Privacy and Security Deeper Dive: Apple, Facebook, Google

Yesterday, Ben shared some findings from the recent Tech.pinions/Creative Strategies survey on privacy and security. Today, I’m going to share with Insiders more details from that survey based on three questions we asked about specific companies — Apple, Facebook, and Google.

Those companies were in the rankings Ben shared yesterday, with Apple on top for protecting both privacy and security, although roughly tied with Microsoft in second place. Google scored fairly highly on both metrics as well, ranking third on both, albeit some distance behind Apple and Microsoft. Facebook, on the other hand, scored much lower, bringing up the rear with fellow social apps Twitter and Snapchat. But it’s worth digging a little deeper to understand the details behind those ratings.

Apple’s recent emphasis on privacy has helped

Apple has emphasized privacy often and forcefully over the past couple of years and it’s fair to say it’s a major facet of Tim Cook’s leadership at Apple. In fact, one of the reasons for doing this survey was to see how many people actually (a) understand and (b) care enough about privacy and security for this to be a successful strategy. So one of the questions we asked was about how Apple’s recent emphasis on privacy had affected people’s trust of Apple when it comes to their privacy. For the purposes of this survey, we separated out the more mainstream users from those who described themselves as particularly tech-savvy and those who see themselves as early adopters, so the results shown below reflect this mainstream group, excluding the outliers.

As you can see, around two thirds of respondents haven’t been moved very much either way but around a quarter have been influenced positively by Apple’s recent statements. In other words, they trust Apple with their privacy more now than they did before. Another 14% of these mainstream users are fundamentally skeptical anyone can protect their privacy and a very small group, somehow, went the opposite way in their perception of Apple’s ability to protect their privacy. Interestingly, when we look at the tech-savvy respondents independently, their responses skew much more towards the “I trust them more now” group – 65% of them responded in this way.

Facebook has some real work to do

I mentioned Facebook scored lower than Apple, Microsoft, or Google. It’s worth digging a little deeper into that question as it regards privacy. The survey asked respondents which of several statements best reflected their views about Facebook. The answers are shown below with both mainstream users and tech-savvy users’ responses.

As you can see for both groups, the statement the largest number of respondents chose was they share less on Facebook than they normally would because they’re worried about privacy. A little under half the mainstream users and a little over half the tech-savvy users responded in this way. This is interesting in the context of recent reports about organic sharing on Facebook falling – though there are other factors including the ease of simply re-sharing existing content and a sense that no-one will see your text-only posts in the algorithmic News Feed — this worry about sharing personal information may be an inhibitor to more personal, organic sharing. However, at least those people are still using Facebook, even if in a slightly inhibited fashion. There was another set of respondents, around a quarter of mainstream users and over a third of tech savvy users, who don’t use Facebook at all because they’re concerned about privacy.

All this is interesting because it’s been a long time since there was a major public outcry about Facebook and privacy – there certainly was a period a few years back when Facebook gained something of a reputation for being opaque about privacy settings and driving users to share with wider audiences than they intended to but that’s long since past. More recently, Facebook has been more careful and clear in its privacy policies and even proactively points out to users when they may be sharing more broadly than they think. So a lot of this perception of Facebook was either shaped during those earlier times and hasn’t caught up with reality, or people simply don’t buy that Facebook is really doing what it says it is. Either way, that’s bad news for Facebook, especially when taken together with the other responses about worries information is at risk and the general “creepy” factor.

Google fares better in spite of privacy worries

When it comes to Google, there’s a fascinating duality – people are concerned about privacy but willing to use Google’s services anyway. The chart below shows equivalent data to the Facebook chart above, although the statements offered were slightly different:

The first thing that stands out among the mainstream users (shown in blue) is fully half don’t feel like they have a good sense of what information Google has on them. Though that number is quite a bit lower for tech-savvy users, it’s still over a quarter of the total. In other words, even those who consider themselves well informed about technology feel they have a poor understanding of what information Google collects on them and, for mainstream users, the problem is much worse. This was a multiple answer question and so some of those same users will have also chosen other statements, among which was, “I use Google’s services and am concerned how much information they have on me.” For mainstream users, that statement was chosen by around a third, whereas with tech savvy-users, it got votes from half the respondents.

In other words, though we might think the more informed someone is about Google’s data collection, the less they’d worry about it, the opposite is the case: the better informed people think they are, the more concerned they are about Google’s data collection. The last statement on the chart reinforces this perception – while very few people in our mainstream sample said they didn’t use Google services at all for privacy reasons, over a quarter of those early adopters said so. Taken together, that’s 77% of our tech-savvy sample who said they either don’t use Google’s services at all for privacy reasons or they use them despite misgivings over the privacy implications. Even for mainstream users, the combined total is 44%.

The other thing worth noting in combining the responses about Facebook and Google is the percentage of respondents who said they were OK with Google’s targeting of ads based on personal data. It was much higher than those saying the same about Facebook – over a quarter said this about Google, but only 10% felt the same about Facebook.

Conclusions

As Ben pointed out yesterday, the group of people who care deeply enough about privacy to take serious measures like taping over their webcams is a minority – around 15-20%. Apple’s emphasis on its privacy stance may well have helped persuade some in this group it’s best placed to protect them among major smartphone and PC vendors. But what the Facebook and Google data shows, especially in the context of their massive user numbers, is many people continue to use popular free services despite, in some cases, having serious misgivings about their privacy protections. That’s an explicit tradeoff between privacy and cost, or a recognition of the price to be paid for well-targeted ads. But in others, it’s a willingness to use certain services even without knowing very much about the data being collected or how it will be used. Facebook and Google can certainly do better in educating their users on that front but, for now, it doesn’t seem to be hurting them much, especially among mainstream users.

Facebook’s Next Big Opportunity

Facebook once again reported very good earnings on Wednesday afternoon, with massive growth in both user numbers and ARPU driving both significant revenue and profit growth. But Facebook also warned of increasing saturation in ad load, which it says will lead to much slower overall ad revenue growth later this year. In that context, it’s worth thinking a little about what other opportunities for revenue growth still lie ahead. Mark Zuckerberg provided something of a hint on the earnings call.

As it currently stands, Facebook is still primarily a social network, albeit one that’s at least as much about content as it is about communication with friends and family. The experience is dominated by a variety of content, from “organic” text posts, photos, and videos shared by its users to a plethora of other content which originates elsewhere and is merely forwarded on by users of the service. That provides plenty of content for users to consume, to the extent Facebook has long since filtered the total universe of content that could be shown to users according to algorithms which prioritize those things likely to drive interest and engagement and therefore keep users on the service to be shown more ads.

However, the fundamental rule on Facebook is still you only really see things your friends have engaged with in some way, whether by actively sharing them or merely liking or commenting on them. Facebook still uses engagement by your friends as an important signal about whether you’re likely to be interested in something too. Your friends are the filters here, along with your own established preferences, both explicit and implicit, about what you’re interested in.

But what if your friends were no longer a filter or limiting factor on what you could be shown? What if other factors could teach Facebook both what you’re interested in and which other pieces of content shared elsewhere on Facebook might be interesting to you? Mark Zuckerberg talked on the earnings call about some of Facebook’s AI efforts aimed at recognizing and understanding the content of not just text posts but photos and videos too. Once Facebook understands the content, it can make a judgment about whether it might be of interest to a given user who has previously engaged with similar content and show it to them, regardless of whether it’s been shared by a friend.

The big advantage for Facebook is it would no longer be limited to the things friends have shared or engaged with – it can show you anything from among a much wider universe of possible content, much of which might actually drive higher engagement because of the subject matter than the things shared by friends. Perhaps you have hobbies distinct from those of your real life friends which are nonetheless shared by many others on Facebook. Perhaps your political views are different from many of those you’re connected to on Facebook. Your personal interests could connect you to a lot more content on Facebook if your friends are no longer a primary filter.

Where this gets particularly interesting is video, which is a key focus for Facebook and one with potential to drive significant additional ad revenue. YouTube has never been limited to showing you content which has only been shared or engaged with by your Gmail contacts. Opening up in this way would allow Facebook to act a lot more like YouTube in showing you recommended videos from outside your personal social graph. Better targeted content, especially content with lucrative ads attached, could drive even higher revenue without necessarily increasing ad load significantly.

But new video-centric experiences could also provide entirely new places for Facebook to place ads and therefore, raise the ceiling on ad load. Facebook is apparently working on an app for Apple TV and similar boxes which would be video-centric – a video service, free of friend-based filtering, could be a great fit for such a service, surfacing the best videos Facebook has to offer based on your interests, combining user-generated and professional content.

Though Facebook has repeatedly warned about saturating ad load, it’s clear it hasn’t given up on finding new places to put ads – mid-roll video ads, ads in Instagram Stories, ad experiments in Messenger and more over recent months demonstrate its commitment to finding new slots to load with ads. This video push seems another obvious way to raise the ceiling. As such, even with ad load slowing growth in 2017, I think there’s still plenty of room for longer term growth, especially around video.

Where Alphabet’s Growth came from in Q4 2016

Alphabet reported its financial results for Q4 2016 last week and posted very healthy year on year growth of 22%, its strongest growth since 2013, and far higher than its average growth from 2014-2015 of 12%. For Insiders today, I thought I’d dive a little into where that growth actually came from, with a view to seeing what it tells us about how Alphabet might grow in the future.

Where Alphabet’s Revenue Comes From

The best starting point for this analysis is looking at where Alphabet’s total revenue comes from. The pie chart below shows the split between four categories in Q4:

Those four categories are:

  • Ad revenue from Google’s own websites, including everything from Google.com to YouTube to Gmail
  • Ad revenue from Google Network Members’ sites, which is all the non-Google sites it serves ads on
  • Other Google revenues, which are all non-ad revenues in the Google segment, including revenue from Google Play, enterprise cloud services, and hardware
  • Other Bets, which is all the revenue that comes from non-Google subsidiaries of Alphabet.

As you can see, Google’s revenues are 99% of the total and Google ad revenue contributes around 86% of Alphabet’s revenues. That second percentage was as high as 97% a little over five years ago, so things have changed considerably, but it’s still fair to say that both Alphabet and Google’s revenues are dominated by ads.

What Grew Over the Past Year

Other Bets – growing fast from a tiny base (and losing lots of money)

The growth rates of these various businesses are very different, however, so it’s worth looking at how the composition has changed over time. The fastest-growing segment is also the smallest: Other Bets. That segment grew by 74% year on year but, of course, the actual numbers involved are very small – that was growth of just $111 million over last year’s fourth quarter. Alphabet doesn’t break out the details here at all, except to say (as it has in the past) that the only subsidiaries within Other Bets that generate meaningful revenue are Nest, Verily, and Google Fiber.

Management did talk up Nest growth but only during a very narrow window around Thanksgiving, so there’s a good chance Nest contributed some of the overall growth but it’s impossible to know how much. It’s also worth noting the Other Bets collectively continue to lose money hand over fist, though the scale of the losses in margin terms has shrunk ever so slightly.

Google Other – Play and Cloud Get a Boost from Hardware

The next-fastest rate of growth came in the Google Other segment, which grew 62% year on year. This is one of the most interesting aspects of Alphabet’s results this quarter because it’s where Google’s new first party hardware, such as the Pixel and Home, sit. That segment had been growing by between $400 and $700 million year on year before Q4, driven by a combination of stronger Google Play app and content sales and Google’s enterprise cloud business. Again, the company has given very little insight into how big each of those businesses is or how fast each is growing but the run rate gives us some sense of what hardware might have contributed. That run rate for Play and Cloud has been accelerating, so I’ve estimated it likely accounted for $600-700 million of the $1.3 billion in year on year growth in Google Other. As such, the other $600-700 million of growth came from hardware sales. Within that, of course, there’s Pixel, Home, Google Wifi, and Daydream View but there’s a good chance much of it came from Pixel sales, which had by far the highest average selling price, likely around $700. I estimate Google sold 600-700,000 Pixel devices along with a similar number in total of the other three categories. That’s not bad for a first quarter, especially given the fairly limited distribution and apparent supply constraints but, of course, it’s a blip in the overall smartphone market.

Google Ad Revenues – Google Sites Vastly Outpacing Third Party Sites

Let’s turn to Google’s ad revenue, which grew by 17% year on year overall but was made up of those two distinct buckets: Google’s own sites and third party sites. Of these two, Google’s own sites grew far faster, at 20% year on year relative to just 7% for third party sites, though that 7% was well up on the recent rate of growth for this segment, which has been 1-3%. That’s been the picture for some time now, with Google’s own sites driving the vast majority of overall ad growth for Google, while third party sites barely grow at all. The underlying ad metrics Google provides show why this is: the price per click across Google’s own and third party sites has been falling pretty consistently, the number of clicks on third party sites has been essentially flat, and clicks on Google’s own sites has been rising somewhat. In other words, falling prices and almost stagnant traffic have been responsible for the flatlining of the third party business and it’s only rapidly growing clicks on Google’s own sites that have driven growth.

What, is responsible for these trends? Well, it comes down to three things: the transition from desktop to mobile, the growth of YouTube, and Google’s increasing presence in programmatic advertising. The transition from desktop to mobile means traffic is going from desktop, where there are many ad slots, to mobile, where there are far fewer and where people are less likely to click on them. As such, it’s inevitable the total number of clicks will struggle to grow even as overall traffic does, while the price per click comes down as Google expands into additional geographic markets with lower ad spending. The other wrinkle with the shift to mobile is Google has to pay out a higher portion of its ad revenues (as traffic acquisition costs) to mobile device makers like Apple and Samsung – Google Sites TAC in Q4 was up 48% year on year, even though revenue only went up by 20%, suggesting Google is having to pay out at a higher rate as more ad impressions come from mobile.

In its own business, YouTube has been a bright spot, as traffic on YouTube continues to grow rapidly and with it clicks (whether measured as actual clicks or merely people sitting through video ads). YouTube was an obsession for analysts on the Q4 earnings call because it’s the driver of much of the growth at Google. That’s clearly a good thing, but there’s a question about whether it can sustain that growth over the long term as other online video services continue to gain steam. The underlying model is still fantastic for Google – all it pays for is hosting expenses, while its users contribute all the content for free or merely a cut of the ad revenue. Lastly, there’s programmatic advertising, which isn’t necessarily a new revenue category at all but a way for Google to scoop up a bigger slice of the advertising value chain and potentially at higher prices thanks to better targeted ads. Google has repeatedly called out the growth in programmatic as another major growth driver, including in Q4.

Where Growth Comes from Next

So let’s return to the question of what all this says about where Alphabet’s growth comes from in the future. Other Bets will continue to grow, especially as businesses like Verily start to drive higher revenue from various partnerships, but that’s still a tiny contributor to overall growth and will continue to be so. Google Other revenue should continue to see a big boost from hardware sales in the next few months and, assuming we see a Pixel 2 and potentially additional hardware from Google later this year, this should become a useful revenue driver over time, boosting overall revenue growth for Alphabet. Play store revenue and enterprise cloud revenue will also continue to drive growth, with those two areas likely roughly matching hardware in terms of new dollars each year. Then there’s the Google ads business, where almost all the growth will continue to come from Google’s own sites and that growth, in turn, largely driven by YouTube and programmatics, while growth in mobile search merely offsets desktop declines rather than necessarily driving net growth.

How Net Neutrality will Fare under Trump

With news this week about the nomination of Ajit Pai as the next chair of the FCC, much of the attention has focused on his stance on net neutrality and the likelihood the existing rules on net neutrality will be dismantled. However, net neutrality is a complex topic; even the definition of net neutrality is subject to widely differing interpretations. It’s worth breaking down exactly what’s likely to change and what isn’t at a Pai FCC.

