as Chief Telecoms Analyst, responsible for Ovum’s telecoms research agenda globally.

Earnings season preview – Q1 2015

Last quarter, I did weekly previews during earnings season of the results coming that week. This quarter, I’m going to do just one preview piece today and then I’ll follow up in a few weeks with a review of what actually happened. I’m going to organize this by previews rather than by company but, in the process, I’ll try to touch on the major companies in the consumer technology space.

Mobile advertising

One of the biggest factors in the success or failure of some of the largest businesses in consumer tech is mobile advertising. It’s been a critical factor in Facebook’s success and growth over the last couple of years:

But it’s at least as important to several other businesses too, including Twitter, Yahoo and perhaps most critically Google. One of the big differences between these companies is the degree of transparency they provide over the transition from desktop to mobile advertising, with Facebook and Twitter being very open about it, but Yahoo providing only a little insight and only very recently, while Google’s mobile advertising revenues are a black hole. As Google’s transition to mobile takes it from a very high share and lucrative business in search to something rather different, it has to prove to investors it can capture both a high share of the market and a high share of the growth in mobile advertising and it’s not yet clear that’s the case. In addition, it’s highly dependent on search advertising revenues from iOS, which are captured through a contract that’s up for renewal shortly and could theoretically switch to another search provider. So, in all these companies’ earnings reports in the next few weeks, look out for the trends around mobile advertising, an increasingly crowded and competitive space, and the degree to which these companies are open about how these trends hurt or help their businesses.

Smartphone market dynamics

Last quarter saw the biggest quarter ever by far for the iPhone. It either tied or eclipsed Samsung’s smartphone sales depending on whose numbers you believe. But Samsung wasn’t the only vendor to suffer as a result – several other vendors saw a dip or slower growth in sales in Q4 2014 compared with Q4 2013:One of the big questions this quarter then, is whether this trend continues or whether the iPhone’s massive quarter was more of a one-off. The first quarter is normally significantly lower than Q4, but all the indications are that even Q1 will be big for the iPhone and, even though we already know Samsung’s profits recovered a little in Q1, it’s likely its shipments and smartphone revenues were down year on year. At this point, it’s posting numbers that look more at home in its 2012 results than more recent years. Xiaomi, of course, is a private company and doesn’t report directly, but the others should all be providing some visibility over their performance in the quarter and it’s well worth watching the Chinese vendors in particular. They seemed particularly hard hit in Q4 and may well be again in Q1. Sony actually had a decent Q4 in 2014, but has been struggling to maintain its momentum in smartphones, so we should watch carefully for signs things are heading south in that business. Lenovo benefited hugely from the addition of Motorola in Q4 and I’m bullish on the chances of the combined business, but it also needs to show continued momentum rather than just a couple of good quarters. Growth outside China is particularly critical.

PC and tablet growth

The fates of these two categories are tightly intertwined, and both have been growth-challenged lately. Ironically, Apple has bucked the trend in PCs, growing while the overall market shrinks, but the growth of the iPad has been slower than that of the overall tablet market, partly because it competes at the premium end and what growth is occurring is largely at the cheaper end of the market. I wrote about the iPad’s fifth birthday recently, so I won’t go into that at length, but I still believe 2015 is the year we’ll see whether the slowdown in sales is just a factor of long replacement cycles or whether there’s something else at work. I continue to believe the former plays a big part, but I also think both more portable laptops and larger smartphones are eating into the iPad’s role as an in-between device. In PCs, early indications are it was another rough quarter for the market but that shouldn’t surprise anyone who understands the state of the PC market. When “good” quarters are characterized by smaller declines than forecast, it’s time to accept the PC category is in permanent decline, even if the decline might be a bit slower than some people believed. Slower replacement cycles, the growth in alternative computing form factors from smartphones to tablets to wearables and the growing share of the Mac means the Windows PC market in particular is tough. This quarter, watch for anyone whose results go against the trend, which will include Apple but quite likely Lenovo too.

Wearables – early hints of the Watch, and the rest

The Apple Watch went on sale after the quarter ended but it’s obviously going to be a major theme on Apple’s earnings call. We already know Apple isn’t going to report Watches as a separate segment for the time being, and to me that’s a signal we may well not get much detail at all on sales in the near term. With the reports in the last week or so of very small inventories available at launch and long ship times, it seems even more likely Apple will hold off on reporting numbers in much detail, since the numbers are far more reflective of supply constraints than demand. That won’t stop financial analysts from trying multiple angles on the call to get more information out of Apple on sales numbers, average selling prices, and so on, but I’d expect Apple to give very little away. Beyond Apple, the wearables category is a bit like the iPad category: lots of competing devices, many of them being given away with smartphone purchases, but few of them truly competitive with the Watch. As I said in my piece a week ago, that doesn’t mean they won’t sell and they’ll actually benefit from the release of the Watch. For now though, sales of other wearables will be a fraction of the Watch, and won’t likely make a blip on other companies’ earnings calls.

Video moves and trends

Video is by far the biggest content category, and there’s a huge amount of revenue tied up in companies which exclusively provide video content or services (broadcasters, cable networks, subscription video-on-demand services and so on), but also many other companies which are either already major beneficiaries from the video market or looking to get in on the action. The major Pay TV companies represent the old guard here and have seen slowing growth but not yet declines in overall subscriptions, but there’s a raft of new players emerging and some of the traditional companies are also experimenting with new models. Sony, DISH, and Verizon are among the companies tinkering with alternatives to the classic pay TV service today, though Verizon’s proposed a la carte bundles seem to have run into a contract issue with the content providers. Apple is also, of course, reported to be working on something here and there will undoubtedly be questions about this on the earnings call though I don’t expect Apple to answer them. More fundamentally, many of the old media companies are suffering from the decline in traditional live viewing and their inability to track and monetize non-live viewing effectively and Apple’s entry could accelerate this as it solves some of these problems. Expect many of the cable networks and broadcasters to continue to report declining advertising revenues during their earnings calls, with little evidence they have a way to turn the trend around.

Wireless carrier performance

I’m going to conclude with a set of companies I track closely, and that’s the US wireless carriers, principally the four largest (AT&T, Sprint, T-Mobile, and Verizon). These companies are engaged in the bitterest, most competitive period of recent history, as growth in phone subscribers dries up and the two smaller carriers in particular fight aggressively for customers. T-Mobile has been threatening to pass Sprint for third place in the market but Sprint has been working to improve its subscriber growth so this may not happen this quarter, though it’s largely symbolic anyway – T-Mobile is much bigger in prepaid while Sprint is far larger in postpaid services. Verizon and AT&T had been largely immune to the onslaught for some time but, in the latter half of 2014, had to begin to respond more aggressively and it’s worth watching for their churn levels and subscriber growth in Q1. Another thing worth watching for is the growth in phone subscribers versus other areas, which I’ve talked about at length previously. Phone subscribers haven’t been growing much, and much of the actual growth has been in tablets (largely Android tablets given away for free with smartphones), and “connected devices” (mostly machine to machine and other embedded connectivity such as connected cars). As competition for phone subscribers becomes increasingly a zero-sum game, carriers’ ability to tap into these other areas becomes important, and so far AT&T and Verizon are running away with the connected devices and tablet opportunities respectively. A big question this quarter is whether Sprint and T-Mobile can start making a better showing in these two areas.

Reinventing “My Music” – Apple’s New Music Service

Signals that Apple is rapidly approaching launching its new streaming music service are getting stronger all the time. The release notes for this week’s beta of iOS 8.4 made particularly clear something is in the works and it’s coming soon:

The iOS 8.4 Beta includes an early preview of the the all-new Music app. With powerful features and an elegant new look, enjoying your music is easier than ever. This preview provides a sneak peek into what we’ve been working on, and what’s to come — the music is just getting started.

The new app itself makes changes to the interface, but adds no significant new functionality. However, these changes suggest the new music service might well fit somewhere within these confines too. I had some debate on Twitter earlier this week about whether this makes sense and it’s prompted me to finally write up something I’ve been thinking about for a while — how an iTunes-branded subscription service can differentiate itself.

Thinking about who buys music

When thinking about subscription music services, the starting point has to be the people who pay for music today, because you’re unlikely to convert non-payers into people who will pay $120 a year, but you’re much more likely to convert people who buy a few albums a year into subscribers. The reality is the people who spend the most money (but actually the least time) listening to music are more affluent and older than the average. In other words, they’re not teens and young adults but more likely to be in their 30s and more likely to have kids of their own than to be kids themselves.

All this makes perfectly good sense: the older you are, the more money you have to spend, but the less time you tend to have to enjoy what you’ve spent your money on. So you spend money where it has the biggest impact and in ways that save you time and maximize the use of your time.

Conversely, when you’re young and poor, you’re more likely to be willing to spend your time than your money, which, when applied to music, means you have more time to spend in discovery and a higher tolerance for ads and other things which interrupt the listening experience. In other words, there’s a bifurcation between cash-rich and time-poor and cash-poor and time-rich which will tend to drive the former to pay for music and the latter to make heavier use of ad-supported services such as YouTube and the free versions of services such as Spotify.

Note: as with all such analysis, this is an over-simplification, but data from Nielsen and other sources back up the broad conclusions well enough to use this as an underpinning for the analysis below.

Discovery versus ownership

Beats had two key features: it was exclusively a paid service and it was oriented around discovery. Ironically though, that means it targeted elements of both groups without going whole hog after either of them. It was focused on discovery, which aligns better with the younger, poorer group, but charged for the service, which likely eliminated many of the most obvious buyers as potential customers. There are undoubtedly older, wealthier buyers who appreciate the ability to discover new music and there are undoubtedly younger, poorer buyers who nonetheless care enough about music to spend $10 a month on it. But it’s not a great strategic fit and Beats never did very well in gaining subscribers (even paying subscribers) in comparison with other, more popular services such as Spotify, Deezer, and so on. Those services could at least get users hooked with the free proposition and then upsell them as they sought to remove ads from the experience.

When you’re relatively time-poor, subscription services are often a poor fit, because they’re overwhelming. Instead of being presented with a familiar list of stuff you like, you might be presented with a search box, a list of generic playlists which don’t match your personal taste, or a series of album covers for newly released music you don’t know. If you just want to start listening now, the best place to start is often the music you already own, because by definition you already know you like it. That’s clearly not enough by itself, because you wouldn’t need a subscription music service if you only listened to music you already own, but it’s an important starting point for many paying users even in a subscription service.

The challenge with most subscription services is they force you to recreate this sense of ownership in some way within the service – either by manually favoriting this music (another time-consuming activity) or by searching for it each time you want to listen. Some services have attempted to bridge the gap by either importing your owned music into the subscription (e.g. Google Music) or by showing your library within the context of their app (e.g. Spotify). But both of these are cumbersome. The former taking a lot of work to get set up and maintain and the latter providing two very separate experiences awkwardly sandwiched together. In many cases, users are likely opening two different apps depending on whether they want to select music from their own library or new music.

Redefining “My Music”

The only way to make owned music truly part of a subscription music service is to bake it in. And Apple is arguably the only company that can do that for many of its customers because iTunes is where their owned music lives. This means reinventing the concept of ownership, or of “my music” in a way that fits the subscription music model. That collection would be at the core of such a service but the definition would have changed from music you’ve explicitly purchased to music that you’ve claimed as yours. That, in turn, would be a mixture of the owned music you brought with you and the music from the subscription service you’ve added to it. As you experimented with new music – a new album from a favorite artist, or perhaps something someone recommended – you could either temporarily or permanently add it to your music collection. Your “collection” of music would grow, but you’d no longer have to explicitly pay to do so, reducing the risk of trying new music significantly while retaining a sense of ownership.

The corollary to this is that, in iTunes Radio and other discovery-centric environments, you’d no longer be invited to buy the music (though that option might still be there), but rather to add it to “my music”. That would dramatically reduce the friction associated with engaging more deeply with new music, because it no longer involves a purchase. But it also means you could easily:

replace that album you used to own but that got lost or damaged
replace the music you accidentally deleted when you switched computers, or that was on that hard drive that died
fill in the rest of an album of which you have some tracks already
finally get that album you meant to get but you only knew one or two tracks on

By the way, I’m not sure it’s a coincidence the tab for listening to your own music in the new iOS Music app in 8.4 is called simply “My Music”. One critical element to all this, however, is total transparency about the cloud and local elements of the service. Today, it’s still often hard to manage which elements of your total iTunes music library are stored locally on which devices and this part of the experience would need to be really good for this whole concept to work.

The economic impact could be positive for Apple and the labels

Make no mistake: this absolutely replaces purchasing behavior for these customers but it gives them a very definite sense of ownership over this music as long as they remain subscribers of the service, which in turn should make them enormously sticky. Since these customers tend to spend more than the average on music but spend less time actually listening to music, the economics could work out very well. Limited discovery time means these customers would likely listen to relatively little new music each month, while integrating their owned library means Apple wouldn’t have to pay record labels for their listening to that library. Today, streaming services have to pay for every listen to every song, whether it’s one the user already owns or not. Whether Apple would choose to share the benefits of these economics with labels is an interesting question – it could either pay out at a higher rate because total listening is shared over fewer songs and artists or it could pocket the difference.

One app or several?

One of the questions I debated on Twitter this week was whether Apple would put its new music service into this same Music app or whether it would be separated out. After all, when Apple launches this service, it will have three separate music offerings:

Traditional iTunes – purchased and owned music
iTunes Radio – free streaming, but no on-demand
iTunes On Demand – subscription streaming, including on-demand

Given everything I’ve talked about, I’m convinced if you’re going to split these into two apps, Radio is the one that doesn’t fit. It’s the only element that bears no direct relationship to the music you already own, and it’s entirely plausible as a standalone service. For all the reasons I outlined above, I think iTunes On Demand (as I’ve chosen to call it) should actually be tightly integrated with the traditional iTunes experience. I don’t think it makes sense to separate it out. Given iTunes Radio has stubbornly remained part of the Music app so far, I suspect that will stay too.

The role of discovery

Having said early on in this piece that discovery is less relevant to the target segment for subscription music services, I want to return to that topic as I close. Just because discovery is less relevant doesn’t mean it’s irrelevant in this segment. In fact, being really good at discovery could be a key differentiator for this segment precisely because those in this segment don’t have time for poor discovery experiences. Constantly having to skip songs, train algorithms, hunt and search for new channels or stations is a pain in the neck and actually reduces the amount of time people will spend on discovery.

All this means Apple needs to create the best possible discovery experience as well as the most integrated owned-and-claimed approach to subscription music. Beats majored on discovery and I’ve no doubt that was a major reason why Apple acquired it. But I actually think the integration with traditional iTunes is going to be a stronger value proposition for many of the target customers than integration with Beats, for all the reasons I’ve talked about.

How the Apple Watch could Float All Smartwatch Boats

Over the last few months, I’ve been asked quite often about what impact the Apple Watch launch will have on other smartwatch makers. On the one hand, it’s obvious to me the Apple Watch offers a vastly superior experience to any other smartwatch and so it would be tempting to say it will clearly be bad for competitors. However, that isn’t what I think will happen and what I’ve been telling reporters and others who’ve asked is I actually think the Apple Watch will be really good for other makers.

Awareness, interest and demand will rise

What the Apple Watch will do in the coming weeks is create awareness of the category in a broad swath of the population, real interest in the category among a subset, and actual demand for smartwatches among certain niches. Yes, all this will be driven by the Apple Watch specifically, but the word “smartwatch” will be bandied about by many people (even though it’s a word Apple studiously avoids) and many people will become aware of other smartwatches as a result.

More like the iPhone than the iPad

Ben wrote this last week:

First, there will be some debate as to “Apple Watch vs. the smartwatch market”. However, from what I know already and see coming in the pipeline, I still do not believe there is a smartwatch category. There is an Apple Watch category, but not a smartwatch category. This is similar to the early days of the iPad where it was common to say there wasn’t a tablet market but only an iPad market. I believe this same dynamic will be true of the foreseeable future for the Apple Watch.

While I agree with some of what Ben says here, I suspect the Apple Watch will be more like the iPhone than the iPad in this respect. That is, whereas the iPad quickly became synonymous with tablets and dominated the early part of that market, the iPhone never did, even though it did quickly become the standard against which almost all other smartphones were compared. However, there were two major factors that limited the iPhone’s ability to capture majority market share – price and compatibility – and I think these same two factors will limit the Apple Watch’s addressable market in a similar way.

Price and compatibility constraints

With the iPhone, prices started high and have remained among the highest in smartphones ever since, even though the lower end of the price range has fallen over time. But the other major limiting factor early on was compatibility – that is, many potential buyers were locked into a particular wireless carrier and that carrier wasn’t able to offer the iPhone. AT&T had the exclusive on the iPhone in the US and other carriers had similar roles in other markets and, although those exclusives have slowly gone away, they greatly affected the early addressable market for the iPhone. They also created strong incentives among competing carriers to promote Android, especially in the US, where Verizon was responsible for creating the Droid brand which gave Android its first real boost.

