For the last 20+ years, the traditional thinking in the tech industry has been that in order to have any real power and influence, you had to have an operating system. Companies like Microsoft, Apple, and Google have turned their OS offerings into platforms, which could then be leveraged to provide additional revenue-generating services, as well as drive the direction and application agenda for other companies who wanted to access the users of a particular OS.
In an effort to follow that strategy, we’ve witnessed a number of companies try, unsuccessfully, to reach a position of power and control in the tech industry by building or buying operating systems of their own. From Blackberry, to HP and LG (with WebOS), to Samsung (with Tizen), there have been numerous efforts to try to replicate that OS-to-platform strategy.
Over the last year or so, however, we’ve begun to see the rise of platforms that are built to be independent from an OS. Prominent among these are Amazon, with Alexa, Facebook with, well, Facebook, and most recently, Samsung with a whole set of services that, while initially focused on their hardware, actually reflect a more holistic view of a multi-connection, multi-device world.
Interestingly, even many of the traditional OS vendors are starting to spend more time focusing on these “metaplatform” strategies, as they recognize that the value of an OS-only platform is quickly diminishing. Each of the major OS vendors, for example, is placing increased emphasis on their voice-based assistants—most of which are available across multiple traditional OS boundaries—and treating them more like the OS-based platforms of old.
Moving forward, I suspect we will see more machine learning and artificial intelligence (AI)-based services that may connect to the voice-based assistants or the traditional OS’s, but will actually be independent of them. From intelligent chatbots, that enable automated tech support, to sales and other common services, through smart news and media-delivery applications, these AI-based services are going to open up a sea of new opportunities for these “new” platform players.
Another key new service will likely be built around authentication and digital identity capabilities. This will serve not only as a first log-in of the day, but function as an identity gateway through e-commerce, online banking, secure communications, and many other key services that require verification and authentication of one’s identity.[pullquote]While some OS-independent platform strategies have been known for some time, the recent Samsung S8 launch event unveiled the first real glimpse of what Samsung may have in mind going forward.[/pullquote]
While some of these OS-independent platform strategies have been known for some time, the recent Samsung S8 launch event unveiled the first real glimpse of what Samsung may have in mind going forward. Because of the company’s extensive range of not only consumer tech products, such as smartphones, tablets, wearables and PCs, but also TVs and other consumer electronics, along with white goods like connected appliances, Samsung is uniquely positioned to deliver the most comprehensive connected hardware (and connected home) story of almost any company in the world. In fact, with the recent purchase of Harman—a major automotive component supplier—they can even start to extend their reach into connected cars.
To date, the company hasn’t really leveraged this potential position of power, but it looks like they’re finally starting to do so. Samsung Pass, for example, moves beyond the simple (though critical) capability of digital payments offered in Samsung Pay, to a complete multi-factor biometric-capable identity and vertification solution. Best of all, it appears to be compatible with the FIDO Alliance standard for the passing of identity credentials between devices and across web services, which is going to be a critical capability moving forward.
On a more concrete level, the Bixby Assistant on the S8, of course, provides the kind of voice-based assistant mentioned previously, but it also potentially ties in with other Samsung hardware. So, for example, you will eventually be able to tell Bixby on your Samsung phone to control other Samsung-branded devices or, through their new Samsung Connect Home or other SmartThings hub device, other non-Samsung devices. While other companies do offer similar types of smart home hubs, none have the brand reach nor the installed base of branded devices that Samsung does.
As with any single-branded effort to dominate in the tech world, Samsung can’t possibly make a significant impact without reaching out proactively to other potential partners (and even competitors) on the device side in order to make its connected device platform viable. Still, because of its enormous footprint across so many aspects of households around the world, Samsung now possesses a bigger potential to become a disruptor in the platform war than its earlier OS-based efforts with Tizen might have suggested.
Samsung’s events always get a lot of attention but the scrutiny around the launch of the Galaxy S8 is somewhat unprecedented — the same can be said about the product leaks. We would do the S8 a disservice, however, if we thought that such a level of attention is because it is the first phone released after the recall of the Note 7. Of course this matters but the Galaxy S family has always had a much bigger impact on overall Samsung’s sales. This means that, as well as the Note 7 could have done, there would have still been pressure on the S8 to be a big hit. To give some perspective, the Note family represents only around 12% of all Samsung phones currently in use around the world.
Similar to Apple, the pressure comes from delivering a product able to excite current Samsung owners as well as convert users of competitive brands. The S8 also hits the market a few months before the 10th anniversary iPhone is released and market watchers will be looking to see if Samsung has done enough to stay ahead of Apple. This is, of course, despite not having any concrete insight on what the next iPhone has to offer.
The Galaxy S8’s lack of bezel, or what Samsung calls infinity screen, is definitively an attention grabber. It is when you hold the S8+ in your hand and compare it to the iPhone 7 Plus, however, that you realize how much screen real estate you get with a narrower form factor. It makes for an easier one hand use. I see this as the biggest selling point of the device, both for upgraders and churners.
The rest of the hardware improvements, from better front camera to more a powerful processor, to Nougat are nice improvements but might have not been enough to get a Galaxy S7 user to upgrade. Had Samsung not brought to market the Galaxy S7 Edge last year, the impact of the S8 would have been even stronger. Think about the current iPhone and the reaction users will have if the current bezel disappears on the next model to leave room for more screen. The S8 feels like an evolution of the Edge. It’s in no way a bad thing, it just means the wow effect is a little muted.
Bixby only Playing a Supporting Role for Now
Samsung is very aware of how much is at stake with personal assistants and AI. It also understands there is no way around being compared to what consumers have already experienced with Alexa, Siri, Cortana, or Google Assistant. Setting expectations for the Bixby reveal was crucial. Samsung explained, through blogs and interviews with press, that what we see of Bixby in the Galaxy S8 family is the foundation of something bigger. For now, Bixby seems to be aimed at simplifying a user’s life by allowing him/her to cut steps in getting something done — turning on flight mode or recognizing a book through the camera and ordering it on Amazon.
Bixby is not really an assistant, not yet. Samsung has been very careful not to call it an assistant and presenters at the launch referred to it as an intelligent interface. I see Bixby as an AI engine focused on a somewhat limited range of functionalities that happens to have a voice. Not calling it an assistant is important as it helps consumers not to make direct comparisons and ultimately avoids disappointment.
Since the first information on Bixby was leaked, I have been trying to explain why Samsung decided to come out with it now rather than waiting until after the Viv acquisition is done. Two main reasons. Samsung wanted to show it can develop in house, not just acquire AI. Culturally, this is important, especially now when Samsung is focusing on reassuring users the Note 7 issues will not hinder its innovation. Politically, it might also help to have a vision and establish a starting point before the Viv team comes on board.
From a consumer perspective, coming out with Bixby now is low risk. Consumers are certainly far from picking their phones based on what assistant comes with them. Starting with a focused set of capabilities could actually get consumers to use Bixby and be satisfied with the experience which would potentially help with future adoption of Viv.
The biggest question I have is what will happen to Bixby when Viv arrives? Will Bixby step aside for Viv? Will it take on Viv’s voice and brains? Will it coexist by narrowing its focus empowering Samsung to deliver a cleaner user interface, not just for its phones but across its devices including TV, wearables, and other connected devices? Fortunately for Samsung, I doubt these questions will keep any Galaxy S8 potential buyer awake at night.
Not Just about Hardware Anymore
Since D.J. Koh took the reins of the mobile business, we have seen a consistent shift to deliver products that go well beyond hardware. Samsung has been focusing on software, especially in enterprise with Knox growing to be a full enterprise platform. The newly announced Samsung DeX is a very good example of how hardware becomes a solution to enhance a user’s experience and extend the life of another product, in this case the Galaxy S8/S8+. Being able to dock your phone in a highly portable cradle that you can plug into a monitor at your desk or a tv screen in your hotel room could transform productivity on the go. Similar solutions have been tried in the past but DeX is coming at the perfect time. Android apps are finally able to better scale on a larger screen and Microsoft Office is also optimised. Mobile productivity delivered securely, with limited overhead hardware cost and management, is certainly attractive. The big question is whether IT managers will justify the upgrade to a Samsung S8/S8+.
Samsung’s ecosystem play is getting stronger, both out of need and opportunity. Even the balancing act with Google seems to be less a concern – despite the stage shout-out – as Samsung expands to strategic partnerships such as with Microsoft with DeX or Amazon with the Bixby camera functionality.
Samsung’s opportunity to own consumers’ home is quite unique and I expect Samsung to continue to invest in it with products like the Samsung Connect Home mesh wifi router that also functions as a SmartThings hub. Whether or not consumers are ready to fully invest in the brand remains to be seen. Starting to build easy connections such as Galaxy S8+Gear VR+Gear 360 for play and products such as DeX for work get the ball rolling. Creating connections to home, fitness, and health might take longer and require more resources but I doubt this will be a deterrent for Samsung.
Those involved in the design and manufacturing of hardware products understand that one of the most important phases of the process is testing. That’s the point when all of the assumptions that have been made need to be validated. The only way to do that is to build hundreds or thousands of units and subject them to a battery of tests. Even then, you might still find problems not anticipated once devices get into the hands of thousands of customers but the goal is to be sure they are relatively minor.
The basic tests conducted include subjecting the products to a wide range of temperatures, humidity and physical abuse, including shock and vibration. The goal is to insure the product performs the same before and after and that the product remains intact and safe. Other tests include real life user testing and measurements to insure the product complies with regulatory requirements.
The testing typically takes several months to perform properly by a large group of quality and manufacturing engineers. Companies have rooms full of test equipment, including large ovens, shake tables, and fixtures that exercise buttons and switches millions of times to simulate actual use.
Yet, in the case of the Samsung Note7, it is puzzling they claimed they were able to identify the problem with their initial shipment, fix it, test it, and ship a half-million replacement units in just two weeks. That just doesn’t compute and apparently, that suspicion was verified by the failures of the second batch of units.
So now, it’s quite possible the problem might have been caused by another component that interacts with the battery, rather than the battery itself.
Testing of smartphones is particularly important because batteries pack a huge amount of energy into a small volume. They contain circuitry to prevent a run away condition should the battery or charging circuitry fail or go out of spec. The batteries are custom made to fit into the allotted space. Often, several companies or divisions are involved: the company building the battery cells, the company packaging the battery and adding the circuitry and connector, and the company putting the battery into the phone. But here’s another opportunity for error. The company doing the assembly may have assumed the battery integrator has performed sufficient testing. I’ve often found communications and clear division of responsibility among companies are often a weak point.
Yet in spite of a product passing all of this testing and having a sound design, there’s another thing to be worried about. It’s how well the product is manufactured on the assembly line. Most lines rely on the use of many workers that perform the assembly operations and not on automated assembly using robotic equipment. Each operator has instructions and tools to do a job that varies from attaching a circuit board assembly to the chassis, positioning and screwing the display in, or soldering a large component in place.
But it’s not uncommon for an operator to make a mistake: not tightening a screw sufficiently or shorting out a circuit. To minimize this, other operators are interspersed in the assembly line to test the partial assemblies, and then the completed product will go through some functional tests to insure it’s working.
But mistakes do happen. One electronic product I was involved in had a screw that was not tightened sufficiently. With little effort, it came loose and rattled around inside the product. That could be catastrophic because the metal screw could short out a battery or blow a circuit. In this instance, the line was building two thousand units a day on two 8-hour shifts and, by the time the problem was discovered, 8,000 units were effected. It was traced to one operator on one shift that failed to tighten the screw, even though she had a calibrated screwdriver that should have prevented this. So, one individual that might have been distracted or wasn’t sufficiently trained, caused a massive problem that required thousands of units to be opened, fixed and reassembled.
Imagine a factory building 100,000 units a day and you can see how a small error can have huge consequences. Much like the analogy of a butterfly flapping its wings and causing a hurricane halfway across the globe.
The world’s leading smartphone company debuts a new device that initially is touted as one of the best smartphones ever made. Glowing reviews quickly follow and the company’s prospects for a strong fall and holiday season, and the opportunity for regaining some lost market share, seem nearly assured.
But then a small number of the phones start to overheat and catch fire. The company tries to react quickly and decisively to the concern and issues a recall of several million already shipped devices. It’s a somewhat risky and certainly expensive move, but the company initially receives praise for trying to tackle a challenging problem in a positive way.
Customers are reassured that the problem seems to lie not in the phone itself, but in a battery provided by one of the company’s third-party battery suppliers (ironically, most believe the culprit to be Samsung SDI—a sister company of Samsung Electronics).
And then, the unthinkable. Replacement phones start to show the same problems and the company is forced to stop the production and sale of the device, encourage its telco and retail partners to stop selling it, and tell all its existing customers to stop using it. Just to add insult to injury, the US Consumer Products Safety Commission (CPSC) also sends out notes to consumers encouraging them to stop using the device, while the Federal Aviation Administration (FAA) and major airlines around the world reinforce the message they’ve been saying for the last several weeks on virtually every airplane flight in the world: don’t use, charge or even turn on your Samsung Galaxy Note 7.
It’s probably the most negative publicity a tech product has ever seen. The long-term impact on the Samsung brand is still to be determined, but anyone who’s looked at the situation at all knows it can’t be good. At this point, it appears that the Note 7 will likely end up being removed from the market, costing Samsung billions of dollars, and there’s even been some concern expressed about Samsung’s ability to save/sustain the Note sub-brand.
Part of the issue isn’t just the product itself—although that’s certainly bad enough—but the manner in which the company is now handling it. Reaction has quickly moved from praise for Samsung’s initial quick efforts to address the issue, to disbelief that they could let a second round of faulty products that are this dangerous get out the door.
On top of that, there are many unanswered questions that need to be addressed. From a practical perspective, what is the cause of the problems if it isn’t the battery cell (the charging circuits?) and what other phones might face the same dangerous issues? Why did Samsung rush out the replacement units without actually figuring out what the real cause was? What kind of testing did they do (or not) to be sure the replacements were safe?
Beyond these short-term issues, there are also likely to be some bigger questions that could have a longer-term impact on the tech market. First, what types of procedures are in place to prevent this? What governmental or industry associations, if any, can take responsibility for this (besides Samsung)? Will products need to go through longer/more thorough testing procedures before they’re allowed on the market? Will product reviewers need to start doing safety tests before they can really make pronouncements on the quality/value of a product? How can vendors and their suppliers work to avoid these issues and what mechanisms do they have in place should it happen again to another product?
Some might argue that these questions are an over-reaction to a single product fault from a single vendor. And, to be fair to Samsung, there have certainly been reported cases of other fire and safety-related issues with electronics products from other vendors, including Apple, over the last few years.[pullquote]Our collective dependence on battery-driven devices is only growing, so it may be time to take a harder, more detailed look at safety-related testing and requirements.[/pullquote]
But when people’s lives and health are at stake—as they clearly have been with some of the reported Galaxy Note 7-related problems—it’s not unreasonable to question whether existing policies and procedures are sufficient. Our collective dependence on battery-driven devices is only growing, so it may be time to take a harder, more detailed look at safety-related testing and requirements.
Given the breakneck pace and highly competitive environment for battery-powered devices, there will likely be industry pushback against prolonged or more expensive testing. As the Galaxy Note 7 situation clearly illustrates, however, speed doesn’t always work when it comes to safety.
