Smartphones

India And The Future Of The Smartphone Wars

Perhaps I should have titled this “India Is The Future Of The Smartphone Wars”?

The appointment of the highly capable Satya Nadella to lead Microsoft only partly explains why I am thinking more about India and technology. The other reason is that it increasingly appears that the future of smartphones, and the winners and losers of the global smartphone wars, will be determined in large part by what happens in India. Great news for Google, possibly even for Microsoft and Nokia. Less good for Apple.

Despite the rather remarkable success of Indians in Silicon Valley, many of whom, like Nadella, are now leading tech companies, I still meet far too many analysts who remain disproportionately focused on what’s happening in China, or in Europe, while steadfastly ignoring the speedy, highly iterative tech landscape in the world’s second-largest nation.

Consider the following about India:

There are over 1.2 billion people — that’s about 4 USA’s
The median age is 25 (China’s median age is 36 and the US is 37)
India is the world’s 11th largest economy — and still one of the world’s fastest-growing
Annual per capita income is a dismaying $4,000 (by comparison, China’s is $10,000 and in the US it is $53,000)

Populous, young, growing, eager for technology, eager for connectivity, albeit with relatively meager resources to spend. It seems to me that is the perfect mix for disruption. Likely, this disruption centers around what is now our most important tool, the smartphone.

There are already about 150 million total smartphone users in India. Despite that number, and despite the nation’s large population, India is the world’s fastest-growing smartphone market. The giant feature phone market is collapsing.

According to IDC, 44 million smartphones were sold in India in 2013. Phablets (smartphones between 5-6.99 inches) garnered at least 20% of the Indian smartphone market, though other sources place this number much higher.

Using IDC’s latest data, Samsung is the leading smartphone company in India, with India-based Micromax and Karbonn trailing. (Nokia, a leader in feature phones in India lags, though sales of its Lumia devices have steadily increased and the company now may have a 5% share of the market there.)

Given the size of the market, and its rapid growth, and the number of new users, current sales rankings may not matter much. As DNA India notes:

Tier one smartphone brands are ignoring the writing on the wall in the world’s fastest growing smartphone market in order to cater to a global market. This could be a dangerous thing to do especially at a time when the market is growing at a rate of over 150 percent and with 85 percent users still using feature phones. (emphasis added)

2014 could prove a watershed year, considering that:

225 million smartphones will be sold in India just in 2014 — compared to 89 million in the US
Of these 225 million devices, an amazing 207 million will be to first-time smartphone buyers — the largest proportion of new users to existing users anywhere in the world

More so than the spread of 3G/4G, and the rapid improvements in mobile-optimized services, it is the almost unbelievable low prices of new smartphones that are enabling the rapid jump to smartphones in India:

“The median price of a handset has fallen from 8,250 rupees (Dh490) in 2012 to 7,000 in 2013.”

That’s $115.

In fact, about 2/3 of all smartphones sold in India are priced under $200.

The derisively labelled “race to the bottom” is in truth, connecting India, and the world, and gifting us with unbelievably accessible technology.

Mozilla is seeking to create a $25 smartphone. Nokia’s X devices are all priced under $150. The new BlackBerry Z3 costs less than $200. This is amazing and laudable. Indeed, marketing firm Jana, has cleverly predicted that 2014 may be the year when a smartphone costs less than a carton of cigarettes.

The world will never be the same, and what’s happening in India offers us clues to our future.

As the Guardian notes, 2014 is when “the number of mobile internet users in the developing world will overtake those in the developed world.”

Connectivity is flowering in abundance. Equivalent access to everyone and to nearly every data resource will very soon be in the hands of the old and very young, male and female, rich and poor. This may be a first in human history.

We can’t know how this will change us, or change the world. But I suspect that watching what happens in India, and it’s happening so very fast, will provide us with many clues.

Predictions

Sorry. This market is too big, and moving much too fast for me to offer any reliable predictions. That doesn’t prevent me from sharing my thoughts, of course.

Apple

Meh.

Right now, Apple simply has nothing much to offer India. Offering the iPhone 4 for over $200 as they are again, when there are so many other amazing, new smartphones available for far less seems to me almost certain to fail. In fact, I think marketing very old devices against clearly superior ones, at the same price, only harms Apple’s brand. They shouldn’t even bother.

For example, India’s own Lava offers the following Android device for around the same price as the iPhone 4, but here’s what you get:

A sleek, sexy product running on stock Jelly Bean 4.2.1 with a magnesium alloy body, a 4.7-inch HD display, a MediaTek MT6589 chipset, 1GB of RAM, an 8MP camera in the back, a 3MP camera in the front, a panel that includes Sharp’s OGS solution, and Gorilla Glass from Corning.

Or, you can get a Moto G. Even the new Nokia X devices are all available for much less — and they carry the beloved Nokia brand name, look great, and include multiple popular Microsoft services.

In addition, India loves phablets — which pose a direct threat to iPads. Thus, even sales of iPad are hemmed in. Apple probably won’t have anything to offer India for years, in fact.

Will this harm the bottom line of the world’s largest tech giant?

Not so much, and certainly not in the near term. As long as Apple can peel off the world’s top 10% of buyers, they’ll be fine. It is a shame, however, that Apple and the world’s biggest democracy have so little a connection.

That said, Apple can certainly learn from the India market. For example, Indian handset makers are known for their ability to rapidly iterate, offer a host of new products, new models, all with the latest, most affordable hardware, and all at breakneck speed. Apple offers a minor iPhone upgrade about once a year, and a major upgrade about every 2 years. This has to change for success in the developing world — and it may already be underway. As the Wall Street Journal recently discovered, Apple is “hiring hundreds of new engineers and supply-chain managers in China and Taiwan as it attempts to speed up product development and launch a wider range of devices.”

Google

Android is the most popular (smartphone) OS in the world. This is especially true for India, where Google Android may make up 90% of the market. Google should do all it can to continue India’s love of Google Android.

Consider that nearly a third of “Android” smartphones shipped worldwide — that’s now over 70 million devices per quarter — come without Google apps and services installed. Blame, or thank, China, and don’t expect this to change soon. Chinese handset makers, Chinese app stores, Chinese web companies, and the Chinese government itself have little reason to embrace Google or to embed the company’s apps and services into their finished product. If Apple should ignore India for now, as I suggest, Google should similarly ignore China, which will continue to be unfriendly to the company, and instead embrace India.

Google should ensure that its very best tech, its latest services, its most amazingly affordable visions for computing devices all flourish in India, where value and accessibility are paramount. Efforts such as Project Ara, where Google hopes to offer a DIY smartphone for $50, should be heavily promoted and tended to in India, China’s manufacturing prowess notwithstanding.

Nokia

The widely mocked Nokia move to incorporate Android in its new Nokia X line could prove a rather bold, canny move. A feature phone stalwart in India, Nokia has to make an aggressive move to retain relevance in the country’s rapidly shifting phone market. Given the country’s speedy, almost wholesale adoption of Android, this may simply not be possible if Nokia remains fully wedded to Windows Phone.

Nokia’s new X phones will operate on Android, which is everywhere in India. However, they will carry the Nokia brand, retain the familiar Nokia design, keep the look and feel of Windows Phone Metro — and just might renew the company’s smartphone fortunes, all while potentially bringing millions more into the world of Microsoft services.

As Ben Bajarin states:

[Nokia X] is going to help Microsoft acquire customers at the low-end where all the growth is going to come from for the next few years. Every ecosystem needs entry points. Microsoft has a chance to acquire new customers getting their first smartphone and bringing them into the Microsoft ecosystem with a Microsoft ID.

Should the Nokia strategy fail, it’s hard to envision any other OS that is not Android finding any appreciable success in India, no matter the cost.

Where this might be wrong, although I think it unlikely, is if Chinese manufacturers such as the aggressively capable Xiaomi, successfully push out the top Indian mobile phone vendors (e.g. Lava, Karbonn), and thus effectively force them to offer something unique — Windows Phone, even Firefox OS, for example.

Understand, however, that India’s homegrown phone makers are formidable. I do not expect China’s own manufacturers, even such capable ones, to crush India’s leading vendors.

Not all aspects of India’s smartphone market will have a direct parallel elsewhere. The popularity of phablets may never be matched in the US and Europe. Features such as dual SIM are irrelevant in many parts of the world. Nonetheless, the smartphone skirmishes that take place in India will reverberate far beyond its borders. Analysts should pay more attention to this market and its users.

Report: Smart Devices and E-Commerce

E-commerce has been a buzzword in the industry for more than a decade. I have come across some interesting data points that paint a new picture of the e-commerce marketplace than one that has previously existed. Not surprisingly, this shift in e-commerce trends is being driven by mobile devices. The implications of mobile on e-commerce will be significant.

Take a look at the following chart depicting the past 11 years Q4 US e-commerce sales as a % of US retail.

As the chart above illustrates, Q4 2013 saw the biggest jump in e-commerce growth of any past Q4. According to the US Department of Commerce, 2013 online sales grew 12% over 2012. During the same time period overall retail growth in the US was up a less- than-anticipated 4.1%. According to a recent report from Monetate, in 2012, only one in five online purchases were made on a mobile device (phone and tablet). This year, that number jumped to one in three, growing approximately 50% in one year. In many of the ways the mobile web is poised to become more powerful and more dominant than the desktop web, so will mobile e-commerce be more powerful and more dominant than desktop e-commerce.

However, not all mobile platforms are made equally when it comes to e-commerce. To understand the future of e-commerce and mobile e-commerce we need to understand how platforms and form factor trends signal how this market will evolve. For the sake of this report we will focus on tablets and smartphones.

Tablets

Compared to 2012, the tablet saw an increase in average order value (AOV) of 14.13%. This last holiday quarter in the US the tablet AOV was $162.80. AOVs on tablet map much more closely to that of a traditional PC. For comparison the tablets YoY increase in AOV was 15.71% with a total value of $167.31.

Similarly conversion rates of tablet purchases and PC purchases were similar as well. The tablet saw purchase conversion rates increase 17.75% YoY with a conversion rate of 3.16% in Q4 2013. The PC saw conversion rates jump 24.29% with a total of 4% of purchase converted.

Understanding that the tablet and the PC have similar average order values and similar conversions is a key takeaway. Why we are more optimist these trends will continue and the tablet may even continue to grow as a percentage of e-commerce transitions is due to its mobility over the PCs. More and more consumers are using their tablets while in key modes of discovery. Using a table to read a digital magazine in bed or on the couch, or using a tablet while watching TV are all situations where the consumer may see something they may be interested to purchase. The mobility of the tablet makes it the perfect form factor for not just gathering data but also for completing the transaction.

A joint research project between Ipsos and Google highlighted that the tablet was the device with the highest number of purchase conversions where the discovery process of something like shopping, planning a trip, and managing finances, were most commonly started and finished on the tablet. Where in the case of the smartphone most of the same tasks were started on the smartphone and completed on a device like a PC or a tablet.

While the traditional PC will still play a key role in the future of e-commerce, the tablet is the device with the most potential in not just western markets but global ones as well. I expect the tablet to soon be the king of e-commerce in every market.

When it came to platforms, unsurprisingly, iOS dominated with the higher AOV of any tablet platform. Below is the AOV by tablet platform for the past few quarters.

Similarly the iPad drove the highest conversion rates of any other tablet platform. In Q4 2013 the iPad saw conversion rates of 2.72%. Android was 1.82% and the Kindle Fire just a measly .82%.