The Apple Watch too, is priced significantly above competing smartwatches, starting at $349 and going up quite a bit from there, in contrast to almost all the other smartwatches in the market, which range from $100-300. This creates a price umbrella for competitors willing to target those who balk at the Apple Watch’s price. But the Apple Watch also has a compatibility handicap, in that it only works with iPhones, which may have something of the same effect as the iPhone’s early exclusivity on certain carriers. Android users have two choices if they want a smartwatch: switch to the iPhone, or go with something other than the Apple Watch. Though a small number may switch smartphone platforms, for the rest the Apple Watch simply isn’t an option.

The promise and the reality

As with the iPhone, though, early Apple Watch alternatives will be competitive in theory, but not in reality, which gets to Ben’s point. Yes, the Apple Watch may be seen as part of a broad category of smartwatches, but it belongs in the same category as the Pebble only in the same way as the iPhone belonged in the same category as contemporary Palm or BlackBerry phones. On paper, they serve similar functions, but in reality they’re worlds apart. However, we all know the iPhone didn’t then and doesn’t today dominate smartphone sales. Price, compatibility, and other factors drove people to competing devices, even though those devices’ competitiveness was more theory than reality. Many early alternatives were dubbed as iPhone killers, but none was worthy of the name. It arguably took four to five years for competing smartphones to begin to seriously rival the iPhone, but it didn’t stop them from selling in large numbers. I suspect it will be the same with the Apple Watch – many people will choose alternatives for price, compatibility or philosophical reasons, despite the poorer performance of those competing devices.

In some cases, that will cause frustration and annoyance at the poor experiences those devices offer, and some of the early buyers of those smartwatches may eventually switch to the Apple Watch. But in other cases they’ll stick with them, either not knowing how different they are or not caring. As OEMs and carriers band together to sell Apple Watch alternatives, many of them with heavy discounts through bundling programs, I expect competing devices will sell pretty well. I suspect market share will be more balanced between Apple Watch and the alternatives than between iPhone and Android globally, but I don’t think we’ll see iPod-like levels of dominance over the long term. In fact, the iPad may well be a good model for what happens to market share over time, with brief dominance followed by a slow decline in share.

A window of opportunity

As I mentioned with the iPhone, it took 4-5 years for competitors to really start to catch up, but the iPad took much less time, partly because many of the underlying technologies were the same. The Watch is perhaps more like the iPhone than the iPad in this respect – a bigger leap forward than the iPad – and, as such, it may afford Apple a multi-year window of opportunity to sell truly differentiated experiences. But competitors have learned from their early struggles with the iPhone and some now move much more quickly to iterate and improve, so I doubt Apple will have 4-5 years this time around. Therefore, it’s all the more important that Apple, too, iterate quickly and produce future versions of both Apple Watch hardware and software which continue to raise the bar. And that’s something Apple continues to do very well, as it demonstrated just this past week with the new MacBook.

Apple’s Slow, Subtle Build to New Products

One of the things that has struck me this week as I’ve read the Apple Watch reviews (including Ben’s), is the Apple Watch builds subtly on work Apple has done over the last several years in other products. Yes, the Watch is an entirely new product for Apple, but it wouldn’t be possible without some of the groundwork Apple laid elsewhere.

A common pattern for Apple

And this is actually a common pattern with Apple, which often builds slowly and subtly to a big launch with smaller, incremental features and services. Some examples of this pattern:

Apple Pay – launched in 2014, but built to a great extent on Apple’s collection over the years of credit cards from users; the launch of Passbook in 2012, and the introduction of 2013 of Touch ID.
Siri – the basic model was introduced in 2009 with Voice Control. Apple then acquired the Siri technology from SRI in 2010, and launched Siri as a more fully-fledged feature in the iPhone 4s in 2011.
3rd party widgets – Apple had a couple of its own widgets back in 2007, but moved them to the Notification Center in 2011, introduced additional widgets of its own in 2013, and only allowed third party widgets in 2013.
iCloud Drive – iCloud launched in 2011, iTunes in the Cloud in 2011, iCloud document storage within apps in 2013, but iCloud Drive didn’t launch until 2014.

Apple Watch builds on earlier innovations

So, which innovations does the Apple Watch build on? This won’t be an exhaustive list, but consider the following:

Bluetooth notification extensions – introduced in 2012 and the foundation of how Apple Watch delivers notifications today
Health and HealthKit – announced at WWDC in 2014, several months before the Apple Watch, and which the Apple Watch fitness tracking fits into
Canned responses in iMessage – introduced in iOS 8 and are a key feature of how messaging works on the Apple Watch
Voice messages in iMessage – also introduced in iOS 8, the other key element of messaging on the Watch
VIPs in email – introduced in iOS 8, helps to focus notifications within the Mail app and, by extension, on the Watch
Muting people/threads in texts – introduced in iOS 8, helps to focus notifications on the Watch
Blocking contacts – introduced in iOS 7, also helps focus notifications
“Hey Siri” feature – introduced in iOS 8, found its way into the Watch
Walking directions – introduced in iOS 7, a key use case for Maps on the Watch.

And these are all just specific features – in a broader sense, many of the key features of iPhone really come into their own on the Watch, notably Siri. Almost all of these are valuable on the iPhone too. I don’t think anyone questioned their inclusion in iOS 7 or 8, but many of them really make sense in the context of the Watch. So why does Apple take this approach? I think there are at least two main answers:

Testing – introducing these features in a partial or early form and building on them over time allows Apple to bulletproof them and make sure they’re really working right before it makes a big push around them (or, in the case of the Watch, allowed Apple to bulletproof certain things critical on the Watch but less so on the phone)
Familiarity – Apple teaches its users new behaviors in subtle ways, tending to stay away from massive changes and instead introducing them bit by bit over time. This is true both for new products and features and for design and interface changes in iOS, which have also evolved subtly over time (with the possible exception of iOS 7, which might also be seen as a precursor to the Watch UI). Apple gets users accustomed to things and makes changes subtly, because that’s less jarring and easier to deal with from a user perspective. Swiping up from the bottom of the screen, for example, is a gesture introduced in the last couple of years in iOS, but is a critical user interface element on the Watch.

What else is Apple building now?

All this raises an interesting question: what is Apple building up to with the other features and services we’re seeing in its products today? With hindsight, we can clearly see how some of the incremental changes outlined above paved the way for the Watch, but can we use foresight to see what else Apple might be building to? This is an interesting thought exercise, and I’m not going to go into detail here, but some examples might be interesting:

Continuity and Handoff – could Apple use these fledgling connections between Mac and iOS to drive deeper and more meaningful integration in the form of, not just notifications and communication, but potentially using Touch ID on iOS devices to unlock Macs running OS X?
Payments – could Apple Pay and iMessage combine to provide person-to-person payments a la Venmo within iMessage?
Touch ID, Apple Pay and Passbook – could these components combine to extend wallet functionality beyond simple payments and into loyalty cards or IDs such as drivers’ licenses and the like?

I’m sure you could go through some of the things Apple is already building and find other examples (perhaps you’ll chime in with some in the comments). I’m fairly certain Apple isn’t done with this model and there will no doubt be some more “Aha!” moments in the coming years as we see these products and features find homes or roles in new and unexpected places.

Android’s Stagnating and Falling Share in Europe

Kantar Worldpanel released the latest installment of its always interesting public data set on smartphone buying behavior this past week and, as usual, I added it to my spreadsheet that tracks these things over time. One of the things that jumped out at me as I crunched some of the numbers from the last few months was Android’s share seems to be stagnating or falling in the five European markets Kantar tracks.

Because Kantar reports smartphone sales and not installed base, you have to be careful to avoid making assumptions based on short term trends, since this market is highly cyclical. One thing you can do is take a 12 month average of the reported numbers, which should ideally allow the cyclical trends to cancel each other out. What I’ve done here is shown the change in that 12 month average view over the last six months for each of the five European countries Kantar reports data for. That’s shown here:

What you can see is Android’s share dropped in Germany, Great Britain, and Spain; it grew, but only very slightly, in France and Italy. This is in marked contrast to the last several years, when Android share in these markets increased significantly (10-20% over the last three years) by the same measure. It appears as though Android has hit some kind of tipping point in these markets over the last six months in particular – there’s a marked change in the trajectory in the last few months in several of these markets. So what’s happening?

The resurgence of iPhone at the high end

Even as Android’s share has been rising in these markets over time, iPhone’s share tends to have been slowly falling, as Android mops up many of the later adopters who either can’t afford to or don’t want to spend what it takes to buy an iPhone. But over the last few months, iPhone’s share has risen even on this 12 month basis (i.e. adjusted for the fact iPhone sales are always higher at this time of year, after new iPhones are launched but before the big Android flagship models come out). This is likely happening mostly at the high end of the market, as the new iPhone 6 models take share from larger Android phones such as the Galaxy S and Note series. The chart below shows the change in the same period in iPhone share over the last six months (also on a 12 month average basis):

As you can see, the iPhone gained share in each of these markets, whereas in Italy, France, and Germany, the share of iPhones in sales has been stagnant or falling for the last couple of years. Again, something has changed in the last few months. As you can also see, the gains in share for the iPhone in some countries is bigger than the losses for Android, as the iPhone is also eating into other bases, including legacy BlackBerry and Symbian bases in some markets, but also Windows in others.

Windows Phone also nibbling at the low end

For comparability’s sake, I’m pasting the same chart for Windows Phone below, and you can see that in a couple of markets (Germany and France), Windows Phone actually made gains in the same period, eating partly into Android share and partly into legacy platforms’ share:

However, Windows Phone is in a bit of a lull at present, and so its effect here isn’t as pronounced as it is in some earlier periods. I’m showing below a longer term view of Windows Phone performance in the same markets, which shows both the significant gains made in earlier periods and the fairly respectable share Windows Phone has captured in some of these countries:

In France and Italy, Windows Phone share of sales was in the teens in February this year, up significantly in France from the previous year though down slightly year on year in Italy. Windows Phone is, I would guess, nibbling at the low end of Android just as iPhone is making gains at the premium end, and I would expect this trend to accelerate as both more low end Windows Phones are launched and as Windows 10 arrives later in the year. AdDuplex data for Windows Phone installed bases in these various countries suggests that here, as elsewhere, it’s primarily the very cost-effective 500 and 600 series that’s proven so popular in these markets. This is Windows Phone’s big success story at the moment, although also a potential liability as the platform attracts almost entirely the lowest spending users in each market. But capturing such a significant share in certain markets at least provides some indication Windows Phone might be successful more broadly when Windows 10 launches in these countries, if not more broadly overall (its share in the US continues to languish at under 5%).

Carmakers and technology – thoughts from the New York Auto Show

I spent Wednesday in a couple of different car-related activities: first, I spent the morning getting an in-depth briefing with a handful of other analysts on Nokia subsidiary Here’s automotive activities and then spent a couple of hours at the New York International Auto Show. I did all this in the context of a connected car report I’m nearing completion on and which I referenced briefly in my last piece about this space, focused mostly on Apple’s CarPlay. Having spent some time on both of these activities, I wanted to share some views about where carmakers are in regard to technology, the significant shortcomings some of them still have, and also some of the unique advantages they have.

Carmakers as “metal-benders”

This unflattering term was used by one of the people I spoke to recently who works for a provider of technology that goes into cars and I think it reflects very well the mentality a lot of us have about carmakers’ potential with regard to technology.

We’ve all seen really poor in-car technology and it seems to reflect a deep-seated inability to understand what sort of experiences people expect today. But it also reflects extremely long development cycles at these carmakers. Another anecdote I heard was about a carmaker that had to make a decision about whether or not to include MySpace in its social technology options – the decision was made years ago, but the car in question only shipped this year. That’s emblematic of the challenges carmakers face when developing technology – it’s on a fundamentally different timeline from all the the other technology we use day in and day out, with frequent software and hardware refreshes, two year hardware upgrade cycles and big annual software releases for smartphones and so on.

What tends to flow from all this is really poor technology in cars. At the Auto Show, one of the experiences I tested was in an Audi, and I’ve embedded a brief video of it below. Remember, this is a premium automobile on display at one of the big auto shows. I suggest you have the sound on when you watch the video, because you’ll hear the clicks as I manipulate the dial that zooms the screen and you’ll notice the lag between the click and the response:

This is what many of us think of when we think of in-car technology and, I think partly for that reason, it was actually really tough to get demos of most of the tech at the New York Auto Show. The carmakers seem to feel there just isn’t that much to show off and the electronic displays next to cars at the show tend to show you the standard transmission options, trim levels and colors but say little about the technology. What they do say about the technology tends to be pretty generic – “navigation and smartphone syncing”, for example. It’s tempting to believe because of all this carmakers have no chance in bringing compelling technology to market, but that’s a huge generalization.

Carmakers getting things right

I did find a couple of examples of carmakers getting things right at the Auto Show and it’s worth talking about. Just as all smartphone makers are far from being the same, not all carmakers are the same, and some are producing far better in-car technology experiences than the Audi one I shared above. I don’t have video to show you, but I do have some screenshots, and the experiences these represent are a lot better. Two cars in particular I was impressed by were the Volvo XC90 and the Jaguar XF (which was announced at the show) – see the images below (the first is the Jaguar and the second is the Volvo):

These two user interfaces were much more fluid and intuitive than the Audi one, and felt way more smartphone-like in their usability than many of the other UIs on the market today. These two carmakers are getting at least some things right and they’re not the only ones. It’s telling to me these are both somewhat premium vehicles, and I suspect their makers are finally catching up with the reality of what in-car technology needs to be. Neither is perfect, but both are getting a lot closer.

Carmakers’ advantages

To take things even further, carmakers have a couple of other advantages in moving in-car technology forward which I think will make it tough for smartphone vendors to be more than just an add-on as they are today. The first is they control all the displays in the car, as I alluded to in the earlier piece. As the cluster display (behind the steering wheel) becomes another all-digital display rather than an analog one as in the past (something I saw quite a bit of at the Auto Show), it becomes an extension of the head unit display in the center console. As such, these two need to work tightly together and solutions like CarPlay and Android Auto in their current configurations can’t touch that cluster display.

But more importantly, for the advanced information and navigation services carmakers are starting to work on, information about the car itself and its state will become increasingly vital in producing the best possible experience, and neither Google nor Apple will have access to that information if the current approach to in-car technology continues. Here and other technology providers for the car are already starting to work on navigation which takes into account the particular characteristics of the car – its mass and weight distribution, how it consumes fuel, dimensions and so on – in determining not just the fastest route but the most fuel efficient and safest route, too. And they use information about the car in real time, such as fuel levels, to proactively find gas stations along the way when you don’t have enough fuel to get to your destination and selecting a location near your route with the lowest price. Today, using your smartphone to complete the same task would be possible, but it would require dipping in and out of several apps, something that is tough to do in the middle of your morning commute. A key concept at Here is that of every day driving — in other words, enhancing your drive along the routes you take all the time, where you don’t need voice-guided turn by turn navigation as much as you need proactive help with real time details such as refueling, parking availability, sharing your ETA with friends or coworkers and so on.

Much of that expanded vision of what users will want from their cars will be tough for smartphone makers alone to deliver. It will take deep integration between the carmaker, technology providers, a variety of data sources, and much more. Along with the issue of penetrating more than just the head-unit display, this is the other factor that makes me believe Apple and Google might need to go beyond their current in-car offerings to something more deeply integrated, or potentially to building cars themselves.

The iPad at Five

This week marks the five year anniversary of the day the iPad went on sale — April 3, 2010. I thought I’d take a quick look at some of the numbers associated with the iPad, especially in the context of its falling sales, with a view to gauging where the iPad is in its lifecycle, and where it might go from here.

Much faster out of the gate than any other Apple product

One way to look at iPad sales is to put them in the context of Apple’s two other most recent new product launches, both of which came before it: the iPod, and the iPhone. It would be fun to put the Mac into this comparison too, but I don’t have those early Mac numbers (I’m not sure anyone does) and they’d be utterly dwarfed by these other products. The first chart shows quarterly sales for those three products, for the first 20 quarters from launch (i.e. quarter 1 is the quarter the product went on sale, and I’ve used an estimate for quarter 20 for the iPad, since it doesn’t end until this week and Apple won’t report it for another few weeks):

As you can see from the chart, the iPad was far faster out of the gate than either of the other two products and it took the iPhone about four years to pass the iPad’s rate of sales from launch. The iPod, meanwhile, largely fell short of the iPad’s sales to date in its first five years. That chart is somewhat lumpy since it reflects the cyclical pattern of sales for each of these products. So in some ways a better method to look at things is cumulative sales, which are shown below:

As you can see, the iPad’s sales over its first five years outpaced both the iPhone and the iPod, the latter very handily. Another way to look at all this is to ask how long it took each of these products to reach two key milestones: 100 million and 200 million cumulative sales, and that’s shown here:

You’ll see the iPad hit 200 million cumulative sales in four years, a period in which the iPhone was half that at 100 million. It took another year before the iPhone, now growing at an accelerated pace, hit the 200 million milestone. The iPod, meanwhile, took over twice as long to hit 100 million and almost twice as long to hit 200 million.

