Cloud – Tech.pinions

Computing Platforms and Value Creation

One of the more powerful indicators of an ecosystem that has not only staying power but one that can ward off disruption as well is when a platform creates value for more than just the company that owns it. Perhaps the best modern example of this is Apple’s iOS platform and Microsoft Windows. Each has succeeded a creating a deep and intricate value chain for partners and customers of the platform. Both have an exhaustive list of software and services which are worth the time of the developers and services providers to invest resources into because they provide value back to those investing in the platform.

I recently participated in an exercise with some folks at Harvard Business School and the Clayton Christensen Institute looking at ways value creation can play in solving the Innovators Dilemma and keep disruption at bay. The thesis they are creating is looking specifically at Apple, as they argue the breadth and depth of the value creation for parties other than Apple is larger than other platforms. An example of this would be with iPhone accessories. While it’s true there is an accessory industry for Android phones, Android’s more open platform approach leads to a massive amount of hardware diversity. For accessories like cases this is a problem since one manufacturer can’t make a case for every Android phone. Instead, they pick the ones they feel are the best selling or the ones most likely to have more valuable customers like Samsung S or Note phones, for example. The iPhone is a much easier product to design accessories like cases for because there are far less designs to have to worry about. Not surprisingly, this dynamic allows for an accessory business to thrive focusing solely on Apple products.

During this exercise, we talked about many companies with platforms that create value to look at how deep and wide that value extends. The main three we focused on — Microsoft, Palm, and Apple — are the ones who have platforms where businesses exist solely focused on one platform. What was interesting in this analysis was when we looked at Android. We were hard pressed to find many companies, certainly no large ones (the ones we did find were in more developing/emerging areas), with a business focused solely on Android. Everyone who is supporting Android with their hardware, software, or services is also supporting iOS or Windows as well. Android stands out as it is the platform with the most global users but also the one with the shallowest value creation web for anyone Google.

The more I thought about this after our working session, the more it made sense that Google is a bit of an anomaly when compared to the other platforms we explored. Google has a different business model. The key point is the biggest segment they create value for besides themselves is advertisers. This is a significant difference with Google’s platform vs. Apple’s and Microsoft’s. To carry this angle further, Microsoft and Apple have an end-user in mind as a customer of their platform where Google’s customers are advertisers.

This angle sets up something I’m calling the Value Creation Paradox. Interestingly, not just Google will have this problem. It seems Facebook may also suffer from this paradox. Both Google and Facebook provide a free service to customers and evolve their offering accordingly yet the needs of the end user are not their primary concern as they are with Apple and Microsoft. Facebook and Google must also continue to architect their platform to meet the needs of their true customers — advertisers.

Which truly begs the question: can a platform serve two master customers at opposite ends of the spectrum? Is the reason Microsoft and Apple have such deep webs of value creation for their ecosystem because they are laser-focused on the end customer needs and companies like Facebook and Google will struggle to build large ecosystems of value creation beyond themselves and their true customers which are advertisers? Ultimately, will free platforms, who over-index on creating value for advertisers due to the necessity of their business model, then be more susceptible to disruption under this new thesis? All questions we don’t have answers to since this new wrinkle with Google and Facebook are so new. But we do know from all available research that companies with a more end-user approach to their platforms are the ones who have succeeded at creating breadth in depth of value for not just themselves but thousands of partners as well.

I’m not saying Google and Facebook don’t provide a valuable service to end-users. They absolutely do. I’m only pointing out Google and Facebook’s customers are different than Apple and Microsoft’s and thus, the way they architect their platform/products will be with the agenda of serving their true advertising customers. The reality is this focus, as of today, has had an impact on their ability to create an ecosystem of value creation.

If some of these observations are true, then they carry with them implications for who is best positioned to succeed in the next platform wars, which may have something to do with cloud computing, artificial intelligence, augmented reality, and perhaps more but we aren’t entirely certain yet. Are the companies best positioned here the one with platforms laser-focused on the consumer as their customer or the ones with advertisers as their customers? No doubt, a key philosophical question worth continuing to flesh out if any of us are to place bets.

A Potential Surprise in Apple’s Earnings

Everyone is focused on iPhone sales numbers and rightly so. It’s going to be a historic and unprecedented quarter for Apple’s iPhone. However, there is a data point I’m very interested in I think may catch some folks by surprise.

We continually emphasize Apple’s ecosystem as the foundation of the their strategy. Sales of end devices is central for the ecosystem, but where we can measure the Apple ecosystem is in iTunes software and services revenues. We know Apple’s increasing payouts to developers. We know App store revenue is increasing but the services side is what intrigues me.

We see overall revenues from iTunes continues to grow.

Which means, as Apple grows their base, these consumers spend money on apps or services in their ecosystem. Selling devices and growing services revenue have to go hand in hand for what Apple is building to be sustainable.

Apple is also continuing to grow grow their base.