The smartphone presents the platform with most upside but its upside may reside less with e-commerce and more with driving new in-store mobile experiences/commerce. When it came to e-commerce the phone is still a distant platform to PCs and tablet in many respect. According to Monetate’s research the smartphone actually saw a decline YoY of 2.20% in average order values. Last Q4 2012 the smartphones AOV $136.61 and in Q4 2013 it dropped to $133.60.

Conversions of purchases from smartphone increased by 26.70% YoY to 1.18% in 2013. What the data suggests is that smartphones are valid entry points to search, discovery, and to help consumers decide what to purchase. Where the tablet is becoming the device consumers use to actually buy. This research from Monetate coincides with the data from IBM’s black Friday report where the following point is made:

Smartphones Browse, Tablets Buy: Smartphones drove 24.9 percent of all online traffic on Black Friday compared to tablets at 14.2 percent, making it the browsing device of choice. Tablets drove 14.4 percent of all online sales, double that of smartphones, which accounted for 7.2 percent of all online sales. Tablet users also averaged 15 percent more per order than smartphone users, spending on average $132.75 versus $115.63 for smartphone users.

Where smartphones may see their true potential is to drive more in-store activity than perhaps traditional e-commerce. In-store beacons may serve as the foundation for this new transaction driver. Apple is aggressively moving forward with implementations of its iBeacon technology. As more of these beacons which have the ability to send targeted and specific data base on precise location are installed in retail locations, retailers will be able to dramatically alter the in store experience. This shift will open new opportunities to influence the behavior of consumers in retail locations. If a store knows where a consumer is in their store it will make it easier for them or brands to offer them information and even promotions in real time.

Image that Coca-Cola puts a rule in place at a local grocery that if a consumer is standing in the isle near Coca-Cola products for a set amount of time, like 1min or more, to offer that person a discount on select Coke products if they purchase today. A smartphone and an abundance of strategically located beacons in stores will lead to this kind of super targeted advertising and promotions.

Technologies like TouchID also stand to impact the mobile shopping experience. This level of security depth will give merchants the ability to not just know where a customer is in store but also that they are who they say they are. Naturally, TouchID is important in the value chain of mobile purchases. This single technology has the opportunity to not just decrease the amount of credit card fraud globally but to also perhaps be a catalyst for an increase in mobile purchasing at large.

Smartphones, paired with in-store beacons, and a secure mobile purchasing mechanism all combined together make for exciting opportunities for brick and mortar stores to add value and to compete against on-line retailers or even use online retail to their advantage.

Mobile Traffic

Mobile devices are invading the PCs territory in nearly every dimension. Monetate’s research pointed out that one out of every three visits to leading e-commerce websites come from either a tablet or a smartphone. Mobile e-commerce orders grew 102% YoY and accounted for 4.22% of holiday e-commerce orders.

On Black Friday, traffic from tablets jumped 89.46% compared to Q4 2012. Similarly, Cyber Monday saw tablet traffic increase to 73.09%. Similarly Christmas day tablet and smartphone traffic was up 46.9% YoY. All data points according to Monetate.

The e-commerce trends are clear. T standout from my observations of market data and research from other and our own internal data is the tablet. You can not ignore the kind of data we are seeing about how tablets are being used in many vectors of consumers digital lives.

How Facebook Could Become the World’s Largest Telecom Provider

When Facebook bought WhatsAPP for $19 billion it shocked even the most seasoned veterans here in Silicon Valley. Most of us analysts questioned how they came up with this valuation. We then started trying to dissect this deal and figure out why Facebook decided to pay so much for this messaging company. There have been thousands of articles written about this acquisition as analysts and media have tried to make sense of this move by Facebook. The fact that WhatsApp had 450 million users was easy to see as the main reason since it could help Facebook get to their next goal of adding another billion users to their social media platform. It was also clear that WhatsApp could add another platform layer to Facebook’s infrastructure that could eventually become an ad vehicle as well.

Although this is the largest price anyone has paid for a company of this nature, one thing I have learned about acquisitions here in Silicon Valley is that a lot of valuations are based on future opportunities and not necessarily tied to current or even projected earnings by itself. Most of the great ones are highly strategic and bring unseen value to the company in ways that most cannot even grasp at the time of the investment. I suspect there is even more behind this acquisition.

One of the more interesting features of WhatsApp is its VOIP calling feature. I use it all the time when I am on Wifi to bypass my telecom carrier to cut down on minutes used via my current voice plan. And here is the best part. It cost me $1.00 a year to call anywhere in the world and talk as long as I want. An even more interesting data point is that WhatsApp already has 450 million “VOIP” customers compared to Microsoft’s 200+ million on their Skype platform. While I also use Skype, especially when I am abroad, the way the VOIP feature is seamlessly integrated into the WhatsApp message application. Which has become an important messaging medium for me when connecting with family and my staff, makes it even easier than having to fire up my Skype App to make my VOIP calls.

Although many WhatsApp users are also Facebook users, the fact remains that WhatsApp still gives Facebook millions of new users to connect to and at the same time got a powerful communications platform that allows them to innovate with and make it part of Facebook’s services. But what many have not realized is that WhatsApp has now given Facebook the opportunity to become a major VOIP provider and could even pave the way to for them to become the world’s largest telecom provider someday.

This idea has been on my mind since I heard of this news last week. Since I am a heavy user of their VOIP calling service it got me wondering if this was not at the heart of this acquisition. Facebook itself is a great communications platform in its own right. But for many, especially in emerging markets, voice calling is still at the center of the way they actually communicate. What if Facebook could also become an MVNO at the local country level and become the major telecom supplier especially in emerging markets and end up providing a of one-stop fully integrated communications medium and telecom platform.

Mark Zuckerberg is highly focused on bringing billions of people online and what better way to do this than by creating a social, messaging and VOIP platform for these markets and then providing the pipes and very low cost links to make this happen. Mark will push to try and get the local telecoms to be more aggressive in their data pricing and reach. If he can’t, he could be the one to do it via an MVNO (in emerging markets) play and use ads and services from these local markets tied to their social and messaging apps to subsidize the telecom piece if needed.

This scenario is not too far fetched. Adding an MVNO layer could help Facebook achieve even greater WW reach and eventually become the world’s largest telecom provider in the process.

Why Nokia is Better Positioned Than Samsung

I wrote today about why Nokia’s move to support Android is bold, risky, but also filled with potential. As I watched Samsung’s press conference, the stark contrast between the big news items of both companies was evident. Samsung chose to focus on evolution rather than revolution. This is exactly what they should be doing. They took no risks and focused more on serving the market rather than over-serving it. Samsung’s press conference made it clear to me that they have accepted their role as a follower rather than a leader in this industry. There is nothing wrong with this strategy. However, once the basis of competition shifts, this strategy could be the undoing of their mobile division. What’s more, is that Samsung is playing it safe in the saturated areas of the market–the high end. This is not a growth segment. As this slide points out:

While Samsung continues to address all the price points in the above chart, their ecosystem is failing to lock-in consumers. This is what they hope to do with the Gear products but again those products are not focused on the low-end. Nokia, on the other hand, is going to help Microsoft acquire customers at the low-end where all the growth is going to come from for the next few years. Every ecosystem needs entry points. Microsoft has a chance to acquire new customers getting their first smartphone and bringing them into the Microsoft ecosystem with a Microsoft ID.

Nokia is including their own app store on the Nokia X as well as popular app stores from each region. This strategy will not just appeal to first time smart phone owners, but the Nokia X has appeal to existing smartphone owners at very aggressive price points. There is another interesting move Nokia has done with the X Android smartphone. They have leveraged their strong relationship with carriers and will offer carrier billing support for app store transactions with over 160 carriers worldwide. It is a little known fact that carrier supported billing for transactions can see up to 10x the conversion than when a credit card is the only purchase option. This means Nokia and Microsoft have a good story for developers looking to monetize. It is conceivable that in the near future Microsoft could have more developers in its Android ecosystem than its Windows Phone ecosystem.

Microsoft is quietly going to use Nokia to acquire customers and meet them where they are. The key word being thrown around is “embrace and extend.” This is exactly what Microsoft needs to do to begin to build a new foundation and serve new sets of customers. Interestingly, Nokia launched several other new low-end smart phones today. A feature phone and a new Asha line. Each one has some Microsoft service on it. Nokia sold over 200 million feature phones last year. This market is in decline. Still, devices such as the Nokia 230 at $49 dollars and Nokia 220 at $29 dollars will still sell massive volumes and these customers will touch a Microsoft service likely for the first time.

Ultimately Samsung is being eaten alive at the low-end. India is still one of their strongholds, but it is also a market where Nokia has brand affinity. Samsung has not created loyalty in the low-end, and this is an opportunity for not just Nokia, but Microsoft is in a position to capitalize also.

Samsung and their Fragile Relationship with Google

For Insiders I wrote a while back about Samsung’s precarious position in the market place. Samsung finds themselves between a rock and a hard place. It is not surprising that a bit of news surfaced stating that the next version of their Galaxy Gear will run Tizen not Android. Tizen is a joint venture OS between Intel and Samsung. Several other big name firms are involved with Tizen as well but Samsung is the largest to date said to actually take it to market.

Samsung’s move to run Tizen on their smart watch platform, if it does indeed turn out to be true, would not be a surprise. As many PC OEMs will attest shipping someone else’s software can only take a hardware company so far. When the day comes where a segment of the hardware industry becomes a commodity it makes life for hardware companies difficult. Samsung is a hardware company who desperately needs to become a software and services company. If history is our guide then it favors software and services companies. Facebook’s acquisition of WhatsApp emphasizes this point.

Samsung is not in a position to control their own destiny. Samsung’s challenge is that they struggle for customer loyalty. Currently, there is little reason for a customer to choose next years Samsung phone when they upgrade. If there is a better Android device on the market that catches their eye they are equally going to consider that device as well. What Samsung, and other Google Android OEMs, do is help drive loyalty to Google and Android but not necessarily to their brand. Apple does not suffer from this problem since their loyalty is built on more than their brand but on their ecosystem of not just hardware but software and services. This is why Samsung appears to be teetering on the edge of going vertical as much as they can without fully leaving the Google Android ecosystem. Samsung needs Google. Yet they need to not need them for their mobile group to thrive.

A Tizen based Galaxy Gear could be a step in this direction. If Samsung were to release an SDK around this Tizen Galaxy Gear product and get a critical mass of developers and apps creating applications for a product unique to Samsung then it could be the foundation for a Samsung ecosystem. It is worth noting that Samsung does not run Android on their Smart TVs. These Smart TVs do have apps but a critical mass of apps or developers exist for the Samsung Smart TV platform. Mobile is inherently where Samsung needs to have a critical mass of developers. If Samsung can’t figure this out and destined to be stuck in the rut of a hardware company then very troubled times are ahead for their smartphone and tablet operations.

Samsung does not have a services business to support forking Android. Amazon does. Xiaomi does and both have been successful at taking Android and building a services platform on top of it. Similarly, Microsoft could have a strong business case to layer their services on top of an AOSP implementation of their own. I’m yet to see something similar from Samsung. Which leaves them in a position to have to “platformize” Google’s version of Android as best they can without over stepping their boundaries as a Google certified OEM.

What we must watch with regard to Samsung is how they make steps in this direction on devices for which they don’t have to go through Google’s certification process. Products like their TVs, Smart Watches, or even new product categories, that are ecosystem boosters, are where they can start to lay a foundation to grow and foster their own platform.

Facebook, WhatsApp, and the New Era of Platforms

What is happening with messaging apps is a big deal. In fact it is probably the biggest thing that is happening that is underestimated and has implications on many. Facebook just announced that they have acquired WhatsApp for what is looking like $19 billion dollars. To put that into perspective that is more than Google paid for Motorola and Nest combined.