Reasons for the iPad’s slowing growth

In the first three years, the iPad appeared to be on an entirely different trajectory from both the iPhone and iPod, and at a significantly steeper angle, suggesting to the casual observer potential for a larger addressable market. But, of course, the addressable market for a tablet computer, unsubsidized and a companion to a smartphone and/or PC, was never going to be as large as the market for the iPhone. Rather, it’s become clear the rapid initial growth wasn’t so much a reflection of a greater overall opportunity, but a more rapid progression towards maximum penetration. The iPhone took a number of years to reach many of the countries in which the iPad was available in its first year. The price and subsidy model also took a couple of years to normalize. Apple was also utterly unproven in such small, touch-screen devices when the iPhone launched, and into a market where smartphones were already in rapid adoption. The iPad, meanwhile, benefited from the much larger number of Apple stores and carrier stores already carrying the iPhone, familiarity with the iPhone itself, and many other factors which allowed it to take off much more quickly.

Think about the fact that, thanks to these sales, the iPad has an installed base that’s likely around half the size of the iPhone base today (I’m no longer making comparisons about the same point in each product’s history, but actual current numbers). In other words, the iPad took just five years to achieve half the penetration rate the iPhone took eight years to achieve, despite the iPhone’s much bigger addressable market. At the same time, the iPad generated $127 billion in revenues for Apple over its first 19 quarters (we don’t know the exact numbers for the 20th quarter yet). Apple’s entire revenue as a company for the five calendar years before it introduced the iPad (2005 to 2009) was $127 billion. The iPad has made a massive contribution to Apple’s business over the period since, equating Apple’s entire revenues from all products over the previous five years.

So, why the slowdown? I’ve written about this a couple of times before, but I think there are a couple of main explanations:

First, the one I alluded to above: the iPad reached a significant portion of its maximum penetration much more quickly than previous products, and at this point it’s converting incremental new users each quarter while existing users are perfectly happy with the devices they have and just don’t feel the need to replace them just yet. This is essentially an argument about replacement cycles, and it suggests we should be due for a bump in sales in the next year or two as lots of 3-4 year old iPads start to feel sluggish.
Second, the argument the iPad served a temporary need in the set of devices we each carry, but the devices on either side are increasingly encroaching on the territory it once served uniquely well. As such, we feel less need for our iPads as we’re using our large-screen smartphones and our increasingly light and portable laptops more. In some ways, it’s as if the iPad landed in the wrong place in the evolution of Apple devices, and its decline at this point would have made more sense had the iPhone come later.

The next five years should be as interesting as the first

Which of these explanations holds true dictates what you think will happen to the iPad in its next five years: whether the replacement cycle for devices sold in its first two years will drive higher sales again, or whether the iPhone 6 and 6 Plus and MacBook Airs and MacBooks mean many of us simply no longer need an iPad. To the extent iPad sales are held up by sales of those other devices, I don’t think that’s a problem for Apple. But I also think there’s significant potential for the iPad to grow again, especially given the IBM deal and the sales force that will be selling these devices into businesses. Regardless of how you think things will pan out, I think the second five years for the iPad will be at least as interesting as the first five. I’ll leave you with this chart, which shows what happened to the other two products as they moved beyond their first five years: which of these is a better model for what will happen to iPad sales in its second five years?

Turning Microsoft’s Archipelago Into A Continent

The Verge and other publications reported this week on a talk given by Microsoft’s CMO, Chris Capossela, at the Convergence conference. One of the most interesting parts of the talk he gave was this chart he shared:

Some definitions to start

It’s important to understand what the chart represents, so I’m going to quote the official transcript for the explanation:

The size of a circle is how many consumers use the product in the U.S. in a short period of time that we measured it.

The arrows that connect the circle tell you that if you use product A, you’re statistically more likely to also use product B than the rest of the population that does not use product A.

Gold is Apple’s ecosystem, purple is Google’s ecosystem, blue is Microsoft’s ecosystem.

The concept is simple, but it’s important to get that grounding before we continue. The key point is the lines don’t represent theoretical or technical linkages, but linkages in people’s actual behavior between these services.

Size of properties matters

So what patterns does the chart show? First, as regards to usage of the various properties:

Microsoft has some real scale around a handful of key properties, including Office, Internet Explorer and Windows PCs, and some moderate scale around things like Bing, MSN, Outlook.com and Skype.
Google also has enormous scale around a handful of properties, including Google search, Gmail, YouTube, Chrome and Android (which, by the way, looks much too small here for some reason)
Apple doesn’t have that kind of massive scale on anything but iTunes.

But this chart is really about linkages

Now, as regards to the linkages between them, which is the real point of the chart (and this article):

Microsoft has relatively few strong linkages and has many more islands of interaction rather than a broad fabric of interconnectedness. I’ve often said what Microsoft has built is an archipelago of un-connected products and services rather than a true ecosystem and this chart illustrates that point wonderfully.
Google has good linkages between many of its products, either directly or indirectly, with some key focal points (more on this in a minute)
Apple’s is perhaps the most interconnected ecosystem, with lots of linkages between the various individual products and services.

As Capossela summarized it:

It shows you that we’ve got a lot of big businesses at Microsoft. Windows is big, IE is big, Office is big, et cetera. But it also shows you that we don’t have nearly the connectivity between our products that Google has engineered and that Apple has engineered.

Google’s linkages are in single ID, the homepage and Android

All this raises the question of what those linkages between products are at Google and Apple and why Microsoft doesn’t have the same level of connectivity. I’d argue the strongest links at Google are the Google homepage, with its list of links and the nine–square grid in the top right corner (see below); the single user identity it consolidated around in 2012 across all its properties; and thirdly, Android. Here’s that homepage corner I’m talking about (there are two separate screenshots here, with the second what you see when you click “More” in the first):

Right here, explicitly connected on the homepage of Google search (the biggest purple bubble in the chart) is Google’s linkage between its various properties. But on top of that, your single identity allows you to hop between these properties while remaining signed in and therefore quickly accessing the data, content, or settings within each of those properties.

Lastly, Android brings all these services together as apps on the mobile operating system with by far the largest market share worldwide. Google, therefore, has these three strong existing ties between its various properties and I’d argue they’re building yet another layer on top of that with Google Now, which pulls in data from various other properties and brings them together in a single interface which proactively surfaces things that are relevant at any given moment.

Apple’s linkages are also in single ID and OS, but also iCloud

The linkage on Apple is a combination of the Apple ID and its two major operating systems, iOS and OS X. Apple’s key services are both tightly integrated into its operating systems and, increasingly, take advantage of the Apple ID for integration across devices and platforms. It’s no coincidence that, even though iCloud is a relatively small bubble, it’s at the center of Apple’s ecosystem here, as it’s increasingly the connective tissue that pulls many of these services together. Apple has always focused on tight integration between hardware and software, but it’s the integration between these two and various iCloud-backed services that’s become increasingly important in recent years.

Where are Microsoft’s linkages?

So what, if any, are the linkages in Microsoft’s archipelago of products and services? Unlike both Apple and Google, Microsoft hasn’t until recently had a single ID system that operated across all its properties. Skype had its own, Office really didn’t have any kind of connected identity associated with it until Office 365 came along, Hotmail and other online properties had disparate identity systems and properties such as Bing also didn’t require any sort of login to be valuable.

Over the last couple of years, Microsoft has begun to consolidate around a single ID system with its Live IDs, and Skype now participates in that same system too. But the benefits to using such a single ID across various Microsoft products have been fairly limited. The one really big potential integration point has arguably been Windows, which appears as a bubble on Microsoft’s chart but isn’t connected to anything else. I’m guessing because it doesn’t count as a service in the same way as the others. But the PC itself has also not really fulfilled this potential in the past, with various individual applications and services running on the PC not really sharing any connectivity between a shared file system. As such, despite both Google’s and Apple’s success in utilizing both identity and operating systems as unifying elements, Microsoft has largely failed on both counts. The new Live ID system and both Windows 8 and Windows 10 promise to do better on these elements, but I still doubt that, by themselves, they’ll drive real connectedness, especially since Microsoft is largely missing the mobile piece.

The potential role of Cortana

One thing I think could become really interesting for Microsoft here is Cortana and the speech makes reference to Cortana briefly, though only as one of several possibilities for driving greater interconnectivity. Now, I’ve made the mistake along with others of thinking of Cortana much as I think of Siri – as a speech assistant on a mobile platform. It is that, to be sure, but what Microsoft really means by Cortana is not just the software on the phone but all the cloud services that sit behind it, including both the global data gathering that happens through Bing and the user-level data crunching that builds a profile of a specific individual. This is what allows Cortana to exist, not only as a feature of Windows Phone, but as a deeply-integrated feature in Windows 10 and as part of Bing online as well. In this sense, it’s much more like Google Now than Siri, in that it’s a cloud platform that can both suck in data from various sources and feed it back on various endpoints in an integrated fashion.

The reports about Cortana making its way onto iOS and Android make a lot more sense in this context, since Microsoft doesn’t enjoy significant share in mobile as it does in the PC market, and tying together your mobile world on iOS or Android with your PC experience requires something like Cortana to pull all the pieces together. Although I’d expect a Windows Phone-like instantiation of Cortana in an app on those other platforms, I’d also expect Cortana to play an increasingly important role in the background of various other Microsoft apps, pulling in data from them that helps improve Cortana’s performance as a virtual assistant wherever you use it. In this way, Microsoft might finally start to build a set of connected services that actually work better together rather than working independently as they do today.

Microsoft’s success in consumer depends on building these links

Chris Capossela doesn’t actually elaborate much on how Microsoft will build these links in his talk, beyond a couple of small examples. But I believe that creating these linkages between consumer properties will be critical to the success of Microsoft as a consumer brand. I wrote about this a bit in my piece on Microsoft’s recent acquisitions in the personal information management space, but it goes further than that. Microsoft won’t be broadly successful as a consumer brand if it only has a handful of popular but disconnected products and services. It will only be broadly successful if it’s able to built an interconnected ecosystem of products and services which are better because they work together in ways that benefit users more than if they piece together their own patchwork of equivalents from various different providers. To extend the analogy I used earlier, Microsoft needs to replace its archipelago with a continent.

A Primer on TV Economics

Given all I’ve written about Apple’s reported TV service (and I promise I will move onto a new topic soon), I thought it might be useful to run through some key figures around the economics of the TV business, based on some stats I collect from various companies.

Monthly cable TV bills are higher than many people think

One of the things I’ve seen passed around a lot this last week or two is the size of the average cable bill. I’ve seen two versions of this, both rather misleading when it comes to the actual monthly spend on pay TV for the average American household. One set of estimates has been in the $55-65 range, and I think it is based on some FCC numbers. The problem with that is it only accounts for the content cost and doesn’t include all the taxes, fees, set-top box rentals, etc., and so underestimates the spend quite a bit. The other number I’ve seen is a total “cable bill” number somewhere around $130, but the problem with that is includes broadband and potentially phone costs. Here’s a chart that shows how much money Pay TV providers actually make from their TV services per customer (this includes advertising revenue, so it’s not all direct from consumers):

What you see here is that $55-65 is way too low for most providers, with several of these Pay TV providers commanding $80-100 per month, and DirecTV even more. Set-top box rental is a lucrative source of revenue for the cable companies in particular, but it’s something Apple wouldn’t charge (consumers would instead buy an Apple TV box on a one-off basis, or just use existing iPads or iPhones). As such, it is possible for Apple to undercut the Pay TV companies on price, even if it pays roughly the same for content. However, I don’t expect Apple to lead with price – it never has before.

Programming costs are rising, driving up bills

The other thing you might notice from that chart is most of the lines are rising slightly over time. This is due, in large part, to the increases in programming costs Pay TV providers pay to cable and broadcast networks for their content. Not all Pay TV providers report programming costs explicitly, but a chart showing programming costs as a percentage of video revenues for those that do is below:

Again, you’ll see that strong trend up and to the right among all these providers, though the amount they pay varies quite a bit by their size, with Comcast (one of the largest providers, and also a content owner itself) paying the least, and Charter (a smaller cable operator) paying quite a bit more. For all these providers, though, programming costs are roughly 40-55% of revenues. In other words, roughly half of what they make from customers is passed through straight to the content providers. It’s only on the other half of their revenues they have any opportunity to make money, hence the importance of box rentals and the like. For Apple, these costs will likely be at least as high, especially since it will start out with much lower scale than the largest Pay TV providers. It remains to be seen what its model is for paying for content, whether it pays classic affiliate fees or whether it uses a revenue sharing arrangement, but it’s likely programming costs will be equivalent to over 50% of Apple’s revenues too.

The importance of advertising in the TV business model

Of course, not all revenues in TV come from consumers – various parts of the TV industry make money from advertising and it accounts for the large majority of revenue for broadcasters and cable networks. Even the Pay TV providers, which have a significant revenue stream from end users, generate a decent chunk of revenue from advertising, as shown in the chart below:

As you can see, 5-10% of cable operators’ revenue comes from advertising. That’s not huge, but it’s not insignificant either. One big question for Apple’s TV service is who will sell the advertising, whether Apple or its partners, and what sort of cut Apple will take. My piece on last week talked about potential roles Apple could play in advertising, but we’ve seen very little detail yet on how this will actually play out.

These charts come from work I do for my clients on the financial and operating metrics for the TV industry. Please contact me if you’re interested in learning more about any of this.

Apple, TV, Data and Ads

This is the fourth in a series of posts on Apple TV, with the first a year ago here on Tech.pinions, the second another Tech,pinions post on Apple’s HBO deal and what it signified, and the most recent from earlier this week on my own blog on the WSJ reports of Apple’s new TV service. This post focuses specifically on a couple of detail points around what Apple might offer, beyond the obvious stuff, which comes down to what Apple might want to do beyond the basics, and what it might have to offer the content providers to get that done.

Although each of these pieces has been based on my own analysis of what’s going on in the market, I’ve been grateful for the conversations I’ve had with a number of individuals, not all of whom wish to be named, who’ve helped me think through all this and who have added insight. You know who you are – thank you.

Linear content alone isn’t enough

Most of the focus with regard to Apple’s reported TV service has been on the channels and content itself, and that’s to be expected: a TV service that doesn’t have the channels people want will never be successful. But the reality is TV has moved a long way beyond pure consumption of linear content. There are lots of surveys out there on this, but they all point to the fact that, for under 45s especially, the main viewing method is now a combination of DVR and Video on Demand rather than live. And the younger you go, the more extreme this becomes. As such, a new TV service launching today has to have some combination of DVR and VoD functionality, the more advanced the better. Even Aereo, ill-fated though it was, recognized this and provided a cloud DVR service.

Of course, one new TV service that launched recently didn’t launch with DVR or full VoD functionality: Sling TV. It’s not because Sling’s owners don’t know how to do DVR. DISH makes the Hopper DVR for its own subscribers, so it clearly isn’t a matter of know how. There are three possible explanations for this. First, Sling wanted to get the service out the door and didn’t have time to prepare this functionality for launch, so it’s coming later; second, DISH, as the owner of Sling TV, didn’t want to compete head-on with its existing service, which is much more lucrative, and so they handicapped it; third, Sling couldn’t garner the rights it needed. My money’s on the last of these explanations and that suggests getting DVR rights might be tough for Apple without giving something in return (Sony has leverage through its content ownership, which explains how it was able to offer it in the service it announced today).

TV rights are tied up in ratings and ads

Television rights are tied up in two things: ratings and advertising. In other words, your ability to secure the rights to the content you want in the format you want depends entirely on your ability to not just deliver but track viewership and to deliver relevant and targeted advertising. But one of the biggest challenges with the shift to non-live viewing is tracking this is tough, and serving ads as content ages gets harder too. As live viewing has dropped off, Nielsen (which tracks this stuff on behalf of the industry) has moved from tracking live viewing only to tracking live viewing plus any views within three days of airing (“live+3”) but that still fails to capture a great deal of viewing which occurs after those three days are up. Given many VoD services offer five recent episodes, some content might well be consumed five weeks after airing, but this isn’t captured in ratings. Content providers feel under-compensated because of this and would love to both track more viewing and better monetize that viewing with higher rated ads. If content providers could reliably track viewing over a longer period, and if they could report those ratings back to advertisers, that would be a boon.

Apple’s ratings and ad play and data

This is where Apple comes in. Apple could do two significant things here. First, because any Apple TV service will be entirely controlled by Apple, it will be able to track all viewing and tie it back to a single user ID. Second, because it knows a certain amount about its users, it will also be able to report aggregated demographic information back to content providers and to advertisers. And it could offer to track viewing through DVR and VoD over a longer period, which would differentiate it nicely from the classic pay TV providers, which are doing live+3 only. Now, here’s where the recent article in the New York Post comes in. That article states:

Apple is offering to share data with programming partners to get them on board with its cable-like TV network package, The Post has learned.

The company is willing to share details on who its viewers are, what they watch and when they watch it to entice broadcast networks and others to go along with the service, sources said.

The information could help programmers better target shows to viewers and advertisers, who are increasingly chasing niche audiences.