Defining Net Neutrality

The first challenge here is defining net neutrality. A very general definition would be it refers to treating all internet traffic equally. It sometimes seems as if some people really do believe net neutrality can only merit the name if it’s really that broad. But that would preclude any sort of network prioritization which puts time sensitive packets above non-time sensitive packets and would also preclude any sort of prioritization by user or content at times of congestion on the network. Most reasonable people seem to at least leave some leeway for sensible network management in order to improve the performance of services subject to delays, such as voice and video calling or live video streaming.

Beyond that, the consensus breaks down very quickly. There are some who insist net neutrality has to bar any and all prioritization or differential charging by content or by user on any basis, whether or not it’s transparent, available to all, or paid for. The best example is the programs introduced over the past couple of years by major wireless carriers, under which some or all content in a particular category is carried without counting against the user’s data plan. T-Mobile and AT&T are the most high profile examples. T-Mobile has two programs – BingeOn and Music Freedom – which “zero rate” video and music content respectively. These programs are essentially open to all comers from a content perspective and there’s no charge to participate. AT&T has recently exempted video from its subsidiary DirecTV from its data caps and says this reflects an internal transfer from the DirecTV division to the AT&T Mobility division in an arrangement also open to any other video provider under the company’s Sponsored Data program.

How you define net neutrality will determine how you see each of these programs. Strict advocates reject both T-Mobile’s programs and AT&T’s, while some others find T-Mobile’s program acceptable but not AT&T’s or Verizon’s. The FCC has never taken a final position on either program but did begin looking into AT&T’s towards the end of last year. The net neutrality rules as presently constituted, however, don’t explicitly bar zero rating programs. Whether you consider either or both of these programs in breach of the principles of net neutrality will determine to what extent you think the new FCC regime will dismantle net neutrality, as I’ll show in a moment.

Rules vs. Motivated Behavior

It’s also worth noting that net neutrality rules were contemplated for many years but only implemented successfully recently. In the time before the rules were finally introduced, there were very few violations of its principles regardless – literally less than a handful of prominent cases existed during that time. The reason is, broadband providers are highly motivated to stay away from controversial breaches of net neutrality principles because they know that such actions would be extremely unpopular with consumers and would invite additional regulatory scrutiny. If we’re talking about actively blocking or degrading any form of content simply because it competes with the carrier’s own content (rather than because it is illegal or against the carrier’s terms of service), that remains very unlikely because there would be an outcry and a backlash and, ultimately, severe financial consequences in terms of lost business if the situation continued.

Net neutrality rules as presently constituted largely lock this behavior in place but the carriers have always made clear they object to the rules largely because they represent additional regulatory encroachments on their freedom to operate rather than because they contemplate any particular action that would contravene them. However, it is clear carriers have other, softer, forms of prioritization and differential treatment in mind, as we’ve seen from the zero rating plans I mentioned earlier. Regulation might or might not bar those zero rating programs but it’s relatively unlikely carriers would ever stoop to systematically blocking or degrading traffic from competing services even in the absence of regulation. Carriers have mostly been willing only to engage in behavior seen as either neutral or beneficial by users. They have much less concern about how they’re perceived by content providers. As such, they’ll zero rate some or all video content because users respond positively to that, regardless of whether providers of other content services like the idea or not. Net neutrality regulation, therefore, mostly helps protect content providers rather than end users, at least in the short term.

Dismantling Net Neutrality

With all that as context, let’s look at what might actually happen in the real world if net neutrality regulations as currently constituted were eliminated. Here are my predictions for what we’d actually see as a result:

  • Carriers wouldn’t suddenly (or even eventually) start engaging in discriminatory prioritization or blocking of traffic based on the source – as I’ve said, users would respond badly and even an FCC largely opposed to additional regulation would have to step in and act if this became widespread
  • Carriers likely would continue to pursue zero rating programs as a way to both differentiate from competitors and to make their own content services more attractive in some cases (as AT&T and Verizon have already done). With the growth of unlimited data services among the major wireless carriers, this actually wouldn’t have a massive effect on the market
  • Some broadband providers are actually bound by terms of merger approvals to abide by fairly strict net neutrality principles regardless of general regulations, with Comcast the prime example through 2018. As such, these companies would have to continue to abide by the rules whether or not they’re overturned, at least for the duration of the commitments they’ve made. AT&T might well be subject to some similar rules as a condition of the approval of its acquisition of Time Warner, putting the two largest broadband providers and the second largest wireless provider under net neutrality restraints

In short, we’re unlikely to see an apocalyptic end to the internet as we know it, even if the FCC begins taking apart the present net neutrality regulations. We will likely see more zero rating and similar programs which don’t prioritize or degrade traffic but merely apply different data pricing to it. If you object to that kind of thing as a breach of net neutrality, you’re likely to be upset but most consumers will be either blissfully unaware or happy about it. If you’re a content provider, you may feel hard done by here too but, again, under the increasingly prevalent unlimited wireless data plans, this will become less of a disadvantage over time. I, for one, am less pessimistic about the outcomes here than many of those decrying the changes on the horizon.

Snapchat is Evolving

Further to Ben’s piece yesterday, I thought it would be interesting to dive into all the ways Snapchat (the app) and Snap (the company) are evolving as the company reportedly prepares for an IPO this year. Both the company and the app are becoming something quite different from what they were in the past and the challenge will be to maintain user loyalty as that evolution continues.

Snap the Company is Evolving

The first thing to note in the context of Snapchat evolving is the company is no longer even called that – last year, the company changed its name from Snapchat to Snap, Inc. as a reflection of a shift from being simply an app company to something more. It now styles itself a camera company, with the app constituting one camera (the camera is still what opens first when you launch the Snapchat app) and its Spectacles hardware product, another camera. The two are of course, integrated, but the Spectacles are also a sign of an evolving Snap, which sees itself as more than just the maker of a messaging app.

The renaming and new tagline open up all kinds of other possibilities for the future — whether an AR/VR headset (perhaps based on Spectacles), more standalone camera products, or something completely different. The fact is, Snap now has a captive audience of (mostly) millennials who spend a lot of time in the app and it can do a lot to leverage that audience into new things, whether those are additional apps and services or more hardware.

Snapchat is Evolving as an App

But alongside the big picture evolution in Snap as a company, the core app has been evolving as well. In fact, the rapid evolution of the Snapchat app has been one of its defining features – it’s hard to think of another app that has successfully added so much popular functionality in such a short space of time. The app only launched in 2011 and, in the five and a half or so years since, it has added video sharing, Stories, video calling, Discover, Snapcash, Filters, Sponsored Geofilters, Lenses, Memories, and much more at a detailed level.

At a fundamental level, Snapchat, in its early version, captured attention from users, mostly teenagers and young adults, and then found additional ways to keep that attention and leverage it to make money. Notably, the ad products in Snapchat are all focused on content of one kind or another. It’s the investment in content that’s really turned Snapchat into something quite different over the last couple of years. The Discover tab has a range of content – much of it not all that appealing to a member of an earlier generation like me – which is designed to keep users in the app and, of course, to show them advertising in the process.

Advertising is another area where Snapchat has evolved significantly in recent months. Having said, in the middle of last year, it would eschew “creepy” targeting of ads, it has in fact invested significantly in new ways for advertisers to target their advertising, including buying offline data from Oracle in a deal announced last week. The biggest challenge for Snap, when it comes to advertisers, is convincing them to spend money when the tools they’re used to from other big online platforms, like Google or Facebook, simply haven’t been available from either an analytics or targeting perspective. That is now starting to change as Snap invests more heavily in these tools but some of these things are likely to cross that “creepy” line as users become aware of them. Snap will have to be careful not to alienate its users in the process.

We’re also seeing a crackdown by Snap on the content shared in the Discover tab. It’s always been a pretty lewd place but some content providers have recently been using racy cover images for Stories that have nothing to do with the picture and Snap has now said it will ban such content as well as any content that links to what it perceives to be fake news. Again, Snap appears to be maturing rapidly as it preps for an IPO, creating a more palatable place for big brands to place their ads while also reducing some of the liabilities Facebook has recently been saddled with as a result of the US election.

Potential and Reality

Snap has shown itself to be both an enormously innovative company and a nimble one, moving quickly to launch new features, making acquisitions where necessary and extending into new areas. There’s clearly lots of potential here, especially given how advertisers covet the audience it has. But, as Ben said yesterday, growth appears to be plateauing somewhat lately and much of its potential is just that and nothing more until it demonstrates it can turn its newfound ambitions into something else. That means demonstrating it really can cross the chasm from experimental to mainstream budgets at advertisers but also successful expansion into new areas – the marketing around Spectacles has been very clever but it’s not nearly as clear that there’s a decent sized revenue opportunity there yet.

Experimenting with lots of new things is one thing but generating meaningful revenue and profits is going to be the next big challenge. It’s not as clear Snap has cracked that yet.

Two Possible Futures for Amazon’s Alexa

Amazon’s Alexa voice assistant was clearly the star of CES this year. No single consumer electronics device dominated coverage but lots of individual devices incorporated Alexa as their voice assistant of choice. The announcements ranged from Echo clones to home robots to cars and smartphones. It was clear Amazon had entirely captured the market for voice platforms. Only one or two integrations of the Google Assistant were announced and those are both future rather than present integrations.

It would be easy off the back of all this to say Amazon had won the voice assistant battle once and for all but I actually see two possible futures for Alexa, with very different outcomes for Amazon and its many partners.

Future 1: Amazon continues to dominate

The first possible future for Alexa is one where the current trends mostly continue and even accelerate. Amazon’s own Alexa-based products continue to sell well, with Dot probably taking a greater share of sales going forward relative to Echo (or Tap), selling into the tens of millions of installed units in the next couple of years. On top of that, the adoption by third parties that was so evident at CES continues, with even more devices offering integration. Importantly, Alexa starts to make an appearance in Android smartphones, making it as pervasive and ubiquitous as existing smartphone-based assistants, possibly even making an appearance in another round of Amazon smartphones.

What we end up with in this scenario is a massive ecosystem of devices which all offer users access to Alexa and its functionality. These devices perform their functions well, recognizing voice commands effectively, responding appropriately, and adding value to users’ lives. Because they’re all part of the same ecosystem, they work the same way — commands issued through one are reflected on the others. Amazon benefits from owning a massive new user interface and platform which can be used not just to push its e-commerce sales but to take an increasingly large share of media and content consumption across video, music, audiobooks, and more.

This scenario also assumes major competitors either don’t launch competing products or those products fail to take off. Google has, of course, already launched its Home device but, thus far, sales are far lower than Amazon’s and are handicapped by a lack of awareness and the lack of a major e-commerce channel. The Google Assistant, meanwhile, should be the default option for Android OEMs in all their devices but the way in which Google has held it back as it promotes its own hardware has also held it back, perhaps fatally, as a third party voice platform. If that doesn’t change, if Microsoft’s Windows-based Cortana strategy falls short, and Apple’s reticence to participate in this market continues, Amazon dominates with its devices and those third party products using its ecosystem.

Future 2: Cracks start to appear in the Alexa ecosystem

The secrets of Echo’s success

I want, though, to paint an alternative future for Alexa, one which is less rosy and more complex. Amazon’s genius in launching the Echo and Alexa was to pick a blank slate rather than an existing category for its experiments with voice. Instead of competing with another smartphone-based voice assistant, Amazon chose to compete in the home, with its relative quiet and better internet connectivity, and a device that was optimized for specific use cases: fantastic voice recognition and great audio output, even from across the room. That had two major advantages: first, it wasn’t going head to head with powerful entrenched competitors and second, it could deliver far better performance around voice recognition than smartphone-based systems.

The Echo performs fantastically well at what it does. Its voice recognition is indeed very good, inviting highly favorable comparisons to Siri and the like. It’s this success in providing great voice experiences that have propelled sales of its own devices and prompted other companies to build their own as well. The assumption on all sides is it’s Alexa that powers these phenomenal experiences and the Alexa Voice Service for device makers will power similar experiences on other devices.

Amazon’s limited control over Alexa devices

However, one look at Amazon’s guidelines for those wishing to incorporate Alexa Voice Service into their devices should prompt at least some skepticism. Echo and Echo Dot famously have a 7-mic array built into the top of the device, with beam forming, enhanced noise cancelation, and more helping to ensure the device does a phenomenal job of picking up your voice from up to 20 feet away. But look at the minimum specs for Alexa-powered devices and you quickly realize many of these devices won’t match up on hardware – the minimum standard for microphones is just one and additional technologies like noise reduction, acoustic echo cancellation, and beam forming are entirely optional.

Also optional is “wake word” support – in other words, the always-listening function that waits to hear Alexa (or another word of the user’s choice) and then springs into life. The Amazon Tap doesn’t offer this feature (and was hammered in reviews for it) because the “across the room” use case is a key part of Echo’s appeal. Even when a wake word is supported, Amazon only requires a minimum of one microphone for near-field recognition and just two for far-field (20 foot) recognition.

Where this second future scenario diverges from the first is the sheer range of Alexa-enabled hardware starts to put many devices into the market that don’t have nearly the appeal of Amazon’s own. Lenovo’s Echo clones appear to be using an 8-mic array and may very well perform at exactly the same level or better but the Huawei Mate 9 smartphone, which is due to incorporate Alexa later this year, has just 4 microphones and the device obviously wasn’t built with optimal voice recognition in mind. In a rush to get products to market, we’ll see many vendors putting out devices with the bare minimum specs and prominent Alexa-related branding.

All it will take at this point is a handful of terrible reviews for Alexa-powered speakers and other devices and the Alexa brand will quickly become tarnished. At that point, Amazon’s admirable openness with the Alexa tools may come to be seen as a huge mistake because it’s set so few limits on what can be done with the service and its brand. Even if third parties are committed to providing the best possible experience, voice recognition on a smartphone or other smaller devices likely is never going to match up to the Echo’s quality, which means the true Alexa experience will likely remain elusive outside of the home. Any perceived quality advantage will, therefore, fade as well, making Alexa a lot less appealing.

More compelling competitors

Meanwhile, competitors will move past their slow start in responding to the Echo and Alexa and will begin producing more compelling alternatives. I see no reason why competitors shouldn’t be able to build devices which perform at least as well, in terms of voice recognition, as Echo given the same parameters (home use, large devices, mic arrays designed for voice recognition). Indeed, Google’s Home has already demonstrated there’s no special magic there. In addition, players like Google and Apple have one huge advantage – they already own massive installed bases of hundreds of millions of devices running their operating systems and integrated voice assistants.

Google’s early misstep in limiting the Google Assistant to its own devices will be overcome in the next few months as it makes it available to Android OEMs more broadly and, at that point, its Home device will become a lot more compelling. Apple, too, has the potential to do really interesting things in the home speaker space should it choose to do so, given the increasing scope and availability of Siri and its AirPlay audio and video casting technology. Again, the appeal of using the same assistant everywhere, tightly integrated into devices, will be a big advantage over Amazon’s looser Alexa ecosystem.

Which future plays out?

On balance, I’m inclined to think the future will look rather more like the second scenario I’ve painted than the first. That is to say, I think Amazon’s advantages in the field of voice assistants are mostly temporary and, to some extent, illusory. Competitors will catch up fast in the home and exceed its capabilities outside it. That doesn’t mean Amazon can’t build a decent business with a more limited scope of opportunity around its first party devices and a handful of really compelling third party devices in an ecosystem but I suspect its future will be a lot less bright than its present in this space.

Q4 2016 Earnings Season Preview

We’re about to head into earnings season once again, with Netflix reporting this Wednesday and most of the big tech companies reporting next week and the week after. With that in mind, here’s a preview of what I’m expecting and what I think we should be looking for as each of the big companies report.