On the shareholder call Mark Zuckerberg pointed out that he believes WhatsApp is on a path to a billion users. All mobile users mind you. Facebook has over a billion users with the vast majority of them being mobile only or primarily. So why this deal? Well Facebook realizes that WhatsApp is their path to the next billion users.

There was a time when Facebook was the driving reason for people to get their first smartphone. WhatsApp as well was a part of that conversation but now in many emerging markets everyone talks more about WhatsApp, WeChat or Line than they do about Facebook. That is why this is a big deal and central to Facebook’s growth story. What many fail to realize is that while we are adding approximately 300-500m new smartphone users annually, Facebook itself has seen slowing growth. While WhatsApp continues to see tens of new customers adding to their platform every month. Facebook buying WhatsApp is their way of getting a piece of the next billion smartphone users in ways the Facebook platform may not have. The number may seem steep but Facebook had to act and could not risk being left out of the next billion users.

Only what gets glossed over is that these platforms are much more than messaging. Right now WhatsApp is a messaging platform plain and simple. However to get a sense of where this is going we need only to look at WeChat and LINE. Both have messaging as a component but that is just the entry point. In the case of WhatsApp, users can shop, bank, message, flirt, hail a cab and a whole lot more. WeChat is more than a messaging app, it is a platform. Similarly, LINE has messaging as a component. But it also has games, sponsored media, sponsored sticker packs, commerce and is growing the capabilities of its platform quickly. These two companies highlight the power of the mobile platform and the para-platforms which can be created on top of them.

The messaging apps are at the center of the real time communications and more importantly at the center of the primary engagement on mobile devices. Platforms like LINE and WeChat, as well as WhatsApp to a degree, are adding features and services to their platform that increases the engagement of their users within their app. What Facebook has come to grips with is that the future engagement models are not the current Facebook model but rather something different.

What is still missing for Facebook + WhatsApp to become what I believe these apps ultimately are, fully enclosed walled garden platforms, is a mobile payment system. I’m keeping my eye on this space and will write more detailed analysis on it when I am comfortable with the research.

All of this, however, should be very concerning to Google. If you read what I wrote last week about AOSP and you couple it with these messaging app para-platforms you have the foundations for a bear case for Google. Time spent using other people’s services, and other people’s apps, is time not spent doing the things that make Google money. Specifically searching the web and viewing their advertisements. Google can not afford to sit still and idly watch watch is happening and be left out of what is now the primary engagement model. Search was the primary engagement model for the desktop web. Mobile messaging is the primary engagement model for mobile devices. Google must adapt.

For further reading on messaging apps, I strongly suggest these posts. One from me and two from my colleagues. Coincidentally all are named Ben.

Messaging Mobile’s Killer App: Ben Thompson of Stratechery

Interaction, canvases, and ecosystems: by Benedict Evans

Trojan Horse Messaging: by Ben Bajarin

Trying To Understand How The iPhone 5c Failed

Failure is fascinating. Failure highlights our limits, our strengths, our mortality. My ‘explorations in failure’ will this week examine the iPhone 5c. At the very moment Apple was about to slice deep into the Android behemoth, offer the world a glorious low-cost iPhone, it fell flat on its face.

How could this happen?

I don’t have all the answers, of course, but I think there is much to divine by piecing together the iPhone 5c detritus.

The scale of Apple, its global supply chain, massive retail footprint, market valuation, the popularity of its computing devices, these all reveal a company that rarely makes mistakes. Apple’s iPhone 5c has been a striking failure, however, selling far fewer devices than Apple expected, likely dampening overall iPhone sales, and, if well-placed rumors are correct, very soon to be no longer of this world.

It all began, of course, with so much promise. The iPhone 5c — aka the “cheap iPhone” — was, we were convinced, going to be the aggressively priced new iPhone, ready to dismantle Android throughout the developing world, possibly beyond. It would (quickly) add tens of millions, ultimately hundreds of millions of new users into the Apple/iOS ecosystem.

This was not to be. As Tim Cook stated during the company’s most recent earnings call, 5c demand “turned out to be different than we thought.” While Apple sold an astounding 51 million iPhones total in the last quarter, Cook admitted that “our North American business contracted somewhat year over year.” Cook placed the blame squarely on the iPhone 5c by bravely reminding us that Apple “actually sold more iPhone 5s’s than we projected.”

Here’s the bottom-line: not only did iPhone 5c fail to sell in the numbers Cook calculated, the company suffered unnecessary expenses and pinched revenues by wrongly estimating the 5c/5s sales mix.

In a rather harsh assessment to the 5c’s poor showing, USA Today noted that Tim Cook refused to address the device by name. The publication went on to state that:

Sales of Apple’s iPhone 5c have been so disappointing that the consumer technology giant will likely cut the price of the device soon or even scrap the model altogether.

Count me among those that doubt iPhone 5c will reach its first birthday.

After all, the iPhone 5c, as it presently exists, is frankly inexplicable. It’s one of the highest-priced smartphones on the market, nearly as pricey as the 5s, yet with shockingly lesser hardware and camera features. Oh, and it doesn’t have the same look as the iconic iPhone 5s.

Go on – do your best sales job with that.

How did Apple so badly misread the market? In fact, there are several reasons.

Failure 1. Losing the Narrative

The most obvious failing of the iPhone 5c may be in how badly Apple lost control of the narrative. Remember the build-up of buzz before the original iPad? A full touchscreen tablet, built on iOS! The only downside, it was going to cost about $1,000.

We happily got that wrong. iPad turned out to be Apple’s most reasonably priced personal computer ever.

The 5c was the reverse of this. For example, as speculated in Daring Fireball: “(Apple’s) three pricing tiers for the next year would be a new iPhone 5S at the high end, today’s iPhone 5 in the mid-range, and the new 5C at the low end.”

Sadly, no. Worse for Apple was that we all believed the rumors. Not simply because of their persistence, no, but from the fact that the market was so obviously ready for that awesome low-end device that we were convinced Apple was capable of delivering.

Perhaps we should not have convinced ourselves. As I have said here many times: it is extremely hard for any company to shift gears and go down-market, or, for that matter, to reverse its low-price strategy and go up-market. Apple is no different. All corporations have unique strengths, unique brands, unique positions within the larger marketplace. With the 5c, we learned this the hard way. Nonetheless, Apple PR must do a better job of controlling the narrative of its upcoming products.

Failure 2. Anti-Apple design

A second failure is that the iPhone 5c altered the familiar design cues of the highly popular iPhone line. The 5c is “unapologetically” plastic and offered in several bold colors. This is the Nokia design template — and they’ve been doing it far longer than Apple. Apple offered up absolutely nothing new.

This is not to suggest the design is bad. I actually prefer the look and feel of the 5c. Not surprisingly, my go-to device is a Lumia 1520, with its bright yellow casing made of sturdy polycarbonate. The iPhone 5s feels much too light, much too fragile for my taste. Whether others feel the same is not the issue, however. Rather, the world knows at a glance what an iPhone is, and the 5c forks from this.

Unless Jony Ive and Apple are set to unleash myriad models of iPhone in numerous shapes, colors and price-points, iPod-like, then the 5c design stands out for all the wrong reasons. If you want the world to know you have an iPhone, the 5c states this with a whisper, if at all.

Failure 3. Devaluing Hardware

The most egregious, most confounding failure of the 5c, and the one I think will haunt Apple, is that the 5c effectively declares to all the world that one or all iPhones are radically overpriced. I am at a loss to understand how Apple allowed this to happen.

There is a measly $100 suggested retail price difference between the iPhone 5c and the iPhone 5s. For that extra $100, the iPhone 5s buyer receives the following additional hardware, services and benefits:

A7
M7
TouchID sensor
Lighter weight
True Tone flash and larger 8 MP sensor
Slo-mo video
Enhanced imaging features

Explain this: A 16gig 5c retails for $549. A 16gig 5s retails for $649. Why?

We know what that extra $100 gets us, and it’s awesome. What are we getting for that first $549? I now have no idea. The very existence of the 5c, priced so high, calls into question the entire pricing scheme for all of iPhone. Either the 5c is priced way too high or the 5s way too low. With the 5c, Apple has brought pricing to the forefront, and in a bad way.

Putting a positive spin on the 5c’s failure, Tim Cook stated that:

“I think the 5s, people are really intrigued with Touch ID. It’s a major feature that has excited people. And I think that associated with the other things that are unique to the 5s, got the 5s to have a significant amount more attention and a higher mix of sales.”

In this case, I think it would have been better had he not spoken.

The 5c was passed over because people want Touch ID? Where are these people? I watch iPhone 5s users on a daily basis and TouchID is of scant importance to them, and certainly not the primary deciding factor between 5c and 5s.

There is simply no justification for either the 5c’s price or the 5s’s price, maybe both. Which is it, Apple? Why even allow this question to be raised?

Failure 4. Peeking behind the iCloud curtain

A final concern, one pointed out to me by reader iDawg, is that Apple may have intended to legitimately price the 5c at the mid- or low-end, but were prevented from doing so, possibly just before launch, because their services — Siri, iCloud, streaming media, data synching, etc. — weren’t yet ready to support a massive influx of new users.

“The real reason Apple doesn’t sell more phones: fear of choking Siri (and online services) to death.”

Thus, as the 5c neared completion, this theory goes, it became apparent that Apple’s various services weren’t ready to effectively meet the anticipated numbers of new users. Raising the price, and thus limiting demand was the only realistic option to prevent every user, not just 5c users, from rage-inducing crashes and failures. This is a bit hard for me to fathom, though if true, ought to place Eddy Cue on the hot seat.

5c We Hardly Knew You

As I wrote a mere fortnight after its release, Steve Jobs would never have approved the 5c. I stand by that assertion. Jobs had a near-religious fealty to focus and function, and the end result was hardware honed to near-perfect clarity. The 5c, on the other hand, is muddied, the result of varied and competing interests. The 5c doesn’t know who it is nor who it is for.

Let’s count the ways the 5c fights with itself and with what Apple is best at:

An alternative design which denotes newness and low-price versus the iPhone design is iconic and beloved
Lots of new Apple customers versus we must provide the best service to all our customers
A low-cost device versus we must protect our margins
We can make a great smartphone at any price versus we focus on the premium market

Is the iPhone 5c Apple’s canary in the coal mine? A telltale sign of near-term headwinds and divergent internal factions? Possibly, though given the company’s track record, I’m inclined to think of this as a minor self-inflicted wound, like how Disney spent far too much on that movie, John Carter.

That said, the failure of iPhone 5c is well-earned. This was not a case of technology before its time. Rather, of botched execution and that rare placement of profits before customers. Apple’s leadership, Tim Cook and Jony Ive, in particular, blew this one. That’s the most troubling aspect of all this. Tim Cook has scaled Apple to once-unimaginable heights. The iPhone 5c, however, reminds us that no company and no CEO has a perfect batting average.

Google, Android, AOSP, iOS and the Global Smartphone Market

Hopefully you have read several posts I have posted this week. This one on Microsoft and Android and this one on Google vs. Android. These posts are building blocks for a foundation I am laying to help our readers understand critical things about this market going forward. The smartphone market is the single largest product market in terms of annual sales so it is important to understand.

As I articulated in the article about Google vs. Android, we must understand Android as a platform that enables the creation of other platforms. OEMs may take Android AOSP and build relevant things on top of it. This is what Amazon and Xiaomi do and expect others to follow suit in 2014. While Android AOSP means Android Open Source Project the reality is that that what is open is not the Android code base but rather the services layers. Therefore I would define it more as the Android Open Services Project.

