Report: Apple’s Unprecedented 2015 in China

With Chinese New Year upon us, I thought I’d focus on some observations on China related to smartphones and particularly Apple.

Apple’s growth in China has been modest but steady — until Q4 of 2014. Apple saw a more than significant increase in Chinese sales during the December quarter as evidenced by their revenue from the greater China area.

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We may look back at Apple in China and view their presence there as “pre-iPhone 6 and 6 Plus” and “post iPhone 6 and 6 Plus”. Without question, the years prior to the 6 and 6 Plus were about laying the foundation for their strategy in the region. This included the opening of 17 stores to date (40 within the next few years), the localization of iOS for specific regional needs in China, the addition of all their major carriers including China Mobile, and the support of Union Pay for iTunes. All of these things were essential for Apple’s foundation of their ecosystem in China. Now that the groundwork is fully laid, we are seeing Apple’s presence in China take shape.

There has always been strong demand for Apple products in China but not for Apple’s ecosystem. Consumers there were getting iPhones largely on the grey market, jailbreaking them, and not investing in the Apple ecosystem. This was a risky proposition from a loyalty standpoint. Despite the allure of Apple’s brand, their longevity to succeed and grow in China is helped by the stickiness of their ecosystem. Ultimately, Apple does not want to just sell hardware to Chinese consumers. Yet that was what was happening prior to the things I outlined above and all based on the high appeal from an aspirational viewpoint of Apple’s brand in the region. However, things are changing and it appears the China ecosystem is gaining traction as well.

Now that Apple’s base in China has become large enough, local developers are realizing the same things many Silicon Valley developers already know — iOS is a better place for developers to monetize. The dynamics I have continually explained, that Apple has the most desirable customers who are willing to spend, drives this. Local app developers, and even local services companies, commerce companies, etc., are starting to cater to iOS customers in ways they previously haven’t before. While this is trend is still in the early phases, there is a shift on the horizon. Some of it has to do with China’s maturing consumers but it seems there are dynamics at play which are bringing iOS into its own as a desirable software platform and ecosystem. Meaning, Apple is appealing to Chinese consumers beyond just hardware and brand. This is key.

This chart shows the history of iPhones in China by usage. Prior to the ecosystem foundation, iPhone 4 and 4s (largely acquired by secondary and grey market sales) dominated usage. But now the entire shift is happening to new devices with deep ecosystem ties (jailbreaking is now less than 10%. It was over 50% at one point in time).

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Competition

Highlighting three frequently talked about brands in China tells some key stories. Samsung once dominated China and their rise and fall is a useful case study specific to global strategy. Similarly, Xiaomi’s rapid rise to number one in China is another telling case study of regional success. As you can see, Apple’s trend line has remained steady in terms of sales in China for iPhones.

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Samsung’s fall from number one in China to number five took just over four quarters. Similarly, Xiaomi’s rise from lower than the top five to number one took just over four quarters. Apple’s rise from the bottom of the pack to #2 took one quarter. Apple will very likely take the number one spot in the March quarter thanks to the Chinese New Year.

It was hard for many who did not study China to understand the massive upside Apple has in the country. Looking at every region we study, I’m not sure I can say this about any other area other than China at the moment. Apple will certainly increase their base in the US, possibly getting to 60% share, but the US has only a little over 300m people. The number of consumers in China Apple can likely appeal to is double that number and growing.

While the revenue chart above still shows US and Europe ahead of China, China will likely continue to grow and get closer to US. The US remains, in the short term, Apple’s largest market by revenue even though, and soon, China will be the largest market for iPhone sales.

China could be the Apple Watch’s largest market day one. I have quite a bit of luxury watch market data for the China region and while a huge number of very cheap watches get sold there, a large number of very expensive watches get sold there as well. The Apple Watch lines up with China’s gadget craze, particularly around mobile, and Apple’s aspirational brand appeal, all which lead me to believe the Apple Watch will not only sell well in China but will drive demand for iPhones even higher. I do believe the ASP of Apple Watch sales will be higher in China than any other country.

Some possibilities for Apple in China in 2015:

  1. Apple could sell more smartphones in China than Samsung
  2. Apple could be the number one or number two smartphone vendor in China for all of 2015
  3. While possible but somewhat doubtful, Apple could see China revenue be higher than the US towards the end of year (driven by Apple Watch revenue
  4. Apple could average more smartphones sales in China than any country (it will be a back and forth between China and the US in 2015)

The last point I want to make with regard to Apple in China in 2015 is a look ahead toward the end of the year. I have a feeling that, when the current iPhone 6 and 6 Plus get discounted in China to the $500-$600 range, whether through primary channels like carriers or secondary/grey market channels, Apple will see iPhones compete with smartphones in the $300-$400 range in China. This means those customers who may have spent $300-$400 may consider an iPhone 6 or 6 Plus in the $500 range within reach and continue saving. If this happens, Apple’s customer base could increase dramatically as the $300-$400 price range sees, on average, more than 40m shipments per quarter in China.

As our readers know, I update and share my data models for China regularly and Apple’s line in 2015 will be interesting to watch. Tim Cook mentioned on the last analysts call that many didn’t think they could do it in China. There is a similar narrative about Apple in India. While it is true the dynamics in India are completely different, I believe it is time to start focusing more on India and what Apple’s upside may look like there as well.

Research: Understanding Twitter’s User Habits

One of my focus areas from my consumer panel research is what consumers do, not just on their devices in terms of activities, but with the software and apps as well. I run regular panels on most the major apps to understand usage trends. Twitter is interesting because it is very different than Facebook. I’m not sure how many people realize Twitter is not really a social network but a broadcast medium. This becomes quite clear when I look at the usage patterns between Facebook and Twitter (a subject for a future research report). While active accounts is the current metric to judge Twitter by, understanding the “active” part of their user base helps us find more insight into what the service is and how it is being used.

When I look at where Twitter ranked in terms of monthly visitation among the other top 75 brand websites/apps, they are 8th in our global consumer panel. This was of a panel of over 30,000 global respondents and my data lines up with Alexa’s ranking worldwide as well. Interestingly, my data shows more people visit Twitter on their PCs than their mobile devices, but by a thin margin right now.

Twitter’s heaviest users are in the United States. Their earnings announcement also points out how they monetize this region more right now. No big surprise here since Google and Facebook also monetize their US user base. While I have this data broken out by region as well, globally, Twitter’s most active users (those who say they use it more than twice a day) are males 25-35 followed by females 16-25. Followed closely by males 16-25, females 25-35, then males 35-45. After that, the age demographic usage falls off a cliff in our panels. Meaning Twitter’s sweet spot is a user of either gender between 16-35. This data is quite different than the same data I have on Facebook where nearly every age group has very high percentages indicating they visit the site/app twice a day or more.

I have access to research on Twitter users I’ve charted below. This is a global view but, keep in mind, Twitter’s heaviest users are in the US. This chart lists the results of Twitter users’ most common actions, weighted numerically. A 10 is a use case done very frequently and a 1 is a use case done very little.

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A few observations on this data. The first is how the actions users say they do most frequently are actually more in line with a social network than a media consumption tool. Despite how myself or others view the upside of Twitter as being a media consumption/real time information network, users seem to be using it like they would a social network. The way Twitter makes money depends heavily on people coming to Twitter with other interests than talking to their friends. Therefore, searching trending topics” and “reading a news story” being in the top five of use cases is a positive sign. However, contrast this with similar research I have on Facebook users where “read an article” is the second most common task done on Facebook. Facebook, while still a social network for many users, has essentially become what it seems Twitter needs to be–a destination to consume/discover media.

Where Does Twitter Go From Here?

Ultimately, I’ll be watching this data to see if habits begin to change. As more people get on Twitter and the service starts to cater to content discovery (the kind that can be monetized), we will see if user habits start to line up more with how Twitter can grow to make more money. It’s key to understand Twitter is unlikely to ever be as big as Facebook. Facebook and its assets, Instagram, WhatsApp, etc., is the kind of service that can appeal to nearly ever mobile consumer on the planet.

Twitter monetizes their heavily engaged users. Today, those are customers in the US. As Jan Dawson points out, Twitter’s monetization levers seem clear.

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Ultimately, it is the usage patterns I find fascinating to observe. As these begin to more closely align with Twitter’s monetization strategy, we will begin to see more of the upside of the service. It may also be a chicken and egg scenario, where making these adjustments makes the service more appealing to new users.

Is “Mobile Only” The Future?

Earlier this week, I attended ARM’s press event where the company laid out an impressive vision for how mobile devices using ARM cores—essentially 99% of all phones and a majority of tablets—will be evolving throughout this year and next. The company’s new Cortex A72 CPU, Mali T880 GPU and CoreLink CCI-500 system interconnect—all of which are scheduled to appear in 2016 products—offer impressive improvements in performance, yet are able to maintain the modest power requirements for which ARM-based devices are known.

The company made a point to talk about some fairly advanced applications running on smartphones, including content creation, 3D printing and more. ARM also highlighted how far smartphone performance has come since 2010, with demos of how much faster common activities are on phones from 2010, 2012 and 2014. In fact, the company’s press release claimed CPU performance from ARM cores had increased an amazing 50x over the last five years.

All of the company’s comments and demos beg an important question. How far can smartphone performance be taken and can smartphones become the sole computing device many people need? It’s a fascinating question, and one that needs to be looked at on many different levels.

From a pure computational performance perspective, we’ve heard countless times that we all carry the power of supercomputers in our pockets. So, debating whether there is or is not enough computing capability in a smartphone has essentially become irrelevant. Yes, there are tremendous CPU and graphics capabilities on smartphones and, when you add in always-on connectivity thanks to cellular radios, it’s clearly a very capable computing platform.[pullquote]Debating whether there is or is not enough computing capability in a smartphone has essentially become irrelevant. However, there is more to a computing experience than raw computing.[/pullquote]

However, there is more to a computing experience than raw computing—the input and output (I/O) capabilities are, arguably, equally important. Most obviously, the size of a screen associated with a computing device makes an enormous difference in the quality of the experience you have with that device. Even within the smartphone category, the rapid transition from 3.5”-4” screens (don’t they look like toys now?) clearly shows the desire people have for larger, higher resolution displays. But even a 6” phablet can’t compare to a 13” notebook screen or a 27” desktop monitor (let alone a 55” TV!).

I know there are plenty of reports of people using their large screen smartphones to do everything (particularly in parts of Asia), but is it because that’s all they really need and want? Or is it because that’s all they can afford or all they can easily access? Everywhere I’ve been in the world, I see lots and lots and lots of large screens and it seems to be basic human nature to want to see things (and work with things) on larger displays. Until we get to foldable screens, you simply can’t fit a large display in your pocket.

In addition to the display issue, there are input capabilities that are possible (or not) on a small, touchscreen device. Yes, you can do an incredible amount of things on a smartphone, but there are plenty of applications, entertainment experiences, and information types that could use other input methods. It’s not just keyboards—although I continue to contend they are one of our most underappreciated peripherals—but other types of I/O devices, including audio, pen, and other specialized offerings.