Alphabet

With Alphabet, I’m looking for two big things: further signs of improving the financial performance in the Other Bets segment following the streamlining that’s been going on there, and any indicators of how Google’s new hardware has performed. Operating losses were down year on year in the Other Bets segment for the first time in Q3 2016 so we may see another quarter of narrowing losses. From a hardware perspective, any revenues will be reported under Google’s “Other” segment, which houses all non-advertising revenue from the Google business, including Google Play app and content sales, enterprise services sales, and various other revenue streams. That’s already a fairly big chunk of revenue in total – $2.4 billion in Q3 – but even a million or so Pixel sales would generate around $600-700m in new revenue for this segment so the growth here should be noticeable. Beyond these two items, I’m also curious to see whether all the growth in ad revenues at Google continues to come from its own sites rather than third party sites – that trend has been evident for a while now.

Amazon

Based on a couple of press releases of holiday sales Amazon put out earlier this month, it looks like it had a very healthy fourth quarter. I would guess e-commerce sales were up 20-30% while AWS likely also continued to grow revenue and profits strongly. Amazon is starting to look unstoppable on the e-commerce side, capturing almost all the growth in e-commerce while expanding into new verticals and even opening more physical retail stores. The hardest thing with Amazon is simply not knowing in which quarters it will choose to reinvest profits versus passing them on to shareholders – just as it had investors trained to expect higher margins following many years of breaking even, it produced lower profits again last quarter and its guidance for Q4 was ridiculously broad. But, on a long-term basis, Amazon looks to continue its stellar run.

Apple

Apple promised modest year on year growth this quarter in its guidance but it has an extra week of sales this quarter compared with the same quarter last year. It has made some analysts assume the growth is based on that extra week rather than underlying trends. Apple tried to push back against that idea on its earnings call and has all but said it expects the underlying business to grow in the coming months, so that’s the biggest single thing to look for, not just this quarter but for the coming year. iPhone sales are obviously by far the single biggest factor – if there was year on year growth in shipments, that should help drive overall growth. But if there wasn’t, that reinforces the narrative that has emerged over the past year that Apple will struggle to grow going forward as it has in the past. Recovering Mac sales, driven by the new MacBook Pro, as well as strong holiday sales of the various versions of the Apple Watch should help too, as will the record App Store revenue Apple touted in a press release earlier this month.

Facebook

Facebook is another of those companies, like Amazon, which seems to have been on a tear lately with no end in sight. But it’s also been providing stronger indications on its recent earnings calls that ad load is near saturation and will cease to be a major factor in driving revenue growth going forward. I’ve done some analysis on this point and concluded that, although this will lead to slower growth going forward, it will still probably see healthy growth relative to most of these other companies. It will shortly launch video ads in its Stories feature in Instagram, which offers a new venue for advertising and will help with overall ad load even as ad load is becoming maxed out elsewhere. But in addition, the growing user base, rising prices per ad, and other factors should still help drive high growth. I’m guessing management will also be asked about WhatsApp monetization on the call – Facebook suggested that was coming at its F8 conference last year (and there have been various hints of how this might happen) but we haven’t seen many details yet. In theory, this could be a useful additional source of ad revenue growth — but WhatsApp’s management has eschewed advertising as a business model.

Microsoft

Microsoft finally seems to be coming out of a long period of declining revenues and returning to growth, with essentially flat revenues year on year last quarter. It helps that the phone business is now so small that even big year on year percentage declines don’t put too big a dent in dollar revenues. It’s also passed the one-year anniversary of the Windows 10 launch, which introduced deferred revenue and artificially depressed reported revenue. However, Surface revenue is likely to have been flat or down slightly in the quarter, with no big portable launch and only the relatively niche Surface Studio launching in the quarter, compared with previous year-end launches. The other major growth drivers should remain healthy, however. Microsoft’s various cloud business have been growing strongly, though the exact components can be hard to pick apart in Microsoft’s complex reporting structure. Negative PC market growth continues to be one of the biggest headwinds and, although there was slightly slower decline in the overall market in Q4, it was still down year on year, which will have a knock-on effect on Microsoft.

Netflix

Netflix is a business that has to be seen in two parts with very different dynamics. The domestic business is massive and highly profitable but has recently seen significantly slowing growth, driven in part by increased saturation and in part by the recent price increases. Netflix forecasted a pretty healthy quarter of growth for the US business, so we’ll have to see how accurate that forecast is – it has struggled recently to get these numbers right. The international business, on the other hand, is catching up to the domestic side in terms of its total size thanks to its rapid growth (on the basis of the current run-rate, it’ll likely become the larger of the two later this year), but has been unprofitable. The loss per subscriber has been narrowing even as the total number of subscribers grows, so there’s a path to profitability here, and a number of individual markets are already profitable. But with massive investments in original content – $6 billion in 2017 – Netflix has to ensure its growth continues to keep revenues ahead of costs and start to turn a profit in its international business.

Samsung

Samsung has already released a surprisingly upbeat preliminary set of quarterly results but we’ll have to wait a few weeks to see the details. Revenue looks very healthy overall, apparently driven by strong performance in smartphones and semiconductors. The former is a surprise, given the Note7 recall and its impact, at least some of which fell into Q4, and which has had at least some effect on people’s perceptions of the Samsung brand, but a strong quarter here will help reassure investors the damage is limited. If semiconductors did contribute to the strong overall results, that will also be a positive sign because that segment has performed unpredictably over recent quarters after being an important growth driver for several years prior. Semiconductors has the highest margin of any Samsung division, so its performance is particularly important to overall performance.

Twitter

Twitter badly needs to show its recent efforts to improve user growth are working. Judging by the number of nagging emails from Twitter I received at my various accounts in late December, I’m guessing it’s doing everything possible to goose monthly active user numbers (which are based on the last month in the quarter) but, of course, it’s this kind of thing that makes MAU such a poor measure of true user patterns. Twitter continues to refuse to provide daily active user numbers which suggest these would reflect poorly on the service. I’m expecting some modest growth in MAUs to be reported but those should be taken with a pinch of salt for the reasons I’ve just outlined. The other big problem Twitter has faced recently is its average revenue per US user hasn’t been growing nearly as well as in the past, so this is worth watching this quarter too. Engagement numbers have also been all over the place and Twitter needs to start showing more consistent trends here as well. I would expect the various live video efforts to be a big focus on the earnings call – the big question here is whether any of this is generating either better user growth or meaningful new ad revenue.

Why I’m Optimistic About the Future of Cars

I spent last week at CES and a couple of days this week at the North American International Auto Show in Detroit. In both cases, I spent a lot of time listening and talking to carmakers and others in the industry. What I’ve come away with from these two weeks is a lot of optimism about the future of cars for several different reasons.

Both the industry and outsiders are pushing change

The biggest reason I’m positive about the future is both the legacy industry players and newcomers and outsiders are pushing for change. There’s nothing more frustrating than seeing an industry where lots of good ideas are coming from outside and they’re all being squashed by the incumbents – we’ve seen this happen in the music industry, the PC industry, and we’re still seeing it in the TV industry. Though there has been some resistance in the past to the big shifts facing the automotive industry, almost all the major carmakers are accepting of the new realities and, in many cases, actively embracing the three big shifts: electrification, autonomous driving, and new ownership models.

The carmakers are actually engaging in their own efforts around autonomous driving and car and ride sharing. In the vast majority of cases, they’re also embracing electrification as one of several powertrain technologies. None of this is to say these companies will end up owning all of this themselves – at the very least, the disrupters from outside the industry and newcomers like Tesla have pushed the incumbents to innovate faster and they may well end up owning some of the end result too. But I heard from company after company about their investments and experiments in a variety of car and ride sharing models, even in urban mobility projects which don’t involve cars at all, such as bike and bus programs.

There is realism about challenges, at least behind closed doors

At both the shows I’ve attended in the last two weeks, there have been lots of high profile proclamations about the glorious future we’re all headed to, many of them with specific timelines attached. Looking at the headlines that result from these statements, it’s easy to despair at a lack of realism from many of the companies involved. Claims about fully autonomous vehicles rolling off production lines as soon as 2021 seem absurd on the face of them but, when you dig beneath the surface and talk to the actual engineers behind the technologies, you get a sense of nuance that’s often missing from those public proclamations.

What I found this week in particular was the carmakers are incredibly realistic about the very real challenges involved in bringing autonomous vehicles to market. There is definitely a headline-grabbing push to establish leadership in electrification and autonomous driving but those actually working on the technologies will tell you about all the complexities and challenges that exist. The real plans of the major carmakers around these topics are far more realistic about the actual timelines, which are much further out than the headlines would lead you to believe, at least for full-time Level 5 autonomous driving without geographic limits. When it comes to electrification, there are also far more sanguine views about the effect of current low gas prices on demand for EVs, the need for more charging infrastructure, and the limits of current battery technology. That realism is a good thing, because it means that, even as these companies embrace change, they’re going to do it in a way that prioritizes safety and the customer experience.

The future looks exciting

At the end of the day, I’m most optimistic because the future of cars looks generally very positive. Tesla has already shown us both the enormous potential for high-performance electric cars and for limited autonomous driving. I used Uber and Lyft extensively over the last two weeks and those services, and many others around the world, demonstrate the potential for far lower car ownership and more flexible mobility models. What I saw at NAIAS this week also reassured me we’re going to get great technology from the incumbent carmakers when it comes to all three of the major shifts, including increasingly high-performance electric and hybrid vehicles and assisted driving technology that helps pave the way for future autonomous driving technologies. We, and especially our children, are going to be able to drive (or be driven by) cars which are much safer, more comfortable, more connected, and better for the environment than the ones we drive today. The competition between the legacy industry and a whole variety of new players is pushing both sides to move faster in delivering that reality. That’s going to be good for all of us.

Evaluating the iPhone’s Impact

This week marks the ten year anniversary of the announcement of the iPhone by Steve Jobs. There’s understandably been lots of reminiscing about the launch event itself, some of it rueful in relation to more recent Apple launches, but I think the most interesting thing about the iPhone launch is to think about the impact it’s had on the broader consumer technology industry.

The impact on smartphones

You’ve probably seen one of the many “before and after” pictures out there which show what smartphones looked like before the iPhone and what they came to look like afterward. The most obvious impact the iPhone had was on what smartphones in general were like after its launch. A few before-style smartphones still launched after (and BlackBerry arguably pursued mostly that model for years), but almost all smartphone makers suddenly realized the iPhone was the one people actually wanted. But it goes much further than that – the iPhone taught regular people why they’d even want a smartphone in the first place and, in the process, mainstreamed the smartphone.

Prior to the iPhone, smartphones were largely used by two classes of people. In North America, in particular, but also beyond, they were mostly used by business people and were email-centric. BlackBerry and various devices based on the Windows Mobile platform dominated this part of the market. In Europe and some other markets, however, a different type of smartphone dominated, much more consumer and media-centric, with Nokia one of the largest vendors. Though both were popular among certain segments, neither had mass-market appeal and both visions of the smartphone were limited relative to what the iPhone would become. Once launched, the iPhone arguably absorbed both those use cases in one device, though it took a year or two to get really good at business email.

The iPhone ultimately represented a different vision of what a smartphone should be – the internet in your pocket, though that was only one of the three main value propositions Steve Jobs outlined at the event. Beyond that, the iPhone would become a computer in your pocket, capable of many of the same things as your computer at your desk, but highly portable and much more fun to use. Almost every smartphone since has sought to emulate that fundamental value proposition, though it took years for competitors to match the execution. It’s impossible to know what smartphones would have been like in the absence of the iPhone – they surely would have evolved in some of the same directions over time – but it’s certain the iPhone dramatically changed the market. Whether you use an iPhone or another smartphone today, you can thank Steve Jobs and the iPhone for almost all of its functionality.

Creation of new markets

Even beyond the smartphone market, though, the iPhone has had far-reaching impact, especially following the release of the App Store a year after the initial launch. Though the value proposition of the essentially unchangeable iPhone of 2007 was already strong, what really transformed it was the App Store and all the additional value that came with it. Certainly, there were lots of existing websites which now had easy to use versions encapsulated in apps on the iPhone. But it went far further – thousands of completely new ideas found form as apps in the App Store and it’s arguable that the iPhone helped launch many companies that have become enormous in their own right. Neither Uber nor Tinder would exist today without the iPhone-driven modern conception of the smartphone. It’s also likely Facebook and Twitter would be a shadow of their current selves in the absence of the iPhone and the innovation in smartphones it drove.

Beyond apps, there are also huge new hardware categories that have emerged in recent years that were enabled by the iPhone and all that came after. Wearables are the single biggest of those, with Fitbit and other fitness device vendors benefiting enormously from easy Bluetooth LE-enabled syncing with iPhones and other smartphones. The Apple Watch also benefited from this tie-in to the iPhone. A huge variety of other smart devices, however, would also have been almost impossible without the iPhone and other iPhone-like smartphones: smart lighting, smart locks, smart scales, smart fridges, and all the other technologies we’ve seen over the last several years which rely on app controls.

And then there are the plethora of other devices which have borrowed smartphone technology and components, starting with Apple’s own iPad and an array of other touchscreen devices. Almost every small electronic device released in recent years also benefits from iPhone-driven innovation in screens, radios, chips, sensors, and miniaturization in general. Everything from drones to AR and VR technology to smart earbuds benefits from the massive scale and innovation driven by the iPhone and all the smartphones it spawned.

The most transformative product of the last 20 years

Ultimately, the iPhone is the most transformative product of at least the last 20 years, pioneering a whole new category of devices but then sowing the seeds of both new device categories and service and app businesses too. It didn’t do that all itself – many other device vendors have innovated in very meaningful ways in this market as well – but the presence of the iPhone is what prompted a massive paradigm shift by every other vendor and fomented a burgeoning of innovation across the smartphone market and many other categories. Almost none of the technology we use today is unaffected by the innovations introduced ten years ago this week.

With TV, Tech isn’t the Problem

Along with much of the Tech.pinions team, I’m at CES this week and, as usual, TVs and TV-connected devices are a big theme. Streaming video providers are also present and making announcements of various kinds. Yet I’m struck again this week, as I have been before, by the fact technology isn’t really the biggest challenge in disrupting the traditional TV and video industry. Yes, there are advances being made in technology which are improving the user experience of watching video, but it’s content rights that are still the biggest barrier to really giving consumers what they want.

Working with – and around – the current system

A lot of the TV-related technology on display at CES either works with or around the current system. An increasing number of connected TV devices are incorporating some kind of over-the-air element. I saw boxes and other hardware from Mohu, Sling, and others designed to capture OTA broadcast signals and incorporate them into a next-generation user interface. This is hardly dramatic new technology – broadcast has been around for decades – but it’s often still the easiest way for cord cutters to access sports and local content.

It’s ironic we’re falling back on older technology to supplant newer coax, fiber, and satellite-based delivery, but this is the state of the TV industry today. Some of the best options simply have to work with what they’ve got – that’s an admirable reality but it often means disjointed experiences which combine OTA signals with internet-delivered streams, multiple user interfaces, and local or cloud-based storage. The new devices on offer at CES attempt to bring some harmony to all this, including the Mohu and Sling hardware devices I mentioned. But, in many cases, these solutions merely cobble back together bundles that end up looking very similar to what they’re replacing. And of course, OTA solutions don’t work for some people at all (I have a big mountain sitting between my house and the local broadcasters, meaning I get no signal at all).