Apple could, in this way, become the trusted source of ratings data Nielsen tries to be but is increasingly failing at. With Nielsen struggling to capture viewing beyond three days, and all viewing on TV Everywhere platforms, it’s serving the content owners and pay TV providers poorly. Some of the pay TV providers have their own data on that viewing, but since they are incentivized to maximize those numbers, they don’t represent a trusted party and this data counts for little. Apple, on the other hand, wouldn’t directly benefit from higher ratings numbers, and could, at the same time, provide very granular tracking and reporting of exactly what’s been watched, by which users, for how long, etc. It would be a trusted third party in much the same way as Nielsen is. This would be valuable for the content owners and give them something traditional pay TV providers can’t. Apple could capture the actual quality of experience on the end user side, something most cloud providers can’t do because they only see their end of the stream.

Privacy concerns are overblown

I’ve seen some people take umbrage at this suggestion that Apple will share data with third parties, because it appears to contradict the principles outlined in Tim Cook’s recent privacy letter, which reads in part:

We believe in telling you up front exactly what’s going to happen to your personal information and asking for your permission before you share it with us. And if you change your mind later, we make it easy to stop sharing with us…

A few years ago, users of Internet services began to realize that when an online service is free, you’re not the customer. You’re the product. But at Apple, we believe a great customer experience shouldn’t come at the expense of your privacy.

Our business model is very straightforward: We sell great products. We don’t build a profile based on your email content or web browsing habits to sell to advertisers. We don’t “monetize” the information you store on your iPhone or in iCloud. And we don’t read your email or your messages to get information to market to you. Our software and services are designed to make our devices better. Plain and simple.

One very small part of our business does serve advertisers, and that’s iAd. We built an advertising network because some app developers depend on that business model, and we want to support them as well as a free iTunes Radio service. iAd sticks to the same privacy policy that applies to every other Apple product. It doesn’t get data from Health and HomeKit, Maps, Siri, iMessage, your call history, or any iCloud service like Contacts or Mail, and you can always just opt out altogether.

Here’s the thing: Apple’s privacy letter outlines several separate concepts and has very careful wording around each:

Personal information – users decide what to share through privacy settings, and retain control over this
Profiling – Apple doesn’t build profiles of its users based on the content they access or sell this information to advertisers or others
iAd – Apple does have an ad product, which respects the overall privacy policy and also doesn’t dip into personal data.

Nothing in this privacy letter contradicts anything in the Post story, as long as it is understood correctly. Apple won’t start collecting browsing or email content and reporting to advertisers or content owners, they’ll let you decide what to share with the apps you use, and yes, they’ll show you ads (or let content providers show you ads) based on broader data they have about you. That last paragraph is key, because it demonstrates Apple isn’t anti-advertising and, in fact, it understands ad-based business models are critical for certain types of services. I’ve no doubt this won’t go away as an issue for some time, but to my mind there’s no contradiction.

On a related note, Amir Efrati of The Information mentioned a tantalizing tidbit in a tweet but never expanded on it in the linked article:

Exclusive: Ad execs super excited about #Apple #iAd allowing targeting using phone number, email. A la #Facebook. https://t.co/YYjDHYBJAh

— Amir Efrati (@amir) March 6, 2015

This is the other element of what Apple could do — offering to help content providers (and their advertisers) match IDs across services, so that it wouldn’t share any information about subscribers itself but would allow these partners to identify users they already know something about from third party databases and services.

What else can Apple offer content providers?

One other thing it could offer is an enhanced electronic programming guide (EPG). Today, what’s typical is the grid of times and channels, with a title, brief description and metadata, possibly a logo or other image, for each program. Apple could offer individual networks a landing page, similar to those they have on iTunes, as an alternate way for users to engage with content. Instead of going to the classic grid EPG, you could navigate by channel and, from the channel page, view the schedule for this evening, but also review your recordings from that channel, set up new recordings through your DVR, browse and view VoD content and so on. This is far more branding than networks currently get from any other service, and it would be familiar to consumers from iTunes. It could also potentially integrate purchases or rentals of content not currently available through free VoD or in the schedule. Apple could also create similar landing pages for genres (sports, dramas, comedy etc) which would also go beyond the typical color coding in the EPG.

An additional benefit for content providers is Apple’s audience isn’t like the general TV audience. As Ben Bajarin has pointed out, Apple’s audience spends more time and more money on its devices and related services. This is the most valuable audience out there and advertisers would love to be able to target such an audience. As a result, even if the audience is small, it’s a very lucrative segment. It may well command higher advertising rates than the general TV audiences at existing pay TV providers.

Apple Pay and iAd

One last thing Apple could do is use its iAd product combined with Apple Pay to offer direct-response advertising, allowing users to immediately purchase items advertised through the TV service. This has been a holy grail of sorts for both advertisers and pay TV providers, but with the only option for payments being adding items to the cable bill, it’s never been attractive for either users or providers. But with Apple Pay offering a secure existing payment solution tied directly to credit and debit cards, it could finally break through this problem. Whether Apple would want to take a direct role in this with iAd, or whether it would simply give the necessary hooks to the content providers is an open question. I’m somewhat doubtful we’ll see this anytime soon, but it’s an interesting additional angle.

A quid pro quo

I talked in my piece earlier this week about the risk content providers are taking here, dealing with Apple and enabling this form of competition with their existing channel to market, the pay TV providers. As I mentioned in that piece, Apple needs to provide significant incentives for these providers to take those risks, especially if it wants to be able to offer full cloud DVR functionality and extended VoD libraries. I believe the benefits associated with better ratings and advertiser data, enhanced branding for channels and content, and the attractive Apple audience could all sway content providers to do just this. That’s critical because, as I also said in my earlier piece, this thing won’t be sold on price, but on the user experience, and that depends on offering much more than just standard linear TV.

Thinking about Apple Watch pricing

One of the key things out of the Apple event last Monday was how exclusive and far removed from the mainstream the Apple Watch Edition is. The combination of pricing, limited numbers, and limited channels will make this a product very very few people will buy in comparison with the other two versions. It’s important for other reasons and is interesting in its own right, but that’s the subject of a whole other post to be written some other time. What I wanted to focus on here was what the pricing looks like if you strip the Edition out of the equation, specifically in context of the iPhone and iPad. The chart below shows lowest, highest and average selling prices for these three product lines. Obviously, the ASP number for the Apple Watch is an estimate and I have it pegged here at roughly $550 though I’d say anything from $500-700 is entirely feasible and it may well end up being higher than $550:

What you see when you strip out the Edition versions is the Watch sits right around the same range as the other two products. The lowest price is between the lowest iPhone and iPad prices, the highest price is slightly higher than the highest iPhone price and, in my opinion, the ASP will end up right in the same range as the iPhone. The other thing worth bearing in mind is the impact that buying additional bands might have on the ASP of the Watch, which of course Apple won’t be reporting directly, at least for the time being anyway. My ASP above is based on a single band sales model, but of course there will be people who do buy more than one band.

But the point here is the Watch is going to end up priced at a similar level to the iPhone and iPad, which has a couple of implications. Firstly, with regard to affordability, the iPhone has a similar ASP and range of pricing but is, of course, heavily subsidized and/or sold on an installment basis in a number of big markets. As such, affordability for the iPhone at this price range is quite a different question from affordability of Watch at the same price. The iPad has a slightly lower price range, both in terms of high and low and in terms of the likely ASP, but it’s sold to consumers at full price in most cases, which means affordability is in some ways a better fit here for how to think about the Watch.

The reasons for the variability in pricing are quite different for the two existing product lines versus the Watch:

Specs, specifically storage size and radios (LTE vs. WiFi only) are a major driver of differences in pricing in the iPhone and iPad ranges, but have no impact on the Watch, which has identical specs at all price points, including the Edition. I’d expect this to continue to be the case – as others have pointed out, specs (or “speeds and feeds”) have been entirely absent from Apple’s discussion of the Watch
Age is the other major driver of differences in pricing within the iPhone and iPad ranges, with older versions commanding a lower price and enabling Apple to take these devices downmarket without sacrificing quality. It’s obviously too early to tell whether the same will happen with the Watch, especially given the existing very large range of price points just with a single year’s model, but it continues to be an effective way to bring the price down
Materials and finishes the only major driver of Apple Watch price variability, with the aluminum/steel/gold question the major driver, but with materials and finishes in bands an important secondary one. Though iPhones and iPads have hitherto come in different colors, the materials have been the same, so this hasn’t been a driver of price differences. It’ll be interesting to see how this changes going forward – will we see solid gold versions of any other Apple products?

As this brief analysis suggests, the reasons for the price ranges are quite different today but that could easily change over time, with age (though likely not specs) becoming a factor in Apple Watch pricing, and materials becoming a factor in iPhone and iPad pricing. But, in some ways, there’s also a parallel between the materials and finishes driver and the specs driver, in that Apple tends to charge a far greater premium for bumps in both these areas than the underlying cost drivers dictate. In other words, Apple has always charged significantly more for the higher storage iPhones and iPads than the lower storage versions, even though the cost differential is very small, driving higher margins on those devices. Similarly, it’s likely the cost difference between aluminum, steel, and gold doesn’t justify the difference (or even the majority of the difference) in price between those ranges, especially when it comes to the Edition. As such, margins will similarly be higher on the more expensive devices, just as they are with the more expensive iPhones and iPads. In this way, even though the specifics of the drivers of higher price are different, the model could end up being very similar.

I’m intrigued to see what the early sales suggest about how the different versions are selling and what the average selling price ends up being. As I mentioned earlier, we won’t know for quite some time because the numbers will be lumped in with other products in Apple’s reporting. As I’ve said before, I believe in time Apple will likely break these numbers out once they’re big enough to boast about, so hopefully we’ll get more transparency and resulting insight eventually.

Apple TV, HBO Now, and the Potential for Something More

Though most of the focus this week has been on Apple’s Watch announcement and, to a lesser extent, the new MacBook and ResearchKit, I wanted to take some time to talk through the other announcement from Monday’s event — Apple’s deal with HBO to be the exclusive partner for HBO Now for the first three months.

Two possible solutions to solving the app fragmentation problem

A few months back, I wrote a piece about what I thought Apple could do to finally take the Apple TV device beyond a hobby. In a nutshell, I proposed Apple would need to create a fully-fledged TV service of its own to really turn the device into something more compelling. But I also talked about other interim steps Apple could potentially take to overcome a major problem that’s emerging in online TV services: fragmentation. As I put it in that piece:

Apple TV does now carry lots of apps which allow you to watch a variety of content without switching inputs on your TV, but that’s only a partial solution. You’re still having to hop between apps, with no universal search to allow you to locate shows across them (unlike Roku). But there are other hassles too – people still have to maintain multiple subscriptions and authenticate themselves to the various apps they want to use.

I still think the best solution to all this would be Apple creating and launching a service of its own, because that’s the only way Apple will be able to exert the kind of end-to-end control necessary to create a truly Apple experience. However, either as a stopgap or even as a more realistic alternative, the other possibility has always been that Apple could simply bring together the disparate elements of the current app-based approach in a more integrated fashion, and I think the implementation of HBO Now is an indicator this might be possible.

One app doesn’t make much difference, but could be the beginning

To be clear, HBO Now is for the time being yet another app on the Apple TV. As such, it adds to rather than subtracts from the fragmentation problem. But in other ways, the HBO Now implementation is different from how other apps have been implemented in the past and in a way that gets at some of my criticisms of how the Apple TV has worked until now. The key element is that Apple will bill for and manage the user relationship of HBO Now rather than that relationship being managed by HBO itself separately and then authenticated on Apple TV. That may seem like a subtle change and it is when we’re only talking about a single service. But where this starts to get really interesting is where Apple becomes the key customer interface for several of these services. In that way, even though the customer subscribes to multiple different services, Apple becomes an aggregator of sorts, such that customers only pay one bill, have one user account, and use a single user interface to interact with all this content.

Beyond that, Apple could then add universal search similar to what Roku offers today on its boxes, allowing users to search content within those several services rather than having to dip in and out of each of them. It could layer on recommendations and personalization which would work across these different services too, so that you could have a single hub on the Apple TV to go to in order to figure out what to watch – a key issue with the current fragmented approach.

From version 1 to version 2 of TV services on Apple TV

In some ways, the current model for most apps could be considered version 1 of TV content on the Apple TV, with each app its own silo, mostly as an instantiation on the Apple TV of a service subscribed to elsewhere, with no integration between them, different billing relationships (and TV Everywhere authentication requirements) for each, and so on. Version 2 could be beginning with HBO Now and could begin to unify a set of services built with Apple devices and this sort of integration specifically in mind. To me, this would overcome many of the risks of the current fragmentation problem in online TV.

Significant benefits to this model

The other major benefit to Apple from doing this is it would be able to steer clear of the thorny issue of advertising, which is such a key component of the business model for live, linear TV today, and which I’ve written about previously here and here. With more of an aggregation relationship than a service creation relationship with content owners, Apple could forgo this role entirely, leaving it to the individual content providers to manage however they wish. It would also leave the pricing of individual elements as a decision between content providers and their end customers, which would enable Apple to stay out of the messy affiliate fees disputes which occasionally disrupt service on pay TV platforms.

Some downsides too

The downside to all this? Apple wouldn’t enjoy the same degree of control over the whole thing as if it controlled and owned it end-to-end. Individual content providers would want to implement their own offerings differently and that would cause some inconsistencies and some degree of fragmentation (though arguably less than at present). Of course, many of them would also extend the same services to other platforms beyond Apple’s, just as HBO will do three months from now. But Apple’s advantage would be its ability to pull these things together and provide the integration layer across all of this.

The next few months could see more partners

I have no inside information that Apple is planning this and it may well not come about. But in the context of such a move, discounting the Apple TV by $30 makes sense – seeding the biggest possible base for future services delivered to the Apple TV, which will then become the major revenue generator for Apple, rather than the device itself. And it would also make sense of several Apple executives’ remarks on Monday that HBO Now is the beginning of something bigger. The big question now is: who’s next? Sling TV could easily become another similar partner – Apple TV was conspicuously absent as a launch partner for that service, but perhaps because Apple has something deeper than just another version 1 app in mind. CBS would be another, with Netflix, Hulu, and other potential future partners if they choose to play ball. Over the next few months, we should see whether HBO Now is a one-off, or the start of something bigger.

Apple Takes a Consumer-First Approach to Healthcare

Alongside the much anticipated final details on the Apple Watch, the company announced on Monday partnerships with several hospitals and related software to allow end users to participate in medical research through their iPhones. I’ve tracked a wide range of technology companies over the years as they’ve tried – and largely failed – to break into the healthcare industry and use technology to transform key processes. Many things have held these companies back, not the least of which is the heavy regulation which applies to healthcare. But one thing Apple has done differently has enabled it to breakthrough where others have failed.

From enterprise-out to consumer-in

Essentially, all of the healthcare technologies I’ve seen from various companies over the years start with some key process from the perspective of the hospital, the provider, the doctor or administrators, with patients often a secondary concern, if they’re involved at all. It’s usually about digitizing records, giving doctors apps to write prescriptions, installing new equipment in hospitals, and so on. It’s what you might call an “enterprise-out” approach to healthcare – in other words, it starts with the business end and works its way out to the patient. What Apple has done is turn this on its head by empowering the patients themselves to take their health and related information into their own hands, generate data that can be used in studies, and feed it directly to the institutions that need it. By contrast to the historical approach, this could be described as “consumer-in” – the solution starts with consumers and goes from there. By turning the traditional model around, Apple has broken through in a way few other companies have been able to and will make a meaningful difference as a result.

The base that sells Watches can also do good

Of course, ResearchKit wasn’t the only thing announced on Monday. The main event was arguably the Apple Watch. But it’s the very same base of iPhones (700 million sold, we were told in the keynote) that allows Apple to have high confidence of selling lots of Watches that enables them to produce a solution like ResearchKit. The only reason hospitals are willing to work with Apple is it has this massive installed base of devices which are capable of feeding them the kind of data they need. And Apple has the distribution mechanism in the form of the App Store to publicize and make available the applications which are at the core of the solution. I was asked by at least one reporter today whether ResearchKit would help Apple sell more iPhones and the honest answer is I doubt it. Yes, there might be some people with chronic health conditions who currently use an Android and who switch to be able to participate in a study. But this isn’t about Apple selling more of anything.

I’ve mentioned before I have a smart friend who’s also something of an Apple fan, who suggested last summer that perhaps the genesis of Apple’s HealthKit and related activities was Steve Jobs’ own health challenges in his later years. He must have found working with the healthcare system enormously frustrating and felt, as many of us do, unempowered throughout the experience. Think of how ResearchKit transforms the experience of someone who feels powerless because of a chronic illness, forced to visit hospitals or doctors’ offices frequently for tests and measurements, often themselves dehumanizing. I don’t think ResearchKit is about selling more Apple gear at all – I think it’s about helping to solve some of the more real and meaningful challenges people deal with in their everyday lives. The fact Apple is open-sourcing some of the software is another sign this isn’t about just reinforcing the Apple ecosystem. I suspect that, even if the spark behind all this was rooted in Steve Jobs, it’s Tim Cook’s more philanthropic Apple that’s making it happen in this way.