Smartphones give us the flexibility to bring a computing experience and information access tool with us at nearly all times, and there’s no question this convenience is incredibly valuable. However, that still doesn’t mean there isn’t a very real need for other kinds of computing devices and computing experiences.

What I will say about the advancements like the ones ARM announced is they do raise the issue of integrating things like wireless display options for connecting smartphone-sized devices to larger screens, or other wireless I/O options to a new level. I do believe something like the ill-fated Motorola Atrix—a smartphone from a few years back that offered connectivity to larger displays and other peripherals—could be a very viable option in the not-too-distant future.

However, there are still a number of very large hurdles to overcome, including more agreements on wireless I/O standards, wider deployment of those standards in both devices and peripherals, and compatibility with operating systems and applications that match the wide range of people’s needs. You could argue these concerns are easily overcome, but I think these very issues will prevent a “mobile only” computing world from becoming the mainstream choice for some time to come.

ARM’s New Cortex-A72 IP and the Impact on the ARM Ecosystem

There are fascinating things afoot in the semiconductor industry, particularly in ARM’s ecosystem. For those who don’t understand how the ARM IP licensing works, I need to explain this to tie my overall point together.

There are two types of licenses a company can acquire from ARM. There is a standard ARM license, where you are given the IP and you take it to market under your brand, making little to no architectural changes to the chipset design. Companies like TI, Mediatek, and a host of other companies do this. It helps them get to market faster and use a standard set of libraries for fabrication.

The other license one can acquire from ARM is called an architectural license. This means you can acquire the IP and make some fundamental architectural changes to the libraries in order to differentiate your chipset from the market. Generally, companies who do this such as Qualcomm, AMD, Nvidia, Broadcom (even Apple is an architectural licensee) focus on more premium markets for their products. If you are going to spend the money to be an architectural licensee, develop your own custom chips on the ARM process, do R&D around the advancement of your ARM architecture, you certainly can’t justify commodity markets from a revenue perspective. Usually, offerings from an architecture licensee cost a bit more, due to the underlying economics involved in customizing a proprietary ARM process. It is this light that makes the latest ARM IP very interesting and potentially disruptive.

I’ve always watch the ARM ecosystem with a careful eye. Looking at the dynamics, it seems as though the ARM IP licensing model is inherently disruptive. There is an distinct trickle down flow of the IP that allows today’s highly differentiated and premium Qualcomm SoCs to be the standard in a generic ARM chipset next year. Meaning, the innovations Qualcomm, Broadcom and others invest in, essentially become the mainstream for their competitors in a matter of time.

During the first phase of mobile, this was not a huge issue. During the heyday of the PC, Intel had predictable performance gains that mattered on a regular basis. Their continued investment in R&D justified this. Similarly, Qualcomm benefited in two ways that made them dominant. There was the need for more performance, both in CPU speed and graphics, as the smartphone industry was maturing. There was also modem advancements which are still relevant today. In fact, the continued increase in wireless broadband is the performance measure that matters in today’s world, not graphics, cores, Ghz, or any other spec. Yet, when we look at ARM’s new IP there are certain implications to tease out.

ARM announced their new A72 which is loaded with features. They are positioning this as the “standard” in premium mobile experiences. Note, this is a tagline Qualcomm would use for their chips. When you dig into the feature set, it becomes clear they have added nearly every major point a company like Qualcomm uses in terms of performance benchmarks for their premium chips. Except, ARM does not touch the modem, which is Qualcomm’s biggest advantage. But if we look at all of what I’ve just outlined, through the lens that the customers for premium parts like Qualcomm’s latest Snapdragon 810 is shrinking as I described on Monday, then we have to question the value of paying the fees and doing the R&D as an architectural licensee with where the world is heading.

Interestingly, Qualcomm showed shades of this as they embraced 64-bit. Rather than take their custom Krait architecture and spend the time and R&D to make it 64-bit, they just used the generic ARM 64-bit process and added some of their secret sauce to it to get it out the door quickly. They can still use their Krait architecture in new 64-bit processes but we have to ask, is it even worth it?

If Apple seals up the premium market and is the only real customer (by large volume) for premium components, then isn’t it logical ARM’s latest premium specs are good enough for the lower tiers? If this is true, then that means companies like MediaTek, or any other upstart branded CPU, can take premium features and make them mainstream at lower prices. So if the real market for Qualcomm or Broadcom or name-the-premium-SoC company, has to start focusing more on mid-range and the low end, then what happens to their premium feature focus and R&D?

This is why I feel the ARM IP ecosystem is inherently disruptive. The layering on top of the challenge to differentiate for an architectural licensee. I study the architectures and premium features of those companies and, looking over ARM’s latest IP, I have to ask if it is worth the effort. Especially when all the growth is coming from lower tier prices of smartphones, I’m not sure there are enough customers for premium SoCs to justify the R&D. Fascinating times in the semiconductor ecosystem and one that will make for some interesting story lines in 2015.

Report: The Smartphone Market in 2014 and Beyond

Fascinating things happened in 2014 with regards to the smart phone market. Two striking ones from my predictions article happened in Q4 2014 rather than in 2015 as I predicted. I hedged my bet saying they could happen in Q4 2014 and, sure enough, they did.

Smart phone vendors sold more in the December quarter than the PC industry has ever sold in an entire calendar year. Apple also passed Samsung as the number one smart phone vendor in sales in the quarter as well. Both, in my opinion, were inflection points on the entire mobile industry and have striking implications going forward. Before diving into the takeaways, I want to walk through a number of data points.

Installed Bases

On of the things I work hard to track is the installed base of smart phone platforms. Here is my chart breaking down the installed base of each current platform.

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As we have been tracking this over time, you can see how Symbian essentially got eaten by Android. AOSP has been on a steady rise, thanks to China, and has an installed base slightly more than the iPhone’s. Blackberry continues to lose customers but may likely hold steady and normalize at some point.

Another interesting way to look at this is to show YoY growth.

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As you can see from a platform like AOSP, when you start from very small numbers and grow fast, you achieve huge YoY growth. But as your share size increases, the growth begins to normalize. I visualize this data this way to see what patterns may emerge. While Android and Apple are holding steady, we are still watching AOSP normalize. Given AOSP’s total addressable market is really only China for the time being, it is likely to hit a stopping point at some time as China becomes saturated. This growth chart will highlight that when it does. Windows Phone has modest gains annually, enough to keep their line in the positive but, in terms of size, we are talking very small numbers. I measure this YoY using a year ago quarter to track growth.

The last way I like to slice my installed base data is as a platform’s percentage of the installed base by quarter.

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The point is we are seeing a normalization pattern among the major platforms. Android continues to add modestly, as does AOSP, as does Apple. What makes Apple’s installed base interesting, however, is the continued growth from hand-me-down devices and the secondary market. By my installed base estimates, about 66% of all iPhones sold to date are still in active use. This can only be achieved by making products that last long enough to get handed down to family members or sold again in the secondary markets of China and India. All of which is a contributing factor to Apple steadily growing their active user base.

Quarterly

Quarterly snapshots give us equally useful views of the market. For this we need both a global picture and a regional picture. First the global view.

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As everyone knows by now, Apple sold more smart phones than anyone else in the quarter. While I don’t chart feature phones, it is interesting to note that Apple became the second largest phone manufacturer as well. Samsung was number one — selling ~95m phones, both smart and feature phones. Apple was #2 overall with 74.5m. Microsoft/Nokia came in at number three at 50m. It is a historic moment as the market rapidly transitions from feature to smart phones. While it is fun to appreciate Apple beating Samsung in Q4, we know it will be short lived as Samsung will be back in the top spot in Q1 2015 and likely sell in the 65-68m range. Apple will likely be in the 57-58m range but could possibly hit 60, largely driven by the Chinese New Year. I’ll update my Q1 2015 estimates closer to March.

Key Regions

I’d like to provide a snapshot of a few key regions broken down by smart phone vendor and by quarter. Let’s start with the US.

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The US has always been Apple’s largest market and this quarter they followed a similar pattern — gaining over 50% of quarterly sell through into the US market thanks to the holidays. Apple’s share of the postpaid market was well over 60% and their share of premium smart phone sales was over 70%.

In China, the number one vendor crown was very close between Apple and Xiaomi. So close we will again see analyst firms disagree on this. However, they all will agree it is close. I am able to see some live network data from Baidu/Umeng, which is a challenge because I see how many iPhones, roughly, are active but not all are sold just in China. Some are purchased or imported from elsewhere but still end up on the network. I’ve created a model to help balance this by using what I believe the percentage being imported vs. bought locally is using a range of data points. Based on this model, I have Apple as the #2 smartphone vendor in China but very close to Xiaomi. Here is my chart.

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With Chinese New Year coming, this quarter will be fascinating to watch. I’m fairly confident Apple will sell more smart phones in China this quarter than in US for the first time. They may also be the number one smart phone vendor in the region and, this time, it may not be close.

Samsung continues to have significant troubles in China despite being a top 10 brand in the region. Xiaomi also posted their first QoQ decline largely due to the larger iPhones. A key storyline I am watching in China is Motorola. Lenovo moves decent volume in China, but they are perceived as a lower end brand even though some of their hardware is quite nice. Motorola fits nicely into a higher price point, more in line with some of the Oppo and Xiaomi mid-range offerings. All our research continues to show significant interest in foreign brands. Chinese brands are having trouble moving upstream in the market and selling smart phones at higher priced tiers. This creates an opportunity for foreign brands. The key point is that, while ZTE, Huawei, and Xiaomi have their eyes set on international expansion, brands like Apple and Motorola are looking to gain share in the region.

Lastly, India. Other than strong continuous growth, India’s picture has not changed very much. Samsung is still the number one vendor, and Micromax is catching up. Apple is slowly but surely climbing but it is very slow.

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Where do We Go From Here

As we look at where we are today, we have to also make some points about where we are going. As I pointed out in my column yesterday, it is clear Apple is getting a near lock on the most profitable segment of the market. As Samsung’s strategy becomes clear, we will cover it for subscribers but the trend lines are not favorable for them to recover much, if at all, in premium. With all the future smart phone growth coming from lower end devices, the next phase of mobile is going to look nothing like the first. These markets will separate and it is unclear what the picture looks like for the next two billion smart phone users. To illustrate this, I’ve created this chart.

tiers

This chart is a picture of the current 2 billion smart phone owners. What I’ve done is illustrate the smart phone platform share of the current price tiers. However, at the bottom I have left it intentionally open to highlight that the battle for the next two billion smart phone users is anyone’s game. Certainly Android could grow to fill that gap or maybe it will be an Android fork or alternate platform like Cyanogen. Perhaps Windows Phone is positioned well for the next few billion. Or perhaps something out of left field like FireFox OS. What’s clear is if there is an opportunity for a third OS the opportunity exists in the gap pictured in my chart.

The majority of smart phone’s sold and in use at the end of 2014 were in the mid-range and high end price points. Increasingly toward the end of 2014, we saw an acceleration in phones costing less that $200. Which brings this nugget from ABI Research into light.