Rights remain the biggest barrier

I’ve been using AT&T’s DirecTV Now since it launched late last year and I’ve largely been enjoying it, though I’ve seen a few technical hiccups here and there. But there are several non-technical things that detract from the experience – TV Everywhere authentication as offered by traditional pay TV services is a bit lacking and commercial breaks often display a “commercial break in progress” placeholder rather than actual commercials. The latter doesn’t bother me overly much, but both of these are entirely down to rights issues. Contracts signed years ago haven’t yet been renewed, so AT&T doesn’t have the rights in some cases to do its own ad insertion or to authenticate users on this service for TV Everywhere apps.

Hulu made some news at CES because it has apparently signed CBS as part of its pay TV replacement service. The fact that a single broadcaster signing on is news is more evidence of how fragmented this whole space is and how important rights negotiations are. The reality is that, even if people balk at the high prices of traditional pay TV services, they still want a lot of the content and that means paying directly or indirectly to access it. CBS has its own digital streaming service – CBS All Access – and has been a holdout from several of the other streaming services including DirecTV Now. Hulu getting CBS on board is therefore something of a coup but we’ve yet to see what other content it has secured and what its reported $40 per month price will include.

The reality is that some of this is merely a matter of contract renegotiations and will get worked out in the coming years, while other elements are down to content owners deliberately resisting or blocking some of the changes to the traditional business models. The major traditional pay TV providers are part of this picture too, though of course Sling and DirecTV Now come from two of the biggest. Cable operators have been the slowest to embrace this change, largely because they dominate the historical market.

User interfaces and video quality can still help

Having said all that, we’re still seeing innovation around user interfaces and video quality and they are making a difference even as the rights issues get worked out. Some of the new streaming pay TV services have much better UIs than the services they’re replacing. Interactive programming guides still often make an appearance, but search, recommendations, and on-demand options make these interfaces more compelling. In addition, we’re seeing innovation around content formats like 4K and HDR, from both TV manufacturers and content providers. Here, too, the newer over-the-top services are taking the lead, with Netflix and Amazon offering some of the first mass market 4K content. But some of the pay TV providers are dabbling with 4K too, and even Samsung is now going to be selling 4K TV through its smart TVs.

A tipping point is coming

At some point in the next year or two, I predict we’ll see a tipping point when it will become apparent to everyone, including the current holdouts, that digital delivery is the future and that it’s coming far faster than many of them thought. We’re already seeing the mainstreaming of streamed pay TV services, with the DirecTV Now launch just the first of a new raft of services, to be joined by Hulu, Amazon, and YouTube in the near future. But we’re also seeing accelerated cord cutting (with the pay TV industry losing well over a million subscribers per year at this point) and many individual cable networks losing subscribers at a much faster rate due to skinnier bundles and rising rights costs. All of this, taken together, will cause a crisis in the TV industry which will finally drive it to embrace new business models and broader distribution. And then the rights side of the equation will finally catch up with the advances in TV technology.

2017 Predictions

A couple of weeks ago, I reviewed my 2016 predictions with a view to seeing what I got right and wrong, and why. This week, it’s time for a new set of predictions for 2017. I’m going to do it mostly on a per-company basis and I’m also going to include one big question for each of these companies.

Alphabet

At Alphabet this year, I see the belt-tightening trend of the past year continuing with more fallout for the Other Bets. Specifically, I think we might see Nest integrated more tightly into Google’s new brand hardware initiative under Rick Osterloh. To the extent Google is pushing its own brand deeper into hardware, it makes sense to have Nest be a part of that, so I wouldn’t be surprised if we see some slightly different branding at the very least. I would also expect Google to announce a Pixel 2 in the fall and probably also new entries in other hardware categories like smartwatches (where Android Wear appears to be flailing), tablets, and laptops. As a result of all of this, I suspect Google’s relationship with all its OEMs, especially Samsung, will worsen in 2017. I would also expect Google to pay a big fine to the EU at some point to settle and move on from its competition case there. We’ll likely see YouTube launch its TV service this year into an increasingly crowded market that already features Sling, Sony, AT&T, and soon Amazon and Hulu.

Big question: will the Google Fiber division be shut down or spun off entirely?

Amazon

I would absolutely expect Amazon to keep growing like gangbusters on the e-commerce side – its ability to not just maintain but accelerate growth has been the big upside surprise of the last couple of years, driven in part by the increasing contribution of third-party sellers who now make up over half of its unit sales. I’d also expect the AWS business to continue to generate growing revenues and profits, though it will likely come under increasing pressure from Microsoft’s cloud efforts. The Echo devices will continue to sell well, but Amazon’s biggest challenge around Alexa is to get it into more devices that leave the home because a virtual assistant can only be really useful if it’s always with you. We may see an Alexa app for iPhone or Android (it would do better on the latter, where it could be made the default) but, ultimately, Amazon probably needs to launch its own phones (again) to really make this work. An Alexa-centric phone would be a lot more successful than Amazon’s last shopping-centric effort.

Big question: can Amazon replicate its success of a handful of major markets in others?

Apple

We’re already seeing the usual reports of supply chain cuts with regard to the new iPhones but I suspect we’ll see year on year growth over at least the first couple of quarters, if not the full year. In the latter part of the year, much depends on what Apple actually launches – if it’s the big bang, tenth anniversary release we’ve been led to expect, I suspect we could see another super-cycle of sales (though, of course, the downside may well be another year of declines from late 2018 onwards). If it’s more of an incremental release, then I suspect we’ll see a dip again.

Regardless, Apple now has a massive installed base of devices which will upgrade with some frequency and will, therefore, drive a large number of sales and revenues from Services, notably the App Store, and increasingly from subscription content like Music. I think Apple finally needs to put out a subscription video service in 2017 but it seems to have backed off from that goal recently. I suspect iPad shipments will start to flatten out, while Mac sales should bounce back a little from a down year. Apple Watch sales should be healthy but not much above this year’s.

Big question: can Apple drive overall revenue growth in 2017?

Facebook

Facebook has already said it expects revenue growth to slow a little in 2017 as ad load saturates and increasing ad load stops being a driver of revenue. But given the combined effects of a growing user base, rising ad prices, the growth of Instagram, and other drivers, I suspect we’ll still see very healthy ad revenue growth from Facebook. It’s less clear we’ll see growth in the rest of the business, which continues to be a tiny fraction of the total. Though Facebook has made some progress in new flavors of payments as well as e-commerce and Oculus hardware, the company’s own guidance suggests these won’t drive meaningful revenue in the short term. Increasing monetization of WhatsApp and Messenger will provide another boost to ad revenue in 2017, though likely modest as Facebook protects the core user experience in these much more intimate settings. I suspect Facebook will continue to face challenges with its internet access efforts, from Free Basics to drones, and may well start to back off on some of these in 2017.

Big question: will we see any products from Facebook’s new hardware group?

Microsoft

In hindsight, 2016 was something of a comeback year for Microsoft, with revenue growth starting to turn around, several well-reviewed consumer products across hardware and software, and accelerating momentum in cloud. But there are still big challenges – it’s increasingly clear Windows 10 adoption is going more slowly than the company forecast and it’s had to abandon smartphones entirely. Gaming is the one bright spot in terms of generating meaningful consumer revenue, while search is a useful secondary consumer revenue source. But beyond that Microsoft’s consumer strategy is still patchy and mostly revolves around free apps and services. Its strategy for competing with the Amazon Echo and Google Home seems to be focused on enabling OEMs. That could lead to some interesting new devices and probably plays to Microsoft’s strengths but we could see a situation in which Microsoft still has to make its own hardware to show OEMs the way.

Big question: do we see a Surface-branded smartphone reboot in 2017?

Samsung

Samsung’s 2016 was two very different things: up until about September, it looked like a great year, with the new Galaxy S products and the Note7 favorably reviewed and selling well. Then the Note7 fires began and things went pretty rapidly downhill. As we head into CES this week, we still have no official explanation from Samsung for the fires and US wireless carriers are pushing updates to brick the remaining Note7 devices in the wild. As such, this cloud will hang over any announcements Samsung makes at CES and throughout the first part of 2017. Whether that continues through the rest of 2017 depends on two things: a clear statement from Samsung of the cause of the fires and what it will do to prevent similar problems in future devices, and a big launch in the first half of the year that wows consumers and doesn’t suffer from any battery issues. Beyond that, Samsung will complete its Harman acquisition, which looks really smart (though we likely won’t see many synergies until next year) and the semiconductor business should continue to be a useful secondary driver of revenue and profit.

Big question: do we see a big shift in smartphone strategy from Samsung in 2017 in response to increasingly challenging market conditions?

Snap

It seems increasingly likely we’ll see an IPO from Snap (formerly Snapchat) in 2017. So much of what the company will do in the coming months will be geared towards driving its valuation up. That means more emphasis on becoming a serious alternative to Google and Facebook for advertisers and moving beyond its current novelty/experimental status. We’ll probably see more big content deals designed to increase video engagement and, therefore, ad revenues and more efforts to track ad effectiveness, providing analytics tools similar to what other platforms offer. We’ll also likely continue to see the same breakneck pace of feature rollouts which has characterized Snapchat from the beginning. And I wouldn’t be surprised if we see version two of Spectacles, perhaps with some rudimentary AR capabilities.

Big question: is Snap able to convince investors it’s another Facebook, not another Twitter?

Twitter

Speaking of Twitter, this is a make-or-break year for both the company and CEO Jack Dorsey. 2016 was the year in which the company tried and largely failed to grow its monthly active user base and I suspect we’ll see very modest growth in 2017, too. The fact the company still hasn’t begun providing daily active user numbers suggests they aren’t pretty and engagement of a large audience remains a key challenge. Jack Dorsey seems to simultaneously want to over-control the product (driving out several executives in the process) while not really having enough time to do it properly, given he’s also CEO of Square. All this will come to a head in 2017 and either we’ll see an unexpected turnaround or Dorsey will be forced out in 2017.

Big question: does Twitter finally address its abuse problem in a satisfactory way in 2017?

Thinking about Apple’s Next New Product Category

Many tech news publications do “year in review” and preview pieces at this time of year. One of the questions I always get asked is what new hardware products Apple might launch in the coming year. Some things – notably the iPhone – are so predictable in their annual schedule at this point they’re barely worth commenting on, while others like the iPad and Apple Watch seem to be settling into something of a pattern too. The most interesting question is often what completely new products Apple might release. With that in mind, here are some thoughts about the new products I think we might see from Apple over not just the next year but the next couple of years.

Additional wearables

I love my Apple Watch – I’ve used one version or another all day, every day, since it first came out. It’s made a meaningful difference in my ability to manage incoming notifications, my health, and my general information consumption. Over the past week, I’ve also been using AirPods a lot and those too are, for the most part, great little devices. However, there are some limitations to both of these products which make me think we might see additional wearables from Apple.

One of the biggest limitations of the Apple Watch now that it’s usable in the pool and has GPS functionality, it’s not appropriate to be worn during certain sporting activities. If you play basketball, soccer, football, lacrosse, or any other contact sport, wearing a watch (of any kind) would be either unwise or dangerous for the watch and player safety. If you get a lot of your exercise through these sports, the calories you burn and time spent exercising can’t be captured by the Watch and, therefore, simply go unrecognized by the Activity app. In the past, I’ve used Fitbit devices which I could slip into a pocket while playing and would track such activity for me. So one obvious device for Apple to launch is a companion of sorts to the Watch which would clip onto clothing or slide into a pocket in order to track such activity, syncing with the Apple Watch when you put it back on.

Others might prefer to have just one of these devices instead of a Watch, if they have never worn a watch of any kind – whether or not someone has traditionally worn a watch seems to be one of the biggest predictors of how they respond to the Apple Watch, in my experience. Some other device worn on the body to track activity and potentially buzz for notifications might be an interesting alternative. If it also came with audio controls as a companion to AirPods, that would make it particularly interesting – I’m finding that using Siri to control playback isn’t always the best fit.

Siri speakers

In my experience, the biggest advantage home speakers like Amazon’s Echo or Google’s Home have over Siri on any of the devices where it’s available isn’t functionality of the assistant itself but the size and configuration of the devices on which it operates. Those devices were, without exception, designed first and foremost with something other than microphone performance in mind. They’re mostly intended to be as small as possible, with smooth lines, large displays, and other features which hampers the ability to deliver high-performing far-field voice recognition. As such, if Apple really wants to improve Siri performance, especially in the home, the solution probably isn’t in software but in hardware and that’s where a Siri speaker comes in.

The next question is exactly what such a speaker would involve. Echo and Home are both very similar speakers, but they’re standalone – other than the mobile app used to set them up, they connect to WiFi in the home and operate independently. Google Home does work with Google Cast but, other than that, it is essentially disconnected from any other device in the home. It feels like an Apple home speaker would be more integrated into the ecosystem of devices in the home, becoming one of several outputs for audio, for example, and potentially working together with the Apple TV and/or other devices for whole-home audio. One can also imagine using Siri on phones to trigger music playing on the speaker, for example. Or even using the Siri speaker to trigger playing a TV show on the Apple TV for a child in the other room. I can also imagine using several of these speakers independently to recreate a sort of Sonos whole-home audio system.

HomeKit hardware

Another interesting category is first-party HomeKit hardware. To be honest, I think this category was more likely a year ago, when HomeKit was still struggling to get off the ground, versus today’s much healthier ecosystem. But I still think it’s possible Apple might eventually introduce its own hardware to work as part of the HomeKit system, especially in categories where design and ease of use on third party devices is poor or in areas where the devices would make a meaningful contribution to other aspects of the Apple ecosystem. For example, sensors placed around the home could help trigger lighting and other home automation features through HomeKit.

Having said all this, I continue to believe the smart home space is essentially stuck at the early adopter phase when it comes to these one-off purchases as opposed to managed services. With that in mind, it’s harder to see how Apple could launch products in this category and have a really significant impact on the market unless it also provides some kind of installation and management support. That would obviously be a departure for Apple, whose premise for much of its hardware has always been it just works. But smart home gear is inherently different in nature from standalone hardware products because it needs to be integrated into the home. That means dealing with wiring and other potentially dangerous and intimidating challenges that don’t apply when it comes to phones or laptops.

Augmented reality

Tim Cook has made increasingly enthusiastic remarks about augmented reality over the last couple of years and it seems likely Apple has some kind of play in AR up its sleeve. However, the biggest question is whether it sees the iPhone or some other device as the center of these experiences. We’ve already seen some basic AR features as part of iPhone apps, from an early version of Yelp which superimposed locations of restaurants on a live view of the environment to the more sophisticated merging of the real and virtual worlds in the Pokemon Go app. With dual cameras and the ability to sense depth, the iPhone is certainly capable of more sophisticated augmented reality applications than ever before.

But there are still some categories of augmented reality where a head-mounted device of some kind can provide more advanced functionality and, critically, free your hands to interact with the environment. This could certainly be used for gaming but also be used for educational and other scenarios, too. Apple is reportedly working on at least some head-worn AR devices, though we don’t know yet whether any of these will make it to market. However, it feels like 2017 could well be the year where we see the first mass-market AR devices launch, testing the market for such devices and potentially laying the groundwork for an Apple entry later.

Timing

If I had to guess, I’d say the Siri speaker and additional wearables are the most likely entrants in 2017, while AR feels at least a year or two away. I’m still not 100% convinced Apple should be in the first party home automation hardware business at all. And of course, I’ve said nothing about cars, which seem less likely as a future hardware category today than they did this time last year and, at any rate, would be multiple years away. It’s entirely possible we won’t see a major new hardware product category from Apple at all in 2017 but I suspect we’ll see at least one at some point.