To start off what we need to know is what the projections are of price bands as a percentage of forecasts for the next four years. Here is what that looks like.

The most important observation is that we are adding the vast majority of new smartphone owners in the mid-range and the low-end of the smartphone segment. More than half of the next billion new smartphone users will come from devices costing less than $200 wholesale. The mid-range will grow and is growing. Those consumers who are in replacement cycles now are often going up stream. The issue is there is still a limit to the price band they can afford. This is why I pointed out in an Insider article a few weeks ago that should Apple continue its path of staying in the high end of the smartphone market their TAM will simply be smaller than if they addressed the mid-range.

Given what is clear now about Android, the question has to be asked if the handset makers who are focusing largely on the devices costing less than $200 and the consumers who will buy them even care about Google’s services. An interesting report came out today in the Wall St. Journal (behind the paywall) articulating the hardware restrictions Google places on OEMs in order to receive certification. This is nothing new and Microsoft has done this with PC OEMs for some time. Google wants to make sure there is at least a minimum bar when it comes to specs to run their version of Android. They want an experience to be preserved and they need to keep a limit on the hardware varieties that enter the market for their software developers. But those OEMs from China and India who are looking to enter high growth markets like Latin America, and Africa, will be looking to cut costs. This does not favor them jumping through hoops to meet Google’s Android certification tests. That is why AOSP is becoming a competitive platform to Google.

Take a look at this chart that I have compiled using both public and private resources to generate the per quarter share of Google’s version of Android vs. AOSP for the past 5 quarters.

What you will notice is that AOSP is gaining as a percentage of the install base against Google’s version of Android with their services integrated. I only expect the mix of AOSP to grow given the growth of the low-end in key markets. Here are some important points about AOSP by the numbers.

In terms of quarterly run rates, it is the second largest platform
In Q4 2013 AOSP outsold the iPhone
In Q4 2013 AOSP sold more than the total install base of Windows phone each month
Google’s version of Android sold 573m units and AOSP sold 175m units in 2013
AOSP is growing faster per quarter averaging 55% quarterly growth compared to Google’s Android average of 23%

Given everything I am seeing these are fascinating trends. It seems as though everyone believed Google has no competition in core services like search. Yet their own platform is being used to compete with them as local companies take advantage of Android and create or integrate their own services for their region. So where does this leave Apple?

During Tim Cook’s interview with the Wall St. Journal he said something very telling.

I look at the mobile phone market as having three kinds of phones: feature phones, smartphones that function as or are used as feature phones, and real smartphones. I care about the market share of the last one. I don’t care how many feature phones are sold. The more that are sold I look at as good because those are all potential future customers for real smartphones. The same thing goes for the second category. I’d like to convert as many of those as possible to real smartphones.

Now, while phones like Xiaomi, ZTE, Huawei, Micromax and even Samsung’s mid-range phones are actually real smartphones and used as such, Cook’s statements point out something about how Apple views competing for new customers. The key is in one single word that he used–convert.

It would be a mistake for Apple to attack the low-end. It would even be a mistake for Apple to attack the lower tiers of the mid-range price category. What is clear is that Apple will target a price bar that they believe is low-enough to compete for customers who are mature smartphone owners in a replacement cycle, but priced high-enough to capture the ones who view what their experience and ecosystem as valuable. The key for Apple in emerging markets is to set their targets on the segments of the market who are existing mid-range owners (the blue bar in my first chart) and compete to convert them in the replacement cycle.

The reality in China is that Apple is competing with AOSP Android not Google’s Android. A bear scenario can be created from this due to the implantation of AOSP devices being more tightly integrated with local Chinese services than iOS. Apple is playing the long game in China and other emerging markets. As long as Apple’s focuses on supporting and in some cases integrating Chinese services providers into their version of iOS for China then they are on the right track to do well in that region. Perhaps their strategy in China can also be used as a template for other markets.

To submit more topics for us to cover or deep dive into use the new “submit a topic” button in the featured topics box to the right.

The Future of Microsoft, Apple, and Google

It seems today like the dominant players in computing, social media, infrastructure, services, and many other big industry segments is settled. It is easy to look at the current environment and say Google and Apple have both won. Both have large thriving ecosystems in the hottest segments of technology. Yet as Benedict Evans and I discussed on our last podcast, while everything seems settled, in reality, the future is still very much anyones game.

Taking into all the major players strategies is essential. Here are some thoughts on a few of the major players.

Microsoft

Microsoft faces some of the most difficult questions in my opinion. What kind of company is Microsoft going to be in the future? This is the key question a new CEO must address. The market where they dominate market share, the PC, is contracting in annual sales every year. They are not participating relevantly in any of the growth sectors like smartphones and tablets. Is Microsoft a commercial company whose destiny is to focus on backend services like IBM and be a much smaller company than they are today? Are they going to choose to only focus on commercial applications and ignore consumer ones?

If their current commercial which aired during the Super Bowl yesterday is any indication then lets hope they see themselves as a technology company rather than just an operating system company, software company or an enterprise services company.

Microsoft is among the top spenders in research and development. Ranking #2 of the top 2,000 companies according to the European Union. Samsung was number 2, Google number 13 and Apple number 46. Samsung should not be a surprise given the number of businesses they are in. Microsoft on the other hand is not in nearly the same number of businesses as Samsung but spend nearly as much as them in RND in 2013. If Microsoft can commercialize their R&D spending in a meaningful way they can evolve beyond their own platforms and enable a broader ecosystem. While I have serious questions and doubts about Microsoft going forward, I’d be more optimistic about them if they evolved into a broader technology company driving growth for themselves and others out of their R&D.

Apple

Apple may always have the smaller ecosystem. A fundamental question to explore is now much this matters. There are industry executives who have seen and participated in key paradigm shifts in this industry who believe that the smaller ecosystem always loses. Yet there is no clear answer from them as to why. It is not a foregone conclusion that the smaller ecosystem always loses. As long as an ecosystem is supported by a long list of third parties the ecosystem will thrive. There does come a point in time when an ecosystem is too small to support, take RIM and Windows Phone as examples.

I believe Apple can successfully acquire and maintain an ecosystem of around 800-900m ((I have logic and deeper analysis from my firm Creative Strategies to justify these numbers)) install base of core device hardware. By core device hardware I mean computers small, medium, and large. Apple will inevitably offer peripheral businesses to the hardware core, and those may be software or other hardware businesses (new categories) but they will all revolve around personal computers small medium and large. At least for the foreseeable future.

Assuming Apple can maintain this core user base, which will err toward the higher more profitable segments of the market, then I am confident their ecosystem will sustain and thrive, despite what many believe about ecosystems (800-900m is not really a small ecosystem).

Apple’s latest ad 1.24.14 is an excellent insight into Apple’s product future.

30 years ago we introduced Macintosh. It promised to put technology in the hands of the people.

By the end of the video you get the sense that the iPhone is the promise and full manifestation of that vision. It ends making the point that the entire video was created with the iPhone in one day.

Personal computing is the focus. In the hand of many is the goal.

Google

Interestingly, while many seem to have established Google’s future being secure, I’m still not so sure. At least I’m not sure about what they offer today as being what sustains them or secures their future. Android is actually still a moving target for Google. It seems established but it is actually a quite fluid product and strategy. Android may look entirely different in 5 years if it even exists.

As evidenced by the recent Samsung and Google patent deal, which likely includes a lot more than the patents, Google is able to leverage their services to bend OEMs to their will. Which gives us a clear line in the sand between Android OEMs using Google services and those that are not. The focus then should not be on Android but Google’s services. Services like search, maps, the play store, and more are at the core of what Google uses to push their agenda.

This is what makes China so fascinating. 90% of the Android install base in China is Android Open Source Project (AOSP) and have not been certified by Google to receive their services. China is unique in that Google’s services are mostly blocked at a network level inside the country. This is why so many alternatives to Google’s services exist in China and are used by the masses. Android AOSP makes it very simple for a hardware company to install a platform and in essence create their own unique platform. This is the case with Amazon, Xiaomi, and many other OEMs. I estimated the market share of Android AOSP vs. Google’s Android with their services in the chart below.

Developing regions like India, Latin America, and Africa are all big continents with lots of people where smartphones are growing the fastest. India has many local smartphone OEMs like Micromax, LAVA + XOLO, and Karbonn. While these devices do utilize Google’s services, what is stopping regional upstarts or entrepreneurs from creating their own set of competitive services to Google’s specifically designed to only serve the unique interests of that region?

Google is a services company that monetizes those services through ads. Whether advertising is their business model or something else in 5yrs time, or longer, I believe Google will see increased competition in many of their services which they depend heavily on.

Google Sells Moto to Lenovo for a Song, Exits Phone Hardware

In the end, Larry Page tacitly admitted that the critics were right all along: In buying Motorola Mobility, Google created an irresolvable conflict with its Android partners. Today, it ended that conflict by selling Moto to Lenovo for a paltry $2.9 billion, which becomes a lot more paltry when you realize that only $660 million is in upfront cash.

Page wrote in a post on Google’s official blog:

We acquired Motorola in 2012 to help supercharge the Android ecosystem by creating a stronger patent portfolio for Google and great smartphones for users… But the smartphone market is super competitive, and to thrive it helps to be all-in when it comes to making mobile devices. It’s why we believe that Motorola will be better served by Lenovo—which has a rapidly growing smartphone business and is the largest (and fastest-growing) PC manufacturer in the world. This move will enable Google to devote our energy to driving innovation across the Android ecosystem, for the benefit of smartphone users everywhere.

The Moto venture has been a major flop for Google. The company paid $12.5 billion for Moto and has absorbed more than a billion dollars in additional losses. It did receive $2.5 billion from Arris for the Motorola Home set top box division and will retain the bulk of the Moto patent portfolio. But it’s not getting much from Lenovo: $660 in cash, $750 in Lenovo common stock, and the balance in a three-year promissory note (in other words, Google is lending Lenovo the money to take Moto off its hands.) When the deal closes, and it requires regulatory approval in both the U.S. and China, Google will be taking a monster write-off.

But it’s probably worth the price for Google to simplify its relationship with the complex world of Android. The deal only made sense in the first place if Google were willing, at a minimum, to make Moto first among equals in the Android OEM business. But Google was never willing to make that commitment–or to risk an open break with Samsung and other Android OEMs. That left Moto as just another struggling Android OEM and while it made some nice products, particularly the high-end Moto X and the Moto G for lower-income markets, it failed to gain much market share of get anywhere near to profitability.

Google, meanwhile, has been trying to move closer to its Android partners and, particularly, to ease a badly strained relationship with Samsung. It recently concluded a broad patent cross-licensing agreement with Google, an arrangement that makes more sense now that Google is keeping the patents but leaving the phone business.

For Lenovo, meanwhile, the move is risky but a clear sign that the Chinese-American hybrid is on the march. Earlier this week, the company reached a deal to buy IBM’s x86 server business for $2.3 billion (mostly cash.) Lenovo first rose from obscurity by purchasing IBM’s PC operations in 2005 and in recent quarters, it has been ejoying strong market share growth in a very soft PC market.

Apple’s Premium Smartphone Dilemma

As I have reflected on Apple’s earnings the past few days I kept coming back to what I am observing with the premium smartphone market. What I think is interesting about what we learned with the 5c is that Apple customers prefer them to be in the premium segment. Brian Hall wrote a column last November that Apple couldn’t go downstream and he anticipated the 5c struggling in the market.