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Why did Android smart phones decline? My answer is because the market for smart phones above $200 is drying up. The next phase, as we get out of tier 1,2, and 3 China and into the rural villages, will demand smart phones much cheaper than $200. Similarly in India, getting past the nearly 200m smart phone owners in the region and into the next phase of growth will happen with much lower cost devices. We are in a slight pause, as we look to re-accelerate growth as very good, low cost devices enter the market. Sometime in 2015, we will likely cross the 400m mark for smart phone shipments in a quarter. And this will be the new normal as we near 2b smartphones sold in a single year. To see how we believe that plays out, I’ll leave you with my chart on smart phone price tier forecasts. We will soon be living in a mobile first world.

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Intel and Qualcomm’s Challenges

It is interesting to see some of the challenges facing once dominant semiconductor companies as the evolution of computing continues. Intel is and has been challenged to maintain the relevance of their architecture as personal computing shifted from desktops and notebooks to mobile devices. Similarly, Qualcomm is facing challenges in the next phase of mobile. Both Qualcomm and Intel have many similarities. Both focus on innovation to drive next generation chipset growth. Beyond advancing the capabilities of computing devices, the goal is to use this focus on innovation to keep the ASPs of their chipsets from falling. However, as hardware is commoditizing, maintaining ASPs is becoming more difficult.

With Intel, the writing on the wall happened with the commoditization and dropping ASPs of PCs. On top of this trend, the PC industry is not growing. Hence, most of Intel’s revenue strength has come from servers, not necessarily client PCs. Intel hit their mark of 40m tablet shipments in 2014, largely driven by the white box Chinese tablet market. But, outside of servers, Intel is facing headwinds with declining ASPs.

For Intel, growth markets like smart phones seem essential for the company to grow share. However, even that isn’t as black and white as it seems. While the smart phone market is huge, with our estimates above 1.5 billion smart phones sold in 2015, the market is seeing ASP declines faster than any segment. Intel has some insulation in the PC market but would have no protection from being forced to compete in commodity hardware in the smart phone sector.

Commodity smart phone hardware is what Qualcomm is facing as well right now. With a range of factors, from China regulatory and licensee disputes, to the potential loss of Samsung as a customer for Snapdragon, are all causing Qualcomm to issue lower guidance for next quarter.

Qualcomm is facing the reality that the era of smart phone growth where they could get a premium for their chipsets is about to end. Companies like MediaTek are able to compete more on price with Qualcomm at the low end of the smart phone market — which is where nearly all the device growth is going to come from in the next few years.

Both Intel and Qualcomm have to become competitive in the lower-price tiers, going against the grain of how these companies are oriented, if they want to capitalize on the upside volume. There is certainly a case to be made they can continue to serve the premium segment of the market with next generation innovations. However, the problem with that reasoning is it is becoming clear Apple is the only major player able to sustain in premium. Apple only needs a discreet modem from Qualcomm and does not use a Snapdragon processor. Similarly, should Intel have a shot at winning Apple it would only be with the discreet modem and not the entire SoC. Both companies get more money for the whole SoC over the just the discreet modem.

Looking at Qualcomm’s financials it is clear Apple’s impact on Samsung is having an effect on them as well. In fact, Apple’s role in this situation is hard to ignore. Their clear domination of the premium segment is locking out potential customers in the space where both Intel and Qualcomm could hope to sell more premium parts. This makes a strategy that Intel and Qualcomm are using to maintain ASPs or sell premium innovations, thus monetizing their RND spending, a little more difficult. If all you are left with are customers who want to sell cheap things, then this model is challenged.

What is interesting about this from a Qualcomm and, to a degree, an Intel viewpoint going forward is how ARM inherently created this situation. Since ARM is a licensable technology, from an architectural standpoint, the ARM ecosystem enables a wide range of competitors to compete in the ecosystem. Essentially, Qualcomm’s latest processor one year is the baseline ARM offering the next. I’m generalizing, but this is essentially the case.

This is what has enabled MediaTek, and really any other new upstart, to compete with a premium ARM licensee. And more to the point, when the market wants low cost chips, the competition in the ARM ecosystem gets incredibly intense. This headwind is what Qualcomm and Intel are up against in this next phase of mobile.

iPhone Next

Now that the excitement has died down regarding Apple’s amazing financial results and the nearly 75 million iPhone shipments it achieved last quarter, it’s time to start looking ahead. From where I sit, I think there are some legitimate questions about how the iPhone can evolve.

Don’t get me wrong; there’s still plenty of juice left to the iPhone 6/6 Plus story, and I expect Apple will have strong seasonally adjusted shipments for the next several quarters. But what comes after that? Apple clearly has no interest (nor any need) to develop low-end iPhones. It also seems clear that they’re counting on existing iPhone customer upgrades as well as high-end Android switchers to drive their business for the next few quarters. The problem is, many industry watchers believe that the high-end market is getting saturated and that most of the action is going to be in mid or even lower-tier smartphones in developing countries.

Of course, a lot of people said that before the 6 and 6 Plus launch, and Apple’s ability to not only ship a staggering number of units, but raise the ASP by over $50 this past quarter shows how wrong that kind of thinking can be. Still, those kinds of trends are very difficult to maintain forever.

The biggest challenge I see is in the product roadmap. In the near term, it probably won’t be a big issue. If they follow the traditional patterns they’ve developed, we’ll likely see the launch of the 6s and 6s Plus (or 6 Plus s, though that’s a very awkward name) later this year. As with previous “s” iterations, these will be modest upgrades with faster processors, better cameras, a slight increase in battery life and maybe a bit of industrial design tweaking. (C’mon, let’s be honest…there’s still a lot of blank bezel space at the bottom of the iPhone 6). It’s going to be very difficult to decrease the thickness of the device by anything really noticeable, however, because they need that depth for battery. It’s also going to be hard to improve the screen resolution—you really can’t see much beyond what they offer—but they could offer modest improvements in color gamut or saturation.

They may also be able to integrate a few more sensors. Bosch Sensortec, for example, recently debuted new sensors that can be used to measure barometric pressure, temperature and other atmospheric elements—essentially turning your iPhone into a portable weather station, among many other intriguing possibilities.

While several of these are interesting, I’m not sure they’re really compelling enough to drive major upgrades—especially for existing iPhone 6 owners. Yes, if you’re sitting on an iPhone 5 or 5s in the middle of your contract, it’s not unreasonable to assume you’ll jump to whatever generation iPhone 6 is the latest and greatest when you’re free to do so. But, that’s different than the kind of wholesale market lunging and grasping we’ve seen for the large screen iPhone 6 models.

The challenges get that much harder for the iPhone 7. Yes, I realize it’s early, but there are no clear signs for what Apple can do to make the next generation iPhone so compelling that they’ll be able to drive the kind of success they’ve had with the iPhone 6. They could add any of the things I mentioned above that don’t get into the 6s (and maybe they’ll finally support higher-resolution audio output), but I see no component technology on the horizon that portends a dramatic shift. Foldable screens would be nice, but they are a long way off….[pullquote]There are no clear signs for what Apple can do to make the next generation iPhone so compelling that they’ll be able to drive the kind of success they’ve had with the iPhone 6.”[/pullquote]

The fact is, adding big screens to iPhones was a slam-dunk opportunity that Apple walked into perfectly. People were dying to have them because competitive phones had shown consumers how much better an experience larger screen smartphones could offer. In fact, in many ways, Apple was late to the party on phablets, but obviously not so late to have missed it.

Now, however, in the same way that we’ve seen Samsung and lots of other vendors start to run short on innovative new hardware ideas, I think the same thing could challenge Apple when it comes time to debut an iPhone 7. Of course, Apple has the clear advantage of owning and controlling the OS and ecosystem, and lots of services built around it. That’s something that really only Microsoft could truly compete with them on, and the likelihood of that happening in the phone space in the near-term is exactly nil. So, Apple is still very well positioned to maintain a position of strength in smartphones.

Maintaining strength and being able to repeat the kind of blockbuster growth that Apple just displayed are two very different things, however. Rightly or wrongly, expectations around Apple are incredibly high because the company keeps surpassing the bar that others have set for them. It’s both an incredibly inspiring and incredibly challenging spot to be in.

Ultimately, I have to wonder what kind of magic Apple will be able to conger up for the iPhone 7, because it is that product that will have an enormous impact on the company and its future. Will they knock it out of the park again and keep their incredible growth rate going? Or, will they make some nice, but not truly compelling changes that end up stalling their growth. As an avid iPhone user, I hope they can do the former, but I wouldn’t be shocked if it ends up being the latter.

 

Understanding Xiaomi Part 1: As a Smart phone Company

I am going to embark on a three part series about Xiaomi. Today, I’ll talk about Xiaomi as a smart phone company. Next, I’ll talk about them as an Internet of Things company. Lastly, I’ll talk about them as an internet services company.

Their Role As a Smart phone Company

Where does Xiaomi fit as a smart phone company? Right now, 95% or more of their volume is in China. It took them five months to sell 1m units in India. Apple still sells more phones in India than Xiaomi in terms of quarterly volume. However, I don’t believe that will be true for long. But, as of the end of 2014, China has been Xiaomi’s primary market. Quite a bit of their strategy and positioning has been focused on China. I detail it in this video analysis. In China, Xiaomi has an app store, an e-commerce store, an e-book store, a video games store, a cloud synchronization and backup service, and more. All of this is regionalized to mainland China.

To take a snapshot with updated data to date, here is Xiaomi’s current quarterly trend line.

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You’re probably asking: what happened in Q4? This is where an important point of how Xiaomi is positioned comes out. What happened to them in Q4 was Apple. Apple had its best quarter by a significant margin in China. The demand of iPhone 6 and 6 Plus was extremely strong in China. Understandable since Apple is arguably the most aspirational technology brand in the world.

Here lies the key point which became clear, for me but not everyone, from Xiaomi’s launch of their latest flagship smartphone. Xiaomi is not actually going after Apple’s customer base. Rather, they are setting themselves up to go after those who ASPIRE to buy an iPhone but can’t afford one. Xiaomi’s bet, and I would agree, is this could be a very large audience. This is why they compared the Mi Note to the iPhone 6 Plus. This comparison is designed to make the statement that it’s on par with the iPhone 6 Plus but less expensive. Xiaomi knows they don’t have the aspirational brand Apple does and, while they are building a fan base and a good brand, it is not clear they are trying to build the status symbol like brand Apple has. As I point out in this Insider post, in China everything about a person externally says something about them. Everything from the car they drive, the clothes they wear, the technology they use, etc., says something about them. A Xiaomi phone says, “I’m upwardly mobile”. An iPhone says “I’ve made it.” While there are similar dynamics in western markets, It is exceptionally pronounced in China.

The price of the new Mi Note is $370, which is the one I believe Xiaomi thinks is their mainstream flagship. They also released a Mi Note Pro that costs $532 and is loaded with specs, which the China market likes. This product, while some may think is designed to go after Apple customers, is actually more of a test of their offerings at this price range. I do not have high hopes it will sell in volume in China or any other market.

Comparing Apple to Xiaomi is certainly apt in some areas where there are similarities. But we have to recognize that, while they have similarities in approach, ecosystem, etc., they are targeting different customers. They are, if I can summarize, bringing an Apple-like solution to the middle-low end of the market. They are bringing Apple’s device, software, and services approach to markets Apple does not care about.