Revisiting My 2016 Predictions

In January of this past year, I wrote a piece with a handful of “fairly confident” predictions for 2016. It seems like a good time to revisit those predictions to see which panned out, which didn’t, why, and where we might go from here. As you’ll see, I got some of the big ones right (and some wrong) but there were a lot of smaller predictions which panned out, too. I could forget that I made these predictions, but I think it’s always useful to hold yourself accountable.

Amazon

Main prediction: AWS and E-Commerce Driving Growth

Verdict: Correct

For Amazon, my main prediction was not only would AWS drive strong growth but the core e-commerce business would grow at a healthy rate, too. This was based in part on late 2015 performance but it’s clear 2016 was a great year for both these segments of Amazon. Amazon’s North American business, excluding AWS, has grown by 26% year on year over the past four quarters and its international business has grown at roughly the same rate. The investments Amazon has made in both processes and infrastructure over the last few years have paid off massively and its share of the growth in the e-commerce market is higher than it’s ever been.

It was feasible that brick-and-mortar competitors would eventually reach parity on some of these facets and that Amazon’s growth would slow as a result but that hasn’t happened. And the combination of AWS growth and the increasing contribution from Amazon’s third party sellers has driven increased profits. The one worry for investors is that Amazon continues to be somewhat unpredictable about when and if it will choose to reinvest those profits in the business, as it did this past quarter. It’s also still unclear, as I said early this year, that Amazon can replicate its success in a handful of key markets in others.

Apple

Main prediction: Continued Growth, Including iPhone

Verdict: Wrong

In early 2016, before Apple reported its results for the fourth quarter, it still seemed plausible Apple would grow in 2016, though financial analysts were starting to call for declines in Q4 2015 and beyond. In the end, Apple did grow in Q4 but hasn’t since. Despite the fact Apple analysts’ pessimism is often unwarranted, this was an exception. I got this one wrong, though analysts were early on their predictions.

In the end, I believe Apple will return to growth in the fourth quarter this year, as per its guidance, and growth will accelerate somewhat in early 2017. There’s still a question mark over growth beyond that however. I was right that iPad shipments wouldn’t return to growth despite the iPad Pro, though we did see one quarter of iPad revenue growth in 2016. I also forecast big changes for iMessage, which did come to pass in iOS 10, but my long shot bet about Apple launching its own HomeKit hardware was wrong. However, it did revamp HomeKit and made it much more usable as a platform, incorporating the Apple TV, and we finally saw meaningful third party hardware launched.

Facebook

Main prediction: Another Acquisition, Possibly an Asian Messaging App

Verdict: Wrong

Having made three large acquisitions – Oculus, Instagram, WhatsApp – I thought Facebook might be ready to make another, especially to penetrate more deeply into the Asian market. That turned out not to be the case. The big challenge here was the lack of available assets, with the largest owned by big internet companies already. What was interesting was Facebook did seem to spend 2016 trying to do better in messaging but did it organically, through a combination of beefing up Messenger with bots and by using Instagram as its chief weapon against Snapchat. I suspect we’ll continue to see this organic approach play out, especially as it appears to be working for Facebook so far, though the bots strategy was overblown and likely won’t make a big difference for the business in the short term.

Google/Alphabet

Main prediction: Alphabet Split Reveals Dichotomy in Businesses

Verdict: Correct

When I wrote my predictions in January, it wasn’t clear just what Alphabet’s finances would look like when it reported but it was already obvious the two halves of the business – Google and Other Bets – would look very different. My prediction here was the spotlight this separation would shine on the Other Bets would presage increased financial scrutiny and discipline on this side of the business. This is exactly what we’ve seen play out here. Ruth Porat, the CFO, has driven significantly increased financial discipline since her arrival and even my long shot bet that one of the Other Bets would be shut down, spun off, or scaled back has panned out. Boston Dynamics was put up for sale in March and Google Fiber has been scaled back significantly. There was also a change of leadership at Nest. On the plus side, Calico seems to be performing better and Waymo is now its own entity on the Other Bets side, so we’ll see how that affects the financial reporting going forward.

Microsoft

Main prediction: Surface Phones Launch, With as Little Success as Lumia

Verdict: Mixed

There was significant reporting that Microsoft was gearing up to launch Surface phones in 2016, so the focus of my prediction was on how those phones would fare, rather than that they would launch. As such, I was wrong about the launch, mostly because Microsoft’s plans here seem to have changed during the course of the year, but right about the ongoing parlous state of the smartphone business at Microsoft. Lumia phones continued to plummet in sales and revenues during the year and, in some ways, it’s unsurprising Microsoft backed off replacing them with something new.

If they ever do launch, the Surface phones have to be special to make any kind of difference in what’s now obviously a duopoly between iOS and Android. Windows Phone as a whole does continue to struggle, as I predicted, and the focus does indeed seem to be mostly on the enterprise market today. It’s also been interesting to see the Surface brand expand in other ways, with the launch of the Surface Studio. This revenue line will plateau and even fall a little in the coming months for Microsoft (mostly due to product release timing) but it continues to be an increasingly interesting part of Microsoft’s business.

Samsung

Main prediction: Smartphone Business Fades, Chips Ascendant

Verdict: Correct

Samsung was on an upward trajectory in late 2015 when it came to smartphones, so it seemed plausible this growth would continue in 2016. But I predicted pressured margins as Samsung pursued shipment growth. In the end, Samsung’s Galaxy S launch went better than expected and it had a strong start to the year. But, of course, the Note7 recall in the latter part of this year has set the company back quite a bit. It lost billions in revenue and profits and the damage to its brand in the short term is considerable, though I suspect mostly among non-customers. Its chip business struggled a little early in the year, but seems to have recovered towards the end of the year, and this continues to be a very important part of its business.

Twitter

Main prediction: Still no Core User Growth, Slowing Revenue Growth

Verdict: Correct

Twitter added half as many monthly active users in the last four quarters than it did in the prior year – 10 million versus 20 million. User numbers actually dipped slightly in the first quarter after I made this prediction. In addition, average revenue per user in the US performed poorly as well, which put further pressure on revenue growth. Despite my early optimism about Jack Dorsey’s leadership in the middle of last year, by the end of the year I had become disillusioned and these predictions have turned out to be depressingly correct. I still use Twitter a great deal and love the service, but I’m increasingly concerned the management just doesn’t know what to do to turn it into a truly mainstream service.

Onwards

I imagine I might write a similar piece in early 2017 but, for now, it’s interesting to look back on one of the most turbulent years in the tech industry. Some of the things I didn’t predict include Samsung’s acquisition of Harman, Snapchat’s renaming itself and its entry into hardware, and Apple’s fight with the FBI. Some of these things are just impossible to foresee because they flow from strategic changes that aren’t visible from the outside until suddenly they’re made manifest with a public announcement. But it continues to be an exciting industry to track and I’m looking forward to another interesting year in 2017.

Tech Should be Helping Families

Technology has done an amazing job of helping empower us as individuals – we can do more, and more quickly and easily, because of technology. But technology can also be isolating, separating us from each other as we retreat into our own virtual worlds. When technology does provide connections between people, it’s often between friends rather than families. There have been few apps, devices, or other technologies designed to really help families in a meaningful way. I’d love to see that change.

Technology can be isolating

Most technology is aimed at individuals, each in their own bubbles. Algorithms learn about us as individual human beings, not as groups or families. That’s fine when it comes to much of the technology we consume because we use it for our own personal interests and tasks. But it can also mean we’re each retreating into our own virtual worlds, carefully customized and curated for each of us. Even when we’re physically together as families, we’re often absorbed in our own devices and activities, separate mentally and emotionally.

The same technology that has so much power to enrich our lives individually, then, often disempowers families seeking to build connections and relationships and to form bonds. Technology becomes a barrier rather than an enabler of those relationships and many a parent has struggled to find ways to overcome them. To the extent companies have sought to provide technology for families, they’ve often focused on enabling parents to abdicate responsibility through time limits, parental controls, and the like, rather than giving them tools they can actively use or connecting them to their children.

There are exceptions

This is not to say technology has done nothing for families in recent years – I’ve actually seen some real examples of technology being put to good use in helping families. Here are just three:

  • Netflix’s user profiles – Netflix introduced user profiles a few years back and they’ve been very useful in our family for separating viewing by my wife and myself from the shows our kids watch. That has two benefits – the parents and kids each get recommendations based on their viewing, not each other’s, and the kids aren’t unexpectedly presented with adult shows. Our children’s’ shared profile is explicitly a Kids profile and is designed differently and populated with different content appropriate for their age group. They know how to select the proper profile when watching and, though we tend to keep a close eye on what they’re actually watching, we can let them choose their own shows because we know it’s going to be a safe list of content to choose from.
  • Apple’s Family Sharing functionality – we’ve only recently started using this, as our oldest child has begun using her own device as opposed to relying on shared iPads. She doesn’t use it extensively yet, but does have her own Apple Music account on our family plan and is able to request permission to download apps, which I can then grant on my phone. We still typically have a conversation about the purchase or download in person first but the technology enables a seamless execution once we’ve agreed in principle. Our kids also get access to their TV shows and movies which I’ve purchased on my account in the same way.
  • Picniic – this is an app I came across recently when the firm’s PR reps reached out to me following a column I wrote on smart home assistants. Though positioned as a smart home tool, what Picniic really represents is a smart family assistant. It’s one of the first apps I’ve come across which actively seeks to solve problems for families and that’s refreshing. It allows families to share calendars, meal plans, grocery lists, and so on, representing a sort of virtual noticeboard or refrigerator door. I haven’t used the app extensively yet – I suspect it’s more useful for those families with hectic schedules and children being ferried to and from music lessons and soccer games, something our kids are mostly too young for at this point. But I can see the utility and admire the focus on helping families.

There are also lots of general purpose technologies which families can leverage, from Skype to texting to shared cloud-based calendars. I put out a request on both Twitter and Facebook to ask what technology families were using to help them connect and communicate and much of it was in this generic category.

Some requests

However, I think the industry can still do better and there are opportunities for innovators to meet needs currently unmet. As I asked about how families use technology today, I also asked what more could be done. Based on those responses and my own thoughts, here are some requests:

  • Better device sharing – Google and Amazon have both done some interesting things here but Apple in particular still doesn’t have a great way to share devices between family members such that the interface or the apps available are different on a per-user basis. As I mentioned above, the Family Sharing setup is great for sharing content between devices used by different individuals but there’s no equivalent for multi-user support on a single device (except in an education setting).
  • Learning about and making recommendations for families – I said technology is great at learning about and customizing experiences for individuals but there’s no equivalent for families. I also mentioned that my wife and I and our kids share two profiles on Netflix but Netflix isn’t really learning about us as individuals. Rather, it thinks we are these strange hybrid creatures who at once like weepies and action movies on the one hand and TV shows for toddlers and tweens on the other. I’ve seen some interesting demos of technology that combines individual preferences based on who’s watching but that’s about as far as it has gone.
  • More content for families – I’ve written previously about the TV industry’s lack of imagination when it comes to using the new-found freedom enabled by digital-first platforms to create content for families and I’d love to see more innovation in this area. But I’d also like to see more technological solutions for filtering and parental controls. VidAngel, a service my family has been using regularly, provides filters to remove swearing and other objectionable content from TV shows and movies so we can watch them as a family but was shut down (hopefully temporarily) by a judge this week. Content and technology companies are still often far too user-hostile when it comes to content and families.
  • More apps for families to use together – we’ve enjoyed a number of apps, especially on the new Apple TV, which re-create the old board game experience for a digital age. But there are still few of these relative to games intended for solo use, or games which are too violent for me to want to share them with my kids. I feel like the industry is making progress but there’s more to be done. It’s worth noting that many board games cost upwards of $20, which leaves plenty of price umbrella for digital competitors to squeeze under.
  • Apps to help manage families – I mentioned Picniic, which is notable for being one of a very few apps that really seek to serve families and help them manage their time and activities. But there’s room in the market for more than one such app. We could see plenty more innovation here.

I’m generally optimistic when it comes to technology – I’m far from a Luddite and technology is both the focus of my work and a massive enabler of what I do. I also use technology heavily within my family for all kinds of things. But the benefits to families have so far been mostly incidental, rather than a result of deliberate efforts to help and serve families and that’s something that could stand to change. Whether it’s the big platform and device companies putting more effort into all of this or startups launching apps or devices to help, I’d love to see more innovation in this area.

Automotive History is Repeating

This week, Google announced its self-driving car initiative would be moving out and becoming its own company, Waymo, under the Alphabet umbrella. It’s also become clearer Waymo’s focus will be on creating the “driver” rather than the car – that is, on the self-driving technology rather than the vehicle itself, as exemplified by its partnership with Fiat Chrysler. But self-driving capabilities are only one of three big shifts underway in the industry, each in some way driven by the technology, which raises questions that mirror those asked in the early history of cars.

Propulsion

The question that defined the early history of the automotive industry was propulsion – the first automobiles were steam-powered, followed by gas (as in vapor) powered cars, then experimentations with electric vehicles and even hybrids, and eventually the internal combustion engine which came to dominate around the 1910s. Today, of course, propulsion technology is again an important question in the industry, with various electrical technologies making another appearance. Tesla – arguably the most Silicon Valley-like car company – is entirely focused on electric vehicles, while the major manufacturers have dabbled first with hybrids and more recently with all-electric vehicles.

Having resolved the question of which propulsion technology is best 100 years ago, we’re now revisiting that question and reaching different conclusions, at least over the long term. A number of major manufacturers have now outlined a vision of an electrical future, such that it seems almost a foregone conclusion at this point that the internal combustion engine will eventually be replaced with electric motors. It’s mostly a question of timing.

Where to focus

Early players within the automobile market tended to focus on a specific part of the value chain. For example, though Henry Ford and his team designed every aspect of the legendary Model T, much of the manufacturing was done by others, notably the Dodge company. Ford’s original skill set wasn’t manufacturing per se, but design. In our day, we have Google/Alphabet determining that the best place for it to focus its know-how is on the self-driving technology and not the car which, in the first of its partnerships, will be supplied by FCA in the form of Pacifica minivans.

Eventually, Ford decided to take over manufacturing and built his own plant and the Dodge brothers, in turn, started making their own cars. One of the big questions for Alphabet and others like Apple is whether they will be able to be successful by focusing just on the technology aspects or whether they will eventually have to spread into other areas including manufacturing as traditional carmakers decide to absorb self-driving technology. For now, we have the official word from Alphabet and reporting regarding Apple that suggests a narrowing of focus. But it will be interesting to see whether this strategy will work over the longer term. Again, though, self-driving technology itself seems to be mostly a matter of timing at this point.

Business models

The third big question looming over both the early car industry and today’s industry is one of business models. Back in the early 1900s, the debate was between those who felt cars were inherently a luxury good and those who had a more democratic vision for the automobile. For a time, high-priced cars for wealthy customers did constitute a big chunk of the market but that quickly changed as manufacturers, like Ford, pursued a lower-cost car for the everyman and those cheaper cars came to dominate. Today’s business model conversation is a different one, though it’s interesting to see Tesla acting as a microcosm in our day of that transition from the luxury focus to the (relatively) affordable car.

The main business model conversation today is one about ownership versus transportation as a service. And, although electrification and self-driving both seem inevitable over the long term, this feels like a more complex transition and one with a more mixed outcome. Uber, Lyft, Didi, and others have demonstrated there’s interest in transportation as a service at a basic level but there’s much more to come here, with big manufacturers trialing their own solutions or investing in the existing brands. The question remains of how much of the market will really be willing to adopt sharing over ownership.