Apple’s partnership approach at work again

The other key feature of all this is Apple is far from doing all this work by itself. ResearchKit grew out of close partnerships with hospitals, doctors and universities. Just as Apple Pay was hugely reliant on partnerships with card issuers, banks, and merchants, and the success of iTunes was based on partnerships with content owners, so ResearchKit wouldn’t be possible without these other institutions. For all the criticism of Apple’s closed approach to doing things, it’s often its very willingness to work closely with partners that makes breakthroughs like this possible.

Just the beginning

Of course, I’m not naive enough to believe Apple has suddenly solved the world’s healthcare problems in one fell swoop. ResearchKit is a very targeted solution to a very specific problem, that of medical research. Much of healthcare remains hidebound and undisrupted by technology. But Apple’s consumer-in approach and the power of its installed base of devices could be helpful in a whole range of other settings within healthcare, with its current Health app and HealthKit tools as the foundation but with much more innovation taking place around them and around iPhones and their potential to track things. The Apple Watch, of course, also has great potential for being part of this picture, with the additional health data it captures. I suspect what we’re seeing is just the beginning of the transformation in healthcare that’ll be possible through the combined power of Apple’s installed base and the experts it works with to create solutions that start with consumers and the devices they already have.

Apple and Intimate Computing

I’ve been speaking to a few reporters ahead of next week’s Apple event, where we’re all expecting Apple to unveil additional details on the Apple Watch ahead of a launch in April. One of the themes from the original launch event I’ve been referring back to is this concept of more intimate computing that Apple talked about. It’s there in Apple’s marketing materials for the Apple Watch on Apple.com too:

And since Apple Watch sits on your wrist, your alerts aren’t just immediate. They’re intimate…

A more immediate, intimate way to connect…

It’s a simple and intimate way to tell someone how you feel…

It also enables some entirely new, intimate ways for you to communicate with other Apple Watch wearers…

One of the big questions I’ve been asked during these conversations with reporters, and something a number of people asked after the original event was, how Apple would sell this to consumers? I’ve written previously about the role of these Apple keynotes, and the fact that these aren’t Apple’s main pitch to consumers. In fact, very few of those in Apple’s addressable market will ever watch these presentations. But when it comes to how Apple will pitch the Apple Watch, both next week and beyond, I think this concept of intimacy will be a big deal. So what exactly does Apple mean by this, and how does it manifest itself?

Personal devices truly become personal

One of the funny things about our smartphones is they’re at the same time incredibly personal devices and yet not very personal at all in other ways. On the one hand, we carry them with us almost everywhere we go, they’re tied to our personal identities, they carry much of our most personal information, and they’re the way we communicate with those nearest and dearest to us. And yet when we talk on them we’re audible to those around us, when we get notifications others in the vicinity hear either pings or buzzes, they’re often secured and tracked by the companies we work for, we use them for the mundane and painful tasks in our lives as well as for the joyful ones, and so on.

What I think intimacy in computing really means is going a level deeper on the personal side, and perhaps also stripping away some of the non-personal elements of the smartphone. The Apple Watch, then, becomes the truly personal device our smartphones have never quite been. Notifications come in noiselessly, communication with our Apple Watch-wearing significant other can be both more private and more individualized, the tasks we do on the Apple Watch can be limited just to those that are meaningful to us, leaving others for the smartphone, and so on. Our smartphones have the potential to be all these things, but because they’re also the main devices on which we get things done, they lose some of that meaningfulness and our associations with them can be emotionally mixed. But a device you have with you all day, that becomes a chief means of communication with those nearest to you, that allows you to be truly in the moment in a way you can’t be when tied to a smartphone, that’s truly an intimate device.

Other devices have tried and failed

MG Siegler wrote about a year ago about a shift in the way he used his smartphone, which relates strongly to what I’m talking about here. He wrote about how he’d always kept his phone on silent or vibrate to avoid bothering those around him when notifications arrived and that he’d been using a Bluetooth headset which allowed him to hear all those pings out loud again without annoying anyone. In a way, he’d discovered an extension to his phone that allowed it to become, in some ways, more personal again. But, of course, the object in question was a gadget hung awkwardly on his ear. More recently, he followed that piece up with another quick thought about the Moto Hint, which is arguably the first mainstream Bluetooth headset that sits more subtly inside your ear. It somewhat solves the awkwardness problem and I think it’s a great evolution in headset design. But it continues to be mostly audible and is still visible from the side. Google Glass is another device which its creators described as something that should allow you to be more in the moment by putting what you cared about in your visual field, but it’s like a Bluetooth headset on steroids: obtrusively and obnoxiously filling not just your field of vision but also highly visible to everyone else.

What the Apple Watch does differently is present itself in a form factor that’s not just unobtrusive, but actually elegant. Tim Cook has drawn the contrast with Google Glass specifically in this context, and I think it’s a point worth making. The Apple Watch comes in a familiar form factor, one which doesn’t look awkward or even particularly gadget-like, unlike most of the smartwatches on the market today. It solves the fundamental issue of awkwardness associated with both headsets and Google Glass while simultaneously going quite a bit further in its functionality, much of it hidden most of the time both to the wearer and those around her.

Intimacy is a tough sell

The most challenging thing about all this is it’s not obvious as a selling point. We’re used to buying devices based on what they can do for us and we usually think about specific tasks. What’s difficult about this concept of intimacy is it’s not really necessarily about doing something new, but doing something differently. I’m curious to see how Apple pitches this in the event on Monday, but even more interested in seeing how they convey it through their advertising.

However, I think the key with the Apple Watch, as arguably with several previous products from Apple, is knowing someone who owns one and loves it. Because this is a new and unfamiliar category for most people, it’s going to take the early adopters experiencing it, finding out how it adds value to their lives, and then sharing with friends and family, to really make the Apple Watch value proposition come alive. I’ve no doubt we’ll see plenty on Monday about both the pre-installed apps from Apple and a handful of third party apps that show off what the Apple Watch is capable of. But I suspect intimacy will be a major theme again and I suspect Apple isn’t done inventing devices that push computing in this direction.

The Devices on the US Mobile Networks

As part of work I’m doing for some of my clients, I created this chart which shows the makeup of the device base on the major US wireless networks. I thought I’d unpack it a little for Tech.pinions Insiders:

The pie chart represents the devices on the five largest US wireless operators, including the four major network operators (AT&T, Sprint, T-Mobile and Verizon Wireless) and the largest mobile virtual network operator, Tracfone. It excludes the network operators’ wholesale subscribers (many of which are Tracfone customers), to avoid double counting.

Smartphones dominate

As you might expect, smartphones dominate the picture. I’ve actually separated out postpaid and prepaid smartphones, but together they constitute almost two thirds of the total. Among all phones, smartphones now account for around 75%, but 17% of total wireless connections among these operators are still feature phones. That may not sound like a lot, but when you realize the pie chart represents around 340 million devices, 17% is actually large — around 58 million subscribers. Given the rates of conversion to smartphones, it’s likely many of these 58 million will become smartphone users over the next two years, representing a significant additional opportunity for vendors during that time.

Phones aren’t growing

The pie chart is a snapshot of a moment in time: specifically, the end of December 2014. What you don’t see is how this picture is changing over time, or how fast the various pieces are moving. But the reality is phones as a total base are barely growing at all. There are about 200 million postpaid phones and about 75 million prepaid phones on these operators, and that number isn’t moving by more than a million or two per year. The rapid growth in smartphone adoption gives the impression of a dynamic market, but the main movement behind those numbers isn’t market growth but conversion from feature phones to smartphones. A year ago, there were around 190 million smartphones in this group, and now there are almost 220 million, with the decline in feature phones accounting for most of that growth.

“It’s all about not phones”

Back in January, during AT&T’s Developer Event at CES, PC Mag analyst Sascha Segan (who covers mostly phones) tweeted the following:

It’s all about not phones. @ATT pic.twitter.com/1nTmtY6yuM

— saschasegan (@saschasegan) January 5, 2015

And that’s a pretty good summary of the growth prospects for the US wireless market: it’s all about not phones. Smartphones will grow, but the phones category as a whole won’t. That’s really what the rest of the pie chart is about. The light gray category really isn’t growing – that’s “other mobile broadband devices” and it’s mostly things like standalone WiFi hotspots, connected laptops, 4G dongles etc. Much of that market is being displaced by the hotspot functionality in smartphones and tablets, so it’s actually likely to decline over the next few years. But the other two categories are where the growth will be.

Tablets overtake phones as a source of growth

Tablets are already growing rapidly, albeit from a small base. The carriers have struggled historically to get consumers to buy cellular-enabled tablets as opposed to WiFi only ones, because of the combined cost of the modem ($129 for iPads) and the service fees associated with them. The price delta for 4G-enabled tablets hasn’t really come down, but carriers are starting to find ways around the high service fees. T-Mobile has been giving away a small amount of data with tablet sales, while AT&T and Verizon have been allowing subscribers to attach tablets to shared data plans relatively cheaply. Every carrier except T-Mobile added more new tablets to their subscriber bases in Q4 than they added phones and this trend is here to stay. Verizon continues to be the leader at adding tablets, mostly because it has a tablet it sells exclusively at a fairly low price as a way to drive adoption. But AT&T is in a strong second place, and the four major carriers between them added almost 3 million tablets in Q4, compared with just 1.4 million postpaid phone customers. Tablets will continue to be a source of overall growth for carriers, though not a huge driver in the grand scheme of things.

Connected devices are the real driver of growth

The thing that’s really going to drive most of the growth going forward is the connected devices category. For the uninitiated (or simply those wondering whether all the devices I’ve already described aren’t connected devices), “Connected Devices” is the term used by carriers to describe devices connected to the networks which aren’t sold with traditional service plans. This includes e-readers such as Kindles, which are sold to customers with the wireless connectivity built in for no fee. It also includes a variety of machine-to-machine (M2M) services which rely on cellular connectivity and the increasing number of connected cars hitting the market. For AT&T in particular, that connected car market has been a big deal. It added 1.3 million connected cars in the second half of 2014 alone and it has basically sewn up the major manufacturers for 4G connectivity in 2015 model year cars. Verizon, having missed out on selling to those car manufacturers directly, is launching Verizon Vehicle, an aftermarket solution that can target the millions of cars already on the roads. Sprint also has a dedicated automotive team going after both consumer vehicles and commercial transportation.

Connected home solutions, broader M2M services, and many other opportunities have the potential to drive the market well beyond its current size, even as traditional devices like phones and tablets barely move the needle. I believe AT&T is best placed to capture this future growth with its progress in Connected Cars, its Digital Life home services, and its broader enterprise base. While all the carriers continue to squabble over the same phone subscribers, it’s this area where all of the carriers should really be focused.

The Real Problem with Lenovo’s Adware

Listeners of the Tech.pinions podcast will have heard me talk about this on last week’s episode, but I wanted to outline some thoughts about what Lenovo’s Superfish problem really says about the company. Tim had a piece on Wednesday, but I wanted to go a little further.

The root of the problem is a lack of differentiation

The real root of Lenovo’s problem here is a lack of differentiation. In the enterprise world, Lenovo has been able to benefit from the power of the ThinkPad brand. In the consumer world, it hasn’t had the same brand to lean on and has instead had to focus on other potential differentiators. But Lenovo suffers here from the same problem that plagues all Windows OEMs — on the software side, they’re all shipping the same thing, Windows 8 (soon to be Windows 10), with all the same features and functions. This obviously pushes them to try to differentiate on hardware, but there’s only so much you can do when the OS is the same and requires many of the same components to make it run. Battery life, screen resolution and other features vary somewhat between devices, but they mostly vary by price band rather than by manufacturer.

All this leads to the relationship PC OEMs have had with third party software vendors. Looking at things charitably, these OEMs are looking for positive ways to set their software experiences apart from competitors (and that’s certainly what Lenovo claimed it was doing with Superfish). Less charitably (but arguably more realistically), these OEMs need these third parties because they help push PC OEMs out of the red and into the black financially. But that’s only necessary because their inherent lack of differentiation doesn’t allow them to charge a premium and therefore leaves them with very low margins. However, the software they do pre-install doesn’t actually differentiate them in any positive way, while Microsoft is ironically able to command a premium for the Windows devices it sells without any third party software pre-installed.

Parallels with Android and lessons from Motorola

There have been lots of stories over the years about the parallels between Windows and Android – two platforms which dominated market share while Apple took minority share but most of the profits. I won’t rehash the parallels here, but there is one specific area in which Lenovo’s problem in PCs could benefit from its subsidiary Motorola’s recent success in Android smartphones. Motorola has differentiated some of its recent phones on the basis of stripping down the user interface to the barebones stock Android experience, while focusing on adding real value through software innovations of its own. This is just the kind of thing Lenovo ought to be looking to do on PCs too.

Windows PC vendors have struggled for years to add real value to PCs with their own software, and the reason is simple: none of them is a software maker by background and all come from a pure hardware heritage. Apple remains the one computer maker that successfully sets itself apart on both its software and hardware, and a large part of that success is down to the tight integration between the two with related services. Stripping down the pre-installed third party software is only part of the answer. Lenovo needs to find ways to provide real value through its own, exclusive software above and beyond what Windows itself provides. This is going to get tougher as Microsoft builds more functionality into Windows in Windows 10: Lenovo has experimented with different “modes” for its Yoga laptops, but that will now be taken care of by Windows 10 itself. And Windows 10 will also come with some Office functionality built in.

Lenovo has built some of its own software in the past and currently pre-installs this with some of its devices. But this software is largely along similar lines to the third party stuff PC OEMs have traditionally bundled. It’s naggy, not very useful, and clogs up the machine. I don’t think Lenovo, or any other Windows PC OEM, has the wherewithal to successfully develop its own software today. But, as Microsoft is demonstrating, it’s certainly possible to acquire good software makers if you’re so inclined. Lenovo has been very focused on hardware acquisitions, building scale and, to some extent scope within that narrow sphere. But I think it’s time it started making software acquisitions. This is going to be a key area for future differentiation, both on the PC and on the smartphone, and Motorola has made a decent start on the smartphone side. But it’ll take a far bigger investment in software to really set Lenovo apart. As long as Samsung continues to try to do this organically, I think there’s an opportunity for Lenovo to really do something different across both its major hardware categories.

The State of Online Advertising

As I’ve covered earnings season the last few weeks, I’ve made a few references to the online advertising business. I thought I’d spend my time today looking at some of the key metrics relating to US-based online advertising in the set of companies I track closely. These are the seven largest businesses in this space which report their ad-related revenues with reasonable consistency. LinkedIn, Amazon, Yelp, Pandora and others follow a little way behind.

Google continues to dominate this space

The most obvious thing you see when you start looking at these numbers is the extent to which Google still dominates the space:

Google’s revenue run rate from advertising alone is around $60 billion a year and it dwarfs everyone else in the market, with Facebook coming a distant second. If we remove Google from the picture, we start to get a clearer idea of how the others shape up:

Facebook is increasingly pulling away from the next set of companies, with a run rate of around $12 billion per year, while the others are all at around $4 billion or less annually. Microsoft is third and growing at a decent clip, while Yahoo is close behind with more stagnant revenues. AOL, Twitter and IAC round out the top seven. For all the attention it gets, people might be surprised to see Twitter is still smaller than AOL in ad revenue terms, and quite a way behind Yahoo and Microsoft, though it’ll catch AOL in 2015 and likely Microsoft and Yahoo in 2016 or so.

Search is a much faster growing business than display

For those companies who separate search and display advertising, the former is a much faster growing business than the latter. Google doesn’t explicitly separate these two in this way, but we can use Google’s “Sites” revenue line as a rough proxy for search and its “Network” line as a rough proxy for display. That gives us this picture, alongside the other companies which do report a direct split:

As you can see, search advertising revenue at these companies is growing quite a bit faster than display, which is in negative territory for three of the four companies. Only Google has positive year on year growth, but even its growth is slower than in its search and related businesses. The main reason for the slower growth in display is prices are falling rapidly. Google has had negative year on year price changes for seven out of the last eight quarters in its Network business, while Yahoo has had year on year declines, sometimes over 20%, in its display ad prices for the past eight quarters. Meanwhile, prices for search advertising continue to go up, reflecting its superior effectiveness in reaching a relevant audience that eventually clicks on an ad.

Mobile advertising a major driver of growth but hard to identify at Google

The last thing I wanted to look at was mobile advertising revenue, but it’s sadly very hard to identify and separate from general ad trends at most companies, including Google, which is the largest mobile ad firm. Only Facebook and Twitter give us the numbers to be able to tease out a revenue figure and their growth is impressive:

In both cases, this mobile ad revenue growth is the major driver of overall growth, which is equally rapid. But in both cases, non-mobile ad revenue is relatively stagnant. As I said, we don’t have an equivalent figure for Google, but eMarketer estimates its 2014 mobile ad revenues at a little over twice Facebook’s, which is growing much faster. Google is rapidly losing share in this market, primarily to Facebook and Twitter, though of course the market itself is growing rapidly, so Google’s revenues are still growing. But this just highlights the challenges Google faces in replicating its desktop dominance in the mobile market. It faces much more, and much stronger, competition here. Search in particular seems likely to capture far less of the total opportunity than on the desktop. Meanwhile, Google is relatively poorly placed to capture revenue from the sort of native, in-feed advertising which is behind so much of Facebook and Twitter’s growth in mobile.