All of this leads us to the next question and analysis. Can their positioning go global?

The Biggest Phone Company in the World

Xiaomi’s CEO Lei Jun said publicly, “we want to be the biggest phone company in the world.” I’m not sure I believe Xiaomi is a smart phone company. I’m also not sure Xiaomi believes they are just a smart phone company. However, the Xiaomi team understands the centrality of the smart phone as the primary computer for billions of people. So, whether or not they are ultimately a smart phone company, the smart phone is central to their strategy. This is where we analyze them on the basis of a phone company and ask the question: can they become the biggest phone company in the world?

Honestly, I really struggle with believing they can. Primarily because it goes against the strongest trend wave I’m observing in the market right now, which is what I call “home field advantage.” Xiaomi understands the future is in software and services, not hardware, at least for the market they are going after. I see two fundamental global headwinds against Xiaomi in many markets.

  1. Local Brands: One of the main points in favor of local brands is local consumer sentiment for local brands. The Chinese are very proud of their local brands. In many cases, supporting a quality local brand like Xiaomi has a great deal of national and cultural pride behind it. We see the same thing in India with Micromax. There are local vendors growing in UK, Russia, Brazil, Indonesia, etc. Not in all cases is local pride a part of the success but there are certainly more than a few pockets where this is taking place. I believe this sentiment exists and it will continue to grow as a trend, assuming the local vendors do not make fatal mistakes in the market.
  2. Local Services: One of the other reasons local brands are doing well is because they are tightly integrating local services. Local services are driving a great deal of the growing demand in many of these high growth regions. Commerce, media, internet services, etc., are all key parts of local experiences. It is becoming increasingly difficult for foreign brands to identify the key local services and integrate them quickly enough to compete with the brands on the ground in these markets.

The question often comes up as to whether Xiaomi will attempt to enter Western markets like the US and Europe. IP issues are quickly noted, but Xiaomi appears to be taking steps at a component level to take their products international and even to regions where they may have faced IP issues in the past. However, I still think they are a long way, if ever, from coming to the West. These major points play into this opinion but it’s also a matter of how unique the US is when it comes to subsidies. So what if Xiaomi offers an affordable premium product? You can get an iPhone for $199. I’m not sure Xiaomi can offer any product, even for free, that could remotely compete with an iPhone even if that iPhone is $199. Maybe some day, but not in the near future. It is also important to note, Xiaomi doesn’t need to come to the West to be the largest smart phone maker in the world, or to even be successful.

It seems as though, for now, Xiaomi is going to use Google’s services outside of China. Which means price competition will remain a key factor. When you run someone else’s software and services, you are only as good as your lower cost competitor. Fascinatingly, Xiaomi’s greatest competition is the very thing that enabled them to become what they are today, Shenzhen’s manufacturing industry (I’ll dive into why this industry is disruptive in a later post). This industry enables extremely good and very low cost hardware. While Xiaomi may attempt to create lock-in with hardware and services, what is to stop local vendors from using the Shenzhen manufacturing industry to create equally good hardware and tightly integrate their own local software and services? Yes, Xiaomi will try for lock-in via their own software and services but it is very difficult to create globally differentiated and regionally specific services plays at the same time.

Xiaomi would have to fight against these headwinds. They are the exact same ones causing Samsung’s decline. Keep in mind, Samsung has a good, strong brand in many of these markets. Yet, they are running into the above issues themselves. So what does Xiaomi do or offer that Samsung hasn’t or doesn’t in these regions? More importantly what will Xiaomi offer that local vendors can not or are not? We will explore this in part 3 of this series.

Mobile Security: The Key to a Successful BYOD Implementation

A great deal has been said and written about BYOD (Bring Your Own Device) programs and their real-world impact on today’s businesses, employees and IT departments. Regardless of your feelings on that matter, there’s no doubt that BYOD has and will continue to influence the conversation around how IT departments need to adapt to the changing world around them.

For most companies, BYOD is seen as a positive move forward. But it does have challenges. Last year, my firm, TECHnalysis Research, fielded a survey with over 300 US-based IT professionals split evenly across small, medium and large businesses. One particularly interesting data point from this BYOD report is that 20% of overall respondents and nearly 30% of mid-sized companies said that, while they dove into BYOD headfirst early on, they’ve started to pull back a bit recently. A key driver for those pullbacks, in many situations, is bound to be security-related issues.

BYOD-Involvement-for-Mobility-Blog-#4

©2014, TECHnalysis Research

Virtually every week we hear and read stories about critical corporate data being compromised because an individual employee’s device was lost or stolen. Given these security concerns, it’s probably not surprising to hear that, according to that same survey, 43% of all companies with BYOD programs have a policy to wipe corporate data from a lost or stolen device. But what is surprising is that a larger 46% of that group wipe out all data on the impacted device—both corporate and personal. Given the increasingly important role that personal mobile devices play in people’s lives—they’ve become the primary camera and digital photo storage device among many other things—completely wiping all that data is clearly an unacceptable solution. Plus, only 26% of employees thought their company wiped all data on a lost device, demonstrating a huge (and potentially litigiously dangerous) gap in understanding between the two groups.[pullquote]Nearly 30% of mid-sized companies said that, while they dove into BYOD headfirst early on, they’ve started to pull back a bit recently.”[/pullquote]

In order to address these concerns, IT clearly needs to develop policies that honor the company’s right to safeguard its own data, while at the same time respecting the individual employee’s desire to not lose their precious data. (Plus, if we’ve learned anything from BYOD, it’s that IT needs to develop win/win solutions for both themselves and employees, otherwise employees will find ways around whatever perceived restrictions IT puts into place.)

One key answer to these challenges is the use of containers, which can separate personal data from work data. Solutions that enable containers allow IT to continue managing access to corporate data and applications, while leaving personal data intact. Not all container solutions are created equally, however.

IT managers need to consider all aspects of a container solution as they do evaluations. How does it work with user authentication and identity? What mobile and desktop platforms does it support? Is it a complete solution or only a partial one that needs to be cobbled together with several other products from several other vendors?

By deploying a robust container solution, IT can feel free to impose very strict, very secure policies around corporate data, while still giving employees access to their own data. In doing so, they can enable all the potential benefits of BYOD, without falling prey to its potential pitfalls.

When a Smartphone Becomes Your PC

Some of the most interesting things I see at CES are not on the show floor. They come from meetings I have behind closed doors in various suites and small rooms tied to a company’s bigger booth. One such meeting took place at Silicon Image’s suite in the Sands where they showed me a product code named Spider.

Silicon Image is famous for being behind and providing silicon solutions for the HDMI standard. They are also known for Mobile High Definition Link (MHL) and they have become a very important company in the tech supply chain. As you know, HDMI is a major standard used in all digital televisions and they deliver key solutions for MHL. MHL is an easy to use technology that’s revolutionizing how people experience mobile content. With an ecosystem of more than 750 million products, MHL is the de facto standard to connect popular mobile devices to TVs, monitors, audio receivers, and more. The current MHL 3.0 standard supports 4K Ultra HD video and enhanced 7.1 surround sound audio. Millions of smartphones are MHL compliant and are used to connect smartphones directly to MHL compliant TV’s all over the world.

The Spider product is unique in that it marries a smartphone to a laptop shell and turns this shell into a functioning computer. If you’ve ever seen the Motorola Atrix + Lapdock you may have an idea what this is all about.

275061-motorola-atrix-2-at-t-lapdock

The problem with the original Motorola Atrix with the Lapdock is, in 2011 when it was introduced, smart phones were very underpowered and trying to use it to power a laptop just did not work. However, with today’s smart phones sporting processors running one to two billion transistors, they have more than enough power to work in this configuration.

Although this product may never catch on in Western markets, Spider will be used by some major players in India and parts of Asia where even low end smart phones have enough power to work with a laptop shell. I understand that in India, a low cost smart phone will go for about $129-$159 USD and the laptop shell will be no more than $50, including a screen and an extra battery in the shell itself.

It will use MHL for the connectivity from the smart phone to the laptop shell and, in essence, give these folks a laptop to use as part of their personal computing experience.

We in the West have a hard time wrapping our minds around the fact many people in these regions actually run full businesses off their smart phones. With a Spider-like configuration, they could use the laptop shell to give them more productivity power and make running these business more efficient.

As you can imagine these folks can barely afford a smart phone so buying a laptop is out of the question for most. This gives them the best of both worlds at a price many in these countries can afford.

I don’t see this concept being big in the West, but for India, parts of South East Asia and Africa, it could be a godsend for many who want more in the way of a better computing experience.

The Accessory Benefiting Most from Low Cost Android Phones

Every year I walk the little known back halls of CES where the Chinese/Shenzhen manufacturers show off products coming out of the their manufacturing ecosystem. Given the global influence of the Shenzhen manufacturing ecosystem, I go to the halls to learn more about the China market and see what’s the new hot item China is manufacturing.

I was the first to spot and tweet about the Apple watch knockoffs in this area. Nearly every major media outlet asked me where I found it and ran stories of their own later in the week. Here was one of three booths selling Apple Watch knockoff hardware.

IMG_0765

While this was interesting, it was also expected, and not the most compelling thing I saw in the area. Many vendors had extremely low cost tablets and have had them for the many years I’ve explored these halls. Selfie sticks were also seen in a number of booths in a wide variety of styles and designs. Whatever I see in many booths tells me what is moving in large volumes out of this ecosystem. Interestingly, the thing I saw being sold at more booths than any was elegantly designed external battery packs.

There were more booths offering a huge menu of external battery backs than any other single product in the Shenzhen area. They came in all types of colors, sizes, and designs. Some were wrapped in unique material like wood.

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Some were gigantic bricks offering 8000 mAh or more. I inquired about the use case of these external battery packs. The answer seemed quite obvious — Chinese consumers are on their phones so much they kill the battery extremely quickly. For those who take public transportation like trains or buses very long distances, they watch an enormous amount of video or play hours of games during these commutes. So, a common use case is to have one of these very large battery packs and keep the phone plugged into it while watching movies or playing games.

As I inquired about the different sizes of these battery packs, the guy at the booth explained the size of the brick depends on how long a person is going to be way from a power outlet. Many leave their home in the morning and aren’t near a power outlet all day while at school or work. Therefore, they get these huge battery bricks so it can last them a day and often more. He also added it was not uncommon to see Chinese consumers watching video on the train or on lunch breaks with their phones plugged into these bricks. My takeaway is, for many Chinese consumers, these bricks are their power outlets. It became clear after chatting with a few of these vendors not only are Chinese consumers on their phones much more than the average Western consumer, but power outlets are also hard to come by in their day to day routines. These external power bricks are a third world solution to a third world problem. But this also points out another interesting element.

Most Chinese consumers have very inexpensive smartphone hardware, running somewhat sketchy and low cost and quality Lithium Ion batteries. It seems plausible the common battery issue is, by nature, also a by product of the lack of quality hardware owned by the masses who can only afford a lower-end phone. Given this reality, companion battery packs seem a viable solution to a real problem. This will not only be the case in China but all throughout SE Asia, India, and many other emerging markets.