The secondary business model question relates closely to the question of where to focus. Even as Alphabet creates Waymo, it raises questions about how this new entity will make money. That’s not a new question for Alphabet in cars but the new focus creates as many questions as it answers. The answer doesn’t appear to be selling cars per se, but it might lie in licensing, the creation of a transportation service with partners, or in other areas. The same question might be posed to Apple – if it’s not going to manufacture cars, how will it make money? Will we see the first attempt to license an Apple operating system since Mac OS licensing was shut down in the late 1990s?

This isn’t 1900

Despite the similarities between today and the early years of the automotive industry, there are important differences. The three major shifts – self-driving, electrification, and transportation as a service – are drawing in new players from the technology industry but they also make this a particularly tough time for new players to enter the market. Not only do these players need to master their chosen fields but they need to navigate these transitions at the same time. The problem is we’re too early in these transitions for any player to commit entirely to all three today, leaving would-be participants having to straddle both worlds for a time or stay out of some domains entirely for the time being. Uber has solved this by pursuing transportation as a service, experimenting with self-driving, and staying entirely out of the propulsion conversation by using third-party vehicles. Tesla focuses on electrification and increasingly on autonomy, but sells (or leases) cars entirely for private ownership. Google may be somewhat interested in transportation services but is leaving propulsion questions to others as it focuses on autonomy.

I recently read a biography of Henry Ford and I’ve been struck by the fact he was able to master essentially all the components of what then constituted a motor car and direct others to build the parts necessary to create one from scratch. That was the reality in 1900, but this isn’t 1900 – cars are enormously complex machines, created through almost equally complex value chains and manufacturing processes. New entrants have to choose where to focus and, in doing so, may face advantages but also disadvantages in competing against established carmakers. I’m really curious to see how this all plays out over the coming years.

Thinking Through Apple Product Adoption Cycles

I’ve been thinking a lot recently about the various hardware product categories in the consumer technology market, how each of them is faring, and the common trends and differences between them. It’s occurred to me that – if viewed from a certain angle – adoption cycles for major product categories seem to be shortening. I want to use Apple’s last four major products to illustrate this but also to pull out some broader trends about what’s happening in the hardware industry.

From the iPod to the Apple Watch

Let’s start with the data on Apple’s last four major product launches. What I’ve done here is take trailing 4-quarter sales for each product from the quarter it was launched as far as we have data and then superimpose those four data sets on each other so we can compare them. The scale is obviously not consistent between charts and that’s important, but it’s the pattern we’re looking at here, not the absolute size:

Apple Adoption Cycles

As you can see, the shape of the curves is different in every case. I also want you to note how similar the iPod and iPhone curves are and how different the iPad and Apple Watch curves are relative to each other and to those two earlier products. Both the iPod and iPhone went roughly 8-9 years from launch to the first real sign of a peak. Conversely, the iPad went just three years before it peaked and shipments began to fall. The Apple Watch made it only one year before annual shipments began to fall. In other words, the shape of the curve was much steeper for the iPad than it was for the iPhone or iPod and the Apple Watch curve has been steeper still. (I’ll come to some caveats in a minute, but bear with me for now.)

Why would this be? What changed between those first two products and the last two? It might be partly a question of scale – the iPhone has found a much larger addressable market than the iPad and, as such, it took longer to reach a peak. Maybe, but the iPad found a larger addressable market than the iPod, peaking at around 75 million shipments a year versus the iPod’s peak of around 55 million, so that can’t be the whole answer. I’d argue that what really changed were the fact those first two products existed when the second two launched. First the iPod and then the iPhone ensured hundreds of millions of people were intimately familiar with Apple’s products for the first time and had certain mostly positive associations with those products that made them more disposed to buy additional Apple products when they came along.

With the iPod, Apple essentially had to familiarize potential customers with the concept but also to convince them to buy a product from Apple, a company which wasn’t known to most of them. Selling the iPhone was a bit easier, since many were now more familiar with Apple products through the iPod but most iPhone sales still went to people who hadn’t used Apple products before. The iPad, by contrast, was a very simple concept to sell to someone familiar with the iPhone – it worked in many of the same ways but was larger. The fundamental concepts and value proposition were very known and many millions already had a similar device in their homes. Last, the Apple Watch is only sold to those who already have iPhones and very much takes advantage of that installed base too.

So all that explains the faster rise from zero, but not necessarily why things have (or appear to have) turned south so much sooner. What this comes down to is these newer products are targeting fundamentally smaller addressable markets than the iPhone (and in the case of the Apple Watch, the iPod too, at least for today). iPad shipments peaked at around a third of peak iPhone shipments because far fewer people have the need for such a device. And Apple Watch shipments are (for now) much lower even than iPod shipments were at their peak because it, too, has a much narrower value proposition. Many people were in the market for a portable music player and almost everyone is in the market for a smartphone – not so the tablet computer, let alone the smartwatch. So these later products have not only ramped up sales more quickly than their predecessors, thanks to the iPhone installed base, but they’ve also peaked at much lower levels.

All this is important as context for any future Apple product launches – it’s very likely those future products too will ramp faster and peak sooner in absolute terms than the iPhone or iPod did. That means it’s less likely Apple will find future hardware products which drive sustaining growth over a longer period of time – rather, we’re likely to see more of these rapid-adoption products that drive big growth over a short time period followed by stagnation or decline. That’s going to make Apple’s future revenue growth even more unpredictable on a short-term basis.

The state of the Apple Watch

Now, I said I had some caveats. It’s arguably grossly unfair to suggest the Apple Watch has peaked at this point – it’s only been on sale for around 18 months and, though annual sales have indeed begun to fall, that may be as much an artifact of release timing as anything else. Taken together with the abandonment of Android Wear by major partners, the failure this week of Pebble, the ongoing struggles of Jawbone, and questions over Fitbit’s long-term future, it’s easy to see a pattern and proclaim the death of smartwatches as a category, as I’ve seen a few people do this week but this is all premature. Tim Cook has said holiday sales so far are ahead of last year and one would certainly expect strong sales off the back of both more compelling products and much lower entry level price points. IDC’s much-shared numbers this week suffer from two problems. First, they’re comparing the first full quarter of sales for a new product in 2015 with the last quarter of sales before an anticipated new release in 2016. Second, their numbers seem way too low. By my estimates, Apple probably did sell about 50% fewer Watches in Q3 this year than last year, but the number was likely over 2 million rather than close to 1 million.

As I’ve written previously, while it’s tempting to say the Apple Watch has peaked along with the smartwatch market as a whole, I actually think we’re going through a temporary period in which the Apple Watch’s focus is narrowing before a potential broadening of appeal and addressable market. The rest of the smartwatch market definitely looks to be in dire straits at the moment but there’s potential for the whole market to recover at some point in the future when use cases beyond fitness tracking and notifications become stronger. For now, it’s mostly an Apple Watch market with a few other smaller players rather than a true smartwatch market, but Apple will continue to sell over 10 million Watches a year for the foreseeable future, with potential for far higher sales going forward.

Putting Amazon Go in Context

Amazon on Monday announced its latest initiative: Amazon Go. This model will see Amazon open a grocery store, in Seattle early next year, with a unique purchasing model – customers scan a barcode in the Amazon Go app as they enter, collect the items they want to buy from throughout the store, and walk out. The store tracks what they pick up and automatically bills their Amazon account when they’re done. Reactions to the announcement seem to have ranged from the skeptical to the overblown, so it’s worth putting all this in context.

The US grocery market

The first context we need is the scale of the US grocery market. The US Census Bureau provides regular statistics on US retail. Total retail sales in the US in 2014 were $5.2 trillion but that includes both car and parts sales and food service (i.e. restaurants). If we exclude those two categories, we end up with a total of $3.6 trillion (cars and parts account for a trillion dollars alone, while food service is another $575 billion annually).

In that $3.6 trillion is a category the Census Bureau calls Food and Beverage Stores, which includes supermarkets and other grocery stores, convenience stores, specialty food stores, and beer, wine, and liquor stores. This entire category generated revenue of around $670 billion in 2014, with traditional supermarkets and grocery stores accounting for the vast majority of that at $600 billion and convenience stores another $26 billion. The chart below shows the percentage of total retail in the several sub-categories of the Food and Beverage Stores category and also two other categories in which at least some basic groceries are purchased: pharmacies/drug stores, and gas stations:

US Retail Breakdown

Of these various categories, it’s likely Amazon Go will only target a small subset – the convenience store category is the most likely fit, while there will be small subsets of the gas station and drug store categories for which Amazon Go might substitute. I would guess that across these various categories, the addressable market amounts to around $50 billion in the US. Of course, that is the total addressable market for all firms with stores across the United States.

There are a total of 38,000 grocery stores with sales over $2 million annually in the US today and the average square footage of those stores is around 46,000 sq ft. By contrast, Amazon intends to have a single 1800 square foot store in Seattle to start. So, any breathless evaluation of Amazon’s entry into the physical grocery store market needs to be tempered by that context. However, based on reporting from the Wall Street Journal over recent months, Amazon apparently intends to open as many as 2000 of these stores over time, which would make a much more meaningful dent in the grocery space. We have no timeframe, however, for that broader ambition.

The context of Amazon’s existing business

The other interesting context to look at here is Amazon’s existing business in the US. I’ve no doubt it’s a major strategic priority at Amazon to look at all the retail categories on a regular basis and gauge Amazon’s position in them with a view to understanding how to increase Amazon’s share. It already has a presence in many of the biggest categories and recently began experimenting with that trillion-dollar car sales opportunity, albeit overseas (in Italy). Also, it participates in the grocery market through Amazon Fresh but that really only targets the planned segment, not so much the “grab something on the way home from work” segment.

Amazon’s North American business (excluding AWS) generated $75 billion in revenue in the past twelve months. So the convenience store business, in its entirety in the US, is only a fraction of Amazon’s existing US business. That may still be worth pursuing but it’s not going to multiply the scale of Amazon’s existing US business as it’s currently constituted. However, the same model applied to larger stores that go beyond mere grocery staples could be significantly larger. That model appears to be part of Amazon’s longer-term plans here too, according to those WSJ reports.

Beyond all of this is the potential for Amazon to license the underlying technology to third party retailers, something Ben suggested in his piece yesterday. He cited AWS and the Alexa developer tools as precedents but, given what the Journal has reported, it’s clear that at least a big part of this strategy for Amazon is about first-party retail. There’s also the broader question of whether competing retailers would want to license technology from a company they generally see as a threat. General purpose developers licensing AWS don’t usually compete directly with Amazon in the same way retailers do. Were Amazon and retailers to come to an agreement on such a structure, Amazon would only take a cut but it would then potentially be tapping into the over 90% of the current retail market that’s still tied to brick and mortar sales.

An interesting start

Whether it’s drone-based delivery or automatic checkout at the grocery store, Amazon is fond of releasing concept videos for ideas most of its customers have no chance of seeing in action anytime soon, especially around the end of the year, which is the company’s biggest time for sales. These publicity stunts often get lots of positive attention in the press, often fairly unquestioningly so. This concept is a little closer to becoming reality than some of Amazon’s other recent announcements, with employees already participating in a beta program and a store scheduled to open in early 2017 for other customers. But it’s still important not to get too carried away by the hype – with one 1800 square foot store in a single city, Amazon is dipping its toes in the water in a decent-sized market but, until it expands significantly beyond that footprint, this is a novelty rather than an earth-shaking announcement and that’s assuming the technology works as advertised.

A Dozen Acquisition Targets for Big Tech Companies

A little over two years ago, I wrote a post suggesting several companies Apple, Google, and Microsoft might want to acquire. As I thought about that post this week, I planned to revisit it in a similar format but then decided to approach things from a different angle. So here is a list of businesses I think would make interesting acquisition targets for the major consumer tech companies, in several major categories.

Hardware

The most interesting acquisition targets in the hardware space are those that seem to have cracked a niche but are struggling to grow beyond it and would benefit from being part of a larger ecosystem. The two that come readily to mind are Fitbit and GoPro, both of which I identified around a year ago as one-trick pony consumer technology companies who would likely struggle to find long-term success as standalone businesses. Either would now make an interesting acquisition target for the right consumer tech acquirer but, of course, the big question is who. I’ve often felt the most obvious acquirer is one of the two big camera companies, Canon or Nikon. But I think there’s also potential for Samsung to jump in. The fit (no pun intended) for Fitbit is less obvious but again, Samsung or one of the other big multi-category consumer electronics vendors seems the most likely bet. Both Fitbit and GoPro have done well, to a point, but now seem to be at something of a crossroads.

Conversely, there are those companies that seem to have peaked and are now more clearly on a downward slope. Jawbone was one of the companies I mentioned in that earlier piece and it has seemed to struggle recently. It would likely be a bargain for an acquirer interested in the audio or fitness space (or both). A slightly more long-shot bet is Nintendo, which has occasionally been suggested as a target for Apple, and which has also been struggling quite a bit, though the recent success of Pokemon Go has raised hopes of a comeback. Apple might still be an interesting prospect, but either Microsoft or Sony or a content conglomerate might be able to do something interesting with all the technology and IP Nintendo still owns. We might add HTC to this list of hardware companies past their prime too. The Vive VR business would be an interesting asset even as much of the rest becomes attractive.

Apps and content

This is probably the broadest category here and there’s no shortage of potential acquisitions. The companies in this sector run the gamut from subscription content providers to one-off app makers and across a number of different domains. Netflix is a perennial subject of acquisition rumors but is now getting to a size where the number of potential acquirers is rapidly dwindling – I’ve suggested Apple as a potential acquirer in the past, at least somewhat seriously, but that remains a true long shot. Also in the content space is Spotify, which I mentioned in my piece two years ago as a potential acquisition for Google. It’s heading towards an IPO but the other possibility is an exit by acquisition and I’d say Google has to be the most likely candidate, though Microsoft is another intriguing possibility. The latter hasn’t been afraid to make productivity-centric acquisitions in the consumer market and has largely failed to create content businesses beyond gaming. This would be a big leap forward in that domain.

In the one-off app space are such diverse options as Pinterest (which I suggested as an acquisition target for Google two years ago); Musical.ly, which remains one of the most under-appreciated apps outside of its target demographic; and the Kik messaging app. Pinterest would still be an interesting addition for either Google or Amazon, as either an advertising or e-commerce bolt-on to their existing businesses. Amazon in particular has been willing to buy smaller businesses in adjacent spaces and continue run them independently under their own brands – Audible, GoodReads, IMDB, and Zappos are all existing examples and Pinterest could follow that model while benefitting from some integration behind the scenes. Musical.ly seems almost certain to be snapped up eventually by one of the big social networking or online advertising companies. And Kik is the rare example of an independent messaging app with a big user base.

Car technology

Samsung’s recent announcement of its intent to buy Harman International will likely create further interest among big technology companies in the automotive industry. Harman was a somewhat unique asset here, in that it combined significant market share with a relatively focused scope. It promises particularly good synergies with the rest of the Samsung business. BlackBerry, which acquired former Harman subsidiary QNX six years ago, makes for an intriguing prospect. The handset baggage is minimal at this point, now the company has finally made the hard decision to discontinue making its own devices, so it’s largely a software and services company. Microsoft would be an obvious buyer, though the QNX part would likely raise antitrust concerns given the two companies are the dominant players in car operating systems. An Apple-BlackBerry marriage has always seemed particularly unlikely but is perhaps less so now, while Google would make another interesting buyer. TomTom is another interesting car-related asset which remains independent even as much of its competition has become part of bigger businesses. Apple relies heavily on TomTom for mapping, though it’s building up its own assets in some markets. It would perhaps be the most likely buyer at this point, especially if it wants to get serious about self-driving cars.