I was skeptical of his remarks but now I am wondering how much truth there is to it. There is absolutely nothing wrong with a premium strategy. It is an excellent business that is healthy and can stand the test of time. However, I’ve never been convinced Apple only wants to focus on the top 20% of any market they enter with personal computing products. In Walter Isaacson’s biography of Steve Jobs, he writes about an interview where Steve was talking about why the Mac lost to Windows. In summary Steve Jobs admitted the Mac was priced too high. In fact, at the 30th anniversary of the Mac John Markoff mentioned that Jef Raskin, the original creator of the Mac wanted to make the Mac a very approachable $500 highly portable computer. All the Mac team wanted to do ended costing a bit more than that. But then in September, in Tim Cook’s interview with Businessweek, something he said stood out to me.

We never had an objective to sell a low-cost phone. Our primary objective is to sell a great phone and provide a great experience, and we figured out a way to do it at a lower cost. – Tim Cook

The last line, “we figured out a way to do it at a lower cost” is the one that intrigues me. I believe Apple is committed to this line. Creating the best, not the most, but figuring out a way to make the best and offer it at a lower cost.

This brings us back to the 5c. The statement above from Tim Cook is referring to the iPhone 5c. The 5c was ultimately challenged in the market because it was too close in price to the iPhone 5s in subsidy markets. More consumers seemed to spring for the extra $100 to get the iPhone 5s than did for the 5c perhaps hinting that if Apple is to have two different current generation and differently priced iPhones in the market that they need to be priced further apart.

Perhaps an option is to focus on making the best product they make at lower cost. If Apple’s manufacturing can support them offering their flagship premium phone but doing so at lower costs, and maintaining margins, they could in theory bring the premium fight to the middle tiers of the market. Which would open up their total addressable market pretty quickly in markets like China and India. It could also bring the cost of the subsidized flagship product as well which could increase quickly the number of iPhone users to switch from Android in key western markets.

Ultimately, the current carrier subsidy model is a challenge to Apple in lower price tiers. If they release a phone that is in the most popular price tiers in China and India ($115-246 USD), it would be practically free in subsidy markets. Apple could of course release phones that are only available in certain markets as well to deal with this but one has to question what Apple could release in one market that would not be desired in others as well.

Apple’s dependence on the iPhone is growing. In 2013 the iPhone made up 53.4% of their total fiscal year revenue which was an increase from 2012 where the iPhone was 50.3% of fiscal year revenue. Of course, new revenue streams (categories) are ways to increase revenue growth in new ways and perhaps lesson the dependence of Apple on iPhone revenue. But it needs to remain firmly planted in everyone’s heads that as much as new categories or new revenue streams are good additional sources of revenue there is no market in annual units sold as large as the smartphone market. We estimate that in 2018 we will sell 1.9 billion smartphones every year.

The key thing to understand about the smartphone segment is that growth has slowed across the board. We added approximately 450-500 million new smartphone owners in 2013 and that number will drop to around 300-350 million in 2013 and stay somewhat flat. The vast majority of those new owners will be in the sub $200 (wholesale) price category. Likely not customers for Apple. So who is Apple competing for? They are competing for owners whose interests are maturing and who may value their ecosystem. Interestingly, among current smartphone owners worldwide we are seeing 25% begin to move upstream from the low-end to the mid-market. The question, should Apple continue to focus on the high-end price tiers, is if/when will more mature consumers move from the mid to the higher end of the market. This may be only a matter of time, but it will require time to manifest.

We do anticipate some growth still to be had in the higher tiers as markets mature and more importantly as the rapid development happens in developing countries. I firmly believe Apple is employing the correct strategy by focusing on making the best products not the most. But if we read between the lines from Apple’s executives speaking, making the best does not necessarily mean charging the most.

Apple First Quarter of 2014: All Eyes on the iPhone

Apple had the kind of quarter companies long for. The established new record number of sales in iPhones and iPads and had the best of any technology company. Yet the iPhone sales will remain a focal point for most. While Apple sold 51 million iPhones, more than any other previous quarter, that number was a bit short of most estimates. The reason for this is an important one to understand.

Much of it had to do with the US market. Carriers moved to a 24 month upgrade cycle from a 20 month. The implications on this were speculated but what I believe it resulted in was an even longer extension of the phone life cycle. We saw a little bit of this with Verizon’s recent revealing that their fourth quarter smartphone activations declined in 2013 vs. 2014 1 million units. Verizon has a significant number of consumers on their network that fall into the late majority and laggard category of consumers. These consumers upgrade more on a need vs. want basis. Up until recently the mobile phone category in general (not just smartphones) has continually kept pace with the 20-24 month cycle. One of the things we believe we are seeing is the lifecycle extension of smartphones in the US. So many late adopters who have come into the market the past few years may impact the annual cycles more than some realize. This will be a key thing to watch.

The 5s turned out to be the hot ticket item and it was wise for Apple to re-shuffle the manufacturing mix. One wonders how many iPhones they would have sold if the mix was anticipated correctly from the beginning and Apple was not supply constrained with the 5s.

Ultimately Apple lost smartphone share in the global market. Apple is now the second company besides Samsung to to ship 50 million units in a quarter. However, Apple did it with a much more focused lineup and a much higher margin. Both impressive feats in my opinion. However, Apple’s market share of the global smartphone market is now 15% which is down from 20% in 2012. This is a key growth statistic to watch. The iPhone needs to remain a growth business and Apple must focus on grabbing new land (like China to do this.) I estimate Apple to grow market share in 2014 perhaps back to and even beyond their previous 20% of 2012.

The Mac did well in Q4 which is impressive given how poor the PC category is doing and has done. I maintain the Mac remains a growth story for Apple over the next few years. Macs are now nearly 7% of the global PC install base and this percentage will be a key area to watch.

The iPad remains a bright spot and given seasonal trends of the PC industry are shifting to the tablet category this is of no surprise. The iPad represented 31% of the total PC sales for Q4. While the iPad may not be considered a PC that statistic reveals the volume of the iPad compared to the PC. A further point is that the iPad’s 26 million sales was more volume than any PC vendor shipped of all their PCs in Q4. Lenovo who shipped the most PCs in Q4 shipped 14 million PCs.

I stick to my growth story points for Apple in 2014 as key narratives to watch. I appreciate and understand the desire for Apple to start to add new segments or categories to add further revenue growth but also highlight the reality that there is still ground to gain in every category they currently compete.

The wording Apple executives choose to emphasize ultimately underscore the priorities. They spent time talking about iOS usage share, customer satisfaction, loyalty rates and even discussed their ecosystems momentum in commercial accounts. All are designed to highlight that Apple has confidence that once people get into their ecosystem they rarely leave. This is key as we grasp the global growth story still ahead for the technology industry and Apple’s role in it.

Three Growth Story Lines for Apple in 2014

The more I study at the economies of scale within the tech industry the more I taken aback by the opportunities that lie ahead. Some opportunities like the traditional PC may not be big market comparatively but they can be very healthy markets. Others, like smartphones and tablets, are not only very large markets but they are also extremely lucrative ones.

As I have studied the why behind many market developments from the past 30 years of this industry it is truly amazing how monumental shifts in the market have favored Apple. Things I’m not sure anyone could have predicted nor anticipated. Apple simply kept being Apple and stayed true to their purpose and vision and found themselves at the right place at the right time to capitalize on these shifts.

Looking at how many of the largest global markets are developing there are several important Apple growth stories to highlight.

The iPhone (Literally)
For the past few years, analysts have been noting a slowdown in not just particular quarter of iPhone sales but also the smartphone category overall. We are witnessing the maturing of many markets of the smartphone category. This is a key observation because when a category reaches maturity the market begins to act different. One of the key things we have observed over the past 30 years with regard to consumer markets is that when they mature they segment. The result of this segmentation is increased competition and increased consumer choice. Diversity is a fundamental to mature markets and critical as they reach post-maturity (like the automotive market for example).

Because of this we anticipate Apple to start even further diversifying the iPhone line and most logical roads lead to a larger iPhone as a part of an expanded iPhone family of products. However, a larger iPhone is actually a key growth strategy (excuse the pun) for the global growth of the iPhone.

While sales of big phones are relatively small comparatively in the US there increasingly the norm in China and to a degree India. On top of that, big phones are a key to premium segments of each of those big high growth markets. Our conclusion is that for Apple to compete in premium in China and India a larger iPhone is the key.

We believe a larger iPhone could spur new growth for the iPhone even in saturated markets like Europe and US but also be a catalyst to grab new land in markets like Asia and India.

The Mac
I’ve been anticipating the Mac growth story for some time but I believe we are finally on the cusp of it. Without question the total addressable market for PCs has shrunk. That being said we believe the fundamentals of a significant market refresh are in place. Our research indicates that a high degree of self-awareness now exists by those who know they need a desktop or notebook form factor. Because of this we are observing that worldwide sales of notebooks in the higher priced tiers actually grow where they have typically remained flat. With this we are anticipating an ASP increase in the PC category as consumers realize that if they truly need a PC they want to buy a good one, which will last, and deliver the best value for the money, since they will likely hold onto it for 5 years or longer.

The fundamental shifts in the PC landscape we are observing favor Apple’s strategy with the Mac. The Mac also has the most to gain since it is starting from a lower market share percentage than Windows based PCs. Our estimates are that Macs make up approximately 6.25% of the total PC install base to date and represented 5% of PC sales in 2013. We estimate the percentage of Mac install base to surpass 10% by the end of 2015 with a target potential of 20% of the total WW PC TAM.

The iPad Air
Much of the focus over the past year has been on the iPad Mini. But a careful analysis of the iPad install base would highlight that there are more larger screen iPad’s in the current install base of Mini’s by nearly a 2-1 ratio. We believe if a larger iPhone comes to market it will challenge the existence of the iPad Mini. In fact, one way to think about the iPad Mini is as a transitionary product. This does not mean the iPad Mini goes away and it may–and should–remain as a part of the portfolio. We simply feel the volume opportunity is with the iPad Air.

Part of this logic is due to my conviction that the iPad Air is the new general purpose mass market computer. We believe that many consumers now are self-aware of their own computing usage habits and recognize the PC is overkill for 90% or greater of their everyday use cases. They still do value a larger screen and highly mobile compute device and we believe this market awareness favors the larger iPad to absorb a significant portion of the upcoming PC refresh as well.

We also believe the iPad Air represents a significant growth opportunity in markets where PC penetration is very low. We believe the iPad has a a groundbreaking opportunity to bring computing to the masses as the first personal computer for many in developing markets.

Summary
Ultimately we believe market fundamentals are shifting into the favor of Apple’s strategy. We also believe other vendors will catch on to this which is why we are anticipating certain categories to continue to see ASP increases. Seasonality plays a role in every vendors growth and understanding each regions seasonality cycle is key. But the bottom line is we are seeing positive signs in developing markets that those price sensitive customers who entered the market with low-cost phones, tablets, and PCs, are now starting to move upstream and become more value conscious than price conscious.

Well still less than half the planet yet to own a smartphone, PC, or tablet, the growth opportunities in this industry remain significant.

The Next Big Challenge for the PC industry

By all accounts there are about 2.8 billion people on the planet that use technology and in various ways are connected to the Internet. One third connect via PCs while the other two thirds use smartphones, tablets and other connected devices that have sprung from the Post PC Era. What is quite interesting is that for the first 30 years of the PCs existence there was little innovation in user interfaces. PCs used mice and keyboards to navigate and interact with digital information. But by 2004 touch had been introduced in some very early tablets and smartphones and it took Apple’s introduction of the iPhone in 2007 to move touch into mainstream of user interfaces. Today all mobile devices use touch for navigation and input and with the introduction of Siri and Google Now, voice has entered the scene as another form of input.