Finally, the tech industry needs to take a serious look at these issues themselves, and figure out potential methods of self-policing. If they don’t, and we start hearing a lot more stories about other devices exploding, catching on fire or causing bodily harm, you can be assured that some politician or governmental agency will use the collective news to start imposing much more challenging requirements.
Technology is breaking down barriers throughout the world. Conversely, a form of technological nationalism has taken hold, limiting tech’s rise. Expect such nationalist fervor to become more widespread, more virulent, probably more unfair.
Technology is the new oil. It’s vital to our lives, our economy, our personal wealth, our national interests. As such, governments believe it is right to be intimately intertwined in the development, use, purchase, promotion and spread of technology.
Government inquiries, embargoes, regulatory barriers and tax disputes with technology companies will become commonplace. Fighting (and/or championing) such affairs will become a standard course of business for tech firms, much like complying with accounting standards are today. VCs, start-ups and well established high tech companies will need to fundamentally reconstruct their focus. I say this all without judgment.
That most of the world’s largest, richest tech companies are American — Apple, Microsoft, Google, Facebook, Amazon, Cisco — makes this new world order that much more combustible.
Should Five Percent Appear Too Small
Big technology companies are sitting atop sizable piles of money. Many governments believe they are owed their rightful share of these piles. The European Union (EU) alleges Apple is concealing taxes duly owed on sales and profits generated throughout Europe. Their allegations rest almost entirely upon the obvious:
“Multinational corporations have a financial incentive when allocating profit to the different companies of the corporate group to allocate as much profit as possible to low tax jurisdictions and as little profit as possible to high tax jurisdictions.”
Examine Apple’s European org chart. What does it appear optimized for? If successful, the EU’s action could cost Apple billions. That is why, when Tim Cook told the US Senate “we pay all the taxes we owe — every single dollar,” he is no doubt being 100% accurate and equally irrelevant.
Tax battles are costly for tech firms, but just one fight of many. Regulatory barriers can similarly limit the full and beneficent spread of the world’s most liberating technologies. As famed tech investor Peter Thiel recently remarked:
“It probably would be better for Europe to find ways to be more innovative, rather than ways to regulate.”
This sentiment was echoed by uber-VC Marc Andreessen, an aggressive proponent of Bitcoin, a cryptocurrency that could, in theory, disrupt a core government function and major policy lever:
‘‘The problem with building a new product or service in the existing financial industry is that tens of thousands of pages of legislation and thousands of lobbyists are going to come down on you very quickly. We needed a new technology to have the wedge to be able to enter the market, to be able to justify all the work to rebuild the system.
With bitcoin, we now think we have that wedge.”
Neelie Kroes, the EU’s digital chief, has made it abundantly clear government is not so willing to rebuild its systems:
“I do wonder how many more Valley companies have to get slapped before the rest of them realize it’s time to start investing in better relations with the EU.”
Expect such “investments” to become commonplace. Likewise, add Amazon to that list of companies who apparently need to be “slapped”:
The European Commission is poised to launch a formal in-depth probe into its serious concerns over improper state aid, dragging Amazon into a multi-pronged clampdown on sweetheart tax deals that has already ensnared Apple in Ireland and Starbucks in the Netherlands.
To absolutely no one’s surprise, Amazon has declared it pays “all applicable taxes in every jurisdiction that it operates within.” As with Apple, the accuracy of this statement is borderline meaningless.
Prediction: numerous governments will alter their tax rules simply to prevent other governments from getting a larger share of any Big Tech monies available. To wit: Why let Europe get a (theoretical) cut of Apple’s bounty when that money could be put to better use in America? Or Brazil? Or China?
Here, There And Everywhere
Tax disputes are certainly not the only concern for tech companies. Just this year:
The Chinese government (blocked) virtually all access to Google websites, instead of just imposing 90-second delays when banned search terms were used. Experts initially interpreted the move as a security precaution ahead of the 25th anniversary of the Tiananmen Square crackdown on June 4. But the block has largely remained in place ever since.
This latest move and previous actions by China have significantly impacted Google’s long term potential inside the world’s largest Internet market. Not surprisingly, China’s own Baidu has a 90% share of search — and not because users prefer its results to Google’s.
Despite Baidu’s ubiquity, many users are finding it to be a poor replacement—especially students, academics, researchers, and technicians who need to rapidly find reliable information online.
It’s not only Google that faces such barriers. Twitter and Facebook are both “filtered” in China. Nor is the problem confined only to American technology companies.
Two popular messaging services owned by South Korean companies, Line and Kakao Talk, were abruptly blocked this summer (by China), as were other applications like Didi, Talk Box and Vower.
Nor is hardware spared. Despite its stellar reputation for security, China’s CCTV ran a report earlier this year suggesting Apple’s iPhone location tracking could put state secrets at risk. If true, China obviously has no choice but to take swift, decisive action.
Government entanglements can take many forms. For example, Apple was caught off guard last month when regulators did not provide the requisite approvals for the company to begin legally selling its new iPhones in China. This despite Tim Cook’s many visits to the country, Apple’s sizeable third party workforce there, and the fact Apple and its partners had readied a major advertising push, believing they had done everything necessary to satisfy the various interested parties. Not so, apparently.
Surprise! Regulators have now proffered their assent, in large part due to Apple’s latest assurances that the American government cannot “backdoor” access iPhone data and obtain any of those China state secrets as noted above.
Rules are rules. The costs required to successfully navigate such rules may not always fall the way prices of technology always seems to fall. Nor may such rules prove as leveling. As Bloomberg recently reported, myriad new government rules in China are likely to benefit local companies, such as Xiaomi.
Moreover, now that users in China can legally purchase iPhone 6, it may cost them more than anticipated. China’s government recently decreed that China Mobile, the world’s largest carrier, must reduce phone subsidies. The effect of such actions are obvious.
“High-end flagship phones will suffer the most from the regulation due to their prohibitive prices in the China market without subsidies.”
“Samsung and Apple, as the two major high-end flagship phone makers, have the most to lose.”
A Day In The Life
Brazil has demanded Apple delete the Secret app from iPhone. Russia recently seized Bitcoin mining equipment at its border with China. Several US states have taken legal action against Uber and Lyft. The EU wants Google, Facebook and Twitter to help it combat what they view as online extremism — and what others view as free speech. The lesson, once again: Tech company interactions with governments will become the norm. Simply put, because tech touches everything.
No matter what you think of Europol‘s veracity, when Europe’s cybercrime unit writes the following, it necessitates a reasoned, continued and very likely financial response from well-heeled technology companies eager to profit from the Internet of Things:
With more objects being connected to the Internet and the creation of new types of critical infrastructure, we can expect to see (more) targeted attacks on existing and emerging infrastructures, including new forms of blackmailing and extortion schemes (e.g. ransomware for smart cars or smart homes), data theft, physical injury and possible death, and new types of botnets.
Death and botnets are always scary. Fighting them is no doubt expensive.
Technology’s promise carries with it parallel strands of fear, always. Consider how smartphones and social media have deepened our understanding of events around the world, such as the recent protests in Hong Kong. Now consider not everyone is pleased by this.
Tim Cook has spoken publicly about civil liberties. Is it fair to ask him — and Apple Inc — to choose a side in this latest skirmish? Is it fair to ask the same of Twitter? Many will.
You Say You Want A Revolution
I suspect you want me to say these many government interventions are dubious, the product of terminally greedy tax collectors, frightened regulators, and entrenched forces hoping to kill off outland competition.
I won’t. Mostly because such sentiments are not relevant.
The many reasons for these many government actions will grow in number, kind and intensity as technology continues to destabilize and disrupt industry after industry. You must understand: There is no bigger industry than government.
Tech is money. Money is power. All three are quickly spreading around the world and most of us want, at minimum, our perceived fair share. Do understand, however, that what’s right and what’s wrong are just two sides to this proverbial Rubik’s Cube.
Freedom is not a zero sum game. Not all believe the same is true for money and power. This is true everywhere. The really big disruption won’t just be of the established order, but of human nature.
Schadenfreude |ˈSHädənˌfroidə | noun | pleasure derived by someone from another person’s misfortune. ORIGIN German Schadenfreude, from Schaden ‘harm’ + Freude ‘joy.’
Samsung has reported a 60% fall in quarterly profits. Just three years ago, Samsung rose from seemingly nowhere to dominate the global smartphone market. Today, Samsung is being pressured from above and below as Apple steals away its premium customers and Xiomi and others steal away customers from the low-end.
Keep in mind that these numbers come from BEFORE the introduction of the iPhone 6 and 6 Plus. The blood-letting has just begun.
Cheer up, the worst is yet to come. ~ Philander Johnson
The Church Of Market Share
Truth be told, I take no pleasure in Samsung’s distress. It is the pundits who preached the gospel of the Church Of Market share who grind my gears.
I don’t suffer fools, and I like to see fools suffer.~ Florence King
They jeered Apple’s premium business model, all the while cheering Samsung on and on — encouraging them to grow market share faster and faster…
…until the train that was Samsung went right off the rails.
Why Can’t Apple Be More Like Samsung?
Remember when the analysts were saying that Apple should be more like Samsung? Seems like only yesterday. Oh wait! It WAS only yesterday.
Thinking of all the pundits that wanted Apple to be like Samsung (low-end iPhone etc.). They aren’t saying that this morning. ~ Sammy the Walrus IV 10/7/14
Remember blogger turned @WSJ then @nytimes columnist recommending Apple cut prices and give free products to gain market share? ~ Rags Srinivasan (@rags)
Ah, good times. Good times.
Here’s a couple of additional Samsung/Apple predictions/recommendations from the archives just to remind us all of how long this nonsense has been going on for.
How royally stupid does that statement look, now that Samsung is the one that is getting crowned…if you take my meaning.
After spending the better part of yesterday digging deeply into Samsung’s analyst day materials, it has become clear to me that Apple, over the long haul, stands very little chance against the Samsung behemoth. ~ Ashraf Eassa, Seeking Alpha , 7 November 2013
Hmm. It seems to me that your digging created a hole, and you fell right into it.
If you find yourself in a hole, the first thing to do is stop diggin’. ~ Cowboy wisdom
Why Isn’t Apple Suffering The Same Fate As Samsung?
All this bad news for Samsung begs the question: If all these bad things are happening to Samsung, why aren’t they happening to Apple too? I could be all snarky and simply say it is because Apple doesn’t follow easily disprovable economic principles and business practices — and that would be true — but it would make this article way too short.
So, just for funsies, let’s do something that the High Priests of the Church of Marketshare never seem to do. Let’s stop and think.
Never be afraid to sit awhile and think. ~ Lorraine Hansberry
It is neither an accident, nor a surprise, that Samsung is struggling while Apple continues to thrive. Many astute observers predicted it long ago.
Logical consequences are the scarecrows of fools and the beacons of wise men. ~ Thomas Henry Huxley
Why then was this a shock to so many? And what lessons can we learn both from Samsung’s fall and Apple’s continued ascent?
Samsung, grab your sh*tty stylus and prepare to take f*ck*ng notes. ~ not Jony F*ck*ng Ive
Commoditization, Average Sales Price, And Margins
COMMODITIZATION
(T)he Apple brand has faltered … And it’s all because Samsung ignored the industry lock-in to constantly focusing on product, and instead changed the game on Apple. ~ Adam Hartung, Forbes, 4 April 2013
…it’s clear that Samsung will brute-force its way into taking more and more marketshare from Apple at the high end while at the same time will enjoy key structural advantages in the low end that Apple would – at least in its present form – not be able to match. ~ Ashraf Eassa, Seeking Alpha , 7 November 2013
This is the “Samsung-is-so-big-they-don’t-have-to-play-by-the-rules” theory of business. Samsung didn’t change the game. Pundits only thought they did because they didn’t understand the rules of the game.
Pundits have predicted, correctly, that hardware would inevitably become commoditized. This, they proclaimed with confidence, would cause Apple’s prices to fall while Samsung, with its good-enough and better-than-good-enough hardware and its lower prices, would usurp Apple’s market share, relegating Apple to niche status. Ironically, commoditization DOES apply to Samsung — the favorite of the Priests of Market Share — but it DOES NOT apply to their favorite whipping boy, Apple. Why? Differentiation.
From Ben Thompson:
Almost all industries have two tenable positions: the differentiated high-end, and the low-cost low-end. The iPhone faces little threat in the differentiated high-end of the market. Suggesting this market is limited in size is fair; counting the days until customers flee for cheap phones is silly. ~ Ben Thompson
What differentiates Samsung?
Hardware? Please. Xiaomi and others are taking a page out of the Samsung playbook by copying Samsung’s designs and making hardware that is more than good enough.
Software? Please. They’re all running the same Android operating system.
TouchWiz? Please. Stop before I die laughing!
Samsung actually DID have some differentiators like scale, time to market, marketing prowess and budget. But none of those is unique to Samsung, and none of them provided Samsung with sustainable differentiation. To put this in military terms, the Samsung army was able to take ground, but they were unable to hold it.
AVERAGE SALES PRICE
There is no doubt, in my mind, that the whole (smartphone) sector is hugely overstretched. The whole sector is priced as if the average player would sustain 25 per cent margin in eternity. It’s bordering on absurdity. This will end in tears. ~ Per Lindberg, MF Global Ltd, Feb 2009
Well, Samsung and the rest of the mobile hardware manufactures may be overstretched and left in tears, but Apple is doing just fine, thank you very much.
And here’s something else to chew upon. The iPhone 6 Plus is 100 dollars MORE than Apple’s previously highest priced phone model. While the rest of the industry is in a race to the bottom of the pricing barrel, Apple is preparing to INCREASE the average selling price of their phones.
ASP will rise significantly this quarter. ~ Horace Dediu (@asymco) 9/9/14
MARGINS
Here are Apple’s actual margins:
And here is how badly Apple’s critics mis-predicted Apple’s margins:
And even if the industry just continues as it has for the past few years, with companies like Samsung continuing to build phones that are as good as or better than the iPhone, it’s hard to see how Apple’s profit margin will continue to expand the way it has over the last several years. ~ Henry Blodget, Business Insider, 7 Sep 2012
Overall, the iPhone 5 is a good phone and will probably sell well, but in the long run Apple will have a hard time maintaining its extremely high margins because the iPhone is clearly no longer cut above the rest. Since Steve Jobs is gone, Apple should be honest with itself and begin to dramatically increase its R&D budget to stay in the game. Otherwise, the competition will leave it in the dust.” Alvin Gonzales, Motley Fool, 17 Sep 2012
Market Share
Apple’s critics obsess over the relatively high price of Apple’s products and insist that Apple must lower their price in order to gain market share.
I think they should invest more of it in the margin, in the business. Get lower-priced products out there. Stop going after just the premium piece. Get into the real growth engine of the smartphone market, which right now is Android, it’s low-priced phones in China and India, same thing on the tablets. ~ Henry Blodget, CNBC, 3 January 2013
I have been left disappointed by Apple’s decision not to release iPhone Lite as I thought this was the most important product for Apple to stop its marketshare decline. ~ Sneha Shah, Seeking Alpha, 25 October 2013
First, Apple DID NOT lower their prices and their market share has gone UP in important markets such as the United States And Japan.