Others

There are, of course, plenty of others I could list here, including some from the earlier piece and relative newcomers like Magic Leap. It’s striking that only one of the companies on my list from two years ago has actually changed hands while several remain interesting prospects for acquisition. But I wouldn’t be surprised if a higher percentage of the companies I’ve listed here end up being bought over the next two years.

DirecTV Now Highlights the Challenges of US TV

On Monday afternoon, AT&T finally announced its DirecTV Now service. It has been talking about this in detail since earlier this spring and for even longer in a more general sense. The service launches on Wednesday and marks the latest entrant in the online Pay-TV replacement market though, of course, it hasn’t been marketed that way. But the service, its structure and, more importantly, its limitations, highlight the challenges associated with operating in the US pay TV market.

What consumers want is straightforward

When it comes to TV, what consumers want is straightforward: they want to watch what they want, when they want, where they want, preferably without ads, and they want to pay as little for it as possible. The last twenty years have seen many attempts to give us these things, starting with boxes (VCRs and DVRs, SlingBox and so on) and then moving on to service structure and cloud offerings to achieve the same objectives. Netflix and HBO have each, in their own way, demonstrated the power of “no ads” while a variety of online services have shown how compelling an entirely on-demand world can be. But we still haven’t seen all these elements combined into a single package. Every service offers only a subset – great interface with no ads but a limited amount of content; or tons of content, but with ads and a crummy interface. Every new service to launch holds out the hope someone will finally crack all this but they always fall short in one or more ways.

What’s not there is as important as what is

Many of the headlines in the weeks leading up to the launch focused on two numbers – 100 channels and $35. However, it’s now clear these numbers don’t really go together, at least in the long term. AT&T’s $35 package has “60+” channels, not 100. The 100-channel package will cost $60 over the long term (though there will be a promotion offering the $35/100 channel combination at launch for a limited time). One of the most frustrating things about following the event was AT&T didn’t announce the exact channels – the focus was all on the number of channels in each package. I suspect that was deliberate: it’s what consumers are used to and it stops people complaining one or another channel isn’t included.

Yet that’s exactly where the focus has inevitably landed as details on the contents of the various packages has trickled out and as more of the asterisks on the service have become clear. So far, we know of the following limitations on the service as a whole:

  • CBS and Showtime are entirely absent for now
  • The service won’t work on Roku devices at the outset
  • Subscribers won’t be able to watch NFL games on their phones
  • There will be no DVR functionality
  • Local ABC, Fox, and NBC stations will only be available where those companies own and operate the local stations.

There’s also still the age-old issue of forced bundling – yes, there are several tiers here but it’s still far from a la carte. In short, though the promise is some version of the “watch what you want, when you want, where you want” story, there will indeed be limitations on what, where, and when you can watch. And because there’s no DVR, you won’t be able to skip the ads. Much of this, of course, comes down to two things: the complicated structure of the US market and AT&T’s mixed incentives as it launches this new product.

The impact on the market

The big thing DirecTV Now has going for it is it comes from one of the big names already in the pay TV business, under its own brand, that will also be tied to the AT&T brand. Yes, DISH has launched its Sling TV service, but that operates under a separate, unfamiliar, brand. Sony’s Playstation Vue service has been limited until very recently to Sony’s own devices. Hulu, YouTube, Amazon, and others are all supposedly working on their own offerings here too, but none have launched yet. I suspect all that means DirecTV Now will do very well in the market, especially with its promotional pricing and its tie-in with Apple TV and Amazon Fire TV Stick hardware. Customers will be able to buy the service and the hardware needed to consume it at very competitive pricing bundles and they’ll be able to do it in AT&T stores.

The zero-rating of DirecTV Now content on the AT&T network will also likely help a little, though with T-Mobile offering unlimited throttled video and Sprint offering unlimited data services, that value proposition probably isn’t as strong as it could be. We’ve also yet to see any specifics around the bundling of AT&T wireless service with DirecTV Now. Overall, though, this service is likely to do well, especially compared to the existing virtual MVPDs in the market, though I suspect there may well be some customer backlash as some of the limitations become clear. The good news is those customers will be able to cancel anytime and won’t be locked in as they would traditionally have been to a pay TV provider.

From a content provider perspective, despite optimism in some quarters about finding new pay TV customers, I suspect the real impact will be a further shift of big traditional bundles from the existing providers towards these skinnier bundles, as people finally sense a way out of paying far too much for channels they don’t use. The most telling statistic in the industry is always that the average customer gets 200 channels in their package, but only watches about 20. People are crying out for smaller packages and now, they’re finally starting to get them. But they’re also still crying out for that vision of the content they want on their terms and this new offering from AT&T won’t slake that thirst just yet.

Four Ways to Deal with Fake News Online

“Fake news” is the phrase du jour across the political, media, and technology domains over the past couple of weeks, as a number of people have suggested false news stories may have swung the result of the US presidential election. There seems to be widespread agreement something more needs to be done and, though initial comments from Facebook CEO Mark Zuckerberg suggested he didn’t think it was a serious problem, Facebook now appears to be taking things more seriously. Even with this consensus on the nature and seriousness of the problem, there’s little consensus so far on how it’s to be solved.

As I see it, there are four main approaches Facebook and, to some extent, other companies which are major conduits for news can take at this point:

  • Do nothing – keep things more or less as they are
  • Leverage algorithms and artificial intelligence – put computers to work to detect and block false stories
  • Use human curation by employees – put teams of people to work on detecting and squashing false stories
  • Use human curation by users – leverage the user base to flag and block false content.

Let’s look at each of these in turn.

Do nothing

This is in many ways the status quo, though it’s becoming increasingly untenable. But, through a combination of commitment to free and open speech, a degree of apathy, and perhaps even despair at finding workable solutions, many sites and services have simply kept the doors open to any and all content, with no attempt to detect or downgrade that which is not truthful. Mark Zuckerberg has offered in Facebook’s defense the argument that truth is in the eye of the beholder and that to take sides would be a political statement in at least some cases. There is real merit to this argument – not all the content some people might consider false is factually so and, in some cases, the falsehood is more a matter of opinion. But the reality is that much of the content likely to have most swayed votes is demonstrably incorrect, so this argument has its limits. No one is arguing Facebook attempt to divide one set of op-eds from another, merely it stop allowing clearly false and, in some cases, libelous content.

Put the computers to work

When every big technology company under the sun is talking up its AI chops, it seems high time to put machine learning and other computing technology to work on detecting and blocking fake news. If AI can analyze the content of your emails or Facebook posts to serve up more relevant ads, then surely the same AI can be trained to analyze the content of a news article and determine whether it’s true or not. I am, of course, being slightly facetious here – we’ve already seen the failure of Facebook’s Trending Stories algorithm to filter out fake stories. But the reality is computers likely could go a long way to making some of these determinations. Both Google and Facebook have now banned their ad networks from being used on fake news sites, so it’s clear they have some idea of how to determine whether entire sites fit into that category. It shouldn’t be too much of a leap to apply the same algorithms to the News Feed and Trending Stories. But it’s likely computers by themselves will find both false positives and false negatives. The answer almost certainly isn’t to rely entirely on machines to make these determinations.

Human curation by employees

The next option is to put employees to work on this problem, scanning popular articles to see whether they are fundamentally based fact or fiction. That might work at a very high level, focusing only on those articles being shared by the greatest number of people but it obviously wouldn’t work for the long tail of content – the sheer volume would be overwhelming. Facebook, in particular, has tried this approach with Trending Stories and then, in the face of criticism of perceived political bias, fired its curation team. Accusations of political bias are certainly worth considering here – any set of human beings may be subject to their own personal interpretations. However, given clear guidelines that err on the side of letting content slip through the net, they should not be prohibitive. The reality is, any algorithm will have to be trained by human beings in the first place so the human element can never be eliminated entirely.

Crowdsourcing

The last option (and I need to give my friend Aaron Miller some credit for these ideas)  is to allow users to play a role. Mark Zuckerberg hinted in a Facebook post this week the company is working on some projects to allow users to flag content as being false, so it’s likely this is part of Facebook’s plan. How many of us during this election cycle have seen friends share content we know to be fake but were loath to leave a comment pointing this out for fear of being sucked into a political argument? On the other hand, the option to anonymously flag to Facebook, if not to the user, that the content being shared was fake, might be more palatable. If Facebook could aggregate this feedback in such a way the data would eventually be fed back to those sharing or viewing the content, it could make a real difference.

Such content could come with a “health warning” of sorts – rather than being blocked, it would simply be accompanied by a statement suggesting a significant number of users had marked it as potentially being false. In an ideal world, the system would go further still and allow users (or Facebook employees) to suggest sources providing evidence of the falsehood, including myth-debunking sites such as Snopes or simply mainstream, respectable news sources. These could then appear alongside the content being shared as a counterpoint.

Experimentation is the key

Facebook’s internal motto for developers for a long time was “move fast and break things” though it’s since been replaced by the much less iconoclastic “move fast with stable infrastructure”. The reality is news sharing on Facebook is already broken, so moving fast and experimenting with various solutions isn’t likely to make things any worse. The answer to the fake news problem probably doesn’t actually lie in any of the four approaches I’ve proposed but in a combination of them. Computers have a vital role to play but need to be trained and supervised by human employees. For any of this to work at scale, the computers likely also need training from users, too. But doing nothing can no longer be the default option. Facebook and others need to move quickly to find solutions to these problems. There will be teething problems along the way, but it’s better to work through some challenges than throw our hands up in despair and walk away.

The State of the Smartphone Market in Q3 2016

You’ve probably seen headlines over the last couple of weeks about Apple accounting for over 100% of the profits in the smartphone business in the last quarter. I’m never a fan of that particular metric because it excludes all the smartphone vendors that don’t publicly report their financials, including several of the largest. Instead, I prefer to drill down a bit and look at what’s really happening beneath the surface, both in terms of shipments and in terms of the financials associated with those shipments.

Shipments – the big three steady, lots of movement below

When it comes to shipments, we’re seeing a fairly clear pattern emerging – the big three globally have been steady for some time now but there’s lots of movement below that. The big three are Samsung, Apple, and Huawei (in that order) and they’ve been in those positions for the last six quarters. Depending on who you believe, Samsung may have briefly ceded its number one spot to Apple two years ago when the iPhone 6 launched, but it’s safe to say Samsung has been consistently in that spot for a very long time. Apple has also been the consistent number two for a long time, while Huawei only ascended consistently to the number three spot last year. There are big gaps between these three, though, with Samsung typically tens of millions ahead of Apple in terms of shipments (except for fourth quarters) and Apple, in turn, 10-20 million ahead of Huawei except in the fourth quarter, when Apple sells far more than in the other quarters.

However, what’s become really interesting to watch over the last couple of years is all the turmoil in the next few spots in the smartphone rankings. The two biggest vendors to look at are Oppo and Vivo, both from China, which have come seemingly out of nowhere to take the fourth and fifth spots, pushing others further down the ladder. Xiaomi, meanwhile, which has flirted with the number three and even the number two spots, has fallen down to fifth or worse. Perhaps more remarkably, of the top 10 vendors by shipments, seven are Chinese, with only Samsung, Apple, and LG the exceptions. Three countries now make up the entire top 10. But it’s also worth noting that three of the largest vendors – Oppo, Vivo, and OnePlus – are all owned by the same company, BBK Electronics.

The chart below shows how rankings have changed over the past few years between the largest vendors.

Financial reporting and margins

Of course, shipments are only one metric and say nothing directly about finances. Yes, there’s something of a correlation between scale and profitability but it’s far from linear. Much depends on which segments these companies target, how differentiated their offerings are, and the selling prices of their devices. Those targeting the premium segment tend to have far higher margins – especially at scale – than those targeting the mid-market or low end. Though Apple is exclusively focused on the premium market and Samsung sells its Galaxy S and Note offerings into that market too, much of the volume among these top ten is very much low-end stuff. As a result, margins for even the largest players are likely to be low, especially since they’re mostly selling relatively undifferentiated Android phones.

Sadly, we don’t have financial reporting for many of these companies, a number of which are privately held or subsidiaries of larger companies (or both). However, margins for these mobile businesses and, in Apple’s case, its overall business are shown in the chart below:

screenshot-2016-11-14-16-49-47

As you can see, there’s been a fairly clear dichotomy between the two makers that sell premium smartphones at scale and the rest of the market. As I wrote about previously, Samsung saw a big dip in margins in its mobile business this past quarter due to the Note7 recall but, in general, is well ahead of most of the other vendors. However, it’s also well behind Apple’s overall margins, which are relatively representative (though perhaps a little low) of its iPhone business. This past quarter, HTC, LG, and Lenovo were all in the red and several of them have been so for some time. Sony bounced back into the black recently, having spent most of its time as an independent company following Ericsson’s exit from the business generating losses. It is finally now turning things around thanks to its focus on the premium segment, which has resulted in lower shipments but higher margins. LG, who had generated some positive momentum in 2015, has slipped further behind again and is back in the red. HTC continues to be only marginally in the market, with very low shipments and significant losses over the past couple of years.

A preview of Q4

I’ve focused here mostly on the historical picture but it’s worth thinking briefly about next quarter, too. We might just see Apple pip Samsung to the number one spot this quarter, as Apple rebounds from a year of shrinking sales and Samsung sees a continued lull following the Note7 fiasco. Behind them, the next three spots are likely to remain unchanged and I suspect the broad financial picture will remain fairly consistent as well. The big question for some of these vendors is how long can they remain in the market with, in some cases, substantial losses. As the upstart Chinese vendors continue to take share of the Android market, some of the more established vendors will definitely need to consider following Sony’s example and refocus on the premium market, or get out entirely. It’s going to be almost impossible for them to compete in a race to the bottom.

The Danger of a Device-Based Approach to Assistants

With Amazon Echo and Google Home now both in the market, dedicated device-based personal assistants have been in the news quite a bit lately. I’ve been called several times by reporters asking me whether Apple, Microsoft, or other companies need to have similar devices. But if there’s one thing the reviews and my own experience with these devices has taught me, it’s there’s a danger in equating your digital assistant with a device.

Note: this isn’t a review – but Carolina did a great review of her early experience with the Home yesterday.

Equating the assistant with the device

Amazon’s Echo began life as the only home of its personal assistant, Alexa and, although Alexa is now available on several other devices, my guess is the vast majority of users still equate the assistant with the device. Google, meanwhile, has made Google Home the entry point for its own Google Assistant and, for many people, Home is the only place they’ll be able to experience the Assistant for now, given the low uptake of the Allo messaging app and the high barriers to smartphone switching.

The downside here is, as people equate the assistant with the device, they will also equate failures by the assistant with failures of the device. When the entire purpose of a device like Echo or Home is to act as an assistant, to the extent the assistant fails to do its job, the device becomes useless. This is, importantly, very different from the likely reaction to failure by Siri or Cortana, which are mere features on devices that do much more. If we’re unhappy with Siri’s performance, we might well fall back on other ways to interact with our devices or be more selective in the scenarios for which we use Siri rather than the touchscreen because we have options. We may also choose to try again at a later time when the software has been updated because the assistant is still there on the device we’re using for lots of other things. But a device whose sole purpose is to be a good voice assistant and fails at that one job fails entirely and we will likely be tempted to return it or, at the least, put it away.

An assistant trapped in a box

The other challenge with equating an assistant with a device is users can easily have the sense the assistant is effectively trapped in the box. This is very much the case with Alexa, which doesn’t yet exist on smartphones or mainstream wearables. Leave the house and you effectively leave Alexa behind where she can’t do you any good at all. The Google Assistant has been designed with a much broader eventual footprint in mind but, for now, Google has limited its availability to this home device, a smartphone that will sell in small numbers, and an obscure messaging app. That’s a deliberate decision on Google’s part to sell more devices but it also means the Google Assistant will be similarly trapped in the home for many users.