All of this highlights the extreme differences between the lower tier of the smartphone market and the higher end. Both of these markets have significant opportunities but it seems the opportunities are at different ends of the spectrum. All of this strengthens the position I outline in this report about Google’s conundrum. All the growth in smartphones will come from this lower tier where there are entirely different problems to solve.

Palm and the Potential Silliness of CES

palm-logo-100539479-largeEd Colligan, a founder and former CEO of Palm, got it right. In a post to Facebook (on former Fox PR head Lynn Fox’s page), Colligan says: “I think it’s amazing these companies think they can buy a brand and stick some crappy products under it, and somehow they will get the benefit of the brand.”

The coverage of Chinese electronics maker TCL’s purchase of the Palm name and logo from Hewlett-Packard’s junk pile unsurprisingly got serious coverage from the same media that gives incredulous coverage to every announcement released at CES. Palm is no exception. “Palm lives! TCL to revive the classic brand” says PCWorld. “Chinese TV giant TCL brings Palm Inc. back to life,” declared Engadget. And more from many others.

Come on tech reporters, we deserve better than this. I won’t bother you with the whole tortured history of Palm, but HP bought the troubled company in 2010. HP had serious plans for Palm’s webOS software, but the CEO had no interest and killed the project. HP sold the entire webOS package and most if not all of Palm’s patents to LG, but kept the brand in a closet somewhere until TCL found it.

TCL intends to put the brand on a U.S. phone (it has been selling its phones under the Alcatel brand, another story) But the product will bear no resemblance to an actual Palm, no new models of which have been designed in three years. The TCL will be built on Android, not Palm’s webOS.

One of the nuisances of the tech industry’s edge is the willingness of some marginal player to buy the rights to a name. You can get a cheap TV branded Westinghouse. You can get an assortment of low cost consumer products branded Bell & Howell. And soon, the same for Palm.

 

 

 

Where Can Intel Find Growth?

XScaleJean-Louis Gassée, a veteran executive, investor, and observer of the tech industry, wrote an accurate and depressing account on the position of once high-flying Intel. Like Microsoft, Intel was unable to to keep up with a rapidly changing world where the kings of PCs were being overrun by small, lightweight, mobile equipment.

The question is, how did Intel get into this mess and how does it get out? One thing to remember is Intel, again like Microsoft, has lots of problems but is not in dire straits. Its revenue and profits have both fallen slightly over the past three years but nothing in danger of putting it out of business. The server market, for which it owns the processor business, is strong and, while PC sales are weak, that business isn’t going away. But this can’t change the fact the market for Intel’s processors is far, far behind the demand for ARM designs in mobile devices.

Intel, of course, could be on top of the world of processors for everything from PCs to phones. In 1997, Intel agreed to acquire Digital Equipment’s StrongARM, a top-of-the-line ARM chip, to settle a legal dispute with DEC. The problem was that the x86 had all the real power within Intel. The x86 teams wanted to build smaller and cheaper chips of their own (of course, mobiles phones in those day did nothing but make phone calls).

Intel renamed the StrongARM XScale and it became a real contender as much more sophisticated mobile data devices, such as Palm, migrated into phones. But it never really counted as a central Intel product.

The classic test came along when Apple, which had already switched to Intel’s x86 for the Mac, expressed interest in XScale for the iPhone. But Apple drove a hard bargain. In an interview with The Atlantic, retiring Intel CEO Paul Otellini said:

At the end of the day, there was a chip that they were interested in that they wanted to pay a certain price for and not a nickel more and that price was below our forecasted cost. I couldn’t see it. It wasn’t one of these things you can make up on volume. And in hindsight, the forecasted cost was wrong and the volume was 100x what anyone thought.

Intel decided to leave the ARM business instead and sold the division to Marvell. Since then, it has been focusing exclusively on miniature x86 system-on-a-chip (SoC) for mobile devices but has failed to make a dent in a field dominated by the ARM products of Samsung, Apple, Qualcomm, Nvidia, and others.

Intel has been pushing its x86 Atom SoC for a while. It’s found a market for its Medfied, Merrified, and Moorfield systems on Windows and Android tablets and a variety of industrial products, but not very many phones. It has been able the shrink the SoCs ever smaller, but ARM has continued to stay ahead. Today Apple’s A7 processor, a Samsung-made SoC, is still substantially smaller at a die size of 102 square mm, compared to the 196 square mm Moorefield.

Intel is going to need a way to get into a phone device, and it seems unlikely to be x86. But Intel, unlike most of its competitors, is in the business of manufacturing its own chips and the drop in demand for PCs has left it with a significant amount of fabrication capacity.

It could get into the business of manufacturing chips for ARM designers. But while Apple would like to take its business away from Samsung, making iPhone chips would be a bitter move for Intel. Taking on the iPhone at its launch would have made Intel a successful partner for the decade’s most important product. But Apple has learned so much about chip design that Apple would be the leader and Intel just a hired fab operator.

To get back into real competition, Intel will probably have to find away to reverse the mistake of the XScale sale and get back into the ARM business. It would be a painful and expensive move, especially since there are no readily available ARM manufacturers on the market. But it may be Intel’s only way to find a growth market.

A Deeper Dive on Android and iPhone in China

I’ve received a number of questions from readers about why I don’t talk as much about the US market for smartphones. It’s primarily because the US doesn’t offer any new interesting questions or problems. It’s about a 50/50 split between Android and iOS and Apple controls over 60% (and growing) of the premium smartphone space. iOS is on track to gain share into Android’s each quarter of 2014 and it will likely be more of the same in the US in 2015. However, other markets like India and China pose much more interesting questions and problems to be solved. I’ll do a few deep dives on the US market with some of our updated data sets, but what we find will likely not contain major surprises. Now, onto the iPhone and China.

First, Android Context

A fascinating data point came from Baidu yesterday. Baidu, the largest browser in use with an over 80% share in China, reported to Tech In Asia that they count 386 million active, individual Android customers. This is Android AOSP, not Google-approved Android, and a few things are unclear about the numbers. First, it is uncertain if these are smartphone-only owners. The report simply states active Android devices. Given China runs both AOSP on smartphones and tablets sold there, either device connecting to the Internet and accessing Baidu’s search engine would be counted. Through my supply chain checks, I learned that, on average, about 20m low cost Android tablets are sold in China each year. As I have discussed before, most of those are used simply as portable media players and large percentages likely do not connect to the internet. Which means, while some of the 386m active Android devices are tablets, the majority are smartphones. ((Even if the report said they were all smartphones, I would still believe a small percentage were tablets since my research there found that even 7-inch tablets in China use smartphone components; therefore they show up in analytics as smartphones.))

Baidu similarly reported last year a total of 270m active Android users. So there is impressive growth for AOSP. For some time now, I have been building a model of AOSP’s growth in China and was pleased to see Baidu’s data for Q3 2014 matched very closely to my own model.

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You’ll note growth is slowing, as is the China smartphone market in general. There is certainly more growth to be had as more of rural China gets online, but these will mostly be with very low cost smartphones. Where things start to get interesting is when we look at the nearly 400m Android AOSP customers in light of the total smartphone user base. A number of Chinese research firms like iResearch China and analytics engines like Baidu/Umeng came out and said over 550m smartphones were in use in China by the end of June of 2014. My model would estimate that number to be around 575m as of today. Now we turn to the iPhone.

All local app analytics sources I have access to in China, and major network statistics I see, show Android and iOS as the two dominant smartphone platforms. So, if ~386m of them are on Android, then the iPhone fills most of the gap between 386m and ~575m. Based on my model, I had estimated iPhones were likely in the 130-150m range and I have believed for some time there were more iPhones in use in China than the US. It seems Baidu’s data is confirming much of what I thought my model was suggesting was true.

However, the bulk of that iPhone active installed base is on much later generation hardware sold through the grey market. This chart is the most updated data — now containing a a month and a half of iPhone 6/6 Plus availability. Keep in mind iPhone 6s starting showing up in September in this data because of grey market imports.

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As Apple offers more models for sale in China, we are seeing the continued rise of primary market sales of iPhones. There remains a large installed base of later generation phones but, as you can see, it is actually more of a mix than domination by a few models. This data comes from Baidu’s app distribution network so it does not cover the entire market but it does cover over 100m devices. I can’t imagine the picture is much different on other app distribution platforms.

What I’m left thinking about is what will happen with the large percentage of current iPhone owners who are using later generation iPhones they bought from the secondary market for prices around $300-$400. It is hard to believe every one of those owners can afford a $700 phone but will they stay in the Apple camp and get another later generation phone like the 5s? Or will they stay in their price range and go with Xiaomi? These will be interesting questions for most of 2015. However, once the current iPhone 6/6 Plus gets discounted in China when the iPhone 7 comes out, I think Apple’s offering in China will be very competitive.

Lastly, it is worth pointing out the China smartphone market is unlike anything out there at the moment. Much of it has to do with WeChat. WeChat is undeniably functioning as an alternate or “para” operating system that runs on iOS and Android. As I look at what lock-in Android AOSP, or Xiaomi’s Android skin, or Apple’s ecosystem has, I observe the true lock-in in China is WeChat. Apple has the benefit of playing as a luxury brand; status is a huge part of their lock-in in China. But as this financial analyst correctly points out, we are hoping to see Apple continue to create more services/cloud lock-in rather than just status. Services like UnionPay integration will help with this but Apple’s services stickiness in China is a story to watch.

With Chinese consumers’ loyalty to WeChat, it means Android vendors could come and go. Xiaomi is doing a decent job building some loyalty and all on-the-ground research I get from China indicates a growing pride of Chinese consumers for local Chinese tech brands. This will continue to pose challenges to Samsung. We are watching a number of Chinese brands closely, but Vivo (charted below) is one to keep an eye on as they are positioning a number of their products to the high end.

There are many story lines to watch and analyze throughout 2015 with regard to China and I’ll keep updating my narratives on all of them.

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Takeaways From IBM’s Black Friday E-Commerce Report

Recently, IBM released their post Black Friday analytics report. As always, it includes some interesting takeaways around devices and platforms used for Black Friday e-commerce. Before digging into the report, I thought this tweet from Benedict Evans was insightful in context.

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Tablets functioning more like PCs in the home rather than mobile devices should be obvious for those who use them. However, this observation has some interesting implications. In particular, it further validates that tablets are more like PCs than smartphones in many aspects of usage. This chart is one I’d like to dig into a little more.

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Note that tablets represent a fairly small percentage of website traffic compared to smartphones. Yet, they have higher conversion rates and much higher average order values. Furthermore, more consumers made a purchase on a tablet than a smartphone. As a percentage of sales tablets made up 16% of purchases where smartphones made up 11.8%. Both the conversation rate and the average order value of tablets are more in line with PCs than with smartphones. The picture this data paints is how that many users do quite a bit of browsing/research on their smartphones but then move to their preferred purchasing platform — either the tablet or the PC — to complete the transaction. The low percentage of traffic from tablets is perhaps representative of the smaller installed base vs smartphones and PCs in the US. It also could suggest that, after consumers decided what they wanted, they moved to the tablet to complete the purchase.