As we move forward, the goal of the tech industry is to bring the next 1 billion on line by 2017-2018. But there will be a big difference this time when it comes to delivering new devices and services to this new crowd. This new age of users will not be burdened or even tied to legacy UI’s and apps from the past. While mice and keyboard will still be optional UIs for some, the majority of the new user will enter the connected world via new UIs that include touch, gestures, voice and even bio-senors that will be used by them to navigate the next Internet age. More importantly, I estimate that at least 80% of these new users will come in through some form of mobile device and that the PC and laptop will have very little interest to them.

The ramifications of this for the tech industry is huge. PC vendors of the past will have to adapt or they will die. I see Microsoft having the greatest risk in that they are so PC centric with so much legacy baggage that making this transition will be difficult. The problem with Win 8 is not the software, but users ambivalence. Unless you are a business user tied to their apps, Win 8 and its lack of apps has little appeal to the mass market. Also, Android and IOS more than deliver what most people need and will continue to rule the OS world of this new digital era.

The biggest challenge though is two fold. The first is related to user interfaces. Mice and keyboards will have minimal interest to these next billion users. The majority of these folks will come in through mobile devices of the Post PC era. That means touch is the new “keyboard” and perhaps gestures is the new “mouse” for these folks. We also see voice playing a more important role in UI’s for the next billion users although perfecting this by 2017-2018 is not very likely. Siri and Google Now show voice’s functionality today to a point but for voice to be integral to the mobile experience it will need better speech to text recognition and more powerful voice accuracy for it to be really useful as a future UI.

The second thing that will need to be in place is a powerful service’s engine that ties these next billion users devices to the cloud and makes interacting with the cloud and their devices easy to do and seamless. Of course, the cloud based apps, synchronization, storage and communications layers have to work harmoniously too. Apple, Google and Amazon have a huge lead in this space and it will be difficult for others to keep up. On the other hand we are talking about a billion new users throughout the world and there is great opportunity to create regional versions of these services as well as deduced devices just for these regions too. The idea of one size fits all won’t work for the next billion users who will want variety in hardware and services.

I see the next two years as pivotal for all of the major players in the PC and CE industry. For the PC vendors, they have to move on and think of their PC business more in terms of a mature market that needs to be kept steady. There is still room to make money and innovate in PC’s and laptops but it will never be a growth market again. Instead they need to focus on mobile products and services that meet the actual needs of these next billion users and put serious R&D into innovating around these new computing paradigms. For the Telecom industry, breadth will be important. They too need to keep investing in building out networks, making them faster and secure to stay competitive but also expand their reach. Sprints move to buy TMobile is a good example of this. They also need to bulk up their services offerings. As for the CE companies, they have to add Internet connections to the majority of the devices they make. Gone are the days when most CE devices are islands unto themselves. They need to think connectivity and sensors and move to make most of the products they make smart. This goes for devices for the home, cameras, TV’s and even toys.

Also, all of these industries need to invest heavily in new user interfaces for their devices in the post PC era. The next billion users will demand a whole host of new ways to communicate and interact with their digital products and ultimately I see this as one of the tech industry’s biggest challenges in the near future. The good news is that there are at least another billion people clamoring to become part of the digital revolution. However, for them to come to the digital party the tech companies have to readjust their thinking about what it will take to interest and reach these new users with their brands and services and invest accordingly if they want to be a company that interests the next billion people who will come online in the next 3 to 4 years.

The iPhone and China Mobile. Impact and Expectations

Yesterday Apple announced that the iPhone will finally come to China Mobile on January 17th. Pre-orders will start on December 25th. The timing of the iPhones availability will coincide with the Chinese New Year. This time of year is a popular time for Chinese consumers to give gifts that reflect good fortune and coming prosperity for the new year. Which makes the initial timing of the iPhone release in China Mobile to be significant as a jumping off point.

China Mobile is the largest carrier in terms of subscribers by far in China. China Mobile has over 700m customers and largely due to their expansive converge of the country. Of course, not all of these devices are smartphones and even more relevantly not all of these devices are 3G. In fact most are still 2G. China Mobile over the past year as added between 23-31 million new 3G subscribers per quarter with their base of 3G subscribers at 169.5m at the end of Q3 2013.

This is a significant tracking statistic to have watched the 3G penetration grow over the past 2-3 years. It may shed some insight into the adoption rate of 4G devices, and in this case the iPhone, over the next 3 years. The iPhone will support China Mobile’s 3G/TD-SCDMA and of course their latest 4G/TD-LTE network in which the iPhone will be a flagship device.

The biggest question most are asking is what the impact of the China Mobile deal will do for iPhones in China. Most financial sell side analyst figures I’ve seen speculate that the bear case is an additional 5 million with the most bullish case estimating the deal could amount to an additional 31m units in 2014.

I tend to think estimates in the 20m range are reasonable as an increase to iPhone sales in 2014. That being said, I still believe most are underestimating the demand for the iPhone in China on China Mobile in particular. But even with that in mind a few things need to be pointed out.

Firstly, there are already an estimate 40-45m iPhones already in use on China Mobile’s network which were purchased on the grey market and brought onto the network unofficially. These devices, however, do not support all the bands of China Mobile’s network therefore have spotty coverage. A key question for the iPhone 5s and 5c are how many of these grey market devices have already been purchased and are running unofficially on China Mobile’s network. If this number is large then it potentially impacts the number of new consumers ready to buy officially from the network.

I have a hunch that many of the rumors, leaks, and even promo material being floated around China from China Mobile about the iPhone coming to the their network was designed to help thwart some of these grey market purchases in the hope that those consumers would wait for the device to be officially launched on China Mobile.

The other key question is what the price and or subsidies for the iPhone will be on China Mobile. While the device is still going to be out of the price range of most consumers on both the subsidy and pre-pay markets, if China Mobile gets creative it can potentially increase the market opportunity for the iPhone. Payment plans, on top of subsidies are examples of ways they can be creative.

When networks invest in new infrastructure they need to find ways to recoup those investments. Carriers around the globe have found that the iPhone is the best device in the market to focus on as a premium services promoter. The job the iPhone does for carriers is to help them sell premium services. China Mobile understands this and we believe is willing to push the iPhone hard as the flagship device for 4G on their networks and begin helping them down the road of recouping their investments in LTE.

A paragraph from Apple’s press release on the subject succinctly points out the aggressiveness of China Mobile’s 4G LTE roll out.

China Mobile now has over 1.2 million 2G/GSM, 3G/TD-SCDMA, 4G/TD-LTE base stations and over 4.2 million Wi-Fi access points, providing broad coverage to quality networks for iPhone 5s and iPhone 5c customers. China Mobile is rolling out the world’s largest 4G network. By the end of 2013, China Mobile’s 4G services will be available in 16 cities including Beijing, Shanghai, Guangzhou and Shenzhen. By the end of 2014, China Mobile plans to complete the rollout of more than 500,000 4G base stations, which will cover more than 340 cities with 4G service. The collaboration between Apple and China Mobile will give a big boost to the development of China’s homegrown 4G/TD-LTE technology. iPhone on China Mobile supports major cellular network standards, making a global phone a reality for China Mobile customers.

While there is still some speculation about the impact of the iPhone being on China Mobile, the key take away is that this is a marathon for Apple. China is poised to be Apple’s largest market for mobile. It is a mobile first and mobile primarily market making it the perfect place for iPhones and iPads from the view of the future of mobile computing.

Apple will surely benefit from this deal in 2014 but over the next 5 years, we expect China to be a booming market for the Apple ecosystem.

Did Samsung use Apple as an R&D Center?

Now that it has been proven in the courts that Samsung stole key intellectual and patented properties from Apple’s iPhone, I’ve been wondering if this move by them was actually calculated. Go back to the 2007-2008 time frame and we can see from this period that Apple pretty much over night reinvented the smartphone. More importantly, its impact on the marketplace was dramatic. Now imagine if you were a proven feature phone developer and had already been working on your own version of a smarter phone at the time. It would have flabbergasted these companies to see a virtually unknown entity in phones leap frog them with such a stunning product that had, in a very short time, created the defacto standard in smartphones. Even worse, these companies probably realized that their own efforts paled in comparison to what Apple had and were desperate to move quickly to become a competitive player lest Apple own this market by themselves.

We also know from the court documents that Samsung claims to have been working on their own smartphones very close to the time Apple was developing their version. However, I suspect that whatever they were developing was not even close to what Apple had created and had to drop those designs and refocus on creating a product that was equally cool and powerful as Apple had on the market. But doing so meant time and I believe that Samsung decided time was not on their side if they were to be a serious player in smartphones. Also, doing a dedicated R &D project not only took time but bucket loads of money to do so.

I remember seeing the first Samsung Smartphone and thinking at first it was an iPhone. You may remember it since it was a spitting image of Apple’s design. Yes, it had Android as an OS and a few other features, but a lot of us analysts who looked at it were extremely surprised to see that it was pretty much a copy of what Apple had in the iPhone. Now when it comes to R & D, many companies reengineer products and try and put their own IP into it and make it different so it does not come off as a direct copy. However in this case it appears Samsung did not reengineer as much as do a direct copy of it in hopes it could get away with it.

From this move the amount that Samsung will pay in damages to Apple currently is around $850 million. There are other suits still on the table but lets say that in the end Samsung pays Apple $1.1 billion overall in damages. Samsung would have shelled out at least that much in their own R&D costs and been years behind Apple as a competitor. Even worse, they might have never even caught up using their own designs and could have been left in the dust. Given Samsung’s position in feature phones they probably realized that in not doing something close to what Apple had created could lock them out of this multi-billion user market and probably decided it was worth the risk in order to guarantee they would have a place in the future market for smartphones.

The result of copying Apple and getting their own smartphone into the market fast has paid off. Samsung sells 50% of all Android phones and has begun beating Apple in market share in some markets. They now have record profits, much if it coming from their smartphone business. They have become one the top players in smartphones and over time have created their own IP and designs so that they are no longer using any of the copied technology or designs from Apple. To say that Samsung has become one the most powerful CE and smartphone companies in the world would be an understatement.

Now, I don’t think copying and stealing to get a product to market fast is in the play books of any MBA programs but this time what appears to be a calculated risk on Samsung’s part to copy Apple to get their own competitive product to market fast has kind of worked. It only cost them whatever they will pay in final damages to Apple and in the end that amount will probably be less than they would have paid in their own R&D expenses if they had built their own smartphone from scratch and would not have had any guarantee that those early versions would be a success.
Using Apple for R&D is a bad business idea and I don’t recommend trying it, but for Samsung, whether calculated or not, it seems to have worked out in their favor.

It’s Bottoms Up For The Windows Phone

Recently, I’ve been reading a lot of upbeat reports regarding Microsoft’s share of the smart phone market. This has been accompanied by claims that Microsoft has finally gotten developers to adopt their Windows Phone 8 platform.

Microsoft’s Windows Phone boss, Joe Belfiore, claims that Microsoft will have completely eliminated its app gap with rival platforms by “the end of 2014.” Writing on his Twitter account, Belfiore has been crowing that “the 3rd ecosystem is decidedly here!”

All well and good. and I congratulate Microsoft on their increased market share. Only here’s the thing…

All Of The Windows Market Share Is Coming From The Bottom Of The Market

Windows Phone’s impressive growth in 2013 has been driven almost entirely by low-end and mid-range smartphones while it’s languished in the high-end market. ((Kantar agrees, stating that a large chunk of Windows Phone sales come from lower-end devices.))