Even when they venture out of the home, having many people’s first experience with the Google Assistant be tied to a larger device with far-field voice recognition technology risks disappointment when people then try it on a smaller device which is less effective at interpreting commands. Conversely, if Apple or Microsoft ever bring their existing virtual assistants to in-home devices like the Echo and Home, users may be pleasantly surprised at the improved voice recognition and will also enjoy a more mobile experience with assistants also present on their other devices.

An assistant that needs an assistant

The other thing that’s struck me again as I’ve been using the Home over the last few days is how important the companion mobile app is, something I noticed with the Echo as well. It’s almost like my assistant needs an assistant, not just for the initial setup but also for other subsequent experiences as well. One of the great advantages Google has in this space is the massive trove of web data it has to tap into but, of course, much of that data is visual in nature – having the Home read you a recipe all in one go is a terrible experience if you actually want to cook something and, of course, image search is also completely useless on the Home. You need the companion app to make sense of those things but, if that’s the case, then why not just use your phone? And, once you’re using your phone for some of these interactions, why not use it for all of them?

I’ve found that what you really want in quite a few of these interactions is to have voice interaction as the primary interface but with some kind of screen as a confirmation or feedback interface as well. A phone (or an Apple Watch or Android Wear device) gives you that combination but the Echo or the Home don’t. One of the frustrations I’ve had with the Home is that, when it fails, it’s often not clear whether that’s because it misinterpreted what I said or because it simply hadn’t been programmed to deal with the request, even when properly understood. A screen of some kind can eliminate that ambiguity.

Best as part of an ecosystem of devices

It’s early days in the history of these assistant-speaker devices for the home and I’m sure we’ll see some meaningful advances in the future. But I’m still finding the utility and performance of these devices is more limited and frustrating than transformative in my home. And I’ve been reinforced in my belief these devices have to be endpoints, not the endgame when it comes to virtual assistants and that such virtual assistants will only be truly effective when they’re part of an ecosystem of devices and not just a single device.

The Big Six in Q3 2016

Every quarter, after most of the big tech companies have reported earnings, I do a roundup comparing some of the key metrics for the “big six” consumer technology companies – Alphabet, Amazon, Apple, Facebook, Microsoft, and Samsung. Here’s this quarter’s analysis.

Revenues – Apple top dog, but Alphabet passes Microsoft

Apple has been the top dog by revenue on a trailing four-quarter basis for some time but, in some ways, the biggest news symbolically this quarter was Alphabet passed Microsoft:

trailing-4-quarter-revenue

Both companies had around $85 billion in revenue in the last twelve months, well behind Amazon at $128 billion, itself well behind Apple and Samsung at $216 billion and $179 billion over the same period. At Amazon’s current growth rate and with Samsung’s recent struggles, it’s possible Amazon could eclipse Samsung in scale in the next couple of years. Facebook, of course, continues to be the smallest of the six by some margin:revenue-growth

Interestingly, Facebook signaled on its earnings call it’s likely to see somewhat slower growth going forward as it begins to saturate ad loads. It will be worth watching to see to what extent Amazon and Alphabet can begin to close the gap on growth rates. Apple, meanwhile, continued its revenue growth turnaround and projected modest year on year revenue growth in the next quarter. Microsoft has just hit positive growth again for the first time in a long while, mostly thanks to the anniversary of the Windows 10 launch, which requires revenue deferrals in accounting.

Margins and profits

As well as being the fastest growing company in our set, Facebook also has the highest margins:

operating-margins

Apple’s margins have taken a slight hit over the past year as revenues shrank but should begin to rebound in the coming months as revenue growth returns. Amazon, of course, is by far the least profitable from a margin perspective and even dipped slightly from its recent modest improvements in margin in Q3. Samsung’s margins took a hit from the impact of the Note7 recall (as I wrote about last week), while Microsoft’s margins have bounced around quite a bit as it has taken write-downs.

A very different picture emerges, however, when you look at dollar profits rather than just margins:

dollar-profits

Here, Apple blows away the competition, with around $60 billion of operating profit over the past year, roughly equivalent to Facebook’s revenues since its IPO in 2012, and approximately ten times Amazon’s operating profits over the past three plus years. Microsoft, Samsung, and Alphabet have all generated around a third of that amount in the past year, though their trajectories are rather different, with Alphabet ascendant while Microsoft and Samsung stall somewhat.

Mixed trends in capital investment

These companies compete across a variety of markets but one area where three compete very directly is in enterprise cloud services, where Amazon, Alphabet, and Microsoft each have a strong presence. However, the investment trends behind those cloud services are quite varied between these three companies. Alphabet’s capital intensity has been falling over the past year and a half, especially since Ruth Porat took over as CFO and instituted something of a period of austerity at the company. Amazon’s capital intensity has dipped a little last year but has been rising for the last two quarters – one of the reasons for its dip in profits in Q3. Microsoft, meanwhile, is rapidly raising its capital investment globally as it ramps up spending on cloud infrastructure.

capital-intensity

Interestingly, Facebook as well is investing more heavily in infrastructure, with a capital intensity higher than any of the other companies in our set and now has wireless operator-like levels of capital intensity, remarkable for a company which operates a consumer online services business. But given Facebook’s recent focus on video, its servers now need to handle much more content and bandwidth than in the past. Apple and Amazon’s capital intensity has been fairly similar, at around 5%, though Apple’s jumped a little in the last two quarters.

As always, there’s far more to these companies than just these simple metrics and it’s worth diving deeper into their financial and operating data to pull out some of the additional detail. I have a larger set of charts on each of these companies and more of these comparative charts as part of my Quarterly Decks Service and Ben and I also discussed several tech companies’ earnings on this week’s podcast.

The Mainstreaming of the Mac

There’s been lots of talk since Apple’s event last week about the reception to the new MacBook Pros, especially among the Apple commentariat. It’s fair to say the backlash against these new devices is stronger than for any MacBook announcement I can remember and yet it’s mostly coming from two particular sets of people – those who use heavy-duty creative applications such as Photoshop and those who develop for Apple platforms. This is easily Apple’s most vocal audience and so such a response must be at least a little disheartening. But it’s also worth remembering that Apple – and even the Mac in isolation – has long since gone mainstream and is bigger than these groups. Apple’s challenge now isn’t serving this hardcore base but pleasing the much larger mainstream Mac user base without alienating the power users.

Apple’s increasingly diverse base

I wrote a post a while back about the counterintuitive liability Apple has in its growing customer base. On the one hand, this customer base is a huge asset, especially given the upgrade cycles for devices like the iPhone and the ability to sell services to a captive group of users. But on the other hand, the increasing diversity of this base can also be a liability, because Apple now has to please many groups in a much less homogeneous base than in the past. The problem is the public image of Apple among many in the media and beyond continues to be of a company that serves mostly creative professionals. This perception has led to a lot of misguided commentary over the past week, both about the damage Microsoft’s Surface Studio could do to Apple’s Mac base and about the perceived shortcomings of the new MacBook Pro line.

Apple’s Mac base today

The reality is that Apple’s installed base of Macs today is likely around 90 million. That’s up enormously over the last fifteen years or so – it was around 25 million in the early 2000s. As that base has grown, it’s diversified considerably. Just visit any college campus to see row on row of MacBooks in lecture rooms and study halls. These aren’t creative professionals and they’re not even using their MacBooks for particularly resource-intensive tasks. But, of course, there are still creative professionals and Apple developers who use Macs for work. So it’s worth thinking about what percentage of the overall base these users might represent.

Here are some data points:

  • In 2013, Adobe estimated it had an installed base of around 12.8 million users of its Creative Suite software, with another 250,000 on Creative Cloud. Around 40% of this revenue came from what Adobe described as creative professionals, with another 25% coming from other creative people in businesses, 10% from creative people using it at home, and 25% from education
  • Adobe currently has around eight million Creative Cloud subscribers (this is how Adobe now sells its creative suite, including Photoshop, Illustrator, Premiere, and so on)
  • At WWDC this year, Tim Cook announced Apple had 13 million registered developers

If we put these numbers together, we get a picture of 8-13 million users of Adobe’s creative products and another 13 million or so Apple developers. Of course, of those Adobe users, a good chunk will be using Windows versions rather than Mac versions. At the absolute outside, though, it gives, at most, around 25 million total users in the two buckets that have been most vocal about the MacBook Pro changes, out of a total base of around 90 million, or around 28%. Realistically, that number is probably quite a bit smaller, perhaps around 15-20% of the total. Of these, not all will share the concerns of those who have been so outspoken in the past week. To look at it another way, Apple sold 18.5 million Macs in the past year, which might end up being roughly the same as the combined number of creative professionals and developers in the base.

In the end, the picture that emerges is of a base of Macs with the kinds of users that have been expressing concerns or frustration with the changes in the minority. The vast majority of the user base is in other categories, principally general purpose consumer and business users. How does the rest of the base feel about the new MacBooks? Well, of course, that base is much less vocal and less visible – the general purpose Mac user tends not to blog or host podcasts about Apple. They’re much more likely to quietly keep using the products they have and occasionally upgrade to something new. The best place to look for their feedback is sales numbers for the Mac. Those have been down a little lately as the existing Macs have been getting a little long in the tooth and those in the know have been waiting for upgraded machines.

However, Phil Schiller said this week online orders for the new MacBooks were higher than they’ve ever been for a new product before, suggesting that some of this pent-up demand is being released now. Mainstream users – and likely quite a few from among the professional class of MacBook users too – are buying this new product despite the misgivings some power users have. We won’t know until at least three months from now – and probably longer – the actual numbers on how these MacBook Pros are selling. But my guess is those sales numbers will suggest the mainstream base cares a lot less about some of the subjects of the criticism from the past week and a lot more about a decent bunch of spec upgrades, thinner and lighter hardware, and some interesting new features.

Keeping the pro base happy

Of course, Apple can’t simply ignore the professional base – though these users may be a minority among the overall set of Mac customers, they are an important segment an,d as we’ve already seen, a vocal one. Pleasing them is important in its own right but also as a way to influence broader perceptions of the Mac and Apple as a company. Apple likely needs to do more here to mollify this base. For starters, it needs to update the desktop Macs, especially the Mac Pro, quickly. The current version of the Mac Pro suffers from being less upgradeable than its predecessor. With that being the case, it requires hardware refreshes more – not less – frequently. It might also be a reasonable concession to the complaints from this base to make it more upgradeable. I suspect Apple will have to think hard about how to please those who want a portable yet ultra-powerful machine, which is really the even narrower segment that’s been criticizing the new MacBooks. The portability/power tradeoff it’s made in the new machines seems to be fine for the mainstream, but that’s the one thing that seems to be creating the most problems for the hardcore base and that’s worth addressing.

The Financial Impact of the Note 7 Recall

Samsung reported its earnings for the third quarter last week and the impact of the Note7 recall was understandably a major focus. Since I track Samsung’s financials on an ongoing basis and, since I haven’t seen a lot of coverage of what Samsung reported last week on this topic, I thought I’d share some of the details with Tech.pinions Insiders and put the impact in the context of Samsung’s broader business.

Samsung’s reporting structure

Samsung Electronics has three main business divisions:

  • CE (Consumer Electronics) – TVs, printers, AC units, fridges, and other consumer and medical devices
  • IM (IT & Mobile) – phones and tablets, but also PCs, digital cameras, and mobile network infrastructure
  • DS (Device Solutions) – components for consumer devices, including DRAM, NAND flash, modems, displays using LCD and OLED technologies, and more.

From a financial perspective, Samsung reports these three but also breaks out some of the constituent parts:

  • CE – Samsung reports divisional results but also breaks out TV sales specifically
  • IM – reports at a divisional level but also Mobile revenues specifically (though not margins)
  • DS – split into two parts: semiconductor (of which memory is again broken out separately) and display panels.

Impact on the IM division

The IM division is where smartphone sales are reported and it’s here the impact of the Note7 recall was greatest. The chart below shows revenues and profits (in trillions of Korean Won) for this division):

screenshot-2016-10-31-14-56-32

Note the dark gray bar for Q3 2016 isn’t missing – it’s just so tiny you can’t see it. In other words, the Note7 recall basically wiped out profits for the quarter for the division. Technically, they were 0.1 trillion Won, or about $87 million, compared with over $2 billion profits a year earlier — nearly $4 billion in profit in Q2. You can also see a revenue dip there, from 26.6 trillion Won both a year earlier and in Q2 to 22.5 trillion Won ($19 billion). That drop is about $3.5 billion, approximately the size of the gap in revenues left by the recall. When Samsung decided to fully recall all Note7 devices, it revised its earnings guidance downwards by around 2 trillion Won, so roughly that much of the impact was from reversing the revenue recognition for those devices which had actually been sold and not recalled at that point. The rest is from sales which had been expected but never happened because of the recall. Interestingly, the impact on profits was even higher – those dropped by almost $4 billion in the financials, as we’ve already seen. The reason is revenues were only impacted by foregone sales, whereas profits were impacted by the cost of the devices sold and the additional costs associated with the recall itself. Samsung doesn’t report expenses by business line, but its Selling, General and Administrative expenses overall rose by around 600 billion Won, or $525 million, year on year, and the company largely attributed this to the cost of the recall.

Overall impact

However, the overall impact of the recall on Samsung Electronics was much more muted, in part because other parts of the business performed well in Q3 and in part because Samsung sold some assets in the quarter in anticipation of the early phases of the recall. A summary of Samsung’s overall financial performance is shown below:

Samsung overall performance

As you can see, while there certainly was a dip in operating margin in the quarter, it was much less dramatic than in the IM division, where margins dropped effectively to zero. A large part of that is because the IM division accounts for less than half of the company’s overall revenues and only around a third of its operating profits. The semiconductor segment of the components division actually accounts for the largest chunk of operating profits and happens to have done particularly well this quarter, which helped offset some of the drop in the IM division. But Samsung also sold some of its stake in components vendor ASML in the quarter, which basically offset the increase in SG&A driven by the cost of the recall when it came to net margins. As a result, Samsung’s net margin was only slightly lower year on year and quarter on quarter.

Guidance for the future

Samsung has provided some rough guidance for the future impact of the Note7 recall as well. In essence, Samsung is expecting the impact to run through the current quarter (Q4 2016) and the next quarter (Q1 2017). In the current quarter, the impact is expected to be around 2 trillion Won, while in Q1 it’s expected to be around 1 trillion Won. Of the 2 trillion in Q4, around 1.5 trillion of the impact will hit the IM division, while the other 500 billion will hit the semiconductor division, which would make some of the components used in the Note7. In the grand scheme of things, this roughly $2.6 billion hit isn’t enormous, though it’s not nothing. But, of course, Samsung will also seek to replace many of these would-be Note7 sales with Galaxy S7 or S7 Edge sales instead, which will help mitigate the impact on overall sales, though the costs already incurred for manufacturing devices which will not now be sold along with the ongoing costs of the recall will still be felt.

It’s worth looking at Samsung’s overall guidance for the fourth quarter as it relates to smartphone sales, too. It sold around 89 million total handsets (including feature phones) in Q3 and expects to sell a similar number in Q4. Of that total, around 75 million were apparently smartphones and the company expects to sell a similar number of those in Q4 as well. As with Q3, that would be down significantly on last year, when the company sold 80-85 million smartphones in the fourth quarter. Interestingly, this also puts the likely total within touching distance for Apple, whose guidance suggests it will sell somewhere in the high 70 million range. We could therefore see Apple outsell Samsung in a quarter for only the second time ever (the first was Q4 2014, when the iPhone 6 began selling in volume).