It’s looking possible Apple will sell more iPhones than Samsung sells Androids this quarter. ~ Benedict Evans (@BenedictEvans)
Second, Samsung followed the pundits advice, lowered their prices…and lost market share anyway.
It appears that Samsung has been cutting prices in order to maintain market share but has lost market share anyway ~ via Charles Arthur, The Guardian
WINNING
The fetish with Market Share is bizarre. Market share times margins equals profits. Market share and margins are the means. Profit is the end. Market share doesn’t mean a thing if it doesn’t lead to more profits and a better platform.
For example, Sony recently announced that it has been improving its smartphone market share in Western Europe and Japan…and is projecting a £1.3 billion loss.
For what hath a man profited, if he shall gain a whole bunch of market share, and loseth his own shirt? ~ John 09:12
Bill Shamblin explains:
More than a 1-to-1 ratio of profit share to market share demonstrates a company’s ability to differentiate its products, provide more value than its competitors, command higher prices, charge a premium and enjoy pricing power.
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Less than a 1-to-1 ratio of profit share to market share demonstrates that a company is buying market share; that the company has not been able to differentiate its product in the market and is likely competing primarily on price.
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Pricing to gain market share simply for the sake of market share is a chump’s game. ~ Bill Shamblin
Market share is not the sine qua non of business — profit is. In football terms, market share is the yardage, profits are the points. In baseball terms, market share is the number of hits, profits are the number of runs. In hockey terms, market share is the number of shots on net, profits are the number of goals. Market share, like yardage, hits, and shots, are a necessary means but profits, like points, runs, and goals, are the end. Pretending otherwise for even one second borders on the inane. Continuing to stubbornly believe such rubbish borders on the insane.
To arrive at a contradiction is to confess an error in one’s thinking; to maintain a contradiction is to abdicate one’s mind and to evict oneself from the realm of reality. ~ Ayn Rand
Integration
HARDWARE
If I had to name just one thing that the pundits got wrong about about Samsung and Apple, it would be their myopic focus on hardware (sometimes called “innovation”) comparisons.
Samsung’s hardware was better, they said. Samsung was out innovating Apple, they said. Samsung was on the rise and Apple was all-but-dead, they said.
(T)he Galaxy S II is remarkably easy to summarize. It’s the best Android smartphone yet, but more importantly, it might well be the best smartphone, period. ~ Vlad Savov, Engadget, 28 April 2011
What [Samsung] are doing is they’re innovating faster. just the pace that they’re coming out with [products] is so much faster ~ Gene Munster, Piper Jaffray, 12 March 2013
The competition is increasing its lead over Apple. Samsung’s S5 seems to have enjoyed a strong launch, outstripping the iPhone 5S launch for which Apple bulls were prepared to declare a national holiday. ~ Michael Blair, Seeking Alpha, 4 May 2014
Samsung DOES make superb hardware. But how has all that supposed hardware superiority worked out for them?
SOFTWARE
By focusing on hardware alone, the pundits totally ignored software and — even more — they totally ignored hardware/software integration. Judging a smartphone by hardware alone is like judging a sailboat by the boat alone. The size, shape and design of the boat is important, but the sails make the boat go. Similarly, the size, shape and design of the phone is important, but it is the software that puts the “smart” in smartphone.
As Ben Thomson put it:
Software Matters – For years analysts treated all computers the same, regardless of operating system, and too many do the same thing for phones. … (Y)ou cannot do any serious sort of analysis about Apple specifically without appreciating how they use software to differentiate their hardware. … (M)any people buy iPhones (and Macs) because of the operating system that they run. … Not grokking this fact is at the root of almost all of the Apple-is-doomed narrative. … (And) for the high end buyer app quality matters as well, and here iOS remains far ahead of Android. ~ Ben Thompson
Here is a video (via Abdel Ibrahim (@abdophoto) of The Tech Block) of Steve Jobs explaining that the iPod is just software in a beautiful box.
AUTHOR’S NOTE: When I see a video link, I generally skip it. But I highly encourage you to follow the link and watch at least the first 90 seconds of the video. I think you’ll find it worth your while.
Some professional reviewers may have voted for the Samsung hardware while declaring Samsung more innovative, but the only reviewers that count — the buyers — voted with their dollars, and when it came to premium phones, they voted 3-to-1 in favor of the iPhone.
Platform
PLATFORM ECONOMICS IN BIZARRO WORLD
The real game changers in the S4 are Samsung’s pace of innovation and the platform it is creating to challenge Apple in this crucial area of innovation – platform economics. ~ Haydn Shaughnessy, Forbes, 18 March 2013
Samsung is innovating on ‘platform economics’? Wow. How wrong could one be? Samsung is currently suffering precisely because it has no platform to help differentiate its products. Samsung’s lack of platform makes it the polar opposite of Apple. Which reminds me of an awful, awful joke:
Samsung’s profits.
No, that THAT awful joke. This awful joke:
Question: Why couldn’t the polar bear get along with the penguin?
Answer: They were polar opposites.
THE NUMBERS LIE
There is an illusion that the current lopsided shipment market share is irrelevant. This idea is completely false. Losing market share is almost always never a good sign. Android is roasting Apple and if things keep going the way they are, Apple will be toast. ~ Alvin Gonzales, Motley Fool, 21 Dec 2012
That was written in 2012 and it got it exactly wrong. Android currently runs on two times as many devices as iOS. TWO TIMES. But it is Samsung, not Apple that is getting roasted.
Sooner or later that [market share discrepancy] ought to make a difference. ~ John Gaffney (@jfpgaffney)
And there it is. Your faith based argument:
“Sure, Apple’s App store is doing okay now — BUT JUST YOU WAIT! Once Android has more market share than iOS, the tide will turn.
Okay, okay, Android has more market share than iOS and the developers haven’t flocked to the Google Play store…yet. BUT JUST YOU WAIT. Once Android has a super-majority, iOS is doomed.
Okay, okay, Android now has twice as many handsets in the wild as does iOS and the Apple App store just keeps growing stronger every day. BUT JUST YOU WAIT! Sooner or later the weight of Android’s market share ought to make a difference.
JUST. YOU. WAIT!”
The bedrock theory upon which the Church of Marketshare is founded, is that the platform with the most market share wins. And that theory is demonstrably wrong.
The great tragedy…the slaying of a beautiful hypothesis by an ugly fact. ~ T.H. Huxley
ABSOLUTE NUMBERS
Absolute numbers matter more than share (percentages).
As of June (2014 there were 886,580,000 iOS devices sold. 1 Billion sold will happen well before this year is out. Horace Dediu (@asymco)
One billion units is hardly niche.
Absolute numbers matter more than percentages – While it’s natural to talk about market size as a percentage, the absolute size is just as important. In the case of Apple, for example, the fact they “only” had 15.5% percent of the market in 2013 is less important for understanding the iPhone’s viability than is the fact they sold 153.4 million iPhones. That is more than enough to support the iOS ecosystem, percentages be damned. ~ Ben Thompson
OPEN
The collective development opportunities made possible by the fact that Android is Open Source will see to that. (What will) matter to the mobile application developer (is that) there are eight or ten Android handsets shipped for every iPhone. Addressable market will again trump elegance. ~ Brian Prentice, Gartner, 21 September 2009
That’s flat out wrong. Always has been. Always will be.
Developers don’t care about people who spend time on the platform. They care about people who spend on the platform. Platforms aren’t a democracy. It’s not one vote per person. It’s one vote per dollar, and each person is free to vote as often as they can afford to do so.
METCALF’S LAW
Perhaps you’re thinking of Metcalf’s law. Metcalf’s law says that the more people you have on a network, the more valuable that network becomes.
Android and iOS are platforms. Nowadays, the internet is the network. Don’t conflate the two. iOS can remain closed and still communicate with the rest of the world via the internet.
There’s something problematic in the idea that platforms with 1.5 billion users and 100 billion+ 3rd party apps installed are ‘closed’. ~ Benedict Evans (@BenedictEvans) April, 2014
PREMIUM DEVELOPERS
There is a striking difference between the two companies though, Apple produces their own hardware and software, they collect all the money whereas Google licenses out the software and occasionally gets in on the manufacturing of a device. iOS is a closed system, Android is open-source and if history proves to be right time and time again then I’m sure that Android will end up winning the battle. ~ Ash Anderson, Motley Fool, 21 Dec 2012
Once Steve Jobs goes away, which is probably not far away, then Apple will have to make a strategic decision on whether to open up the platform. Ultimately a closed system just can’t go that far … If they continue to close it and let Android continue to creep up then it’s pretty difficult as I see it. ~ Patrick Lo, CEO, Netgear, 31 January 2011
That’s the theory of “Open”. These are the facts.
The Apple App Store has now paid out over 20 billion dollars to developers, half of that in the last 12 months.
The Apple App Store has paid out 10 billion dollars to developers in the past year. During that same time, Google has paid out 5 billion.
In other words, Apple has half the users that Android has but pays out twice as much to developers. That means that an Apple user is worth four times more than an Android user to developers or, conversely, that it takes four Android users to equal one Apple user.
A sobering thought: in order for Google to match Apple’s iOS revenue with Android, they would need 3.6 billion Android users. ~ Ari Najarian (@stickbyatlas) 6/27/14
Arguing that the Android market share is going to sink the iOS platform is like arguing that the Titanic is going to sink the iceberg.
PREMIUM CUSTOMERS
The difference in payout between iOS and Android is telling in a whole different way too. We used to think that Android engagement averages were much lower because there were so many more Android users. It was assumed that high-end Android users were worth as much to Android as high-end iOS users were worth to Apple. The numbers tell us that this is not so.
There are roughly the same number of high-end Android and iOS users. Yet the total payout over the past 12 months was 5 billion for Android and 10 billion for iOS. This means that Android engagement numbers are not lower because of all the low-end users. It means, instead, that high-end Android users act very differently than high-end iOS users.
Either the Apple App Store motivates the high-end user to spend more or the high-end user chooses the Android platform because they want to spend less. Neither bodes well for Android developers.
THE NEW PLATFORM PARADIGM
The Prophets of the Church Of Market Share have had it wrong all along. Market share does not draw developers to a platform. Dollars draw developers to a platform.
And the strength of a platform is not dependant upon the number of users. It is dependant upon the amount those users spend.
Premium
NICHE
Android now commands 80% of the smartphone O/S market and over 50% of the tablet O/S market. Apple, which pioneered the touch screen smartphones and tablets, finds itself increasingly becoming a niche premium player. ~ Sneha Shah, Seeking Alpha, 16 January 2014
Shah treats the role of the premium provider as though it were that of a vulgar street walker.
As the mobile phone market increasingly offers more quality phones at a range of price points, Apple now faces a difficult choice. Does it try to remain a premium product-premium price company, or does it dive into the commoditized lower priced arena? Neither choice is very appealing. ~ Bob Chandler, Motley Fool, 2 May 2013
Why does Chandler think that choosing between being a premium provider and a low-cost provider is difficult? If you can make the choice, premium is the obvious choice to make.
In the fourth quarter of 2013, Apple sold 64% of all the premium smartphones in the U.S. That number will grow in the the fourth quarter of 2014. Yet pundits seem to treat the premium sector as a ghetto that must be avoided at all costs.
Presuming all decisions are based on price is the easiest way to mispredict the future. ~ Ben Thompson (@monkbent)
The pundits seem wholly incapable of understanding two simple facts. First, Apple WANTS to be the premium provider. They are targeting that market. Second, Apple will not pursue additional market share if it endangers their position as the sector’s premium provider.
This is such heresy to the priests of the Church of Market Share that they simply cannot grok it.
The hardest thing to explain is the glaringly evident which everybody had decided not to see. ~ Ayn Rand
Yet it is the norm everywhere in every market! There isn’t a good or service that doesn’t have a premium and a low-end sector and, as a general rule, the premium sector is the place to be.
Brand
Samsung makes some truly lovely high-end phones, but by selling a million, bazillion, gazillion mid-tier and low-end phones too, their brand has become diluted.
If I’ve told you once, I’ve told you a thousand times: Resist hyperbole. ~ William Safire
No one mentions of “Samsung” and “premium” in the same breath.
Middle
High end buys iPhones. Low end cares only about price. No middle. There.~ Ben Thompson (@monkbent)
Samsung sells high, mid, and low-end phones — which is exactly what the pundits have been urging Apple to do — and Samsung is paying dearly for it. Samsung is losing the high-end to Apple. They are losing the low-end to Xiaomi and others. They’re trapped in the wholly undifferentiated and wholly indefensible middle.
Two Ways To Grow
There were two ways for Apple to broaden its ecosystem – take a chunk of the mid-range or take another chunk of the high-end. ~ Benedict Evans (@BenedictEvans) 9/11/14
Clearly, Apple has chosen the latter. Unlike Samsung, Apple doesn’t WANT to corner the phone market. They want to corner the PREMIUM phone market.
If you want to catch trout, don’t fish in a herring barrel. ~ Ann Landers
And they’re doing it, too. The new iPhone is a direct assault on that part of the premium market still being controlled by Samsung.
(W)ith the iPhone 6 and iOS 8, Apple has done its best to close off all the reasons to buy high-end Android beyond simple personal preference. You can get a bigger screen, you can change the keyboard, you can put widgets on the notification panel (if you insist) and so on. Pretty much all the external reasons to choose Android are addressed – what remains is personal taste. ~ Benedict Evans
Apple Is Doomed Anyway
“Apple is screwed” – 1997, 1998, 1999, 2000, 2001, 2002, 2003, 2004, 2005, 2006, 2007, 2008, 2009, 2010, 2011, 2012, 2013, 2014. ~ Sammy the Walrus IV (@SammyWalrusIV)
None of what I’ve said will deter the High Priests of The Church Of Market Share from continuing to predict Apple’s doom. If the facts disprove their theory in the here-and-now, they simply fall back upon irrefutable prophesies that will only occur in the here-in-after.
Faith is an oasis in the heart which will never be reached by the caravan of thinking. ~ Kahlil Gibran
Apple’s lack of market share will be their doom, they say. It is going to happen, they say. All we have to do is patiently wait for the day that is sure to come, they say.
CAPTION: Waiting and waiting and waiting and waiting and…
And what the hey, while we’re waiting, we can always have some fun by twisting every story into anti-Apple FUD:
Well, of course Samsung’s problems are bad news for Apple. All news is bad news for Apple…in accordance with the prophecy!
My only hope is that the pundits who told Apple to be more like Samsung, shorted Apple and invested heavily in Samsung. That would be some schadenfreude that I could really get behind.
The best way to convince a fool that he is wrong is to let him have his own way. ~ Josh Billings
You want to talk about Apple. I understand. They are the biggest tech company in the world. Their products are used by hundreds of millions. Oh, and next week there’s — OMG! — a major Apple event, not at Moscone Center in San Francisco but at Flint Center in Cupertino, the very same location where the original Mac was introduced and where the phoenix-like (i)Mac was introduced, and this can only mean…
A new Mac?
How can that be?
We are all expecting an iWatch.
And a large, new iPhone.
Two!
Some of us are even expecting an iPad XL, complete with badly needed split-screen, multitasking function. Tim Cook has repeatedly promised us new products, after all. We are 14 years beyond Y2K. Macs are borderline inconsequential in our glorious new world. Apple can’t possibly be putting the Mac at center stage, can they?