“In Britain, almost three quarters of Nokia Lumia sales in the latest period were low-end devices such as the Lumia 520 and 620 — a pattern that is similar across other EU markets,” said Sunnebo.

Just 1 of the top 4 Windows Phones in the world is a high-end model while the rest of the platform’s top devices are in the low-to-mid-range market.

What’s particularly interesting is that AdDuplex found that the Lumia 1020 — which is not only the best Windows Phone device on the market but has also received a very strong advertising campaign — doesn’t crack the top 10 in any market.

The most popular Windows Phone in the world by far is the Lumia 520, a budget model that accounts for more than one-quarter of all Windows Phone devices sold in the world.

Here is the AdDuplex report showing that the low-end is the driving force behind Windows Phone success:

This is what the Windows Phone device ecosystem looks like over the past 13 months:

If you look carefully at the above chart, it reveals that the low end is growing, the “other” is growing and the high end is being squeezed between them.

The Battle For The Bottom With Android

Android — via Google — isn’t just sitting still and letting Windows regain market share. Google’s recent KitKat OS seems to be designed to run best on low-end devices. Further, Motorola’s Moto G phone may be an attempt to directly attack Microsoft’s new found low-end base.

Biggest Moto G impact could be on Lumia. Great majority of sales are <$200, where quality is better than cheap Android. Not for much longer. ~ Benedict Evans (@BenedictEvans)

It’s difficult to say who will win in the battle for the low end. However, since Microsoft’s ultimate goal is to make money from licensing their software and Google’s goal is to disrupt that business model by giving away their software for free, I believe that Google holds the better cards and — to conflate my metaphors — the upper hand.

Market Share Is Not The Goal

There’s so much talk of market share that we sometimes forget that market share is not the goal. The goal is:

1) To create a viable platform; and
2) Make money.

Taking the bottom of the market will not accomplish either of those goals for Microsoft.

…OEMs are trying to go upstream not downstream. ~ Ben Bajarin (@BenBajarin)

We’ll see. But if Microsoft is going to become a genuine player in phones, it’s going to be a long, long, hard slog. They’ve got the money to stay in the race. But staying in the race is not the same as winning.

Here’s to you, Microsoft. Bottoms up.

The China Smartphone Report

This is a high level overview of the Chinese market and some of the interesting trends we see in the region with smartphones.

Chinese consumers remain a mobile first set of consumers and in many cases mobile only. For the vast majority of Chinese consumers their only access to computing is coming from their smartphone. It is the only way for them to connect with each other and the broader world. It is how they are communicating, playing, learning, and more. For these consumers the smartphone IS their computer and may be their only computer.

Chinese consumers are being shaped by mobility and the rest of the world should take notice of how the region develops as a mobile first continent. We expect many similarities over the coming years with younger demographics in many other regions as well.

Table of Contents:
– Mobile Domination
– Smartphone Pricing
– Retail Channel
– Apps and Media
– Highlight: Xiaomi
– Concluding Observations and Takeaways

Download the Report as a PDF. Right Click and save as to download or click to view in browser.

At Last, the Last Act for BlackBerry?

This may be the exception that proves Betteridge’s Law. ((The law, named for Ian Betteridge, states that any headlong ending in a question mark can be answered no.)) It’s too soon to put a number on the days remaining to the once high flying BlackBerry, but the latest financial developments suggest that the sand is running out.

To recap: Back in September, a major shareholder, Fairfax Financial Holdings, offered to take BlackBerry private for $9 a share. That deal never got beyond a letter of intent and today it fell apart. Instead, BlackBerry is issuing $1 billion (U.S.) in convertible debt securities. Fairfax will take $250 million and plans to place the other $750 million privately. The securities have a 6% interest rate and a $10 conversion price, which becomes worth anything only if shares rise nearly 50% from their current price of $6.55. In addition, Thorsten Heins is out after a couple of miserable years as CEO. John S. Chen, former CEO of Sybase, will take over as executive chairman and interim CEO.

The big question is just what this deal does for BlackBerry. The company has been exploring “strategic options” for months, but doesn’t seem to have found any. BlackBerry doesn’t seem to need the cash urgently. It burned through $368 billion in cash in the quarter ended Aug. 31 but still had $1.2 billion is cash and equivalents on hand. The company’s plan to reduce operating costs by 50% by February should slow the hemorrhage, though we won’t know until year-end whether it suffered a big drain on cash from massive layoffs in the current quarter.[pullquote]If management had come up with a compelling turnaround plan, firing the CEO would be a very strange way to begin implementing it.[/pullquote]

It seems unlikely that this new financing can do more than delay the inevitable. The company has been trying to sell itself for months with no takers, at least not at a price that the board would accept. If management had come up with a compelling turnaround plan, firing the CEO would be a very strange way to begin implementing it. BlackBerry’s relevance to the smartphone market is trickling away, day by day.

The remaining question is what’s in this deal for Fairfax. Maybe it’s CEO, Prem Watsa, is a true believer who thinks BlackBerry is on the verge of a comeback. The financing is structured in such a way that Fairfax and whomever else it gets to take the BlackBerry debt stand to make a lot of money out of even a modest recovery, especially if the stack price tops $10. But there are less happy possibilities. Writing in the New York Times DealBook blog, Steven M. Davidoff speculates it may have more to do with Fairfax’s standing in an eventual BlackBerry bankruptcy:

One way to look at this investment is that it positions Fairfax and the other investors for a BlackBerry bankruptcy. BlackBerry has no long-term debt on its balance sheet, so this investment would now jump Fairfax ahead of the equity line for controlling BlackBerry in any bankruptcy proceeding. And remember that BlackBerry is a Canadian company, so the bankruptcy would be there. Canadian rules are different than those of the United States, but they do allow the creditors to have a substantial say in any restructuring plan, including approving it.

It’s been a long, strange trip for BlackBerry. But the end of the line is getting close.

Apple’s 5C Invasion Strategy

All the speculation around the iPhone 5C was that it was designed to be Apple’s product to infiltrate the lower tiers of the market and begin to take share from Android.

You may or may not know that in several markets like the US, Japan, and parts of Europe, the iPhone dominates the premium section of the iPhone market. This market makes up roughly 10-15% of the global smartphone market. Obviously Android dominates the other and much larger sections of the smartphone market. So the speculation around the 5C was that it was designed to help extend Apple’s product line beyond the 10-15% of the high-end segment. So does the 5C do this? I believe the answer is yes but it is not clear exactly by how much.

I know that is a foggy answer but this is a complex problem. If you study Apple like I do you know that what matters to Apple is not just market share but the right market share. Apple wants customers that add value to their ecosystem. Meaning that they spend money on apps, media, accessories, etc. The ultra-low-end part of the market does not do this. The larger middle-tier of the market does this to a degree. The market that Apple currently dominates does do this and in large volumes.

Apple has brought a current generation iPhone line-up in the 5C at lower-costs than previous current generation iPhones. This is why in the US market the lowest-priced iPhone with a new two year contract is $99. Now in many other markets Apple does not set the price of the phone. The carrier buys the phone then prices it at whatever they want. So this means a carrier in other parts of the world can buy the iPhone 5C then charge any price they want. They can make it free, $49, $69, etc.

So to answer the question we need to anticipate the value of the iPhone to a carrier by way of driving data services. If you follow the iPhone’s market share by way of web consumption (data) then you will know it is the undisputed leader when it comes to driving data usage on carrier networks. This is a big deal and I believe that carriers in markets outside the US understand this value and will price the 5C aggressively in order to attract the more valuable customers to their network.

So what about China?

This is the big wildcard. Apple for the first time included China as a launch day country. This is significant and the Chinese customers will appreciate this in that is shows them Apple is not treating them like second class citizens. Of course to really tackle China Apple needs to have China Mobile as a distributor.

This deal is inevitable in my opinion, especially since the new iPhones support TD-LTE which is the standard for China Mobile network. Cost aside, my firms forecast and from many others I saw, anticipated that a China Mobile deal alone could lead to 3-5% extra market share in China for the iPhone.

Is the cost high for the iPhone 5C in China? Yes, but keep in mind that all imports suffer a massive import tax. This will always keep the cost of iPhones higher than any local brands in China. This fact alone complicates the competitive landscape in China more than many realize.

All of that being said, I’ll say this about what Apple announced today. In light of the competition, they have never been up against an actual iPhone lineup. Competitors have been competing against only one current generation phone. Yes Apple offered legacy devices in the market but I can’t overstate the importance to new buyers and upgrades on current generation devices. This holiday will be the first time that Apple’s competitors will be going up this strong of a current generation iPhone lineup. With that I will add that Apple’s brand and marketing should not be underestimated by the competition.

Many of my analyst colleagues doubt that Apple’s moves today take them beyond the 10-15% they currently own. I disagree. Colors will be of interest to many segments of the market. The gold iPhone will be a huge hit in China due to what the color represents. Pair that with the project Red case and the Chinese will go crazy.

I’m not going to project or forecast what amount of extra share Apple can garner from the new lineup. But I will not be surprised if this takes them beyond the 10-15% and into the 20% if not higher. I certainly believe that in markets where the iPhone is priced even just 100-200 dollars more than a competing mid-tier Android device that the iPhone will fair well. In fact in all but pre-pay markets we estimate the iPhone to take share from the 350-400 dollar mid-tier Android devices.

There are number of data points we are tracking to validate this. Google Play app store revenue in Japan for example as well as the sales figures of Samsung and others in key regions. Lastly, we estimate that by the end of the year iOS will have gained enough ground on Android to now have more than 50% us market share.

What the A7 being 64-bit Means for The Competition

Samsung declared that it too will follow in Apple’s footsteps and embrace 64-bit processor designs in their products. I have no doubt that Qualcomm and Nvidia will catch up with equally impressive 64-bit designs. That being said, Qualcomm and Nvidia do not have what Apple does, an operating system.

Although Qualcomm and Nvidia will make exceptional processors, the question remains as to whether Google will do what needs to be done to transition Android to 64-bit.

When I first saw that the A7 was 64-bit my first thoughts were about what this means for the competition. More specifically I started thinking about what this means for Android.

Now to clarify there is a port of Android that exists that is 64 -bit. It happens to be a port of Android that Intel has developed running on their own 64-bit x86 architecture. That said, this implementation is designed for more desktop device than for mobile. Intel’s smartphone chips are not yet 64-bit. But an interesting point to this competitive story is that Intel has the expertise already to take Android to 64-bit in mobile.

There are two things to understand about this from a competitive picture. The first is that the transition to 64-bit alone is not the only contributor to performance upside. The 64-bit architecture Apple has adopted and modified is an updated version of the ARMv7 architecture called ARMv8. There are a number of optimizations ARM has included that makes ARMv8 a much more enhanced architecture than ARMv7. Efficiencies have been added that are key to the overall story. The fact that it is 64-bits is just part of the story. This is simply a more efficient new architecture built on a 64-bit framework.

Not all companies are like Apple. Apple designs their own chips solely for their own purposes. This is why they can take liberties in the design process that competitors can’t.

Competitors need to spend the lengthy time going through the ARM validation process for all their chips. Competitors also work to tune the software running on their chips but this also takes time, especially with Android, when you have to optimize for many different OS configurations.

There is no question the competition will go 64-bit but will the platform benefit? From what I see, Google wants to go downstream with Android not upstream. They are trying to commoditize computing not do something unique with it.