While the picture painted from Black Friday of tablets and smartphones is interesting, I’m not sure this dynamic continues forever. By next year, I believe Touch ID-equipped smartphones will have a larger impact on the Black Friday device e-commerce landscape. Apple is working to eliminate payment friction in both the physical and the digital world and, by next year, my sense is the large US installed base of Touch ID-equipped iPhones may shift this picture quite a bit.

For now, the IBM report paints a non-surprising picture of iOS vs. Android users when it comes to online purchasing.

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It’s worth noting the above chart is not a breakdown of iPhone vs. Android smartphone users but the platform as a whole. Which means iPad is playing into these statistics as well. Some key stats from the report:

  1. Average Order Value: iOS users averaged $121.86 per order compared to $98.07 for Android users, a difference of 24.3%.
  2. Online Traffic: iOS traffic accounted for 34.2% of total online traffic, more than double that of Android, which drove 15% of all online traffic.
  3. Online Sales: iOS sales accounted for 21.9% of total online sales, nearly quadruple that of Android, which drove 5.8% of all online sales.

One other stat that stood out was that average page views on Android devices were higher than on iOS devices. This is interesting because the installed base in the US of iPhones and iPads is quite a bit higher than Android phones and tablets. While on a monthly average basis iOS leads Android in US in web browsing, it didn’t on Black Friday. Some have suggested this means Android users are more “window shoppers” than iOS users. While that could be true, it could also mean more iOS users were out shopping at physical retail stores, thus spending less time browsing. The disparity between Android purchases and the high average page views could also suggest Android customers are a bit more calculated, possibly even frugal, than their iOS counterparts. Meaning, they are more selective in what they purchase, even though they do roughly the same amount of research.

The picture painted here of iOS vs. Android users is not surprising and likely the gap in spending between iOS and Android users will increase over the next year and should be evident in the data this time next year.

Lastly, the dominance of the PC for e-commerce still shines. It led in every category for online purchasing. This shows the trust and comfort level many in the US have in making purchases on the PC. While this isn’t terribly surprising, what struck me is how different this picture is with regard to the PC and e-commerce in the US vs. other regions I study, particularly markets like India and China. E-commerce from mobile devices is dramatically higher in those markets than the US and I believe it has everything to do with, for now, the high PC penetration and comfort level with PCs in the US. Which, as I will flesh out more at a later time, is potentially a roadblock keeping the US from progressing to the mobile reality the rest of the world is living in. Perhaps this is just a matter of time, but the centrality of the PC in the US may be a negative compared to innovative things happening in markets where the mobile is the center of consumer’s universe.

What Foxconn Making a Nokia Tablet Tells Us About the Future

Something interesting happened today. Many people missed what is perhaps a significant development when Nokia announced the N1 Android tablet. Lots of folks saw the announcement and proclaimed Nokia back in the hardware business, making and selling tablets. A deeper look reveals what the real story is.

The release states:

The N1 will be brought to market in Q1 2015 through a brand-licensing agreement with an original equipment manufacturer (OEM) partner responsible for manufacturing, distribution and sales.

So a “brand licensing agreement” between Nokia and an OEM has been established. We have since found out this OEM is Foxconn, which is technically an ODM (original device manufacturer). That is where this really gets interesting.

The release goes on to point out:

In addition to the Nokia brand, Nokia is licensing the industrial design, Z Launcher software layer and IP on a running royalty basis to the OEM partner. The OEM partner is responsible for full business execution, from engineering and sales to customer care, including liabilities and warranty costs, inbound IP and software licensing and contractual agreements with 3rd parties.

So what is going on here? Several very important observations need to be made.

Nokia has developed a tablet design. A pretty decent one at that. They have also licensed the Nokia name as well as their own design to Foxconn who will make the tablets, handle sales, engineering, customer care, etc. Basically, Nokia has handed Foxconn a cookie cutter product to be sold and marketed under a global household name. So why does this matter?

If you read much of what I write, I am fascinated with the hardware business model in the mid-to-low end segment of the smartphone and tablet market. There are virtually no margins to be made in the commoditized tablet and smartphone world we are quickly moving toward. How hardware vendors sustain themselves has always been a key question for me. Yet, I’ve concluded long ago other companies using business models other than just monetizing hardware under their brand are well positioned to succeed in this future. Foxconn’s business is manufacturing and, as long as they make things, times are good. I’ve heard for some time that Foxconn has been thinking about ways to use or develop its own brand to go to market with products. In areas like India and Brazil, there are import fees that make it very hard for external parties to succeed. Foxconn has a plant in Brazil and is well positioned to make handsets in the region, without an import tax, and do very well. Foxconn has a business model going for them and all they needed was a brand. Now it appears they have it.

It is true they cannot make phones yet due to the Nokia brand name licensing deal with Microsoft. I fully expect Foxconn to start making Nokia smartphones in 2016 when the smartphones brand agreement between Nokia and Microsoft is complete. Foxconn can make these devices and sell them at dirt cheap –commoditized–prices and it fits their business model.

Foxconn also has a similar deal with Blackberry. But they have yet to do much with it and for good reason. The Nokia brand gives them more credibility in the markets where I think they seek to enter. Sure, there will be challenges. How does an ODM do sales, marketing, and support? We will have to wait to see to get answers. But what Foxconn is doing addresses a business model problem I think businesses have in selling commoditized hardware to the next billion plus consumers.

For Nokia, this is an interesting move. They have done the design and maintain some quality control in order to protect their brand. What they are doing sounds very similar to what Polaroid tried to do. This is an intriguing move by Nokia and one that, if successful, could be quite sustainable.

Regardless if this scenario works or not, how big companies navigate the business model challenges of connecting the low income majority of the planet will be fascinating to watch.

Xiaomi: Just a Hardware Company?

Whether or not Xiaomi is just a hardware company or is truly an internet company as founder Lei Jun continually emphasizes came into question with last week’s Wall St. Journal report. The statistic that surprised many was the “94% of revenue made in hardware” figure. It was generally believed Xiaomi sold their hardware at cost with little to no margin and made their profits with internet services. However, if the Wall St. Journal report is correct, then that assumption has been flawed, at least up until now.  What’s fascinating, and perhaps enlightening, about what we learned from the report is they have effectively figured out how to still get average OEM net profit margins. Xiaomi’s BOM cost of their popular Red Rice Phone is about $85 and sells for $130. Their popular Mi3 has an estimated BOM cost of $185 and sells for $270. By being able to manage the supply chain and, after other hard costs, I estimated hardware net profits of approximately $23-$26 per phone sold.

What is interesting to ponder with relation to the Wall St. Journal report is why Xiaomi’s profit only increased 85% when handset shipments increased 200% YoY. One would think, given this hardware model they are employing, profits would scale with such a dramatic increase in unit sales. Clearly Xiaomi incurred some significant costs, perhaps in CapEx, or in global expansion efforts, which offset their profit growth.

Another explanation for the discrepancy in growth was a higher mix of products like the RedMi and RedMi Note which, in a BOM cost analysis I did by looking at their suppliers, suggests this product was sold well below the average of $23-$26 estimated margin per phone and may have actually been sold at a slight loss. In fact, non-public reports I have read hint that Xiaomi initially prices their phones at or just below cost but then quickly drives costs down allowing them to begin to yield margins that weren’t there initially. Xiaomi in this case is a lot like Dell, in that they only order the phones to be made once the sales are taken in. Xiaomi manages zero inventory and only builds phones in bulk for the orders they have taken. This is one reason the order availability is capped at a certain level. By managing supply chain tightly, and driving product costs down over time while capturing those margins in real time, they have effectively been able to generate the kind of hardware revenue the Wall St. Journal report indicates. That being said, they can not simply be a hardware company. And ultimately their growth prospects are challenged with just this business model. This is why they are seeking to raise capital. A cash infusion is necessary for Xiaomi to grow and grow quickly, which they’ll need to keep capitalizing on the mind share they currently have.

Ultimately however, I believe Xiaomi is still laying the critical groundwork to be the internet services company they desire to be. Being in the hardware business alone is not a sustainable business for many global OEMs. I have spoken with several high-up execs at Xiaomi and was told that, as of late 2014, they are generating around $21 million USD in revenue from their app stores (game app store, mobile app store, and books app store). Which means it is likely 2014 profits should have quite a bit more balance between hardware and services. Xiaomi is on pace to again increase handset shipments ~200% — yet the WSJ report only estimated a 75% increase in profits this year. The curious variable of why profits are not more closely matching explosive YoY handset shipments is a concerning element of the overall Xiaomi story.

Can Xiaomi go international? That remains to be seen. Their sales in markets outside of China have been nominal to date but there is increasing brand awareness in non-Chinese markets. Scaling internationally will be a challenge and they have to be more than a hardware company to do it sustainably. Xiaomi is in the news a lot but I still have my doubts about their long term fate. If China is the only market they are relevant, this is not a bad thing. Xiaomi can have a strong and profitable regional business and still be successful.

Google’s Ads: Defense or Offense?

I recall not too long ago Google did zero advertising. “Just Google it” was spreading virally and Google was growing and had no need to spend money on marketing. Slowly but surely over the past few years, Google has stepped up its advertising efforts. Which, and some may disagree, I interpret as a sign of their slowing growth. Myself, along with others, have pointed out that Google’s long term growth prospects have been challenged. From internal discussions I have had with execs there it seems this is well known inside the organization. I have been observing two distinctly different advertising efforts and I have a few observations.

North American Advertising

Google has, all of a sudden, begun advertising Android in several prime time commercials in the US/Canada market. I see several fundamentals causing Google to get more aggressive in Android marketing.

  1. Samsung’s US dominance is declining. Samsung is currently in a very vulnerable position in the US. Many fail to realize Samsung’s aggressive marketing and sales commissions helped get them to where they are today in the US premium segment. Yet Apple still sells nearly ~2:1 more phones than Samsung in the above $500 wholesale price tier. Despite Samsung’s best efforts, and a massive internal effort to become the leading US smartphone vendor, they have yet to knock off the king of the hill. Furthermore, it is doubtful they will in the foreseeable future. It is not a secret that Google makes more money from iOS consumers globally but Samsung was helping them get the profitable US consumer more embedded to Google’s services. If Samsung’s growth slows or declines and it is not picked up by another Android vendor but instead by Apple, Google could be loosing key advantages in the US.
  2. Carriers backing iPhone 6/6 Plus more than other premium Android devices. In case you haven’t noticed, nearly every major carrier commercial running in prime time right now is for the new iPhones. This may very well be a part of the agreement between the carrier and Apple but the point remains. More promotion is going on currently for the new iPhones than any other US smartphone. Google must recognize Samsung alone can’t push the Android agenda forward in the US. Yet Motorola and LG are not equipped to embark on the same kind of marketing blitzkrieg Samsung can.

India

Google winning in India is not a slam dunk. I’m not sure many realize this. India is a completely green field when it comes to smartphones and smartphone ecosystems. In fact, Microsoft even has a chance in India. Google can not afford to be a minority player in India and they know it. Android One is Google’s push at getting Android deeply engrained into the Indian mobile ecosystem. Their challenge is things like Facebook, WhatsApp, and even other app stores/distribution methods, are more dominant than many Google services. Which is why Google is advertising on behalf of several Android One OEMs in India to help spread the word and drive the brand/ecosystem. I expect Google to be ruthless in competing for India. Which is fantastic for Indian consumers but may be quite challenging for competing ecosystems and even to a degree competing hardware vendors.