Unlikely, but kudos for cleverly diverting our attention.
Oh, glorious Apple. Stoking the rumors, week after week. Divvying out the “leaks” bit by bit. Building our excitement. Inciting our lust until…shazam!
Something totally unexpected.
Fine. Two can play at that. Here’s my totally unexpected prediction: a 5.5-inch iRemote for the home.
Price? $299, including an Apple TV.
The $299 iRemote
Ben Bajarin says there will be no 5.5-inch iPhone “phablet.” I agree. Jony Ive resisted increasing the size of the original iPhone for years. Market demand forced his hand. The market now wants an even larger iPhone. Ive will once again be forced to capitulate.
A 4.7-inch iPhone should suffice.
An iPhone that size can retain most of Ive’s iconic design, support one handed use, at least for some, and have the additional benefit of offering a larger, longer lasting battery, which is sorely needed.
A 5.5-inch iPhone is nothing more than a twisted abomination of Ive’s design. I can’t believe this will happen. Unless the rumors of a 5.5-inch iPhone point instead to an entirely new device.
The Future Of The iPod
A remote control for the Apple-optimized home does not require one handed use. It needs only be light, mobile, affordable, possibly even unapologetically plastic.
Such a device can control your HomeKit-enabled appliances.
It replaces that wretched plastic Apple TV remote which has grown so useless even as Apple TV offers up so many more new content possibilities.
It’s the perfect size for tweeting while watching television. It encourages FaceTime calls.
Possibly, this device even supports multiple user accounts.
That Apple will finally offer “widgets,” which are optimized for both the small iWatch screen and glanceable CarPlay screens, may possibly work better on this new device as well.
The device also does not diminish iPhone sales, where Apple gets the bulk of its money from. Think of this as the future of the iPod, if that helps. Not quite an iPad, which is more personal, this new “iPod” belongs not to a person but to a home. It collects data, controls applications and commands other devices. Yes, even an Apple Television in time.
Instead of storing and presenting your music collection, this new iPod stores, presents and manipulates the collection of data from the family’s wearables, appliances, the Internet-connected thermostats, door cams, and lights. The iPod becomes the universal remote for the Apple optimized household.
Siri will be front-and center with this new iPod, encouraging you to tell her when to turn off the air conditioner, or for how long the oven temperature should be set. Plus, with iCloud, Apple suddenly becomes a leader not just in “machine learning” but more importantly, possesses a knowledge of people inside their homes that is truly unique.
Everywhere A Screen
I accept I may be completely wrong. Where a large iPhone ends, a small iPad begins, or how iPod evolves in a world with all of these is not as clear-cut as even Apple marketing would have us believe. My strength lies not in predicting new technologies but in understanding how existing technologies will re-make the world, the economy, learning, work, power, joy.
Yet, as computing spreads into all areas of our lives, and burrows its way into all of our things, we need new and better devices to help take full advantage of their combined potential.
This is a unique Apple strength.
Time and again, Apple shows us how all our many technologies are supposed to work — for people, not for corporations or things or business models or the established order.
This is why I am reasonably confident that, whether Apple reveals an entirely new device, a deconstruction of an old one, or something in between or far beyond, it will matter. If not right away, soon.
Next week, the very moment Apple releases a larger iPhone of any size, tech bloggers will giddily point their finger and exclaim: “J’accuse! Apple copied! The iPhone phablet is copying the Samsung Note!”
Mobile computing is barely into the Model T phase. Apple is helping to push us forward, mostly in positive ways — even when we think their latest product is just one more device in an already crowded market. We can’t know what we need till we have it, be it an iWatch, a phablet, an all new Mac, or, yes, a universal home remote.
We live in interesting times. They are about to get even more interesting.
I have been publicly doubting the existence of the 5.5 inch iPhone for some time. I promised many on Twitter I would share my overall thesis on the category so here it is.
Starting from the data points, we know several things. In the USA, phablet sales are quite small. Our estimates have the active installed base of all Galaxy Notes in the US at under 10m units. Phablets, or smartphones with screen sizes above 5.3″, have tended to not sell well at any price point in the US market. However, the US market is not the only one that matters.
Phablets are successful in some parts of Europe but much more so in Asia, so we will focus there. You could argue Apple needs to make a 5.5″ phone primarily to serve the Asian market and you may be right. But let’s focus on the data at hand.
As you can see, the vast majority of Android devices in use are not phablets. Now, it is entirely possible Google is not tracking or including China’s AOSP Android ecosystem in this chart. If they did, it could certainly bump the active use of phablets a bit higher but it would not be by much.
Another data point is IDC’s own projection of the phablet market which is, somewhat conveniently for my thesis, hot off the presses. This statement can be found in their latest press release.
The other widely discussed trend has been the shift towards large screen smartphones. IDC expects “phablets” (smartphones with 5.5″—7″ screens) to grow from 14.0% of the market in 2014 to 32.2% of the market in 2018. With the expected entry of Apple into this market segment, and the pent-up demand for a larger screen iPhone, Apple has the ability to drive replacement cycles in mature markets despite the slower growth seen in recent quarters.
IDC is stating 14% of smartphone shipments this year will be phablets, growing to 32% in 2018. In raw numbers, based on consensus of smartphone forecasts, that equates to approximately 165m phablets in 2014 and approximately 576m in 2018. In neither case are those small volumes. However, of the vast majority of phablets being sold in Asia, more than 80% cost less than $350. An interesting question is, where do premium phablets, like the Galaxy Note series, sell in volume in high prices points? The answer is South Korea. Good estimates of the Galaxy Note installed base in total is around 60 million. Nearly half of those can be found in South Korea. ((This estimate comes from network data I have on the region as well as some publicly stated numbers of Notes by Samsung. Notes appear to have the greatest concentration in South Korea. However, since Samsung uses shipment numbers not sell through numbers, it is entirely possible millions of Notes are sitting in a warehouse somewhere collecting dust. Perhaps if this is true it helps my thesis even more.))
What we know today is:
Phablets are not the majority of form factor sales.
The price points they do move at in volume are not price points Apple seemingly would want to play at with an iPhone.
Where phablets do sell at high price points, and where Apple would seemingly play, are in Samsung and LG’s home country of South Korea. A market Apple has very little share in today.
When I share my skepticism, it is due to the nature of what we see regarding phablets today. However, there are always other ways to look at this data.
Firstly, perhaps the large screen phones have not sold well in the US because Apple does not offer one? Possibly yes. However, if I had to place a bet on which of the two larger screen models Apple offered would do better in the US, I would bet the 4.7″ would be the better seller.
The real question to dig into around the necessity of an Apple 5.5″ iPhone is to address a market that may be choosing Android instead of the iPhone specifically due to that sized phone. Apple will address many people’s desire for a larger phone with the 4.7″ and, in many markets, particularly the US market, it will likely bring users back to the iPhone who may have left and bought a Samsung Galaxy S series because it had a larger screen. But ultimately, Apple already dominates the US market and has an extremely loyal customer base. I don’t believe the argument for a 5.5″ has anything to do with the US.
So — back to Asia. The affluent audience who purchases iPhones in that market due so because of the status that accompanies buying an iPhone. It is entirely possible there are more iPhones in active use in Asia than in the US thanks largely to the secondary market. A 4.7″ iPhone alone will be a huge hit in Asia and break sales records at whatever price. So why offer a 5.5″ also? Is there evidence that those in Asia who can afford a $650 iPhone (not the majority) are choosing to buy an Android phablet for $350 just because Apple doesn’t offer one in that screen size? I see no evidence of this and it is the primary source of my skepticism. The decision to release two new flagship models, at the same time, and possibly causing some difficulty deciding between the two by Apple’s core customers, has to be to appeal to new customers who don’t just want a bigger iPhone (the 4.7″ will do this already) but want one specifically at the increased size of 5.5.”
Bottom line, phablets move in volume at lower ASPs than iPhones in Asia. Those who can afford iPhones in Asia will buy whatever Apple makes due to status. I’m not convinced Apple is or would lose customers in Asia if they did not make a phablet. That being said, and looking at the data I have, there are always times to forget data and go with your gut. It will be exciting to see what Apple’s gut has told them to do.
I’m happy to announce that I am rolling up my podcast with Andreessen Horowitz partner Benedict Evans into the Tech.pinions podcast as well. We will shoot to release these discussions between us every few weeks, midweek.
Ben Bajarin and Benedict Evans discuss what a low-cost iPhone could mean for Apple and explore the global and regional differences of iOS an Android.
Some recent media has come out stating we need to acknowledge Apple knows what it’s doing as a company and with their strategy. I don’t know any analysts worth their reputation, either on the financial or industry side, who ever doubted Apple knew what it was doing. Part of the quibble with Apple from said media is the belief Apple was leaving money on the table by not changing their established and successful business model of focusing on the high end, more profitable segment of the market. Many called for Apple to make a lower cost iPhone in order to capture more “hardware” sales. But what many of us knew is just selling a lower cost phone doesn’t necessarily mean more money. And, in fact, it could have consequences on the higher margin products. Luckily, Benedict Evans shared a post recently that broke down exactly what I and many others have been saying around the implications of a lower cost iPhone.
What Benedict wrote is something he and I have spoken about on past episodes of our podcast. The thesis was always that a lower cost iPhone would certainly help raise sales of iPhones but would not raise revenues. Selling a lower cost and lower margin product means you need to sell substantially more product to equal similar revenues to selling less of a higher margin good. But as Benedict points out, this does not necessarily mean Apple should not release a lower cost phone — only that it would not necessarily be for the hardware revenue but for the potential value to the ecosystem, in terms of revenue capture beyond hardware, like apps, subscription services, etc. Benedict rightly points out Apple has more options than ever and I would add few companies are in full control of their destiny than Apple.
Back to Apple knowing what it’s doing. This relates entirely to a margins discussion. Several days ago Jan Dawson posted on his blog some thoughts on Samsung. I asked Jan to add Apple and Samsung to a particular chart on margins and it is below.
If any chart shows Apple knows exactly what it is doing, it should be the chart above. Apple remains the anomaly of all consumer electronics companies when it comes to operating margins. Apple has not and does not have to chase the lower margin commodity products thanks to their vertically integrated advantage. Granted, no one is arguing Apple chase the uber-low end. That’s unwise for any branded OEM. But rather, there is a healthy and growing middle of the market. What we are discovering in many markets like China and even pockets of India and Brazil, are more mature customers who started off buying lower cost entry level smartphones are moving upstream and being willing to spend more on their next smartphone. I believe this trend will continue as a large percentage of smartphone users move off basic devices and become willing to spend more on devices in mid-range price tiers.
Whatever strategy Apple decides, given their approach, they have a limit on their total potential customer base. We simply have no idea what the size of that number is. Employing this strategy means Apple will need to foster opportunities for their customer base to spend more in their ecosystem thus incrusting their average revenue per customer beyond the hardware. The point remains — Apple is in control of their destiny.
Samsung, on the other hand, is a giant question mark. What does Samsung do? They have built a business that requires scale. Their strategy has been to fast follow companies and products which have scale then leverage their vertical components businesses to sell products to each other as they scale. Each group benefits, revenues rise, and they are able to slightly buck the low margin fate that faces so many companies. Samsung has always been Samsung’s best customer in components. But the main point is their business requires scale. So what does Samsung do to maintain scale? They are losing in premium to Apple, and they are losing in the lower and mid-tiers regional players in the regionalization of the smartphone market.
What is even more interesting about Samsung’s struggles is they are actually price competitive with some products in many of these markets with the same vendors they are losing out to. So the question is why? Why not Samsung in these markets where they are price competitive? I do believe it has something to do with the fact they are a foreign brand in markets increasingly favoring brands from their home country. Therefore, to assume Samsung should just compete on the low end to get scale back does not necessarily solve the problem. Nor does doing so help their margins, or the inter-departmental sales approach their components business sell within the country. Samsung, like Jan’s chart shows, is stuck in the middle. Their margin line is unlikely to go up toward Apple’s and unfortunately if it is to go down toward the others, it’s a huge, company wide issue for a vertical component company who requires scale.
What I keep landing on is increasingly hardware, for all vendors including Apple and Samsung, is going to have to play a role as a mechanism to other revenue. Xiaomi is a great example of this, using hardware as an entry point to increased revenue of proprietary services. Amazon also, to a degree, employs this model. However, it is foolish for many to believe Apple can’t do this and that their future depends only on hardware sales. The challenge for others, like Samsung, will be to differentiate on more than hardware. The role of the OEM is changing, and will continue to change.
The iPhone is bigger than McDonald’s. That seems a useful demarcation for how we should view the iPhone in particular and Apple in general.
The iPhone is that once-in-a-generation product that alters daily reality for at least a century. The Model T production line, overnight shipping, indoor plumbing and the credit card are other such examples. I fully expect the iPhone will enable Apple to become the world’s first trillion dollar company.
There is a cost however, at least for we users. Almost certainly, iPhone will diminish Apple’s ability to create new game changing products.
Why? Because being irrational is hard, really hard. It’s rational to do everything in your power to maximize a product that has the legitimate potential to help you become a trillion dollar company. To do anything — anything at all — that might alter that path is irrational. Steve Jobs could be irrational at times. Tim Cook cannot. At least, I have witnessed no evidence of this. Apple is now iPhone. iPhone is now Apple. Just like Windows is Microsoft.
The Long March
No one ever got fired for buying Apple computers from IBM.
An iOS-based, touchscreen-enabled laptop, priced around $799, and sold by IBM to the enterprise seems an obvious product Apple should offer. It also seems like the kind of product that could destroy numerous existing giants.
For too long, iPhone users have not had their much desired iPhone “phablet.” A reason for this is because an iPhone phablet would gut iPad sales. Considering the iPad sales numbers for the past year, this is a fear Apple no longer possesses.
You will not give up your iPhone. You will not give up your Mac. You may give up your iPad. At this juncture, iPads are simply not must-have devices for nearly anyone. That’s the primary reason for the diminishing sales gains.
Easy prediction: We will almost certainly get an iPhone phablet this year and, likely by next year, a larger iPad.
I am regularly surprised at how bad Apple is at app discovery. That Facebook app ads are my current best source for app recommendations is a clear market failure. I hope the purchase of Beats, Swell and BookLamp signal that Apple is finally willing to get serious about content curation and recommendation.
I have no idea if Swift is a superior language. I am not a developer. I do know however, Apple is big enough to demand its use.
Despite the iPhone’s incredible array of features and functions, we mere mortals no doubt spend far too much time obsessing over which apps belong on the home screen.
Bugs And Features
The smartphone is the computer. Your app is your business model. Every business is impacted by iPhone. Know this or perish.
That Touch ID can’t read my thumbprint if there’s just a tiny bit of water on it seems more bug than feature.
It’s 2014, fourteen years since Y2K. Still, iPhone users can’t have their preferred calendar app list the date on the app icon. This is the equivalent of how the DOOR CLOSE button on any elevator never seems to work.
Samsung ads mocking iPhone users have been brutal and highly effective. Yes, I have had Android users (justly) mock me for having to scour an airport in search of an available outlet. The iPhone battery deserves its poor reputation. However, Samsung’s latest ad where they mock Apple users for not yet having a large display iPhone strikes me as desperation. Almost certainly, there will be a large display iPhone. What then, Samsung?