Amazon and Apple are also players

Two other notable companies which have at least some stake in this space are Amazon and Apple, neither of which breaks out revenue from advertising officially. eMarketer estimates Amazon is already in the top 10 by online advertising revenues, while Apple is much smaller, but has a meaningful share in mobile advertising through iAd. Amazon seems very keen to grow its ad revenues, while Apple’s relationship with advertising is more nuanced, since it’s keen to differentiate against Google on privacy. Both are worth watching, though.

The Evolution of CarPlay

Given the reports over the past week or so about Apple’s ambitions in the car space, I’ll share some thoughts related to a report on the connected car I’ll be publishing in the next week for my clients. This is a huge and broad topic, so I’m only going to focus on Apple’s potential role in all this and, specifically, the evolution of what is today called CarPlay.

A natural evolution

There’s a natural evolution in the relationship smartphone vendors such as Apple will have with the car and it’s mostly a question of how far this evolution will go. The diagram below shows four possible steps in this, with the red box in each case defining the contribution of the smartphone vendor to the overall solution:

Phase 1: Generic UIs controlled by car OEMs

In this evolution, Apple’s CarPlay is currently in the second phase. The first phase was everything that came before, with fairly generic sync capabilities to allow smartphones to extend some of their functionality onto the in-car infotainment systems. The UI for these solutions was entirely controlled by the car OEMs, through systems designed by the various Tier 1 vendors that built these systems. Ford’s Sync has been one of the most sophisticated and they have just debuted a new version based, for the first time, on BlackBerry’s QNX rather than Microsoft’s in-car technology stack. But in such a model, a smartphone vendor such as Apple gets zero control over the in-car UI and almost no opportunity to extend its proprietary features such as navigation or voice control onto the car’s infotainment system.

Phase 2: OS-specific UIs for the infotainment system

2014 saw the introduction of phase 2 in this evolution, with Apple announcing CarPlay and Google announcing Android Auto. Both represent solutions for extending OS-specific UIs and apps onto the in-car infotainment system, focused on the main infotainment display. The smartphone vendors now define this experience to a far greater degree, including the look and feel, the specific apps and interaction models, and so on. Their sphere of influence has extended from the smartphone itself and an element of syncing technology to the display within the car. But this model is challenged in several ways: first, it threatens the car OEMs’ vision of what the in-car infotainment solution can be, namely something they can differentiate on and monetize. Having the smartphone and OS-specific UIs at the center removes their ability to differentiate and to monetize, putting smartphone vendors and car OEMs in conflict. The second challenge is that such solutions are in some ways a band-aid, sticking an OS-specific UI on top of the overall UI and in-car experience, which includes many other elements totally disassociated from them. Many modern cars have at least two information displays. Quite a few have as many as five, including the main infotainment display, the traditional dashboard dials, a small information display in the dash, a clock and climate control display, not to mention a slew of dials, knobs, paddles and so on to interact with all these. CarPlay and Android Auto represent progress beyond phase 1, but they suffer from conflict with the car OEMs’ objectives as well as a very limited role in the overall technology systems in the car.

Phase 3: Broader participation in in-car systems

I mentioned QNX and Microsoft earlier in the context of phase 1 systems such as Ford Sync. These companies have traditionally been among the major suppliers of in-car operating systems and software. Yet these companies are chosen, not for their ability to provide great user interfaces, but for the underlying technical capabilities they have, which are well-suited to the core functions of the car and the driving experience rather than the user interfaces and displays in the car. Microsoft lost the Ford business to QNX precisely because its system was poorly suited to the way consumers expect touch displays to operate today. One possible role for the Apples and Googles of the world in phase 3 is to extend beyond the band-aid-like approach taken with CarPlay and Android Auto into the in-car OS itself. This requires a much deeper integration with the car itself, beyond the infotainment system and that, in turn, requires going beyond each company’s traditional competencies. Apple and Google have always provided consumer grade operating systems and software, whereas both Microsoft and QNX have a long history in industrial grade operating systems, with both security and reliability characteristics suited to the highly performance sensitive environments in which their software has to operate.

I think it’s entirely possible Apple is exploring this kind of extension of CarPlay into a fully-fledged in-car OS that would go well beyond the current capabilities of CarPlay but, if so, this is a challenging task. There’s no doubt Apple’s expertise could make a huge difference to the in-car user interfaces we’re used to seeing but getting its operating systems and software ready to run core functions in a car would be a big leap. There is already talk about using Android as a potential operating system in cars and there are specific rumors about the next version of Android coming with a flavor designed explicitly for cars, but this is a leap for Android too, as a platform not known for robustness and flawless performance. On the other hand, Google is working in parallel on self-driving cars, giving it a great deal of insight in to and experience with what it takes to design software for more than just a car’s various displays. Given Google’s investment in this area, Apple may be tempted to make a move analogous to Google’s acquisition of Android, which was designed to prevent a Microsoft hegemony in mobile operating systems.

Apple may be better suited to work in close partnership with car OEMs to provide the design and user interface elements they’re so poor at, while leaving the underlying systems to those with a longer history. I’m not convinced Apple has the capabilities or the strategic reasons to participate at this lower level in the car technology stack, when participating at the higher, user-centric layers, makes a ton of sense. This is, to my mind, the most plausible explanation for the recent rumors about Apple’s broader ambitions in the car.

Phase 4: Building a car

Of course, as long as Apple works with the carmakers, it has several problems:

The inherent tension with carmakers who want to differentiate their experience, not adopt an Apple-flavored experience which might be shared with other carmakers and who want to monetize their own infotainment services rather than simply see Apple extend its services into the car
The inability to completely control the experience from end to end, as Apple tends to want to do. Steve Jobs was always fond of Alan Kay’s aphorism that “People who are really serious about software should make their own hardware,” but Apple wouldn’t be making the hardware, or even controlling it, in the phase 3 scenario. CarPlay shows, in a small way, what happens when Apple can’t have complete control over the UI for something it designs: a wide variability in the quality of the implementation within the infotainment system
The fact competing smartphone vendors may well not want to integrate with a system designed by a competitor.

Tesla has demonstrated that it’s possible to totally overhaul in-car systems in such a way that both provides an enormously better UI, while adding a technology layer to core car and driving functions, but it’s in the position of having built the whole thing from top to bottom. Apple seems like one of the few companies out there that could match this level of reinvention, but it simply doesn’t have the heritage in actually designing and building cars. It’s been reported it would use a manufacturer to build the cars but it would still have to design the car itself, something that’s entirely outside of its core competencies – designing a car, after all, isn’t just about the outside and the technology functions but, most importantly, the mechanical functions Apple has no history of. Again, Tesla has demonstrated that it’s possible for a new entrant into the market to do these things enormously well, but it’s not clear Apple would benefit strategically from designing a whole car top to bottom when the technology functions are the main area where it would add value.

Phase 5: Self-driving cars

Of course, the whole concept of the connected car may just be considered a step along the way to autonomous, or self-driving, vehicles. This is obviously an area where Google has already invested significantly, and Uber, Tesla, Audi, and other car manufacturers are also far down this path. I continue to be skeptical we’ll see mass-market self-driving cars capable of driving nationally within the US, let alone globally, within the next five years, but it’s fairly clear this is an attainable goal within a longer timeframe. If this is what Apple is working on, which I consider a pretty long shot at this point, it’s a project that likely won’t see the light of day any time soon. But I continue to think the most likely scenario is Apple is working on what I’ve described here as phase 3: an evolution of CarPlay that goes deeper into in-car systems.

Comparing the “Big 7” Consumer Tech Companies

Something I’ve done after each earnings season is plug all the results from some of the biggest and most important consumer tech companies into a spreadsheet and compare them. Much of my analysis during earnings season focuses on individual companies, but it’s often instructive to sit down and put these numbers side by side. I have seven companies I typically refer to as the “Big 7”, though they’re strictly speaking not the seven largest. They are:

Amazon
Apple
Facebook
Google
Microsoft
Samsung
Sony.

The odd one out is Facebook, because it’s a fraction of the size of these companies, with revenues of just $12 billion in 2014 compared to at least $65 billion for the others. But it’s included because, of all the smaller tech companies out there, it feels like the one that has both the greatest potential and the broadest reach into our daily lives. Its base of users is on par with, if not ahead of, the rest of the Big 7 which is why I include them even though their size doesn’t justify the name.

What I’m going to do here is run you through just a few of these comparisons, with some commentary. As a special freebie for Tech.pinions Insiders, I’m also going to embed the full set of charts I send to those who subscribe to my quarterly decks service. We’re looking for a way to make these decks available to Tech.pinions as an additional tier also, so watch this space.

Revenues

First off, revenues. This is the best measure of the scale of these companies and what becomes very apparent from the chart below is there are three distinct tiers within this group:

The top tier is Apple and Samsung, which jockey for position throughout the year as the largest by revenues. On an annualized basis, Samsung has been the larger of the two for the last several years, despite Apple’s monster fourth quarters. But in 2014, Apple finally pipped Samsung, thanks to its massive Q4. The second tier is made up of four companies with annual revenues between $60 and $95 billion: Amazon, Microsoft, Google and Sony. Facebook brings up the rear, with far lower revenues. Two other things worth noting are cyclicality and trajectory, with the former sometimes making the latter hard to discern. Only some of these businesses have highly cyclical revenues, with Apple perhaps the most dramatic, having huge spikes every Q4. But Amazon, Microsoft and Sony have pretty dramatic Q4s too. Even Google and Facebook have bigger fourth quarters driven, in their case, not by holiday sales to consumers, but by higher ad spending in Q4, which in turn is intended to drive higher Q4 spending by consumers. The only company which is not notably affected by seasonality is Samsung, which has such a broad range of products across its various consumer electronics and appliance categories it sees a pretty steady flow of revenues throughout the year.

Trajectory is harder to see but the chart below shows year on year growth rates:

Two things stand out to me: Facebook’s massive faster growth rate compared to all the other companies (though it appears to be slowing), and Samsung’s dip into the red. But, if you look closely, you’ll see Apple had a significant move in the last couple of quarters, from low single digit year on year growth to 12% growth in Q3 and over 20% growth in Q4. Meanwhile, Amazon’s growth has slowed over the past couple of quarters and there’s no discernible trend in the other companies’ revenue growth.

Profitability

Profitability is another way in which Facebook justifies its inclusion in this elite group because it’s one of the most profitable companies in consumer technology. There are various profit metrics you can use to measure this, but let’s focus on net income, the true bottom line:

As you can see, Facebook was the most profitable of these companies over the last two quarters in margin terms, even at a time when Apple was generating record net income dollars. Apple, Facebook, Google, and Microsoft are all clustered very close together around 20-25% margins (Microsoft’s was easily the highest before the Nokia acquisition). Samsung’s margins have never been as high, but have also dipped significantly in the last few quarters, dragged down by the mobile business. Sony and Amazon, meanwhile, compete for the “least-profitable” crown. While Amazon’s low margins are ostensibly the result of an intentional business strategy, Sony’s are the result of several businesses in turmoil and transition, but the result is the same: very low margins. What’s impressive to me is Facebook has rocketed so quickly to margins similar to those at the very largest consumer technology companies without the same scale benefits – it’s clearly a very different business model. But it’s also likely to see continued declines as it absorbs Oculus and WhatsApp, two businesses with minimal revenues today, but fairly significant expenses. Though the chart above focuses on percentage margins, it’s instructive to note Facebook’s $5 billion in operating profit in 2014 is greater than Amazon’s entire operating income dollars for the last nine quarters combined.

Business models

The last thing I want to touch on is business models, which vary enormously between these seven companies. I’ve created eight broad categories of products and services to characterize these companies’ revenue streams and the chart below shows an estimated breakdown of their revenues over the past year by these eight categories:

What you get is some broad themes:

Facebook and Google’s revenue is equally dominated by advertising, at around 90%, though the source of the rest of their revenues is quite different. Facebook is deriving just under 10% from its legacy payments product, while Google derives the rest from the Play Store, Nexus devices and enterprise revenues.
Apple, Samsung, and Sony derive a majority of revenues from hardware, with Samsung’s dependence on hardware starkly illustrated in the chart, while Apple and especially Sony have much more diverse businesses. Apple’s other revenue is, of course, very closely tied to its hardware revenue, while Sony’s is in many cases entirely disconnected — a major part of its ongoing struggles.
Microsoft and Amazon are unique, with the former deriving most of its revenues from software and services, and the latter from general e-commerce. However, these two companies and Google each have a growing revenue stream in enterprise cloud services hidden in these various categories.

These business models, as I’ve written about before, have far-reaching implications in terms of profitability, the ability to differentiate, tensions between users and paying customers, and so on. They also have implications for the revenue these companies generate per employee, which varies enormously:

Much of the difference, of course, is driven by the kind of employees these companies hire. Many of Amazon’s employees are stockpickers working in warehouses, while a great majority of Apple and Google’s (edit: non-retail) employees are highly trained engineers, commanding the best salaries. It’s also interesting to see Facebook and Google, which have very similar businesses, generating very similar revenues per employee, though Facebook has now eclipsed Google. It’ll be interesting to see if that trend continues.

More charts in the deck below

Below is that deck I mentioned at the beginning – there are quite a few more charts in here if you found the ones above interesting. I do this on a quarterly basis for my clients.

Big 7 financial comparisons for Q4 2014 from Jan Dawson

The End of Subsidies in the US Wireless Market

Almost a year ago, I wrote about the then-nascent move by the US wireless carriers away from smartphone subsidies. T-Mobile was the pioneer in ending subsidies and the other carriers took a while to get on board – especially Verizon – but we’re now quite a bit further along. I thought I’d share some numbers and some more thoughts about these trends.

Significant progress in getting the postpaid base off subsidies

The chart below shows the progress the major US carriers are making in getting their postpaid subscriber base off the subsidy model, with T-Mobile leading the way:

As you can see, T-Mobile’s base is largely off the model and it should be done with the transition by the end of this year. AT&T has made rapid progress over the past year too, with over 50% of its base now off subsidies. Verizon was the slowest to get started and the most reluctant to move off the subsidy model, but even their numbers are starting to pick up. Sprint doesn’t report this number directly, but 46% of device sales in Q4 were on the non-subsidy model, so it is very much moving in the same direction.

So far, installment billing is helping, not hurting, sales

One of the big questions about the end of subsidies (and the accompanying move to installment billing for devices) was whether it would hurt or help smartphone sales. Well, Q4 2014 was easily the largest quarter for smartphone sales in the history of the US wireless market, which may help to answer that question. Three factors played into this:

all the carriers aggressively driving switching behavior
new iPhones launching late in Q3 and driving many sales in Q4
the move to installment billing

The result was dramatic (and we don’t even have T-Mobile’s results yet):

The four carriers who have reported so far had 30.1 million smartphone sales between them and T-Mobile may well have had another 8-10 million too. The move to installment billing certainly doesn’t seem to be hurting device sales so far.

A change in carrier finances

The shift away from subsidies and towards installment billing is also having a significant effect on carrier finances. One of the traditional carrier metrics – average revenue per user, or ARPU – has gone into rapid decline at most of these carriers, as they adjust their service pricing to account for the end of subsidies. But, at the same time, they’re billing an increasing proportion of customers every month for device payments which is pushing their total receipts from customers back up. Three of the four carriers have adopted a new metric – average billings per user (ABPU), which also accounts for installment payments, as shown in the chart below:

The chart is a little busy, but hopefully you can see that, in every case, the ABPU figure is above the traditional ARPU figure and, for the most part, these numbers are increasing even as ARPU is falling. The one exception is Sprint, which is seeing an ever higher percentage of its total device base shift to tablets, which have a much lower spend level associated with them than phones and that’s dragging down overall ARPU.

The other major financial impact of this shift is the positive impact on margins in the longer-term. That’s much harder to tease out, so I won’t show it here, but all the carriers are also seeing an improvement in margins as a result of the decline in subsidies. That’s a good thing too, because their underlying margins have come under pressure from the increasingly aggressive competition in the market, which is pushing prices down even beyond the adjustment for removing subsidies.

A win/win – so far

At least so far, it looks like the end of subsidies is working out well for operators, device vendors, and consumers. Device sales are actually up, despite some worries they might decline, and consumers now get greater transparency over the true costs of both devices and services and greater freedom to switch between carriers. The only potential downside is the same risk I talked about in that earlier piece: once consumers get used to the idea of paying for devices this way, certain device vendors might decide to cut out the middleman entirely. I talked about Samsung and Apple as two of the most obvious vendors to do this, but of course we’ve been hearing rumors lately about Google launching some sort of mobile virtual network operator (MVNO), which could be particularly interesting if paired with Nexus device sales on installment plans. We’ve seen an iPhone for Life plan and other leasing options from Sprint, and all this leads me to believe that – if they wanted to – Apple or other vendors could still come in and take over the primary customer relationship, which might well have negative implications for the carriers over the long run.