What Google has me thinking about with regards to their marketing strategy is a lot like Intel’s. When a vendor picked an Intel chipset, Intel offers marketing assistance as a part of that design win. Most PC OEMs do not shoulder the bulk of their marketing — Intel does. It is one of the main advantages they have had with OEMs over AMD. Intel’s chips may be more expensive but they will help/do the bulk of the outbound marketing for you. Similarly, Google is beginning to do the same. Understanding that their partners are not good at marketing nor can they afford big marketing budgets, it seems Google is willing to take on the marketing efforts for many of their partners.

What impact this has on their margins is a key metric to watch. Their growth is already stalling and they currently have the most profitable customers they are going to get to fuel their current business model. Spending marketing dollars to acquire customers who will they will reap less revenue from is both a necessity but also risks off-setting any gains.

Chart: Internet Access by Device

As our readers know, every now and then I like to post a chart and tease out the highlights. Today, I want to do that with some updated data. Across many global markets, consumers were asked which devices they have accessed the Internet on, either through an app or browser, over the past 30 days. This data is updated frequently so we can track the growth of internet access by device over time.

Screen Shot 2014-11-07 at 9.30.04 AM

Mobile/Smartphones: This is be obvious and we can expect continued growth in internet access by smartphones for the foreseeable future.

Tablets: Tablets remain the other growth area. Given the slowdown of tablet growth overall, we can make a few observations. The first is the tablet is continuing to steal internet time from other devices, mainly the PC. The second is the tablet market is actually growing. However, it is doing so by the secondary market. Meaning that many of those initial rush of iPad buyers are continuing to hand down older iPads to other family members as they upgrade their iPad. Since this upgrade isn’t happening all at once but is trickling in over time, we see slower sales but larger use of tablets. Another is the continued explosive growth we see of Chinese white box tablets. In certain markets like Russia, India, Mexico, Brazil, and to some degree China, these low cost, no name brand tablets are quite popular. Most are dedicated game players or portable TVs, but internet access at some level should also be assumed. This is happening to a degree in the US as IDC highlighted RCA being in the top 5 of tablet vendors for Q3 2014.

As I see this data on tablets and see quarter after quarter of more people say they are getting on the internet with a tablet than the quarter before, it shows us the category is still viable and still growing.

PC/Work PC: I like that these two categories are separated in the survey. It helps us get an understanding of how much larger the consumer PC segment is vs. those who use a PC at work. When you look at both numbers, it is possible to interpret their lines and believe the PC market is simply not growing. This certainly looks to be the case. We are not adding brand new PC users at anywhere near the rate we once were. Also, as I alluded above, more PC users’ internet use is likely shifting to other devices.

I point this out in many of my focused PC industry analysis reports through my firm Creative Strategies. What we discover when we study PC behavior in both consumer and enterprise environments is the device is becoming a much more focused product than a general purpose one. People use it for specific tasks and have now defined what tasks it is better for vs. others. A great example of this is Facebook. In our studies, we found over 75% of daily US Facebook users access Facebook on their phone but while sitting at their work PC. Facebook has a browser based version so why not just use it? We find people simply prefer the mobile version, so we see this dual use of a PC and smartphone at the same time. Responses we’ve heard were that it was faster, more private, more convenient, and they could use the mobile app to get a particular task done, even though they could have done the same thing on the PC. If general purpose computing moves from the PC to devices like the tablet and even more so to the smartphone, it will bring dramatic implications to the PC ecosystem.

Television: Increasingly, more people are accessing the internet from their TV. It is important to note in this data that a game console or set top box is included. This is not referring to a dedicated connected internet TV, but to the use case of connecting to the internet in some way from your TV. Clearly Netflix, online console gaming, and other use cases drive this, but the fact it is slowly increasing tell us quite a bit about the role the TV will play going forward and the internet services are poised to be monetized from the big screen.

Given this survey comes from over 30,000 responses, what the lines also show approximates volumes. The higher the percentage of the line, the more people using the device to access the internet. Like most surveys, it does not include mobile only consumers, but we can be assured there are more people accessing the internet from a mobile device than a PC, even though these lines don’t show that. What this chart sheds light on is what the internet by device landscape looks like in the multi-screen user world. The “internet embedded into everything” is the theme. What devices dominate its usage is the interesting part to watch going forward.

Research: Who’s Buying What Tech around the Globe This Holiday Season

We have some research that gives us insight into what tech products are on the interest horizon for purchase over the next six months. While intent to purchase surveys don’t always lead to purchases, it does give us an indication of what products are top of mind and more importantly how that may differ from each region across the globe. This research comes from surveys across 32 different regions and over 30,000 people in total. With as much data as I have, I struggled with the best way to display it. Since percentages did not equal 100% and were also based on sample size from each region making the percentages vary, I decided to weight the values numerically by priority. 12 is the highest priority / interest to purchase over the next 6 months and one is the lowest.

Here is the chart from a global standpoint with all 32 regions included.

Screen Shot 2014-11-03 at 8.31.48 AM

As you can see, globally tablets, smartphones, and a PC (laptop) have the highest interest level/priority to purchase over the next six months. While mobile phone numbers shouldn’t be surprising, it is interesting that, in all regions, the tablet still remains the highest priority with the PC (laptop) third. As I look at what we see happening in the market, my gut tells me there is still a large number of global consumers struggling with whether to get a laptop or a tablet. I’ve been saying for some time that, when the consumer market moves and finally upgrades their PC, we will see how the tablet and PC conundrum plays out. Still, looking at the data, one has to believe companies like Microsoft and Intel look at this and believe the 2-1 value proposition is strong if a buyer is struggling between both products.

To look at the data more granularly, I’ve broken it out by some of the larger regions by population. The sample sizes were also quite a bit larger in these regions giving us better detail of who intends to buy what.

Screen Shot 2014-11-03 at 8.43.14 AM

As you see, most regions are prioritizing the tablet from a purchase intention standpoint. A few markets like China and the US are prioritizing mobile, thanks to these two regions being extremely seasonal with mobile purchases. When it comes to the PC, it still ranks high, but only Brazil consumers have it as their top priority over the next six months. What is interesting to me is other categories on this list which can also be served by a tablet should the consumer desire. Take the e-reader for example. While lower on the priority list, a tablet can also be an e-reader. Perhaps, as a consumer gets savvy to this, it sways their decision more toward a tablet or a 2-1 rather than a desktop or clamshell? The tablet or 2-1 could also conceivably fill the role of a game console or even a DVD player where access to digital movies exists. What this highlights is my point about the tablet as a much more diverse device due to its form factor than previous heavy computing devices like notebooks and desktops. The tablet form factor can simply “morph” into so many things thanks to the software and services. As consumers become more knowledgeable, I believe the value of the tablet increases.

One point that stands out and is worth highlighting is India’s intent to buy a mobile phone. Look at the data point and you would think buying a mobile is simply not a high priority for Indian consumers. When in reality it is the highest priority among the masses from a tech purchase standpoint. Keep in mind, to take this survey, you have to be online already in some capacity with a smartphone, PC, or tablet. The online population in India is still very small in contrast to India’s population (somewhere over 200m people are actively online). So people who are answering these questions from every region are already online in some way, shape or form. Google’s head of India estimated 5 million new Indian consumers are coming online every month. Most of those are coming from mobile devices. For the unconnected, the mobile phone is the highest purchase priority since it is most people’s first computer. Looking at the data, we are focusing a bit more on what the purchase intent of the already connected is for the next few months.

Where that reality stands out is when we look at what tech was purchased over the past six months. This is a question I like because it brings a bit more clarity to the picture since consumers are stating what they have actually purchased rather than what they intend to purchase. Similar to the above chart, I weighted the percentages numerically. The most purchased product over the past six months is a 12 while the least purchased product is a one.

Screen Shot 2014-11-03 at 8.59.54 AM

Here we see the clarity of the mobile priority. As expected the mobile phone has dominated purchases over the past six months. We also see the strength of the notebook and desktop rebound we are seeing as it shows up in this data. The desktop in particular was a frequently purchased product globally over the past six months. We had a hunch early last year the PC would do well this year and we were right. Partly based on similar intent to purchase data we got this time last year. In fact, the above chart showing who purchased what was very similar to the same intent to purchase data from a Q3 2013 survey.

We know about the centrality of mobile, but what intrigues me about this data is the continued interplay between tablets and PCs. As a part of my overall industry analysis of both categories, this remains a story line and one that does not have as crystal clear of an ending as other categories. I get this data every few quarters so we will check back early in 2015 and see how the story is playing out. My guess is that Mobile is still high, but where PCs and tablets fall is the key question.

Video Analysis: Samsung’s Fall From Grace by the Numbers

In this video analysis/padcast I take a look at some of the numbers behind Samsung’s steep revenue and profit decline.

If you have the Perspecive iOS app from Pixxa, then you can click this link and watch my story on the app, pause it and interact with my charts and data yourself should you please.

Video length = 7 Min.

[fluidvideo url=”//player.vimeo.com/video/110544905″]

Profitable Niches

As of late, I have been speaking with management of many different companies. Oftentimes I’m asked for my recommendations in these engagements and I have noticed a certain theme that remains constant in my answer. That theme is to focus on profitable niches.

Way too many companies, in their internal strategic planning, make the mistake of doing zero sum game analysis. Having done a review of these analysis for Fortune 500 companies, it becomes clear that many bring an old world view to the competitive landscape. What I mean by “old world” is the thinking that, for someone to win, others have to lose. This may have been true at a time when the industry was small and the total addressable market of computing products was less than 500 million. It was in this environment Microsoft ruled computing and Apple was nearly bankrupt. Not long after that narrative, another emerged, also including Microsoft, with Internet Explorer vs Netscape. The online population was also only in the hundred millions and the narrative was only one of these browsers could win. Eventually, Internet Explorer did. The same was true when Palm entered the scene. Against Microsoft’s Pocket PC platform, most analysis looked at this as a zero sum game in a winner-take-all market. That world is gone and has been for some time. In a world being drive by computing’s S-Curve (pictured below), there is market share to go around.

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Market Share vs. Market Shares

“Enough market share to go around” seems to be lost on many companies. Which is why I hammer home the theme of profitable niches as a sustainable business in such a large market. Perhaps the best modern day example is Nvidia. A company thriving by continuing to advance high end gaming graphics cards with incredible margins. They sell these to an enthusiast market which, while small, spends a tremendous amount of money. Gamers are a profitable niche. In fact, you could probably argue any enthusiast market is a profitable niche. Every market has these. In the automobile world, there are cars designed specifically for car enthusiasts. In the consumer packaged goods space, health enthusiasts enable premium prices for more quality food and goods. Fashion, jewelry, and more all have their commodity products but these markets also have profitable niches.