Amazing iPhone games are available for $5.99 yet millions refuse to pay such ‘outrageously high’ prices. There is much to celebrate and decry with this.
Using the same OS for the iPhone as for the iPad has some obvious limitations. On the small smartphone screen, getting into an app, grabbing the data, then exiting, a singular app occupying the entire screen makes obvious sense. Not so with the iPad. I want at least two windows open on my iPad almost always. Kindle and Twitter are the most common examples. Email and web browser are another. Even while gaming, I prefer two windows open. I can’t imagine buying an iPad until Apple offers this feature.
The Sincerest Forms Of Flattery
The almost laughable copying by Xiaomi of the iPhone and iOS 7 is all the evidence you need as to why Tim Cook must expend significant resources on building the luxury appeal and premium status of the iPhone; all those hard-to-define elements beyond actual quality, reliability and usability.
There are few people better at this, if any, than Angela Ahrendts.
Confession: it’s hard for me to watch the original Willy Wonka and the Chocolate Factory movie and not think of Steve Jobs and Apple.
Rumors Jony Ive was in a Flock of Seagulls cover band are completely unfounded.
Input method is now a more important consideration than processor, OS and software. No one seems to understand this more than Apple.
More Is Less
Lost in the bubbly talk of an Apple iWatch is the fact everything about it seems wrong. We do not need yet another thing. I want my iPhone — or any smartphone — to serve as my ID, car keys, credit cards, TV remote, glucose reader, everything. Apple should focus its genius on making the iPhone devour more of those things, not create new ones.
The newest version of PayPal appears to equal, possibly usurp, Apple’s Passbook vision: Payments, money transfers, loyalty cards, information on nearby shops, it’s all there. Apple certainly wants the iPhone to be used for payments, though maybe they have finally decided enabling payments and not powering them is the way forward. This may also explain the company’s recent decision to once again allow Bitcoin apps in the App Store.
I actually read app update notes. This recent update from Yelp made me laugh.
Jan Dawson made a strong case for why Apple should stagger launches of its major products. Commenters offered additional insights as to why Apple does not (or should not) heed his advice. Not stated, however, but which I think is at least worth considering, are the possible impacts of corruption. Nearly all assembly of nearly all Apple products takes place in China, where there is a less-than-transparent relationship between the government and business. It seems the implications of this should at least be examined.
I am surprised by how few iPhone users seem to ever use AirDrop to transfer files or data to one another. Perhaps personal iPhone-to-Mac AirDrop sharing is the superior use case.
I am unaware of the age, gender, race or LGBQT numbers at Apple Inc., Apple in Cupertino, or of those who work solely on the iPhone. But together, these people have created something positively impacting lives. And they keep making it better. I tip my hat to them all and hope in some way, my words can ever do the same.
Over the last five years, Samsung has become a behemoth in the tech marketplace. Their smartphones dominate the tech landscape and their profits have been relatively good until recently, considering the fact they still make most of their money on hardware. However, as we have seen in the PC market, a hardware only business model is not sustainable. Indeed, as smartphones become more and more commoditized, Samsung’s profits margins will soon be squeezed — especially by competitors like Xaomi who is eating their lunch in China.
While they are one of the most vertically integrated companies in the tech arena and can leverage this to help margins to some degree, I am convinced that, unless they take control of their entire destiny, they are just going to become like any of the PC companies who have been beholden to Microsoft and Windows and have seen their margins shrink consistently as PCs became commoditized. “Google and Android” replace “Microsoft and Windows” in this scenario and at the moment, Samsung is just a front end to deliver more and more customers to Google to get their ads, services and products via Samsung devices. Given the fact 50% of Android devices are Samsung branded, and Samsung’s cut of any related profits is the same as even tiny companies who also back Android, if I were Samsung I would be really pissed I’m making Google richer while at the same time, jeopardizing my future earnings potential if I continue to back Android.
To Android or Not to Android?
It is clear to me Samsung sees this and is rethinking their relationship with Google and their support for Android. At their recent developers conference, they showed off their own mobile OS that uses Tizen at its core and have even started paying developers to write apps for Tizen. At first glance it seems the focus on Tizen seems to be for the Asian market but don’t let that deceive you. I think there is something bigger in the works with Tizen.
Here is what Samsung is up against if they continue down an Android path as is.
First, they just make Google wealthier and continue to deliver customers to Google instead of to themselves. Yes, Android has served them well so far, but as long as Google owns the OS, Samsung is beholden to Google and is just a slave to them. Second, they drive revenue to Google, revenue that could be all theirs if they owned the customers. Third, they will continue to face margin pressure as hardware based profits shrink. As I mentioned above, our analysis suggests Samsung’s margins, even on their upper end products, could be reduced to around 10%-15% as even high end smartphones become more commoditized.
There is a reason Samsung copies and steals from Apple as the court in San Jose has already proven during the recent trials in California. They look at Apple’s ownership of their ecosystem and lust after it in a big way. Apple is mostly insulated from very low margin pressure since they not only make money from hardware but also from apps, products and services. They can do so since they own their OS and ecosystem and control their destiny across the board. Put more directly, Apple gets all of the profits from hardware, software, ads and services while, in Samsung’s case, Google gets most of the ad revenue, app sales profits and services sales.
The irony to all of this is Samsung is the one who has made Android successful — yet Google will not share the wealth with Samsung any more than they do with other Android licensees. Samsung has to be steaming at this predicament and looking for a way out. However, they have a dilemma and are boxed into a corner in the short term. While they can and will modify Android as far as they can without losing the store certification, the apps on Android that are both legitimate and illegitimate (the later being important in China) is too vast for them to abandon. Not being able to run android.apk apps would be suicide for anyone in the short term. Their developer environment is still based on Android so it seems they are trying to create a para-platform on top of Android that still uses the store but gets custom apps created for them in their ecosystem.
However, even in this scenario, where they can add some customization, they are still pouring money into Google’s coffers, leading them down a path where a hardware only play could hurt them big time in the future. Keep in mind, all OEMs backing Android are getting the same OS and, while hardware may differ, the OS is identical. It becomes harder and harder to differentiate with Google in control of the OS and related products and services. And Google’s new Android One program basically takes the cost out of the hardware and makes it possible for small companies to enter the market and go right after Samsung’s low end business in emerging markets.
So what could Samsung do to extricate themselves from the powerful hold Google has over them? Some industry folks I talk to think that Samsung could just fork Android the same way Amazon has done with their Fire OS. But even with Amazon’s clout, there are still not as many apps available on the Fire OS as there are in the Google Play Store and staying with Android even in a forked mode could be confusing for Samsung’s customers in the long run.
I think the real thing Samsung is working towards is to get away from Android completely sometime over the next three to five years and take complete control over their future. This is where I think their backing of Tizen becomes interesting and potentially important. Although Tizen has not attracted a lot of app support to date, if Samsung got behind it and was able to prove to the market they will continue to innovate around Tizen and keep delivering hundreds of millions of smartphones and tablets annually under their brand, they could attract serious software developers to the Tizen platform. Remember, they have 50% of the Android market today. If Samsung could show they would continue to be the #1 leader in smartphones even with Tizen, software developers would be crazy not to back Samsung’s Tizen strategy.
I don’t believe Google will let Samsung dump them without a battle. In fact, the recent fights between the two are becoming more public as it is becoming clear Samsung is no longer in love with Google.
I don’t think Google will adjust the revenue share for Samsung since, in doing, so they would probably have to have similar terms for other big Android vendors and that would really impact Google’s earning abilities. But they could be creative in trying to keep Samsung in the Android fold as well as putting a lot of pressure on them in ways we can’t even imagine at the moment. What Google wants, Google mostly gets.
In the long run, Android is a dead end for Samsung. As stated above, their relationship with Google is not that much different than what other PC OEMs have with Microsoft today and look what that has done to them in the commoditized age of PCs. I have no doubt even high end smartphones will become commoditized in a similar manner. If Samsung does not find ways to gain more control and deliver their own apps and services to enhance their overall profitability, they will, excuse the pun, become marginalized.
I have spent the past three weeks in Detroit, a city possessing a rich history and an unremitting present. The vagaries of Silicon Valley count for little here. When I heard a young man ask — for real — if the Samsung Galaxy S5 was an iPhone or an Android, I knew there was much to glean if I simply put my smartphone down and listened.
Here then are my thoughts, insights and observations from the past one score and one day…
There are no smartphone wars. Rather, just amazing, affordable and truly expansive opportunity. Android versus iPhone means nothing to nearly everyone I speak with.
It is hard to overstate just how much television will be disrupted by the combination of children, tablets and YouTube. Free, always accessible content uniquely tailored to their own self-driven interests, available from any location is now possible — and the young will accept nothing less.
Facebook, not smartphones, not telcos, not automobiles, not Disney or ESPN, is connecting the world. Facebook is the new oil. If there is any ‘next Steve Jobs,’ it is Mark Zuckerberg. For whatever confluence of reasons, Zuckerberg divined the power of social media from the start, just as Jobs did with computing. No matter how rich, no matter how many struggles, I expect Zuckerberg to devote the remainder of his life to Facebook and all it represents.
There is middling outrage over the Facebook ‘user emotion’ study. As for me, this represents little more than A/B testing. In fact, I’m more angry over the iPhone keyboard. It’s so terrible. Is this some sort of secret Apple study? I mean, what other possible reason could there be?
I am in the place where cars and mass production altered the course of humanity. Now, it is smartphones, social media, mapping, and code; these are re-making the planet as much as the automobile did in the 20th century. We are at the start of a new future. That’s just awesome.
I was often asked the best way to become a professional writer. It’s such an easy question to answer.
Marry well.
Oh, and should you be so fortunate to have an opportunity to write about what you love, for an organization with no concern for page views and provocation, as I am at Tech.pinions, then do not fritter away such a blessing.
I first learned about the SCiO from Techpinions. Point this device at a piece of fruit for example, and it will tell you what it is and even provide data on its composition, such as how much fat and carbs the item contains. Every single time I read more about this device, I think it is absolute magic. I told so many people about it that I now desperately hope it works as advertised.
I have nothing but good things to say about the Amazon Fire Phone. Yet, I can’t possibly recommend it to anyone. Why would I? In the US, at least, there is almost no reason to recommend any smartphone other than the iPhone or the Samsung Galaxy.
Microsoft’s Windows Phone faces a similar fate as Amazon’s Fire. Fair or not, can you imagine any outcome for Windows Phone other than failure? How does Microsoft start over? What amazing technologies, hardware and combination of services can they possibly deliver to make the world care about a device that is not iPhone or Android? I do not have the answers.
If I were in charge of Microsoft I would simply continue to make quality devices, offering great Nokia design, great Nokia imaging, incorporating Skype, OneDrive, HERE, Office and other Microsoft-owned products and services. Plodding along, hoping more and more Android vendors exit the business, picking up the scraps, all while leveraging my enterprise install base and security, identity and productivity tools, hoping users discover my superior value.
It won’t help. The smartphone market is lost to Microsoft.
The screen market, however, is barely in its infancy. Microsoft should forget smartphones and focus instead on screens. Screens will become like power outlets, we only notice them when they cannot be found.
Perhaps no company — not Apple, not even Google — possesses the breadth of services Microsoft offers. The problem, of course, is these services are not exposed for all the world to use. They are locked inside unwanted PCs, shoved inside tablet abominations, buried beneath the content we actually seek from our Xbox systems, sold mostly to IT directors, attached to products and platforms we do not need, and hidden behind an incomprehensible UI. Microsoft has built an anti-moat around its services, not locking us in but keeping everyone out.
The World Cup has introduced to millions the joys of live sports streamed to our smartphones and tablets. This is so in Detroit and around the country. It has never been more clear we all want to watch what we want to watch when we want to watch it where we want to watch it and on the device we want to watch it on. This is simple, obvious and unstoppable. It’s only a matter of time before we have a difficult time explaining to our progeny how it ever could have been anything else.
Last week, Apple CEO Tim Cook very happily took part in the San Francisco Pride Parade. Also, Hobby Lobby successfully won the right to provide only certain forms of contraception for its employees. What do these have in common?
Values equal profits.
Companies are publicly declaring their values, even going to court to defend and promote their values. This is only start. The technologies of Silicon Valley are breaking down barriers, bringing corporations to their knees and empowering individuals and groups around the world. With smartphones in hand, with continuous, real time, location-aware connectivity always available, we become our own corporations — with Uber, AirBnB and others merely pointing the way. We will work for ourselves and we will live by our values.
This is good. But it will be messy. Very messy.
Hype aside, can you envision a situation where you use Bitcoin over, say, your iPhone ‘wallet’ linked to your secure iTunes payment data? iPhone offers ease of use and peace of mind. That’s a powerful combination. Still worse for Bitcoin, is that it is essentially digital cash in a world addicted to easy credit. Learn about the blockchain. Bitcoin itself is merely a bystander.
Given Android’s headstart in wearables, it’s hard to see Apple winning any wearable app wars. Given the limitations of its market reach, it’s similarly difficult to see Apple winning the “smart home” market without buying its way in. Sonos would be a good start.
Smartphones are borderline magical. That said, the iPhone 5s battery and the HTC One (M8) camera are embarrassingly bad.
In the past week, I’ve rented two movies from iTunes. I failed to finish both in the first sitting and was not able to watch either until after 24 hours later. iTunes refused, insisting the rental period had expired. This was true, though did not mitigate my anger. I may abandon iTunes rentals altogether. The lure of non-legal downloading is strong.
How much of Yahoo’s Alibaba riches is Marissa Mayer prepared to spend to get us to visit Yahoo? I suspect all of it. Nowhere I go does Yahoo seem to matter.
Idle prediction: Apple will not kill off the iPhone 5/c/s form factor this year, nor will Apple offer three simultaneous iPhone form factors. Yes, that means I am predicting only one large-display iPhone.
Not a prediction, just a thought experiment: In 2024, when a chid is born, they will be assigned either an Android or an iPhone. This will control everything.
There will be over 1 billion (American) Android activations this year, and several hundred million (Chinese) Android (AOSP) activations. Android is a stunning success story. All those involved in Android have long since earned our respect. That said, some analysts, bloggers and even industry insiders still have not grasped the obvious: Smartphones are the first screen. Smartphones are the primary computer.
The CEO of Yahoo is female. The CEO of HP is female. The #2 at Facebook is female. A man runs Android, the world’s most popular OS. He is from India. The CEO of Microsoft is from India. The tech sector points the way forward not only with its products.
Anybody still recall when Apple’s chief competitors went about mocking the company for being, well, technology designed for older people? Those attacks came to an abrupt end in large part because Apple kept on printing money. I suspect, however, there is a second reason: iWatch.
iWatch may be the perfect personal computer for boomers, seniors and the elderly, yet Apple’s competitors, desperate to prove they are cool, have only now clued into the importance of this demographic. If at all.
Yes, the Apple iWatch does not exist. Rumors abound nonetheless, most insisting either that Apple iWatch will be the greatest computing revolution ever, or the latest batch of prognostication, an odd sort of tamping down of expectations, as if we should prepare ourselves to be disappointed.