Themes From Earnings Season

Earnings season technically isn’t over yet – there are still a few companies reporting their results in the next few weeks. But the vast majority of the big name tech firms have now reported, so I wanted to review for Insiders some of the key trends from what these companies have reported over the last few weeks. Note: I do a lot of analysis of earnings as they happen on my personal blog. I also offer a subscription service which provides lots of charts illustrating financial and operating metrics on these major companies and we’re working on a way to offer this directly as a product for Techpinions readers too.

iPhone puts a big dent in Android, especially in China

I think the most obvious trend that pops out of my analysis of the major device makers’ results is the impact the iPhone had on several of the largest Android vendors, especially in China. The chart below illustrates this: For most of these large Android vendors, growth rates from Q3 to Q4 this year were significantly worse than Q3 to Q4 rates last year. Lenovo (excluding Motorola) and Xiaomi were particularly badly hit, with most of their shipments in China, but Samsung and LG also saw quarter on quarter declines. Among vendors, only Huawei and Sony managed to weather the iPhone’s impact. At Samsung of course, there are longer term challenges at play but, for most of these vendors, the iPhone accounts for a substantial portion of the impact.

US wireless carriers had a huge quarter for smartphones

Three of the big four US carriers have now reported their Q4 results and each of them saw very high rates of smartphone upgrades. Results for those carriers that reported numbers are shown below: All three of the big carriers have reported a higher percentage of upgrades than in any quarter in the past three years and I would expect T-Mobile to join them. Several factors play into this. The iPhone 6 and 6 Plus obviously drove a big iPhone upgrade cycle, but another major factor was the move to installment-based billing. There’s been quite some debate about whether this new model will stimulate or slow smartphone sales, but this quarter it was a huge factor for all carriers and they all sold tons of smartphones as a result. In Q4 alone, the four big carriers likely sold almost 40 million smartphones between them. Despite this upgrade behavior, however, the vast majority of the subscribers these carriers added in the quarter were not new smartphone lines, but tablets and “connected devices” (machine to machine subscriptions, e-readers and the like).

Social networks battle for users

Facebook and Twitter both reported and shared very different user growth numbers. Facebook, as is customary, reported huge user growth in its core product, up to almost 1.2 million mobile monthly active users. But they also reported significant growth in three other mobile products: Meanwhile, Twitter reported just 230 million mobile MAUs, a number that has barely moved since last quarter (its overall MAU number didn’t grow by much either). These numbers just reinforce the difference in scale and breadth of appeal for Twitter and Facebook in their core products. But this doesn’t tell the whole story. Facebook’s entire product is private and based on being logged in to an account. But Twitter’s product is inherently public. So much of the exposure most people get to Twitter is not through the core service itself but through embedded tweets, hashtags on TV, and so on. Twitter is at a crossroads in terms of its user growth: it clearly believes it can get MAU growth going again, but even if it does, it’s simply not going to be on a trajectory to reach Facebook (or Google) scale. But Twitter’s management seems to believe it can capture another kind of audience that isn’t logged in (and may not even have an account). It already attracts a pretty significant audience this way but it makes almost no effort to monetize it yet. That’s the next challenge for Twitter.

Trends in advertising – Display down, Native, Search and Video up

The last big theme I want to cover is the diverging trends in advertising. I’ll use Microsoft’s results from the Bing business to illustrate this, but the trends are much broader. The chart below shows the proportion of Microsoft’s ad revenue from Display and Search, according to my estimates: This illustrates the divergence nicely, because this is happening across major companies that play in the advertising space, whether Google, Yahoo, IAC, AOL or whoever. Display ad prices are falling, clicks aren’t growing as fast, and the business is generally performing much worse than other forms of online advertising. Meanwhile, search continues to be a very lucrative business for those who offer it, notably Google (though even there, there are signs of challenges). But the other major growth areas are native advertising, whether at Facebook or Twitter or news sites such as Buzzfeed, and video advertising, which is obviously already a huge business at YouTube, but is also increasingly important at Facebook, which now reports 3 billion views a day. Of course, Twitter and Snapchat both recently announced video products both for users and advertisers, and Instagram has tweaked its video product too. Video will be increasingly important for these companies in generating ad revenue, especially as non-native display advertising continues to suffer.

What Microsoft’s Productivity Acquisitions Really Mean

There were reports on Wednesday that Microsoft had acquired the maker of the Sunrise calendar apps for iOS, Android, Mac and the web for over $100 million. This follows Microsoft’s acquisition of email app Accompli for $200 million a couple of months ago. One of the most pointed responses to the latest acquisitions came from Om Malik, who wrote:

It is a pretty damning indictment that Microsoft had to spend hundreds of millions on front end apps for its own platform –Microsoft Exchange — and it should send alarm bells ringing. Exchange is something Microsoft understands better than most and it should in theory be able to develop good apps as front end for it. And yet, it has to go seeking help elsewhere. Mind you, this is not some new technology and neither is it a new market (like Minecraft) focused on a new demographic. In the mobile OS sweepstakes, Microsoft has been left eating dust by iOS and Android.

I’m not nearly so pessimistic about what these acquisitions mean for Microsoft and, in fact I’m rather optimistic in regard to what they say about the company and its strategy, for several reasons.

Fundamental misunderstanding of Accompli and Sunrise

First of all, both Malik’s post and a number of other reactions I’ve seen have latched onto the idea that all this is about endpoints for Exchange, which isn’t accurate at all. Look, for example, at the Outlook app Microsoft released last week. Yes, it connects to the Exchange app, as Microsoft’s OWA app did previously. But it does much more than that and does it well. In fact, it’s so much better as an iOS endpoint for Gmail and Google Apps mail that it’s replaced Google’s own Gmail app on my dock after just a few days. Perhaps it’s the Outlook name that’s thrown commentators off but this is not your father’s Outlook by any stretch of the imagination. What’s best about it is it bakes in functionality acquired through Accompli but isn’t just a rebadging of that app. I was a beta tester of Accompli and quite enjoyed some of its features, but it never made it off one of my secondary home screens or replaced my default email app. Neither Accompli nor Sunrise is an Exchange endpoint first and foremost, but Outlook on iOS is a service-agnostic productivity app. To the extent Microsoft is now a company about platforms and productivity, this sits firmly in the latter camp, connected only indirectly to Exchange, which surely sits on the platform side. And that’s the key here.

Recognition of failures

I see the acquisitions of these two companies not as evidence of failures only, but also as a recognition of past failures to adequately build both service-agnostic email apps in general and compelling productivity apps for third party platforms. Yes, Microsoft has failed at this in the past, and yes, its current Office version on the Mac is a poor substitute for the Windows version, with Outlook being particularly poor. But these acquisitions are a sign Microsoft is finally recognizing this and taking steps to remedy the situation. As such, they shouldn’t trigger despair but hope on the part of those who have faith Microsoft will do better. That Microsoft is willing to accept it perhaps doesn’t have the wherewithal to create these products, given the people and assets it has, is a positive sign, not a negative one, at this point in its history.

The difficulty of cultural change

That brings me to my next point, which is why Microsoft can’t build such products itself organically. It’s already demonstrated it’s capable of building a very good version of Office for something other than Windows in the form of the iOS Office apps. So what’s the issue? I suspect a large part of the problem is the goal people such as the Office for Mac team were given in the past, were likely about providing a reasonable approximation of the Windows experience on the Mac, rather than providing the best possible product for the Mac. That’s a subtle difference but an important one. With Windows as the centre of Ballmer’s universe, these products lived in an odd sort of limbo, extending the reach of Office but simultaneously making a rival operating system more attractive. In the Nadella era, such tradeoffs are supposed to be going away, but it takes an awful lot of work to turn such thinking completely on its head and it certainly won’t happen overnight. Microsoft could hire new developers to work on these apps, but as long as they report to Old School Microsofties, the transition will be stymied. Hence the attraction of bringing in the necessary people and products. Here are teams who’ve already built compelling apps optimized for precisely the platforms Microsoft wants to target, who come with none of the baggage associated with Microsoft’s history. It’s certainly no guarantee these teams will either retain their employees over the long haul or that they won’t eventually be absorbed into the Microsoft culture. But they may retain their separate identity long enough to get Microsoft through the transition.

A sense of urgency

The other thing these acquisitions hint at is a sense of urgency. I think, given enough time, Microsoft probably could develop some of these apps on its own. But it would take a long time and Microsoft clearly doesn’t think it has that time. The price tags on the acquisitions seem high for what Microsoft is actually buying, but I think that too suggests a seriousness and urgency about this effort. Microsoft doesn’t just want to get good at this stuff eventually, but to get good products out into the market now. And that’s also a good thing, because it again indicates an understanding at Microsoft of the magnitude of the challenges it faces and a willingness to do what it takes to overcome them.

A connection to “loving” Microsoft products

I wrote two weeks ago about Satya Nadella’s use of the verb “love” in the context of talking about his goals for Windows 10. As I said in that piece, the focus on Windows is misplaced (who loves an operating system?), but the basic idea is sound. Microsoft has survived and thrived over the last 20 years, not so much on the basis of being better than the competition, but on the basis of being ubiquitous and therefore being the default option in operating systems and productivity suites. The problem it faces now is it doesn’t enjoy that default position anymore on many of the most popular platforms and, to become relevant there again, it can’t rely on being good enough or doing what’s always been done. Instead, it has to be truly great on the different platforms it targets for development and that, in turn, requires fresh thinking. To me, this is the single biggest reason for these acquisitions. Microsoft needs to get people to actively choose its products and, yes, “fall in love” with them. And that’s going to be awfully hard to do with an incremental, evolutionary approach to existing products. It needs to reinvent existing products and invent entirely new ones. Sometimes that means buying teams that have already done so in a way that’s complementary to Microsoft’s business.

The downside to an acquisition-based approach

There is, of course, another side to this coin. All the things that make acquisitions make sense as a strategy for Microsoft have corollaries that could cause trouble. The acquired teams and products may come to be resented within Microsoft by those who have paid their dues and done their time on the core products. The attention lavished on them by management may cause conflict on the part of teams who’ve spent years developing products already in very wide use and who’ve never received such acknowledgement. And to the extent these teams are insulated from Microsoft’s culture, Microsoft’s culture will also be insulated from them, limiting their ability to spread their entrepreneurial spirit and inventiveness through the rest of the company. Acquisitions can’t be the whole story, either in terms of time or in terms of the vast scope of what needs to be done. No patchwork of acquisitions can create a cohesive set of products and services that feel like they’re designed and built to work together seamlessly. Acquisitions can, at best, plug gaps and accelerate efforts which ultimately need to be driven by the core teams at Microsoft. But despite all this, I’m more optimistic than most about what these two acquisitions mean for the company.

Tech Earnings Preview for Week of 2 February 2015

This is the third and final post in my series on major tech companies’ earnings, and this one previews earnings for the week of February 2nd-6th. The first post is here, and last week’s post is here. I won’t review last week’s post in detail because it was a long one and could easily be a post in its own right (perhaps next week I’ll do a look back at all the earnings so far and pick out trends). But I recommend you go back and compare it with what happened this past week – most of what I previewed was fairly accurate.

The major earnings coming this week are sparser than last week. We only have Sony on Wednesday and Sprint and Twitter on Thursday. So I’ll spend a bit more time talking about each of them than I have in the past. Also reporting this week are several smaller businesses that might be of interest to some readers – three gaming companies (Take-Two Interactive, Glu Mobile and Activision Blizzard), as well as IAC, Pandora, Yelp and LinkedIn.

Sony – Wednesday, earnings at 5am US Pacific Time

Sony has officially requested an extension to the deadline for filing its results this quarter because its systems have been in such disarray since the hack. But it’s still holding an earnings call to give a high level view of its performance and its strategy and outlook for the year.

There have been several major themes with Sony over the past couple of years:

Constantly shifting forecasts – the company has frequently revised its financial forecasts, almost always downwards, as over-optimistic goals haven’t been met and it misses its own guidance.
Paring back and refocusing – this has happened at two levels: it’s exited the PC business and spun off its TV business while, in other areas, it’s focused on the most profitable segments, for example in smart phones.
Increasing integration between its various activities. I’ve described Sony as a dysfunctional company in the past, in that it’s been like a family where no one talks to anyone else. Sony has so many assets internally that could be compelling if brought together but it’s often struggled to achieve that integration. Over the last couple of years, we’ve seen some more of this integration and that’s a good sign.

As far as what to look for this week, I think the smart phone business is probably the most interesting one to focus on, because that’s one area where – despite some progress for a period – things have turned south and it’s missed its forecasts. Sony has some great smart phones (though they’ve struggled to get them on US carriers) but it’s just not selling at the scale it needs to be to be really effective. There have been rumors about job cuts and other restructuring so I expect management to give an update on their strategy for the business.

Playstation has been doing great and, although Microsoft’s Xbox has been doing better over the last couple of months due to some price promotions, I’d expect some good numbers from Sony in the console business again. There will obviously be an update on the movie business and the ongoing impact of the hack of a few weeks ago. The hack itself was a good example of Sony’s failure to get the parts of its business to work together. Once it decided to release “The Interview” digitally, it failed to do so through its own streaming service, Crackle, for several weeks.

The funny thing about Sony is its strongest business is Financial Services, a business many people might not even realize they’re in. Almost all of its other divisions are modestly unprofitable or unpredictably so, fluctuating widely from one quarter to another, especially the movie business, which is very hit-driven. The movie business was likely significantly impacted by the non-release in theaters of The Interview this quarter, of course. But Sony’s business is enormously fragmented, with around a dozen significant reporting segments adding up to a complex mosaic of financial results.

Sprint – Thursday, earnings at 5:30am PT

Sprint is the third and last of the carriers I’ll cover in these weekly pieces, having talked about AT&T and Verizon earlier (T-Mobile hasn’t announced its reporting date yet). Sprint is the third largest of the carriers, too, though T-Mobile has been threatening to overtake it for some time, and T-Mobile CEO John Legere set a goal of passing Sprint in total subscribers by the end of 2014. I said back in August I didn’t think this would happen and now I’m certain it didn’t. Sprint, though, has continued to leak subscribers for most of the past year and only recently became more aggressive about trying to keep its current subscribers and increase switching from the other three major carriers, as new CEO Marcelo Claure took over a few months ago. But Sprint’s metrics have generally been the weakest among the big four. It’ll take quite a bit of work to get things moving in the right direction again, especially with T-Mobile also aggressively pursuing competitors’ subscribers and Verizon and AT&T getting more aggressive at fighting back.

Sprint has previewed its earnings already and it had positive postpaid net adds for the first time in a year (although only barely) with just 30,000 net subscriber additions on the postpaid side. Marcelo Claure will have to continue to articulate his new strategy for turning Sprint around and for focusing on more than just price promotions. Sprint has talked a lot in past quarters about its network upgrade program and the future benefits it will provide, but this quarter I expect to hear more about what it’s actually done on its network, because that’s all customers and potential customers really care about. T-Mobile and Sprint both suffer from some of the same scale challenges, but to date, T-Mobile has arguably been more effective in overcoming those than Sprint. One example is marketing, where T-Mobile has very effectively leveraged social media and viral campaigns to achieve good brand awareness without spending massive amounts of money on advertising. Both the smaller operators also had Super Bowl ads this past weekend, but T-Mobile has been much smarter about multiplying the effect of that spend by previewing the ads and leaking teasers ahead of time. Sprint needs to get much better at doing this kind of thing if it is to compete going forward.

Twitter – Thursday, earnings at 2pm PT

Twitter always suffers from comparisons to Facebook (and even comparisons to Facebook’s subsidiary Instagram in recent months) – Facebook is much larger, growing much faster, and vastly more profitable. Twitter is enormously popular among certain segments and in certain markets, but has a fraction of the scale and has struggled to monetize usage effectively. Recently, Twitter founders Ev Williams and Jack Dorsey have been suggesting Twitter’s real value is the social good it does, the way it’s transformed how we follow major news events, and so on. Twitter has been positioning itself on earnings calls as a media company or a media platform and clearly its recent video product announcement is part of that story too. But fundamentally, Twitter has asked investors to measure it on user growth, engagement and monetization, and yet the core metrics it has given investors to measure progress simply aren’t delivering. This, above all else, is why Twitter and its CEO Dick Costolo are so embattled.

There have been hints on recent earnings calls about new metrics for measuring what Costolo calls “logged out users” – those who visit Twitter but don’t log in – and he’s given some suggestions of the size of that audience. But the key challenge remains monetizing usage, when Twitter knows very little about those users or their interests and therefore can’t effectively target advertising. In the meantime, the core logged-in user audience has been growing slowly. There’s no immediate prospect of catching up to Facebook and even Instagram recently passed Twitter in the number of monthly active users.

I’d expect Costolo to continue to sell his stories about the three groups of users Twitter is targeting, as shown in the diagram below:

But investors will need more details about the size and growth of these audiences, how Twitter intends to target them effectively with advertising, and how Twitter will grow that ad spend over time. It hasn’t provided satisfactory answers to any of these questions on previous earnings calls. As such, much of the reaction to Twitter’s earnings is typically a direct response to core user growth, with most other metrics ignored. Unless Twitter had a monster Q4 for user growth, I’d expect the initial reaction from investors to be negative, unless Costolo and others can provide either better new metrics and/or evidence it has a plan for monetizing these other groups of users effectively. I’d expect investor sentiment to be even more negative.