On Android games will benefit greatly from 64-bit. But I am not sure the rest of the developer ecosystem is trying to push the envelope. I could be wrong but we will have to wait and see. Regardless, Apple can take advantage of every bit of 64-bit computing. I’m not sure I can say the same about the competition.

The biggest blow to the competition will be the iPad. The iPad going 64-bit has the potential to transform the tablet in ways not yet imagined.

Apple’s lead time over competitors in this is significant. It will be at least a year before we see products on the market. Apple will have developers already established and entrenched.

I’ll end again by restating a point. Apple is trying to do something unique with computing. Google is not. The A7 is a prime example of this and there will be many fruits from this effort.

For a bit deeper dive on just some of the uniqueness of the A7 read this article on the role of the A7 with the Touch ID.

Understanding The iPhone Pricing and Segmentation

In my mind, the key to yesterday is to understand how the iPhone is segmenting and the role the pricing structure plays on the segmentation.

Everyone, including myself, was convinced that Apple was going to be more aggressive with the pricing of the iPhone 5c. Now, looking back, it should be obvious that Apple has not really changed much in the way of their strategy. They did fragment the iPhone line as many expected. They did introduce a ‘new’ product at slightly lower price point. But they did not do what many thought, which was hit a price point that fully targets more unsubsidized and pre-paid markets.

That being said, there is more to the pricing strategy than meets the eye.

Understanding the Segmentation

Over the last few years, Apple has sold a current generation iPhone along side several last years models at discounted prices. From looking at the sales announcements from many carriers, we know that later generation iPhones sell extremely well. Verizon even reported that half of their iPhone activations were non-LTE, meaning the 4S. This just goes to show you the strength, even in the US, of devices at the $99 subsidized price range.

Outside of the US, and in many areas of Europe, the price of handsets vary much more than they do in the US. Carriers can acquire the devices at their wholesale prices and offer them at whatever cost they want to acquire new customers. In the US we see Walmart do this from time to time with the price of the iPhone 5. Walmart just recently dropped the price to $98 of the iPhone 5 with a 2-year contract. They can do this because of the cost structure deal they have to carry the device and incentives on contracts. Couple that with the fact that people don’t go to Walmart just to buy iPhones and you can see how they can make up some perceived cost losses with additional items bought in store.

For many carriers the iPhone does a similar job on their network that it does for Walmart in stores. Carriers hire the iPhone to drive up their average revenue per user. The iPhone is the undisputed leader for network operators in driving ARPU. The iPhone 5c gives them some leverage to be creative with their pricing of the device in order to acquire new customers and drive higher ARPU than they could before with the premium iPhone model.

Take a look at the chart below and the iOS share of web traffic in specific countries.

This demonstrates the good job the iPhone does in driving premium data services. In regions still trying to drive LTE users and monetize the massive investments they have in network infrastructure, the iPhone is the best product for the job.

Looking at the lineup, I will not be surprised if the iPhone 5c becomes the larger share of iPhone sales. Thus Apple has created a phone for everyone, or at least most, and a premium phone to aspire for. This is segmentation at its best.

Economies of Scale

One other element to watch with the 5c is whether the price may come down as manufacturing economies of scale allow. Since the casing is using a process much less complex in the finishing and machining than the 5 and 5s, it may allow for economies of scale to allow for better pricing.

This of course may not be evident in anything other than the carriers ability to be creative with the pricing. It will be interesting to see if the pricing carriers have with the iPhone are the same in six months time or less.

Overall Apple’s competition has never been up against a current generation product line. They have been up against a single new iPhone in two different colors. Previously Apple had two current generation iPhone choices for consumers. Now they have eight.

I’ve always said that it took an army of Android devices to compete with Apple. Now Apple is creating it’s own army. I do have to imagine competitors are a little nervous.

What Will Microsoft Do With Nokia’s Feature Phones?

There are many things curious about this deal. Particularly, the things Microsoft did get and the things they did not get. By not acquiring the totality of Nokia, Microsoft got a steep discount in order to acquire the parts they did. But looking over at the way the deal was structured, it is logical to assume that Microsoft did not have to include the feature phone business from Nokia and could have let that business run its course.

So the key question is what why did Microsoft include the feature phone business. Let’s explore some scenarios.

First, if you subscribe to the theory that Microsoft acquired Nokia because they were going to lose Nokia as a partner, either to Android or to bankruptcy, then it would make sense to not leave a bit of hardware business to Nokia to continue making devices that they can chose to switch to Android. The deal instead states that Nokia can not use the Nokia brand name on any device until the end of 2015. So technically, Nokia could again start making hardware in 2016 but can not use the Lumia name since Microsoft owns that as well. At the outset it seems unlikely that Nokia will make hardware again in the future. However, should things go south over the next few years with this deal with regards to the Nokia assets, name, brand, etc., the door is still open. But by absorbing the feature phone business, Microsoft ensures that by this time next year there are no Nokia Asha handsets running Android in emerging markets or elsewhere.

So what to do with it?

Nokia still sells a lot of feature phones. Even though it is declining, every quarter the industry still sells several hundred million feature phones. Last quarter over 200m feature phones were sold with 12-14% approximately carrying the Nokia brand.

Take a look at the chart below which shows global handset vendor market share by sales to end users.

Although on a downward trend, Nokia still held 14% respectively, of all phones sold over the past two quarters. Again the vast percentage of those being non-smartphones like their Asha line.

Here is another chart showing global mobile phone OS usage share as measured by web usage.

I bring up this chart for reason. Nokia’s Asha brand running the S40 operating system is practically a smart phone. It runs Java apps, has an app store, has a UI that feel smart phone like but few consider it a smartphone. This phone targeted emerging markets exclusively and strategically was the device that would be used to transition emerging markets from feature phones to Nokia smart phones.

By keeping this group Microsoft could simply bring Windows Phone to all hardware, including Asha, and keep the low-price points the same in those countries and within a few quarters garner double digit global market share for Windows Phone. Believe it or not many in these countries buying these low cost Android phones have no preference of OS yet. This is why I’m convinced in markets like India, Africa, and even parts of China if Microsoft just put Windows Phone on the very low end the would get market share.

Market share alone may not be enough to build the ecosystem out. I try to remind our readers that market share is fine but it is more important to have the right market share. It is yet to be seen if these low end consumer contribute any real value to ecosystem. But if Microsoft can get some of these customers early in their maturity cycle then it will at least be a start.

A Suspicious Angle to Microsoft’s Acquisition of Nokia

Not long after Microsoft and Nokia did a deal for Nokia to back Windows Mobile and Microsoft exec Stephen Elop moved over to become its CEO, I mentioned to some of my colleagues that I thought this was a set up. In fact, I wrote a Techpinions piece on Aug 15th, 2011 that literally said Microsoft WOULD buy Nokia in time.

If you look back at this period in which Nokia was Microsoft’s major Windows Mobile vendor and Elop got serious experience being a CEO of a multi-national company, one has to wonder if there was not some type of grand plan put in place between Ballmer and Elop from the beginning. Surely Ballmer knew even then that his days might be numbered and that while Elop was a natural successor to him then, he needed responsibility as a CEO before he would be seriously considered as a successor.

I have known Ballmer since 1985 and over the years have watched as he has aged and the pressure of running Microsoft was catching up with him. During this time his kids have all grown up and I am sure he looks back on the missed times he had with them during their most formative stages of life. Regardless of his performance at Microsoft, I have felt for a couple of years that he was ready to step down and allow someone else to try and bring Microsoft into the post PC era.

While it is true that Elop’s tenure cannot in itself be considered a success, let’s be honest. He was handed a highly wounded Nokia from the beginning and he gets street cred for just keeping them alive and competitive given the beating they were taking from Apple, Google and Samsung. And Nokia became the #1 vendor of Windows Mobile phones and, as research stats have shown, Microsoft actually gained ground in a lot of international markets where Nokia already had a large place in those parts of the world.

While Microsoft and Nokia have no chance of rising above Apple, Google and Samsung in terms of units sold, together they can clearly become the third option in a smart phone market that is still in its early stages of growing and will sell at least 1 billion units per year for the foreseeable future. And even at #3 there is a lot of money to be made if they execute well and aggressively at a competitive level.

If you read many of the news stories about the Microsoft/Nokia deal, most of them suggest that Stephen Elop is now considered the #1 candidate to replace Ballmer as CEO of Microsoft. At the moment, he will be running Microsoft’s recently announced device division and will focus on helping Balmer in the short term achieve Microsoft’s One Vision goal of being a hardware, software and services company.

I believe that this will be a short-term role. I doubt that Ballmer will stay the full year and would not be surprised if Elop is in place as the new CEO by Dec 1, 2014.

But the neatness of Microsoft now buying Nokia to anchor their device division, at a discount no less, seems to me to be less happenstance and rather part of a grand scheme hatched a couple of years back. And if Elop does become the new Microsoft CEO, it would come full circle and be looked at as one of the more interesting premeditated corporate purchases of all time.

The Myth of an iPhone Killer [Updated with added chart]

The resiliency of the iPhone in not just the US but global markets as well is truly a marvel. As we will see in some of the charts below, against all odds Apple’s iPhone market share remains steady.

I’ve long argued that vendors in the Android ecosystem compete more with each other than with Apple. One can take a perspective that says a consumer who buys an Android phone is a lost customer to Apple, at least for the time being. In the case of the ultra low-end and cheap phone market, those customers are likely simply not Apple’s target. They may be when they are ready, if they ever get so far as to value the things Apple creates. In the case of the premium market for devices like the S4, HTC One, etc., we notice that these devices seem to take share from each other more than Apple–especially in the US.

I don’t think many realize how dominant the iPhone is in the US among premium handset market share. Getting these specific statistics (iPhone 4s, 5) share of premium sales is tough but from inside sources I’m told that by quarter the iPhone US share of premium can go between 60-75%. The key take away is that the iPhone is the dominant sales device in the premium segment of the handset market.

Even knowing that, myself and many would agree that looking at usage of the devices is the key metric. People can buy lower end and even premium Android devices all they want but if they are not being used as smartphones, or creating value to the carrier, then we wonder if we should even count them.

Below is a look at the share of platform usage in the US.

As you can see, even when new premium Android devices are launched in the US there appears to be no significant impact to the iPhone. Perhaps even more interestingly is the dip in iOS usage share during the “droid franchise” peak. Then as we can see when the iPhone came to Verizon it gained share back. The key losers over this time period was clearly RIM.

Now if we turn our eyes to the global vendor market share, we see similar patterns. For obvious reasons, the iPhones share of the global smartphone install base is much lower than the US but what we see is that its piece of the pie stays relatively the same size.

Notice for example that Android’s gains are not making the iPhone’s share of the pie look like RIM’s, Bada’s, or Symbians. Meaning declining. Android is gaining, yes, but the iPhones share is not decreasing like the others.

Now to look at what the opportunity looks like going forward I want to show a much bigger global handset vendor picture.

When looking at this image there are several things to note. First is that the iPhone’s share again remains relatively constant. It is not shrinking dramatically like other vendors but keeps its slice of the pie relatively static. However, look at the global rise of “others” in this chart. These are largely white box label vendors flying off the shelves in China. The size of the “others” pie is even larger in China than local brands like Huawei and ZTE. Others is the real growth opporunity as we see customers refine their interests and look to go with more established brands than white box makers.

I can show charts all day of global vendor sales and in no chart will you see iPhone’s share of the pie shrink rather you see it maintain. Obviously, what we will watch going forward is for the share of the pie to grow, likely at the expense of “others” to begin with. The point to take away in all of this is simply that there is no such thing as an iPhone killer, even though many assume there is.