Spoiler alert: neither of these groups knows.
We do know, however, that there is a massive, untapped market for an Apple iWatch: older people.
Consider that a device roughly as we imagine the iWatch to be, can at this very moment, serve as a tracking beacon, a camera, a heart monitor, an exercise monitor, pulse oximeter, a voice-based notification service – “time to take your pills” – a non-invasive glucose monitor, and a possibly a method of alerting the wearer to an impending heart attack.
All of which would be extremely valuable not simply to fitness freaks, but to baby boomers, seniors, elderly — certainly anyone over 60.
Bonus spoiler alert: there are a lot of older people. They positively abound in core Apple markets, including China, Japan and the United States.
The Bleeding Edge
Change comes fast to technology. The irony here is that the next insanely great market for computing tech, wearable devices, may reside within the demographic long considered furthest from the bleeding edge: older folks.
About time.
But first, a trip down memory lane.
“Apple is for old people.”
This glib statement has been a surprisingly persistent refrain from the media ever since the rapid mass market ascendency of the iPhone. Over the past 24 months, a “brand perception measurement” firm noted that Apple’s “biggest fans” hail from the older end of the spectrum. Bloomberg was happy to repeat this gospel: “Older people use iPhones, younger people use Samsungs.”
iPhones are not that cool anymore. We here are using iPhones, but our kids don’t find them that cool anymore.
Samsung famously mocked iPhone’s appeal to the older crowd in a series of blistering televised attacks:
Not wanting to feel left out, Microsoft joined in on the action, wondering if the mean old lady was nonetheless (wink wink) too young to have an iPhone:
As a way to limit Apple’s growth, this line of attack has simply not worked. Indeed, I think this mocking of Apple – and by extension, all their older users – will come back to haunt the perpetrators. As this Digital Trendsanalysis reminds us:
Older consumers tend to have more disposable income and be less price sensitive than young consumers.
In addition, older people, happy and content with their iPhones and iPads, may offer Apple a sly path into the enterprise:
Having a positive perception among older consumers can also have indirect benefits to Apple’s business, since older users are more likely to be able to influence purchasing and technology policies and purchasing at schools, businesses, and enterprises.
The technorati continue to miss the big picture: whether or not “old people” are a natural Apple customer, we keep making more of them. Lots more. Just in the US, we will have 55 million people age 65 and over by the end of the decade. China is already approaching 200 million people aged 60 and older. This number is growing — fast.
What’s Old Is New Again
Note the graphs below documenting the aging of Japan and China, in particular. These aging populations will require innovate support, services and technologies to meet their unique needs.
Breaks down like this: More older people, living longer, possibly living alone, and with a greater need for health (and health monitoring) services. Think of the massive potential of an iWatch or similar device for this group.
Thus, while Apple is aggressively pushing into China, I suspect there is far more at stake than sales of iPhone. As Bloomberg noted last year:
More than two decades of record economic growth turned the Chinese into the world’s top consumers of cars and smartphones.
Yes, yes, smartphones. And yet, that very same Bloomberg report noted:
As the almost 200 million population of over-60s more than doubles in the next 40 years…
Forget talk about Apple building a “phablet” because China consumers will demand it. I can’t help but think an iWatch is the most logical product for Apple to build for China (and beyond). An affordable tracking device that monitors pulse, breathing, glucose, offers reminders, its data instantly synched to the cloud, accessible by health authorities, shareable with children or caregivers, could prove invaluable.
Again, it’s not just in China.
The US is similarly gaining extraordinary numbers of older people, as this PBS report noted:
(Starting in 2011) the first of the estimated 79 million Americans born between 1946 and 1964 will turn 65 years old this year, at a rate of 10,000 a day. (emphasis added)
It gets better — if you’re Apple and if you’re working on an iWatch:
The number of people enrolled in Medicare will grow from 47 million in 2010 to roughly 80 million when the last of the baby boomers turns 65 in about two decades, while enrollment in Social Security is expected to rise from 44 million to some 73 million. At the same time, the ratio of workers paying taxes to support the programs to beneficiaries will drop.
Our healthcare industry, and our seniors, are going to be tasked to do more with less. Something like an iWatch, priced under $500, say, could prove a rather innovative means to save money on health testing, monitoring and possibly even visits to the doctor.
The Case For iWatch
It may seem like smartphones are everywhere, but even in the US the latest data shows that less than 20% of people over 65 have a smartphone. Likely, they find little need. But an iWatch, as imagined, could prove to be a near-necessity. Ask yourself: who is best equipped, anywhere in the world, to build a highly functional, reasonably affordable, startlingly intuitive, wearable personal computing device? My money’s on Apple.
Almost a year ago, CEO Tim Cook said “I think the wrist is interesting. I’m wearing this (Nike Fuelband) on my wrist…it’s somewhat natural. But as I said before, I think for something to work here, you first have to convince people it’s so incredible that they want to wear it.”
I do not know if Apple has reached that “incredible” stage yet, nor when they might. But a device that older people can legitimately operate and will use, offering valuable and personalized health data, could prove to be yet another massive market for the company.
I predict the iWatch will usher in a entirely new personal computing paradigm, flipping the early adopter/late adopter convention on its head. For the next phase of computing, build first for the old, that’s the bleeding edge, then let the technology drift out to the rest of the market in due time.
Business is a combination of war and sport. ~ André Maurois
The Long Summer Of The Microsoft Monopoly Olympics
Computing was pretty simple for the last 15 years: PC plus a browser. Both are splintering now. ~ Benedict Evans (@BenedictEvans)
Once upon a time — long, long ago in 2006 — the Personal Computing Olympics used to be oh-so-simple. First off, you weren’t even invited to the games unless you were bosom buddies with Microsoft. And almost everybody who attended got a medal (but Microsoft took home most of the Gold, if you know what I mean). It was the long summer of Microsoft and we thought that it would never end.
Then along came Mobile. Mobile changed the game as radically as if the Olympics had switched from Summer Games to Winter Games. The world of computing was turned on its head and it would never be the same. Oh, Microsoft tried to play in the new Mobile Winter Olympics, but they were ill prepared. Surprisingly in foresight, but unsurprisingly in hindsight, the new Winter games left them cold.
One Olympics, Two Champions
So much for the old Olympics and the former Olympian. Let’s turn our attention to the New Mobile Winter Olympics and the question of who won them. The answer? Well, it depends upon the question you ask.
It is not the answer that enlightens, but the question. ~ Eugene Ionesco
You see, the Tech Olympics — just like the real Olympics — are divided into two very different types of games:
1) Subjective Games that are judged by a panel of judges — like Ice Dancing and Half-Pipe; or
2) Objective Games that are determined by clocks, tape measurers and other quantifiable metrics — like Speed Skating, Downhill Slalom and Ski Jumping.
So who won the Tech Olympics — just like who won the real Olympics — depends on how you score the games. Are you judging based on how the market responded or how the press responded or are you judging based upon objective measurements? Two very different ways to measure. Two very different types of winners.
The Subjective Olympics
And the medalists in the Subjective Olympics are:
Gold: The Google and Android twins walked off with the Couples’ Gold Medal. The Judges raved about their mobile acumen and no one else even came close to matching their exquisite market share.
Silver: Samsung came in a very strong second for the Silver Medal. Some argued that they should have won it all, but Samsung was all strength, no subtlety; all power, no grace. Four years ago, no one even expected that Samsung would be at the games, so they should be grateful just to be standing on the (Android) platform.
Bronze: And the Bronze goes to Amazon, of course. True, Amazon did not have a particularly productive Olympics. They over-performed in revenue, but under-performed in profits. But none of that really mattered to the Judges. Amazon’s coach was brilliant, their business model dazzling and their potential awe-inspiring. The Judges awarded the Bronze to Amazon not on merit but because it was clear to them that Amazon was destined for greatness.
Off The Podium: Apple? As if! Pushed off the podium altogether. All sorts of glitzy performances, but they only entered a few, select events, they had the smallest team at the Olympic Village and they could muster only a paltry market share, to boot. On the whole, a most disappointing performance.
Oh, it was true enough that Apple had its fanatical, cult-like following, but Apple’s fan base was oh-so-tiny in comparison to the other contestants and it was full of pretentious baristas and other obnoxious types. Apple simply didn’t fit the Judge’s image of what it takes to make a champion.
The Objective Olympics
The medalists for the Objective Olympics were a different story altogether. Let’s do them in reverse order:
Disqualified of Did Not Finish: Sony, Panasonic, Sharp, BlackBerry, Palm, Dell, and far too many others to list. Some started too soon, some failed to finish, some did both.
Shut Out: Microsoft talked a big game, but they finished with no medals. However, they vowed to win the next Olympics, for whatever that’s worth.
Bronze: The Bronze? No winner. The podium remains empty.
Silver: Samsung of course, with a strong showing. 309 million units, which represented 39.5% of total Android shipments in 2013.
Gold: In a surprise to absolutely no one who was paying any attention and to absolutely everyone who wasn’t — the Gold went to Apple. And it wasn’t even close.
Scoring The Objective Olympics
[pullquote]I like long walks, especially when they are taken by people who annoy me. ~ Fred Allen[/pullquote]
“Apple!” cried the outraged Subjective Olympic judges. “Apple, the winner? And no medal for Google and Android? Impossible. Outrageous. Unheard of! The fix is in!
“Well, you see,” the Objective Judges calmly explained to their irate brethren over and over again, “in the Objective Olympics, we judge things by objective criteria and Apple walked away with them all — save one.
1) Apple gained mobile phone share. ((Gartner: Apple gained mobile phone share as smartphones overtook feature phone sales in 2013))
The Smartphone App Wars Are Over and Apple Won” Yep. If you care about have the best/newest. Ben Thompson (@monkbent)
3) Apple dominated profits. Their profits went UP from 78% to 87.4% in 2013. And just to give you an idea of how much Apple dominated, iTunes — which is their “loss leader” — grossed half as much ($17.5B) as all of Google combined. ((Mobile phone market hits ‘the great moderation’;
—
Including hardware, iTunes grossed about $175b in 2013))
Market share is the right metric for Android’s business model. Revenue is right for iOS’. The two aren’t mutually exclusive. ~ @mtabini ((via ArrAySee @ArrAySee))
Two Different Ways To Judge, Two Different Types Of Olympians
“What, what, what,” sputtered the flustered Subjective Judges. “If the facts favor Apple, then the facts must be Apple Fanbois!”
Yeah, they kinda are.
[pullquote]Android’s increased market share HAS NOT come at any cost to Apple’s iOS[/pullquote]
It’s been apparent for years that Apple was taking the high end of both phones and tablets and that Android was taking almost all of the rest. What HAS NOT been apparent to many is that Android’s increased market share HAS NOT come at any cost to Apple’s iOS. As noted, above, despite Android’s massive increase in market share, Apple’s numbers in platform, profits, Enterprise and customer loyalty all went UP.
Did you hear about the guy that lost his left arm and leg in a car crash? He’s all right now.
Did you hear about the company that lost all the profitless market share they weren’t ever competing for? They’re all right now too.
In Olympic terms, Apple didn’t enter the most events, Apple didn’t win the most medals, Apple didn’t win any medals in any event that they didn’t enter, Apple didn’t win any bronze or silver medals, but Apple kept its eyes on the prize and they took home the Gold in every event that they participated in.
Market share is the right metric for Android’s business model. Revenue is right for iOS’s. The two aren’t mutually exclusive. Not that hard. ~ Marco Tabini (@mtabini)
Using market share alone as the one and only measure for who won and who lost the Mobile Tech Olympics borders on the delusional.
[pullquote]Life’s hard. It’s even harder when you’re stupid. ~ John Wayne[/pullquote]
It’s like awarding the Gold Medal to the hockey team that had the most shots instead of the most goals;
It’s like awarding the Gold Medal to the speed skating team that had the most players instead of the fastest time;
It’s like awarding the Gold Medal to the curling team that threw the most stones instead of to the team with the stones closest to the center of the target.
Never underestimate our ability to ignore the obvious. ~ Po Bronson
The Next Olympics
So what happens at the next Olympics? Well, like former president George Bush, I have opinions.
I have opinions of my own, strong opinions, but I don’t always agree with them. ~ George W. Bush
I’ll save my analysis of the future of Blackberry, Apple, Chinese Android, Samsung Android, Nokia Android, Microsoft Windows Phone and Google for next time.
Time to fess up and see how badly I did in last year’s predictions. You can find them all here.
Criticism may not be agreeable, but it is necessary. It fulfills the same function as pain in the human body. It calls attention to an unhealthy state of things. ~ Winston Churchill
Prediction #1: There Is Little Room For A Category Between The Tablet And The Notebook.
This is still in dispute. Many still feel that a hybrid category between the tablet and the notebook will eventually emerge.
Not me. And it surely didn’t happen in 2013, so I’m chalking this one up as “correct”.
Here’s the thing: The touch user input (finger) is wholly incompatible with pixel specific forms of user input (mouse and stylus). And putting both side-by-side on a single device is not the solution, it’s the problem.
Why (my wife) hates Windows 8? In her words, “It doesn’t do what I’m telling it to do!” ~ Brad Reed (@bwreedbgr)
It’s anecdotal, but that’s about as damning a criticism as a product can receive.
In 1995, Cynthia Heimel wrote a book entitled: “If you leave me, can I come too?” I think that’s today’s de facto motto for Microsoft. Microsoft wants to have it both ways – sell you an all-in-one notebook AND tablet — and consumers are having none of it.
Prediction #2: Tablets Are Going To Be Even Bigger Than We Thought.
Worldwide the number of smartphones will surpass the number of PCs in the next 6 months. ~ Benedict Evans
Nailed it. 2 for 2.
Tablets were the biggest story in 2013. And they may well be the biggest story in 2014, too.
Prediction #3: Apple Will Create A New iPad Mini In The Spring.
Wrong, wrong wrong. I thought that Apple would target the tablet for the education market. But Apple has opted, instead, to move almost ALL product launches — iPod, iPhone, iPad – and maybe even Macs — to the holiday quarter.
2 for 3.
Prediction #4: iOS will become the premium model, Android will take the rest.
Sounds about right to me.
There a persistent misunderstanding of the Apple business model.
…Apple simply doesn’t care about market share. As a properly capitalist company it cares about the profits…
Apple has repeatedly said that it’s not interested in being a top Chinese or anywhere else smartphone player. It’s interested in being a top player at the top end of the smartphone market which is an entirely different thing. ~ Tim Worstall
No one seriously argues that Burberry should be more like Walmart ((Analogy borrowed from Brian S. Hall.)). Why ever does anyone think that Apple should be more like Samsung?
That makes me 3 for 4.
Prediction #5: Samsung Will Be Forced To Create Their Own Ecosystem.
Hmm. Lots and lots of talk about such a thing happening but almost zero action. Got that one definitely wrong.
Final score: 3 for 5.
Conclusion
I don’t really have much faith in my predictions anyway. I don’t pretend that I’m a seer who can peek into a future that no one else can see. As I often say, I prefer to predict the past — it’s safer. Easier too.
I more or less see my role as trying show people that the future they’re resisting is already here today — that the things that they are denying have already happened.
To most men, experience is like the stern lights of a ship, which illumine only the track it has passed. ~ Samuel Coleridge
Here’s a couple examples for 2014.