The iPhone Economy

Apple’s earnings this week were such that it’s almost impossible not to be distracted by the sheer scale. However, since that’s been well covered every where the last couple of days, I wanted to focus on a particular way of looking at Apple, which I suspect fits well with where the company will go in the coming years. I’ll start with this chart, which is a datapoint you probably won’t have seen anywhere else – it’s the total revenue Apple generates as a company divided by the number of iPhones sold. Note: it’s not iPhone revenue per iPhone sold (i.e. average selling price), but the total revenue from all products and services per iPhone sold in each quarter:

What I want to look at today is the degree to which the iPhone has become central to the Apple ecosystem and the degree to which Apple can essentially be seen as the iPhone company. To some extent, we can also begin thinking about “the iPhone economy” as existing beyond the confines of Apple itself. What the chart shows is Apple is starting to stabilize at around $1,000-$1,100 per quarter per iPhone sold in total revenue. Now, iPhones themselves account for somewhere between $600 and $700 of that $1000, but the rest is made up of other devices and services and that’s where I want to focus our analysis.

Other devices – today

About 30% of Apple’s unit shipments in the quarter were something else – iPads, Macs and a few iPods. As the iPod goes away, the other devices are essentially becoming companions to – or extensions of – the iPhone. I’d bet a very high percentage of iPad and Mac owners are also iPhone owners and, with concepts such as Continuity and its implementation in features such as Handoff, the iPhone is becoming more and more interconnected with those other devices. These devices will largely be sold in future to iPhone owners and their interconnectedness with the iPhone will make them more and more attractive purchases, which will have a positive effect on sales over time (witness what’s happening with Mac sales, in contrast to the broader PC market). Today, these other devices make up about 25-30% of Apple’s revenue in an average quarter.

Other devices – tomorrow

But of course these aren’t the only devices Apple will be selling going forward. With the launch of the Apple Watch in April, Apple will have another companion device to the iPhone – the first to be explicitly tied to it (and of very little use without it). The revenue opportunity around the Apple Watch is significant – if it ships 20 million or more in 2015, as I think it might well do, then it could generate $10 billion or more in revenue, contributing about 5% of Apple’s overall revenue after it launches. Over time of course, it’s likely to generate significantly more than that and will make an increasing contribution to overall revenues. Then there are other devices that become part of the iPhone ecosystem: home automation devices connected to HomeKit, other wearables connected to HealthKit and the Health App, and so on. Apple will likely sell many of these in its stores and so capture revenue that way. But it’s also possible Apple will launch some of its own hardware in these categories, further stimulating sales. The Apple TV, of course, is another device tied in many ways to the iPhone, and which plays a role in HomeKit too. If it evolves and Apple manages to move it beyond the “hobby” phase, it too could play a significant role in boosting the iPhone economy.

Accessories

Then there are accessories – Apple sells lots of these today, though it’s just stopped reporting this number separately. Apple has also acquired Beats, which makes first party accessories for Apple and has the potential to grow and expand over time into other categories. And there are quite a few other segments Apple could expand into over time, within the broad scope of accessories, which could further boost revenues per iPhone sold.

Services and content

Lastly, there are services and content, including iTunes content, the App Stores across iOS and OS X, iCloud, and newer services such as Apple Pay. Assuming Apple is able to turn content performance around with whatever Beats evolves into, each of these has the potential to grow significantly over the coming years and make an increasing contribution to revenues and profits.

Perpetuating astonishing growth

All this is relevant because, even though the revenue per iPhone sold number has been falling, I expect at some point it’ll turn around and start rising again, as each iPhone sale generates not just $650-700 in revenue directly but an increasing amount of ancillary revenue through sales of iPads, Macs, Apple TVs, and Apple Watches, along with iTunes content, apps, Apple Pay, iCloud and a plethora of other products and services. Apple’s December 2014 quarter was astonishing in its scale and the growth it entailed and Apple will continue to feel the effects of the iPhone 6 and 6 Plus launch for several more quarters. But if it’s to generate that kind of astonishing growth going forward, these additional revenue opportunities, adding up to over $1,000 per iPhone sold, will be increasingly important as iPhone growth slows down a bit in a year’s time. But at the same time, these peripherals to the iPhone will help ensure its place as the most attractive ecosystem for both developers and consumers, which in turn should help keep iPhone sales ticking over nicely as well.

Tech earnings preview for week of January 26th

This is the second in my series of posts previewing the week’s tech earnings (the first, for last week, is here). I have at least one more week of these to go and both weeks will be very busy, with lots of tech company earnings announcements due. To avoid clutter, instead of embedding charts in this post, I’m going to link to charts where relevant for those who are interested. These should pop up in a new tab/window when clicked.

I wanted to start with a very quick review of last week’s piece in relation to what was actually reported:

Netflix – I suggested watching for whether growth in the US would bounce back (and intimated it probably wouldn’t), and the company came out and said growth would indeed be slower going forward. I also said we should watch for commitments to more original programming and the company announced a big increase in spend year on year. Overall, I think Netflix is actually doing very well.
IBM – I suggested they’d likely have another bad quarter and they did – almost every major metric was moving in the wrong direction, especially growth across all divisions. But I also said Tech.pinions readers would want to listen for any references to the Apple partnership, and there were seven on the earnings call, five of them in the prepared remarks and two in the Q&A. Sadly, there was very little meat on those bones.
eBay – I said there were increasing questions about the viability and sustainability of the core eBay business and it turned out to be something of a miserable quarter for that division, with very slow growth year on year and the announcement of significant layoffs. Paypal, meanwhile, had a much better quarter, further reinforcing the rationale behind the company split.
Verizon – We already knew a little about Verizon’s quarter ahead of earnings because of some guidance issued earlier, but the details reinforced key trends — it was a massive quarter for device sales and upgrades (Verizon’s biggest ever) and this dragged down profits. The company remains very focused on profitable growth, however, and explicitly stated it would resist the urge to compete on price and would see churn rise as a result. I also said we should look out for tablet net adds, and that had its highest ever quarter, likely soundly beating the other three big carriers in this department.

Microsoft – Monday, January 26th, after market close

Earnings call: 2:30pm PT. Link

A few things to look for this time around:

Surface sales and profitability – last quarter, Microsoft announced healthy revenues (though likely similar shipments to a year earlier, at higher ASPs), and positive gross margins (I calculated rough numbers for these last quarter too – chart). It’ll be interesting to see whether sales grew or shrank (I suspect modest growth) and what the margins look like. They have a long way to go for operating profitability still.
Lumia – this is the first full quarter under Microsoft and, of course, Q4 is traditionally big for devices of all kinds. Following some patchy growth in 2014 (chart), it would be good to see a big Q4 for Lumia and potentially maintaining or even increasing market share globally. Sales were likely almost all at the low end, however, so share of revenue continues to fall.
Cloud services – one of the real bright spots in Microsoft’s earnings in the last few quarters and it should continue to grow rapidly, even as Amazon’s AWS unit seems to sputter a little. It was over $1 billion in a quarter for the first time last quarter and should eclipse its “Enterprise Services” category this time around (chart).
Office 365 – Consumer Office 365 continues to grow slowly and I don’t expect any big change here. It’s still tiny as a revenue stream compared with traditional Office sales (chart). It’ll be interesting to see if Microsoft provides any commentary on the impact of making more Office functions free.

AT&T – Tuesday, January 27th, after market close

Earnings call: 1:30pm PT. Link

The second of the major US wireless carriers to report, AT&T has the most total reported subscribers and by far the most ‘connected devices’ subs (think Kindles, connected cars and the like – see chart). It’s likely to continue to extend that lead this quarter with strong additions driven by connected car, Digital Life (home security and automation) and other connected devices sales. AT&T also recently overtook Verizon as the carrier with the lowest churn, and I’d expect this trend to continue as Verizon’s churn has begun to rise as it has avoided competing aggressively on price. It’ll be particularly interesting to see whether AT&T shared Verizon’s huge quarter for smart phone sales and upgrades.

Apple – Tuesday, January 27th, after market close

Earnings call: 2pm PT. Link

To my mind, the two most interesting questions for Apple this quarter are iPad and iPhone sales. As everyone knows by now, iPad sales have been slowing for some time, while iPhone sales have continued to grow steadily (chart) and should see a huge boost this quarter from the new phones. The questions are whether iPad sales recover (as I suspect they will in time, though perhaps not this quarter) and just how big the iPhone quarter will be. Based on all the available indicators, it seems like it will be massive growth, far bigger than any previous single quarter for the iPhone. Perhaps less predictable is what will happen to average selling prices for both iPads and iPhones. iPhone ASPs have held up very well over rate years and may even grow significantly this quarter as the base iPhone 6 Plus price pulls averages up. But the iPad ASP keeps falling as Apple keeps older devices in market at lower and lower prices (chart) and I suspect this trend will continue. The big surprise last quarter, of course, was how well Mac sales held up and, in fact, grew. I expect we’ll continue to see this trend in the past quarter’s results.

Lastly, it’ll be very interesting to look at the various metrics that help us derive a number for App Store sales. Based on the numbers Apple recently provided, it appeared 2014 was significantly higher than 2013 but during 2014 proper growth slowed significantly (chart). But the numbers Apple provides in these press releases are rounded and therefore provide an incomplete and occasional picture of performance. The actual financial results should hopefully help to pin down exactly what’s happened here and whether this slowing is really occurring. If it is, the question becomes why.

One more thing — this is the first quarter for Apple’s new reporting segments, which will increase opacity in some key areas and provide homes for some newer initiatives such as Apple Pay, Apple Watch (when that arrives) and so on. So there will be some extra work to do to make sense of the new financials. Sadly, we’ll lose some visibility over elements of Apple’s business as this happens, potentially including the retail business, just as things start to get interesting with the introduction of the Apple Watch to retail and the potential channel implications.

Yahoo – Tuesday, January 27th, after market close

Earnings call: 2pm PT. Link

Yahoo is a company in two parts: there’s the core Yahoo business itself and the Alibaba investment which actually drives the vast majority of the valuation for the company. Following the IPO, Yahoo has some serious cash with which to make acquisitions, something it’s already shown a considerable willingness to do. It’ll be interesting to watch for any commentary on how that money might be used. I suspect we’ll see continued attempts to buy and build video properties and to augment Yahoo’s search capabilities (and increasingly untangle itself from its Microsoft search relationship). I believe Marissa Mayer is, to a great extent, trying to recreate Yahoo in Google’s image, and since video and search are huge parts of Google’s success, those will be key investment targets. Alibaba itself continues to do phenomenally well as an investment (see below), but the Yahoo core business isn’t turning around just yet (chart). Another thing to watch for is commentary on the switch from Google to Yahoo as the default search engine in Firefox, which some statistics are already showing had a substantial impact on Yahoo’s share in the US. I especially hope financial analysts ask about whether this will stick, since it’s a relatively simple matter for Firefox users to switch back again.

Facebook – Wednesday, January 28th, after market close

Earnings call: 2pm PT. Link

Facebook has been on a great run financially, putting up big growth numbers and increasing profitability, almost all of it driven by the rapid growth in mobile advertising revenue (chart). The big question everyone keeps asking is to what extent this is driven by app-install ads, and to what extent that’s sustainable. I expect financial analysts to ask Facebook executives about this on the call and I expect them to cave to this increasing pressure, if not this quarter, then in the next couple of quarters. Regardless of whether they increase transparency, I expect them to continue to downplay the importance of app-install ads and play up the percentage of that spend that comes from big brands such as McDonalds rather than simply from game makers. In looking at Facebook’s business, it’s always worth remembering the three major drivers of growth: user growth, engagement, and monetization. User growth on the core Facebook platform continues to slow, so the really important things are engagement and monetization on the Facebook platform and user growth in the newer properties – Instagram and WhatsApp. But of course those properties are only poorly monetized today, so look for some guidance on how that’s progressing too.

Qualcomm – Wednesday, January 28th, after market close

Earnings call: 1:45pm PT. Link

I don’t follow the chipmakers closely, so I’ll keep this brief. I think one of the key things to look for in Qualcomm’s earnings and on their call is not so much direct financial reporting as their guidance on two major issues that could affect their results. Firstly, the ongoing situation in China. On the one hand, Qualcomm claims it’s losing out on significant revenue it’s owed by local players. On the other, the government is pursuing an antitrust investigation. Both are already hurting Qualcomm and could continue to do so. It’ll be good to get an update on those. Secondly, persistent rumors of problems with Qualcomm’s newest Snapdragon 810 chip which Qualcomm itself has largely denied so far. I have no doubt financial analysts will ask some pointed questions about this on the call and that they’ll call on Qualcomm to provide guidance about any delays related to it.

Samsung – Thursday Korean time, Wednesday US time

Earnings call: 4:30pm PT on Wednesday. Link

Samsung has already previewed the headline figures and they’re ugly (chart). Profits and margins rebounded a little from last quarter, but things were still way down on the same quarter a year ago and I see no sign of an immediate turnaround. Part of Samsung’s problem is, while they’ve used channel stuffing and discounting to paper over short term performance issues in the past, both will come back to bite them as they seek to address long term issues. Of course, we’ll be looking for more details on the performance of the mobile business in particular – its decline has been, by far, the greatest factor in Samsung’s overall poor performance, while the semiconductor business has been performing much better. It’ll be interesting to see the interplay between these two, but more interesting will be to hear whether Samsung provides any more details about its plans for fixing this mess.

Google – Thursday, January 29th, after market close

Earnings call: 1:30pm PT. Link

Four key things to watch out for in Google’s earnings this week:

The impact of Firefox’s switch to Yahoo as the default search engine in the US. I mentioned this above in the context of Yahoo, which will undoubtedly talk it up, but Google will no doubt be pressed about this on its earnings call as well. It’ll be interesting to see to what extent it affects overall numbers and how Google talks about its ability to win back those Firefox users. I suspect the impact on overall financials will be small as it’s US only, Firefox has relatively small market share, and it only took effect late in the quarter. But it’s certainly symbolically important and the numbers involved are still meaningful. As I’ve said before, Apple is the company who really has significant potential to put a big dent in Google’s numbers.
Google’s increasing cost of gaining traffic for its own properties. This is closely related to the item above, but Google’s traffic acquisition costs (TAC) for its Sites business have been steadily rising as a percentage of revenues (chart) and it’s worth seeing whether this changes, and how Google talks about it. A portion of this revenue goes to Apple and that, in turn, is driven by the large proportion of Google’s revenue that comes from iOS devices in particular.
“Other” revenues. Another big ongoing trend at Google is that its “Other” category of revenues are easily the fastest growing part of the business (chart). This includes Google Play revenue from apps and content, Nexus device sales, and various other smaller businesses, but we get very little insight into this in Google’s financial reporting. Expect analysts to continue to pressure Google to reveal more about the details behind this headline number, especially with the growth of Nest and other subsidiary businesses that report into this line.
Growth in the core business. That “Other” growth is important, because Google’s core business has been showing some signs of slowing as users shift from desktop to mobile and Google fails to capture as much value in mobile as it does on the desktop. Both prices and traffic have struggled to grow recently as much as they have in the past and results from companies such as Yahoo, Microsoft and AOL suggest this is more than just a Google problem. As more and more companies successfully capture share of the mobile advertising market, Google will continue to struggle to capture the sort of share it’s accustomed to in the desktop world.

Alibaba – Thursday, January 29th, before US market open

Earnings call: 4:30am PT. Link

Alibaba is one of the poster children for the rising Chinese tech giants, and rightly so. Its core business looks like a combination of Amazon and eBay but, as I indicated last week, it already dwarfs both in terms of total transaction volumes. And in contrast to both Amazon and eBay, Alibaba is driving a great deal of growth through mobile, which is accelerating rapidly (chart). The importance and rapid growth of mobile is one of the key differences between the Chinese and US markets (though, as Ben Bajarin points out, it may simply be a question of timing rather than fundamental). What Alibaba has in common with Amazon is it is starting to sacrifice some of its margins in the pursuit of rapid growth, though not nearly to the same extent as Amazon. Alibaba remains a company with healthy profit margins overall. It’s worth watching for any headwinds or signals of slowing growth, but I suspect Alibaba will continue to grow rapidly and likely expand into more and more areas, including investing more outside of China.

LG – Thursday, January 29th

Earnings call: 5am PT on Thursday, earnings released a few hours earlier. Link

LG continues to be one of those quiet success stories in smart phones – a company that’s been making steady progress without capturing anything like the attention of some other businesses (and in stark contrast to its compatriot Samsung). Its smart phone shipments and, in tandem with them, its operating margins have been steadily growing (chart). Last quarter it looked as though LG’s smart phone margins might actually pass Samsung’s this quarter but we’ll have to see if that really happens. It’s remained the clear number 3 player in the US smart phone market behind Apple and Samsung, with 6.5-7% of the market, and its latest flagship phones have allowed it to capture share and drive growth in other markets around the world. Outside of smart phones, LG’s presence in smart devices remains limited, with nothing like the reach of Samsung, but I would expect that to change over time as it invests more in these categories.