In essence, this is what Blackberry is hoping to accomplish with their Passport. They hope there is a business “enthusiast” who values the hardware, software, and services they create and are willing to pay more for them. If successful, Blackberry will have found a profitable niche.

While it is hard to predict which niches will be profitable, I do believe the computing markets globally will continue to splinter. As the broader commodity smartphone, tablet, and PC categories grow, there will be some splintering off to these profitable niches. Nvidia again has a great example with their Shield gaming tablet. Nvidia knows the makeup of core PC gamers and built them a tablet to compliment and extent their PC gaming experience. Kids’ tablets are another great example. Nabi is moving millions of these products at decent margins by focusing on parents but delivering a kid-friendly tablet solution. Ruggedized PCs, tablets, and smartphones are profitable niches. GoPro is another great example of a profitable niche. There are already many examples and more will come.

The key is to be looking out for them or being an innovator and creating them. As computing grows, so will a large base of those underserved by commodity computing products and looking for things more reflective of their unique needs, wants, and desires. This will be true of everything around hardware, software, and services. Some profitable niches will be bigger than others in terms of their slice of the pie. However, these profitable niches are in essence zero sum games. These are the areas where first mover advantage is real and apparent. So the key to is see them early or create them.

Know your customers, and look to fill an underserved need in the market and the profitable niche will emerge.

The Future of Retail

Physical retail and the world of technology have yet to combine in any meaningful way. I believe that is all about to change. Having spent more time speaking with retailers recently, it is clear they are about to make a technological leap. All of them have a deep fear of Amazon. Showrooming is a trend spoken about often internally at large brick and mortar locations. Yet one of the more interesting trends of late is called “Webrooming”. I outlined this trend in this insider report but, at a high level, webrooming is when consumers research online but then purchase the product in store. Our research on consumers who do this revealed the primary reason for webrooming was to read customer reviews of products they were interested in. 78% said they use Amazon reviews as their primary source for getting reviews of things they plan to purchase in store. Perhaps more interestingly, 42% said they read reviews on Amazon about products they were considering while at the store where they eventually made the purchase.

What I find intriguing about this environment is Amazon has been playing the game with an unfair advantage. Amazon has been using technology to gain competitive advantage. The playing field is not yet equal since most retailers have not been using technology to their advantage. I believe the groundwork is being set to level the field.

Payments

If you didn’t understand why the timing was right for Apple to get into payments and embrace NFC, then I encourage you to look into the EMV Migration and the accompanied credit issuers liability shift which has a deadline of October 2015. EMV is essential a “chip and pin” solution which enables credit card issuers to put a secure chip into their credit cards. The process for payment will be pin-based — meaning consumers will have to enter a Personal Information Number to authenticate the transaction. This shift will require all new payment terminals at physical retail locations. Merchants are incentivized to embrace this shift because as of October 2015, if they have not meet the deadline for the EMV transition, either they or the issuing bank becomes liable for any fraudulent charges. This shift in liability from the credit card companies to the merchant or the bank is the mechanism driving the investment in infrastructure change that makes not just chip and pin but NFC viable now in the US market.

Apple will sit right in the middle of this, playing a key role in helping limit fraud, thus limiting the risk to banks and merchants. This is just step one of brick and mortar retail stores embracing technology. The next will be Beacons.

Contextual Shopping

Beacons can help bring retail into the technological age. As our research on commerce highlighted, consumers are increasingly using the internet to make purchasing decisions. After the Christmas season last year, I spoke with several IT managers for major retailers and all of them were surprised at the high level of usage in store of their mobile app. This was everything from coupons, to product information, and sometimes just a map of the store to find a certain section. Thanks to our mobile devices, the in-store experience stands to get significantly better and low power proximity beacons can play a role.

If you have never seen this video from Estimote, I encourage you to take a look as it presents a vision of how beacons can transform retail.

Things like QR codes, and RFID tags are used today to give customers relevant product information. But the experience still needs to get much better and more interactive. This is what the promise of Beacons can deliver.

When we dive into the trends in markets like US and Europe behind webrooming and showrooming, it becomes clear in both cases technology is what has enabled them. This is why it will be interesting to see what happens once technology comes to physical retail in a meaningful way.

E-Commerce is growing but is still less than 10% of all retail sales. Clothes, shoes, gifts, books, and snack foods are the top five items purchased online out of 50 product options and categories. Automobiles, flat screen TVs, laptops, and mobile phones are the most researched online and purchased offline.

While still early, I have a hunch that, when technology is deployed strategically at retail, it could have an impact on Amazon. As I mentioned earlier, Amazon has been playing with an unfair technological advantage. Convenience and reviews are at the core of their value and both can be replicated and advanced by physical retail through the use of technology.

Global Implications of the iPhone Lineup on the Smartphone Market

With the new iPhone lineup, Apple has addressed every major screen size base for smartphones. What they have not addressed is every price point — unnecessary given Apple’s strategy. My read is the impact of Apple addressing premium (phones over $400) Android smartphones primary differentiating factor, larger screen sizes, this will in turn dramatically impact the sales of the premium Android smartphone market. The biggest impact could come from the US at first but other key markets for premium Android handsets will be impacted as well. If that does happen, it may also impact the Google ecosystem in significant ways.

Apple has taken just about every reason to buy a premium Android phone from Samsung, HTC, LG, etc., off the table. Most mainstream consumers don’t care about specs and features. They want functionality. Many found a larger screen to be more functional for them for whatever reason. My gut tells me the premium Android space, and Samsung in particular, will be severely impacted by the new Apple lineup of iPhones.

In the US, Apple’s iPhone made up 64% of the premium phones sold. Apple’s average of premium phone sales during the past six quarters was 60%. If I was a betting man, I’d wager that is all about to change. Apple will likely get a minimum of 70% (this was their number in Q4 2012) of premium smartphones sold during the holiday quarter in the US. Around the world, Apple’s premium share is dominant as well. In China they make up 78% of all premium phones sold, per the last data point I got from Umeng earlier in the year. In China, Apple has sold just over 12m iPhones since January and approximately 40% of all 4G phones sold since then in China were iPhones. Now that they will release a 5.5 inch device, the demand for iPhones in China amongst the social elite, and even upwardly mobile Chinese consumers, will be higher than ever. Apple’s share in Europe is also higher at just below 60% but the volume of premium phones there is much smaller compared to the US and China.

Globally, Apple has the dominant share of premium smartphones. My last estimate, which needs an update, was premium Android smartphones were just over a third of the total of the iPhone installed base. I sense Apple will convert a significant percent of the current crop of premium Android buyers over the next year or so and this will impact Samsung the most. But it may also impact Google.

If you have followed what myself and Benedict Evans have been saying about the Google Play ecosystem, Google is paying out half of what the iOS App Store is to developers but with just about double the active users. I’m also fond of saying Google has already secured the most profitable customers. Understanding this point, the following chart becomes interesting to dig into.

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That chart is composed of the latest snapshot of app store revenue. Included is Google’s (really Samsung’s) share of the premium smartphone buyers. Prior to knowing anything about the iPhone 6 lineup I had concluded, based on a projection model, that Google would need nearly 4x the iOS user base to pay out the same number of revenue to developers. It was unlikely Google would get that amount but now it is inevitably going to be losing a good chunk of their premium buyers. I’d be willing to bet Google’s and Apple’s App store lines begin to deviate further. Apple’s is continuing to go up and Google’s is showing signs of slowing growth.

While ultimately Google’s overall revenue may still be fine, thanks to the ability for them to make money off iOS customers, the app store revenue could see an impact. Which raises some very interesting questions for developers on Android. Questions I don’t have answers to yet.

Broadly, Android is continuing to sell in volume to low end customers. In many areas of S.E. Asia, India, Brazil, and even others, we are seeing early evidence of manufacturers choosing other services instead of Google’s in order to try and make more money. Monetizing the low end is very hard and it will be hard for Google and anyone who uses Android — unless they create and develop their own services to monetize on top of Android.

China has its own Android ecosystem and it will continue to advance and flourish. Apple will likely never be the dominant vendor there as they are in the US but by further lowering the price of the 5s (which is likely) it could compete quite well against a $400 Xiaomi Mi4 for example. Undoubtedly, Apple will continue to gain share in China but the real question for Apple is India.

India will be the second largest smartphone market at some point in the future. India does not want cheap, crap smartphones. This is a market keen on “value for the money.” Right now, there is better value for the money in the Android camp than there is for iOS for Indian buyers. That may always be the case but as the smartphone ramp takes place in India, I’d be interested to see Apple do some things to appeal to the value for the money mentality in that market. Just under 70% of mobile phones in India are feature phones. I do not expect a first time buyer to get a iPhone. However, as India ramps, and the market matures, the timing will eventually be right for Apple to be creative in that market.

From the data and research I have on the global smartphone market, it is very hard to not be optimistic about Apple’s overall opportunity. Ultimately Samsung is the biggest loser here as is the premium Android smartphone category at large. Android’s most passionate fans will still buy premium smartphones but that is such a small number it will not factor.

The questions around Google’s app store will remain but as new data points come out we can check back in on it. I’ll be spending more time thinking about what Samsung and other premium vendors can do but they are all in for a few rough quarters at least.

Unprecedented iPhone Demand

As we lead up to this years “main event,” I wanted to share some initial points underscoring my read that there is unprecedented demand for Apple’s iPhone this holiday quarter and beyond.

Major Upgrade Cycle: This has been the source of many analysts’ upside, but I think it may even be larger than many realize. From data points I have from the US, China, and even parts of Europe, it appears there is an unusually large number of legacy devices (smartphones more than two years old) still in use in the world. This includes devices like the iPhone 4, and Galaxy SIII. Our own research revealed the average life cycle of an iPhone in the US is 2.8 years. That number is even higher when only multi-person families are included. Apple’s quality curse is they build such good devices they can and do remain in use for longer than the traditional 24 months.

Gaining Share with the Phablet: One of the more compelling theories for the existence of the 5.5 inch iPhone is it could steal customers away from Samsung who were previously fans of the Galaxy Note line, on the simple premise of screen size alone being the most premium smartphone on the market.

Emerging Market Growth: Perhaps one of the most interesting things Apple can do is use previous years’ models, as they typically do, but be even more aggressive at their price points and target them in emerging regions. Keeping the 5s, for example, at a 5c price would go over very well in China for the middle tier market. Keeping the 4s and pricing it even lower could do extremely well in markets like India and other parts of South East Asia.

All of this gives me the sense this could be more than just a typical growth holiday quarter for Apple but that they blow past most consensus estimates for the holiday quarter with ability to meet the demand their only limiter. While my job does not depend on making estimate predictions for shipments, I would not be surprised, assuming they can make sufficient quantities, that Apple sell mid-60’s of iPhones in the holiday quarter.

The other thing that will be interesting to watch is what happens with Samsung’s sales. Last quarter, Samsung shipped 78m smartphones and they stuffed the channel prematurely to mask some of their challenges. I think it is extremely possible, given the sense I get on both Apple and Samsung trend lines, that Apple and Samsung sales in the holiday quarter could be closer than people think.

As some recent comScore data suggests, iOS and Android are neck in neck as far as users go in the US. I have a sense Apple takes the majority share in the US by end of the year.