A) Microsoft is in more trouble than people seem to realize. Microsoft is making lots of money — which is good — but consumers are about to fire Microsoft from its current job and Microsoft doesn’t have any obvious prospects for obtaining future income — which is bad, bad, bad.
B) Phones and tablets are a thing. Notebooks and Desktops are a niche. Still getting lots of resistance to this fait accompli, and that resistance is warping the analysis of many.
C) Android is not the Windows of the 1990’s. Apple is not the Apple of the 1990’s. If you can’t see that today’s marketplace is entirely different from the computing marketplace of the 1990s, it’s because you refuse to see what is right before your eyes. The evidence is all around you.
There’s more, of course, but this isn’t a prediction article, it’s a mea culpa article. I was extremely conservative in my predictions and I still got 2 of 5 wrong. C’est la vie.
He is known simply as Charbax. You can find him on Twitter, on Youtube, and very often in the comments section of any post that trashes Android. He is in my opinion the biggest Android fanboy — fan, fanatic, believer, evangelist — in the world. His numerous first-hand, homebrew videos showcase the incredible innovation occurring across the Android ecosystem, be it in China, in Europe, or America.
What fuels his passion? Apple makes gorgeous physical products, easy to love. Android, by contrast, is a string of ones and zeros, cold, unfeeling code. There are many more questions, of course. If Android is “winning” then how does he explain Apple’s massive profits? Or the pre-eminence of iPad? Why care about an OS whose primary reason for being is not to get more people online but to capture more personal data to sell to advertisers? And what of Google’s continued moves to tighten control around this once aggressively marketed “open” platform?
Charbax arrived in San Francisco last week and did not shy away from any of my questions — though his numbers are often suspect.
Disclosure: I have followed Charbax online for at least three years. As that rare pundit who has gone on record stating that Android is, well, not very good, and almost certainly to be eclipsed by a far more functional and cohesive platform, I have faced his wrath many times over. Watch his videos, however, and you must admit that no person, no company — not even Google itself — has so well documented the stunningly rapid spread of Android throughout the globe, and into all manner of computing devices, be they phones, tablets, toys, cameras or sensors. If Android does come to rule our world, as Charbax absolutely believes it will — maybe already has — then history will lean heavily upon his work.
Author note: I have edited responses for the sake of brevity and clarity.
His real name is Nicolas Charbonnier. He is from Denmark. He tells me that he funds his work primarily through his well-trafficked pro-Android website and popular Youtube channel.
What explains the rapid global spread of Android?
Android is the first embedded Linux for smart devices platform that got enough investment to reach full usability.
What are some current examples of innovative development taking place with Android?
Android is reaching sub-$25 Phones this year and it’ll be in sub-$15 phones next year. Android has reached sub-$20 Desktop HDMI Sticks now and it’s going to reach sub-$10 desktop prices next year. Without Android, there would be nothing of interest going on in the tech world.
Android is enabling the next 5 Billion people access to smart technology. You can fly to China and buy an iPhone 5S copy on MediaTek MT6572 (dual-core ARM Cortex-A7, Android 4.2.2) for the same total price as buying a “real” iPhone 5S in America.
It seems as if only Samsung has profited from Android. What if they abandon the platform?
This is the dream of the same morons that sank Nokia and Blackberry. Samsung is hugely profitable only thanks to Android. Android subsidizes Samsung, Sony and LG’s HDTV business and other businesses. Companies make money on Android because it’s free, open source, and optimized for the most advanced consumer products.
Are you affiliated with Google?
Nope. If Google wants to give me a job, they are welcome to hire me.
Why are you an Android “evangelist”?
I’m basically an evangelist of technology. I think technology is the solution to all world’s problems and all the (latest) technology is powered by Android. I video-blog at 20 consumer electronics shows per year and 99% of what is happening there revolves around Android. Without Android, I would have nothing to video-blog about.
How do you support your globe-spanning work documenting Android? My Youtube channel passed 25 million views and I make money from ads. A few companies pay for my flights and hotels when they want me to video-blog at their conferences. I have some 300+ members paying me $20/year on my website. I also earn money by offering advice on sourcing devices out of China.
What do Apple users get wrong about Android?
The world is bigger than Cupertino. Most technological innovation is not happening in the USA and especially not in Cupertino!
Stop believing Apple invents stuff! Apple never invented anything! Even selling overpaid hardware pre-dates Apple by millenia. Apple is simply a cash machine. They invest money wisely in components at the right time for them and they make absurd amounts of profits selling those devices.
They convince consumers that it’s worth paying $2,500+ with a 2-year contract for a device that cost Apple less than $150 to manufacture by underpaid workers in China.
While you may stay in love with your Apple plastics if you want, there is much more happening out in the rest of the world. Android has 100 times more engineers and 100x more R&D being invested throughout the thousands of Android companies working on Android innovation right now.
Author note: I did not ask Charbax if he was referring to me with his “stay in love with your Apple plastics” remark or to Apple users in general.
What is the future of Android?
Android has about 90% market share today (where it matters, growth markets and non-US developped markets). It’ll be 98% in 2 years. It’ll power everything in the world.
But isn’t fragmentation a significant problem for Android?
With retail prices for Android devices ranging from $20 to $2000, you cannot expect everything to work on all those different types of devices. On the other hand, even without “official” support on perhaps 50% of the Android device output to date, most apps and most Android features work perfectly fine on 98% of the Android devices on the market.
Author note: Again, Charbax did not offer verifiable evidence for his assertions.
Android was very ingeniously designed since day 1 for both massive backwards compatibility and forwards compatibility. The Android apps SDK enables 99.9% of the 1 million Android apps to work perfectly fine on 99.9% of Android devices being used on the market right now. Even your 3-4 year old Android device will support above 99% of the 1 million Android apps today.
This is absolutely not true of Apple iOS. iPad apps don’t work right on iPhone. iPhone apps don’t work right on iPad. iPad (2) apps don’t work right on iPad Mini. iPad Mini apps don’t work right on iPad Mini Retina.
Android is built to accomodate for just about any screen size, pixel density and any optional hardware features. You do not need to design “tablet optimized” apps for Android for example as you must absolutely do so for iPad.
What else is better about Android than iOS or Windows Phone (or any other operating system)?
Android is 100% open source. This is the most important thing. Android is like the web. iOS and Windows are like proprietary competitors to the web. Android is 100% free.
What about claims that Android or Android makers infringe on other’s patents? All those patent lawsuits against Android are complete bullshit. Anyone who believes Microsoft or Apple have the right to sue Linux open source on smart devices is just out of his mind. Nobody must touch Linux, it’s free and open source. End of story. Nobody can patent any touch UI, any device shape, any essential user interaction idea, or anything that somebody else would have come up with.
Google appears to be transitioning away from the very open source view you espouse.
Admittedly, Android needs to be even more open source and even more free. That means open source GPU drivers, open source WiFi, Bluetooth, and other source drivers. It means perhaps 100% free alternatives to HDMI, USB, H264, Mp3, Dolby, as well as alternatives to whatever else other people are claiming licence fees against Android device makers for. That practice is just wrong and needs to stop.
Connectors, codecs, graphics engines, all those things need to be free to use for any device maker. Google needs to ramp up their involvement in providing 100% free alternatives to the market for these things so that device makers can in fact produce 100% free and open source Android devices worldwide.
But is this something Google should do? What about controlling the Android brand name, the use of Google apps, and controlling development of future releases?
(I suspect) Sundar Pichai‘s role overseeing Android may be to prepare Android 5.0+ to be totally open. Google should (and soon may) allow any third party developer access to see in real time all the future features of Android that Google is working on. Google should release dailies and accept way more third party patches and feature requests. Any improvements to Android that any third parties want to submit should get integrated in real-time.
You think Google will do this?
I think Google knows they are so far ahead of anyone else now that it really doesn’t benefit either Google or Google’s hardware partners to offer exclusive access to future Android development anymore. Give everyone equal, real-time access.
I also think Google will un-licence and un-restrict the use of their Android apps so that anyone will be allowed to ship Android with Google Play, Google Maps, Gmail, and whatever other apps Google offers, as much as they want, with no more need to ask for Google certification first.
Google should also count all Android activations in the future, and not only count certified Android devices. The 1.5 million Android activations per day are only certified Android devices being activated. That does not include the 500,000 – 1 million non-certified Android devices that are sold worldwide and activated each day.
Why are you visiting San Francisco?
I want to interview HP, Intel and others in the region. I will also be attending a Samsung developer conference. Before this, I was in Shenzhen, China and purchased some Android phones for $36, and Android-powered devices that copy both Windows Phone and iPhone.
Thank you.
Author note: below are some of my favorite Charbax videos:
The hundred meter dash, archery, weightlifting and the long jump are four very different Olympic sports with four very different methods of keeping score. The hundred meter dash is scored on speed. Archery is scored on accuracy. Weightlifting is scored on strength. The long jump is scored on distance. You don’t judge the participants in the hundred yard dash by how much weight they can lift. That would be the wrong way to measure them.
“…looking at ‘smartphone share’ or ‘profit share’ or ‘platform share’ all tell you something about the industry, but all three metrics mislead you if you try to treat them as a way to see who’s ‘winning’, because ‘winning’ means different things for Apple, Samsung or Google. After all, Google may well still make more money from searches on iOS than it does from searches on Android.” ~ Ben Evans, On market share
Hardware manufacturing, advertising, “razors-and-blades” content sales, and platforms are four very different business models and they have four very different methods of keeping score too.
You don’t take the metrics used to measure one business model and apply them to another business model. That would be the wrong way to measure them.
Each business model demands its own specific forms of scoring. The goal should be to devise, discover, or discern a form of measurement that properly and accurately reflects how a business is performing in the business model in which it is participating.
Biathlons, Triathlons and Decathlons are all unusual Olympic events in that they group together several disparate sports and then determine an overall winner. Think of Apple, Google, Samsung, and Amazon as Olympic teams that compete with one another in the four interrelated mobile business models – hardware manufacturing, advertising, “razors-and-blades” content sales, and platforms – a sort of Quadrathlon. Each team has its strengths and its weaknesses, each team wants to win the events that they’re best at and maximize their score in the other events in order to win the overall Quadrathlon.
Let the games begin!
Hardware Manufacturing
Last week I tried to explain how using only market share to analyze mobile hardware manufacturing was not only the wrong way to keep score of that business model but that it was actually obscuring the real score.
“The truth is that focusing on market share as the primary metric is the only way to paint the iPhone as anything other than a roaring success.” ~ John Gruber
I suggested an alternative measurement known as the “Fair share profit analysis,” in order to generate some perspective but, truth be told, the only real way to accurately “score” who’s winning in hardware manufacturing is with net hardware profits. When it comes to selling mobile hardware, do Apple, Samsung, HTC, Motorola, etc. really care what their market share is? No they do not. That’s the top line, a means to an end. The only thing that matters when they are selling mobile hardware is profit. That’s the bottom line, the end for which the means were made. Market share is all well and good but only if it brings home the profits. Keep your eyes on the prize – and profits are the prize.
Awards Ceremony: Apple walks away with the Gold (both figuratively and almost literally), Samsung takes the Silver and no one else even medals. The Bronze podium stands empty.
Advertising
The only proper way to score advertising is net advertising profits retained. Market share and platform may be used to garner advertising revenue but they are only the means and they should never be confused with profit, which is the end.
Today, there are three great truths in mobile advertising:
1) Google is killing it in mobile advertising.
2) Google is killing it in mobile advertising…but mobile advertising is still relatively small; and
3) The vast majority of Google’s mobile advertising revenue is generated on the iOS platform, not the Android platform.
1) Google is killing it in mobile advertising.
Google dominates the mobile search market with 93% of US mobile search advertising dollars, according to eMarketer. Facebook is at No. 2.
2) Mobile advertising is still relatively small.
The mobile ad market alone stood at roughly $4.1 billion at the end of last year, up from $1.5 billion at the end of 2011. Google, currently has more than half the mobile ads market with annual revenues of around $2.2 billion.
Just to keep things in perspective, mobile ad revenue only accounted for 9% of all online ad revenue last year, although the percentage of mobile ads vis-a-vis other online ads is rapidly growing. And mobile ad revenues paled in comparison with mobile hardware sales. While it took an entire year for ALL mobile ad revenue to reach $4.1 billion, Apple alone, and in 90 days, and in what many considered a down quarter, brought in revenues of approximately $31.4 billion just from iPhone and iPad sales.
3) Google is making its advertising money on iOS, not Android
“(I)t’s Android’s large market share that is the winner for Google. The more Android devices being used, the more Google services with Google ads are being used.” – Virtual Pants
Actually, not so very much. Most of Google’s advertising dollars are generated by iOS’s relatively smaller market share, not by Android’s massive market share.
Take a good hard look at the chart, above. The iPhone ad spend doubles the ad spend share of ALL of Android. The iPad almost matches ALL of Android BY ITSELF. And even the lowly iPod has one-quarter of the ad spend that ALL of Android does. Market share is all that matters? I don’t think so. That’s like arguing that acreage is all that matters in real estate. The size of the lot does matter in real estate but location, location, location matters more, more, more. And market share does matter in mobile advertising but it is the location of the market share that matters even more.
“My belief, though, is that what Google is winning with Android is a booby prize — overwhelming majority share of the unprofitable segment of the market.” – John Gruber
When it comes to ad revenues and profits, we shouldn’t be counting Android as a single entity anyway. Ad revenues don’t help Android, the platform. They help specific digital stores. Ads going to Amazon, Google, and the various stores in China and elsewhere need to be broken out separately, not lumped together.
Awards Ceremony: Google wins the Gold and they win it going away. But they receive their Gold medal standing on the Apple iOS platform, not the Android platform.
Silver and Bronze? I’ll let you decide if it’s Facebook, Yahoo, Microsoft’s Bing or someone else. They’re all so far back that it doesn’t much matter now anyway. That may change over time but we’ll have to wait and see how this market develops.
“Razors-And-Blades” Content Sales
“(T)he razor and blades business model, is a business model wherein one item is sold at a low price (or given away for free) in order to increase sales of a complementary good, such as supplies…” ~ Wikipedia
The “razors-and-blades” business model is tricky to score.
— Hardware revenues and profits mean NOTHING in the “razors-and-blades” model. In fact, it’s not unusual to LOSE money from hardware (razor) sales.
— Market share means both nothing and everything in the “razors-and-blades” model. It means nothing because it doesn’t actually generate any profits but it means everything because it is a prerequisite to generating profits. In fact, the only reason you’re giving away your hardware in the first place is to acquire massive market share which, in turn, will hopefully lead to massive profits.
— Ultimately, the only way to measure the success of the “razors-and-blades” model is on the net profits generated by the sale of the complementary goods (razors). In mobile, the complementary goods are content such as music, video, books, etc. and apps. Amazon also has the added advantage of being able to sell everything from their sprawling retail catalog.
As I tried to explain in my tersely titled article: “Selling The Amazon Kindle Fire and Google Nexus 7 Is As Silly As Selling Razor Blades To Men Who Love Beards“, the “razors-and-blades” model makes no sense in this market space. At least it makes no sense to me. In the “razors-and-blades” model, the complementary sales – whether it be blades for razors, or ink for inkjet printers or games for gaming consoles – must be proprietary and must command a premium price. That’s the whole point. Give away the razor, make it back – and more – by selling the blades at a premium.
If you’re selling content, you want to be platform agnostic so that you can sell as much content as possible. This, in my opinion, should be Amazon’s strategy.
If you’re giving away hardware in order to sell content, then you want that content to be tied to your hardware product so that you can monopolize the sale of the complementary product and command a premium price.
In the mobile space, the complementary sales ARE NOT proprietary, they ARE subject to competition and they DO NOT command a premium price. Amazon and Google don’t sell content that is any different or superior to that being sold by Apple and other content providers and their content isn’t being sold at a premium. In fact, Amazon often sells their merchandise at a DISCOUNT which – in the “razors-and-blades” business model – is completely bat-manure crazy. ((Then again, we all know that Jeff Bezos is crazy like a fox.))
So who’s winning in the “razors-and-blades” business model? Why, surprisingly, it’s Apple and it’s Apple in a runaway.
Despite growing competition from other tablets, Apple’s iPad still accounts for a whopping 89.28 percent of e-commerce website traffic, and also rakes in more money on a per-user basis than any other platform. ~ Monetate
Distimo reports that iOS App Store revenues were 430% larger than Android during 2012. ~ Apple F2Q13 Earnings Call
“…iTunes inclusive of Apple’s own Software generates as much as 15% operating margin on gross revenues. That’s over $2 billion a year.” ~ Asymco, So long, break-even
Apple sells their content, not in order to make money but, in order to make their hardware more attractive so that they can sell ever more hardware and make ever more profits. With regard to tablets, Apple is playing the OPPOSITE game that the Amazon Fire and the Google Nexus are playing. While Amazon and Google subsidize their tablets (razors) in order to make money on the sale of their content (blades), Apple should be subsidizing the sale of their content (blades) in order to make money on the sale of their hardware (razors). But that’s not how Apple rolls. Instead, Apple sells their hardware at a premium AND they sell their content at a premium. That’s not supposed to happen but that’s just how good the Apple ecosystem is.
It’s like a walk-on winning the Olympic marathon while everyone else is stuck in the starting blocks.
You can say that it’s elitist or arrogant to argue that iOS users are better customers than Android users. But you can also say that it’s the truth. ~ John Gruber, Church of market share
One last thing. If Amazon and Google have an incentive to sell discounted hardware and premium content and Apple has an incentive to sell premium hardware and discounted content, one of those business models is going to fail and it’s going to fail hard. Since Apple is, so far, successfully selling premium hardware AND premium content, I’ll let you be the judge of how this is going to play out.
Awards Ceremony: I’m tempted to award all three medals to Apple just for having the sheer audacity to win a game that they didn’t even enter. But I guess Apple will have to console themselves with just winning the Gold.
And the Amazon Fire and the Google Nexus tablets? Disqualified for not understanding the rules of the game that they were playing.
Remember, Amazon and Google sell their hardware at cost. They don’t make a penny off those sales and they might even be taking a loss.
Market share? Yes, they have taken some minor market share…in a market where they are GIVING AWAY THEIR MERCHANDISE. And market share is not how you score in the “razors-and-blades” game. While the press and the pundits fawn over the market share of the Amazon Fire and the Google Nexus, what they’re entirely missing is that in the “razors-and-blades” business model, market share should be a GIVEN. I mean, honestly, if you can’t obtain overwhelming market share when you’re giving away your product at cost, then you should be ashamed, embarrassed, abashed, chagrined, humiliated and mortified ’cause you’re doing something terribly, terribly wrong.
You win the “razors-and-blades” game by scoring the most content profits. All those Amazon Fire and Google Nexus market share numbers that the analysts are always going gaga over? Meaningless. They should be removed from the count. They’re probably not hurting the sales of the other available tablets and they’re not helping the bottom lines of their makers either. There is zero proof that Amazon and Google’s hardware giveaways have led to increased retail sales which, after all, in the “razors-and-blades” model, IS the point.
And if you’re going to prophesy that market share alone gives Google data that will someday, somehow, be worth something to someone, then you need to go back and re-read how the “razor-and-blades” business model is scored.
What we desperately need in analyzing mobile computing is far more attention paid to profits and far less attention paid to prophets.
Next Time
Next time I will finish with the “mother” of all business models – platforms – and do the medal count.
The author would like to gratefully acknowledge the contributions of Ben Bajarin and Steve Wildstrom. All the great ideas, that you agree with, were theirs. All the bad ideas, that you disagree with, were mine.
This is the first of three articles looking at how we measure – and mis-measure – who is “winning” in the mobile sector. Article one focuses on market share and was inspired by an article written by Bill Shamblin, entitled: “Chasing Smartphone Market Share Is A Chump’s Game.” Article two will focus on the proper way to measure or “score” mobile hardware manufacturing, mobile advertising and the “razors-and-blades” content models. Article three will focus on the role that market share plays in the network effect and will examine the proper way to measure or “score” how well a platform is doing.
The Joke
Have you heard this one?
Two farmers bought a truckload of watermelons, paying five dollars apiece for them. Then they drove to the market and sold all their watermelons for four dollars each. After counting their money at the end of the day, they realized that they’d ended up with less money than they’d started with.
“See!” said the one farmer to the other. “I told you we shoulda got a bigger truck.”
Or how about this one?
Android is winning because they got a bigger truck.
The Joke Is On Us
Both “jokes” are based upon the old saw that one can lose money on every sale but make it up in volume. Unfortunately, the joke is on us because this is exactly the kind of nonsensical analysis that is being doled out by tech pundits and lapped up by the press and investors. You think I’m exaggerating? Take a gander at some of these recent tech headlines:
I could link to a dozen more headlines just like them. These headlines – or their underlying articles – all have two things in common:
1) They contend that Android is winning and Apple’s iPhone is in deep, deep trouble; and
2) They point to market share as the sole or primary basis for their conclusion.
“The latest numbers are in: Android is on top, followed by iOS in a distant second. There is no denying Android’s dominance anymore. There is no way even the most rabid Apple fanboy can deny that iOS is in second place now. Android is winning.”
ReadWrite takes it one, final step further, stating:
“The Mobile Battle Is Over – And Google Won.”
In other words, pundits think that Android has won because they “have a bigger truck” (i.e. more market share) – regardless of how much – or how little – profit Android manufacturers make. Android, the pundits opine without a hint of irony, is not making much, if any, money but that’s okay because they’re making it up in volume.
But is that really how market share works? Can you tell how well a company or an operating system is doing solely by measuring its market share?
No, of course not.
Quiz #1: Market Share Alone
Question: Company A has 25% market share. Company Z has 75% market share. Which company is doing better?
Answer: With market share alone, there’s simply no way to know or tell. Company A might be bringing in all the profits and company Z might be going bankrupt.
The Wrong Way To Calculate Who’s Winning
(T)he primary problem with using market share as a measure of business health is it provides no insight into the profitability of the product being sold. ~ Bill Shamblin
Scoring by market share alone and ignoring profit is like saying that a baseball team won because it had more hits when the other team scored more runs. Scoring by market share alone and ignoring profit is like saying that a football team won because it gained more yards when the other team scored more points. Scoring by market share alone and ignoring profit is like saying that a hockey team won because it had more shots on goal when the other team had more goals.
Market share without context is not only useless, it is worse than useless because it is likely to be misinterpreted.
First, market share without context assumes that each percentage of market share is equal to another – that every Android activation is equal to an iOS sale. Nothing could be further from the truth. You can’t simply total up market share and determine a winner any more than you could count up coins or poker chips without knowing the underlying value of those coins or chips. A penny does not have the same value as a quarter and only a small child would rather have more coins than fewer coins but more money.
Second, market share without context implies that market share is a zero sum game – that market share gains for one always result in a loss to another. But in a rapidly growing market, a company can actually LOSE market share yet have both positive unit sales and profit growth. Not growing as fast as another company is not nearly the same as “losing”, especially if the growth is coming in a more desirable portion of the market.
For example, despite a decline in Q1 market share, iPhone sales actually increased based on year over year comparisons. (iPhone sales were not declining,they were growing slower than the overall market.)
The same was true of tablet sales. Last quarter, Apple LOST tablet market share, but because the entire market was rapidly growing, they GREW unit sales by 65%.
What matters is not only market share and not only profit share but the ratio between them. This is called Fair share profit analysis. Fair Share Profit Analysis contends that 1 point of market share should deliver 1 or more points of profit share.
Less than a 1-to-1 ratio of profit share to market share demonstrates that a company is buying market share; that the company has not been able to differentiate its product in the market and is likely competing primarily on price.
More than a 1-to-1 ratio of profit share to market share demonstrates a company’s ability to differentiate its products, provide more value than its competitors, command higher prices, charge a premium and enjoy pricing power.
Quiz #2: Market Share or Profit Share
Question: Company A has 25% market share and 75% profit share. Company Z has 75% market share and 25% profit share. Which company is doing better?
Answer: If you said anything other than company A, then you are dumber than a doorknob. Any intelligent person would take company A’s profit share over that of company Z’s market share.
No one would be confused if Apple had 50 percent market share and 50 percent of the profits. But apparently it’s very confusing to some that Apple has only 5 percent of the market share and well over 50 percent of the profits. ~ John Gruber, The church of market share
Imagine, for example, that Apple were a hamburger chain who made more money than McDonalds, Burger King, and Wendys combined, but only sold 5% of the total hamburgers. Would anyone seriously contend that Apple was “losing” the hamburger wars?
For those who say market share doesn’t matter, that Apple still commands most of the industry’s tablet profits, they clearly haven’t been paying attention to the smartphone market.
It turns out it’s a really big deal to maintain market share, and not simply profits. Profit share follows market share.
Profit share follows market share? Are you kidding me? Show me a business sector where profits have a 1-to-1 correlation with market share and I’ll show you the exception that proves the rule. The reason market share doesn’t necessarily correlate to profit share is because profits are made up of both market share and margins. And market share alone tells us nothing about margins, therefore market share and profit share are almost always going to be unbalanced.
Take, for example, the Apple Mac. As the pie chart above demonstrates, the Mac has 45% profit share with only 8% of the market share. That means that Apple pulls in an awesome 5.63% of the sector’s profits for each and every 1% of its market share.
Profit share always follows market share? Not hardly.
The truth is, anyone can get market share if they want it badly enough. All they need to do is sell their product at cost, give it away for free or, better yet, subsidize (pay their customers) to take the product off their hands. This is called “buying” market share, but it always comes at the cost of profits.
Pricing to gain market share simply for the sake of market share is a chump’s game. ~ Bill Shamblin
The problem is, you can “cheat” and buy market share, but you can’t do the reverse and “cheat” to buy profits. You have to EARN profits. Buying market share is a downhill race to the bottom but gaining profits is an tortuous uphill climb and it can only be made if the manufacturer is able to produce highly valued and differentiated products. The company that buys market share must inevitably go out of business or reverse its course and fight its way back up to profitability. The company with the value and the profits, on the other hand, has the advantage of holding the high ground and can choose to take market share at will.
Quiz #3: Less Market Share Can Be Better Than More
Question: Company A has 25% market share and 50% profit share. Company Z has 75% market share and 50% profit share. Which company is doing better?
Answer: Anyone with any business sense would say company A.
Company A is commanding 3 times the price of Company Z. The formula is 50% profit share divided by 25% market share (50/25 = 2). This means that for every one percent of market share, company A has two percent of the profit share. Company Z’s position is reversed. For every one percent of market share, they command only 0.5% profit share (50/75 = 0.66). Company Z would have to work three times as hard and sell 3 times as much product just to match the profits of a single sale by company A.
Grading The Contestants
Android accounts for approximately 70% of global smartphone shipments and 29% of global profits. This means that the average Android manufacturer creates just .41% of profit for each point of market share (0.29/0.70 = .414). In other words, the average Android manufacturer needs to capture 2.4 points of market share just to increase their market profit by 1%.
Such a low fair share profit index may indicate that Android manufacturers are:
— Having difficulty differentiating their product;
— Sacrificing profits in order to buy market share (the “race to the bottom”);
— Unable to reach economies of scale in the manufacturing process.
Samsung is doing far, far better than the average Android manufacturer. Samsung’s 2013 Q1 market share was 33% and its profit share was 43%. This means that Samsung reels in 1.3% of the profits for every 1% of the market share it owns (0.43/0.33 = 1.30). Samsung, unlike all other Android manufacturers, is earning, rather than “buying”, market share.
Apple’s iPhone 2013 Q1 market share was 18% with 57% profit share. This means that Apple’s iPhone took in a lavish 3.12% ((0.57/0.18) of all profits for each 1% percent of market share it controls.
If Android manufacturers needed to sell 2.4 phones just to gain 1% profit share, they would need to sell a staggering 7.5 units just to match the profits that Apple garnered from the sale of a single iPhone.
“… Apple could simply have blown through much of its $13.1 billion quarterly profit to “beat” Samsung in market share, rather than allowing Samsung to do that while earning $4.8 billion less than Apple.”
Further, in 2012 Q1, Apple held 23% market share and 74% profit share. This means that each 1% of market share was equal to 3.22% (0.74/0.23) of the sector’s profit share. Apple’s market share to profit share ratio remains almost identical, which means that Apple has maintained its pricing power. Not only that, by focusing on just a few smartphone models, Apple has become the low-cost manufacturer in smartphones as well.
Take a good hard look at the chart, above, then go back and re-read the headlines I listed at the start of this article. What each and every one of those headlines is contending is that Android is winning and Apple is losing because Apple doesn’t control the green portion of the chart, above.
I mean, honest to goodness, take a look at the total units sold compared to the paltry profits obtained from those green sales. Who in their right mind would even WANT that market share?
Price Elasticity
What we’re really talking about here is the economic concept of price elasticity. “Price elasticity” seems to be way beyond the pay grade of most pundits and analysts who follow the mobile sector, but what it essentially means is that when the price of something goes down, sales almost always go up, but the rate of that sales increase depends upon the price elasticity of the product. In other words, dropping prices may increase sales but the increased sales may result in disproportionately larger or smaller profits.
Unless we truly understand the price elasticity of the iPhone, we really shouldn’t be calling for Apple to drop its iPhone prices.
Summation
It isn’t what we don’t know that gives us trouble, it’s what we know that ain’t so. – Will Rogers
Not only do the high priests of market share have it wrong, they have it exactly backwards. The company with the lower market share and the higher profits has all of the leverage. The goal is to INCREASE, not decrease, the ratio of profits to market share. Increasing market share at the cost of profits is a recipe for disaster, not a formula for success.
Apple may or may not do well in the future but right now, and contrary to popular belief, they are winning the smartphone wars and winning them handily.
RATIO OF PROFITS TO MARKET SHARE
3.12% Apple
1.30% Samsung
0.41% All Android
Not only is market share not the best way to evaluate the relative positions of competitors but, without context, it is one of the worst. Assuming that market share will always bring you success is like assuming that a bigger truck will always bring you bigger profits. It’s literally a joke.
Next
Next, I’ll talk about how market share affects hardware manufacturing, advertising and the “razors-and-blades” content models. The series will conclude with a discussion of platforms and the network effect.