This is my model of the iPhone installed base. As you can see it continues to grow. A primary reason for Apple’s continued installed base growth is hand-me-down devices and the secondary market in areas like China and India where consumers buy refurbished iPhones through secondary channels. The point is, as Apple’s user base grows so does iTunes software and services revenue. These are key points to watch. However, I think in Apple’s earnings call tomorrow revenue from software and services may surprise some folks.

My belief for this is based on the new addition to iOS 8 around iCloud storage. Pricing varies by region slightly but the basic new offerings are 20 GB for .99c per month, 200 GB for $3.99 per month, $9.99 for 50 GB per month, and $19.99 for 1TB per month of storage. I was quite optimistic about the upside of these services when they were first announced. Many on the financial side modeled modest uptake of these cloud storage monthly services but I think uptake was more than most anticipated.

From some initial consumer research we performed in several markets from US, Europe, China, etc., we found percentages ranging from 15% up to 30% who said they opted for a monthly iCloud storage plan. The .99c option was the most popular. This appears to be driven largely by the need for more storage for photos and cloud backup. It is no secret consumers take a massive amount of photos with their iPhones. But now they are taking more photos with burst mode, more video thanks to slo-motion and time lapse, and all these new innovations around the iPhone’s camera take up more storage. An interesting way to look at this is how Apple’s innovations around the camera essentially drive the need and value of the iCloud storage plans.

The December quarter is usually already a big one for iTunes software and services thanks to the holiday season and many getting App Store gift cards as presents. However, with the addition of the iCloud pricing plans, we may see a surprising number come from this area in Apple’s earnings call.

Why Chromebooks Have No Consumer Market Future

The question of whether Chromebooks will have a future in pure consumer markets is an intriguing one. There’s no question Chromebooks are well positioned for education markets where they are selling in volume. But I don’t see Chromebooks being successful in pure consumer markets.

At a fundamental level, we have to understand consumers do very little “heavy lifting” with their current PCs. While it is true consumer do quite a bit of basic web browsing on their PCs and this is a primary point for Chromebooks in consumer households, that activity has largely shifted to their smartphones or tablets, which now have over a 53% household penetration in the US. Other devices currently serve consumers with the same value proposition of Chromebooks and offer even more. As larger phones increase penetration, it hurts the Chromebook consumer proposition even more.

The other challenge is the form factor. A Chromebook is a clamshell which means where and how it is used is limited. Things like phones and tablets are more easily carried and used in more convenient ways around the house to browse the web and more. It is the clamshell form factor I also believe is not attractive to general consumers.

Lastly, there is the issue of software. If we step back and look where ALL the software innovation for consumers is happening, it is on smartphones and, to a degree, tablets (meaning the iPad). There is simply no software value proposition on Chromebooks that consumers can’t get on their existing PCs or even their smartphones and tablets.

Even with a fundamental leap in consumer-facing cloud software/apps, I believe the pure consumer market has largely moved past the PC. All the innovation happening in native apps for mobile is accelerating this shift not just in time but priority, with value being placed on mobile computing devices and not “fixed” ones like notebooks and desktops.

Some things I think could be very interesting from Google’s ChromeOS are tablets and smartphones. I think media consumption as a large percent of time spent with mobile devices plays into a future where thin-client and heavy back end server computing can come together nicely. I still feel ChromeOS may be the future of Android but that is just speculation. Where I have a strong opinion is that ChromeOS has little to no future in pure consumer markets in the shape of a clamshell PC.

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

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

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

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

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

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

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

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

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

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

The Myth of TV Disruption

I, along with many other people, cannot wait until the day TV is disrupted. It continually shocks me that the single worst piece of technology I have in my house is my cable TV box. I’ve played out scenario after scenario about how TV gets disrupted and still I land in the same place. It is much farther out than any of us want. This realization was further confirmed this week as I was at a conference and got to spend time chatting with the heads of digital media for ABC, CBS, Fox, WB, as well as the VP of Dish Networks. Suffice to say, if I was going to get a handle on if or when the disruption of the cable operator business would come, there was no better group to speak with than these executives. The subject on my mind was the possibility of un-bundling network content from the cable subscription.

HBO recently announced they will take HBO direct to consumers in 2015. Previously, to get access to HBO content you had to be a subscriber of a qualified cable service. HBO will now let consumers subscribe directly to them should they choose. News headlines position this move as a focus on cord cutters and it certainly is. However, the feasibility of cutting the cord remains an option for only a small number of consumers, not the masses.

Similarly CBS is getting in the a-la-carte game but offers significant restrictions in the service. What gets missed most often is how costly contract rights are as well as the production costs of proprietary shows. When you add all these up, the economics for a network to offer a-la-carte options don’t add up. The VP of digital from ABC told me if they were to offer just ESPN and ESPN network shows as a subscription they would charge upwards of $40 a month and, in some cases, $60 for all access. But the real kicker for me in this conversation was the contract rights for sports.

Every major sporting league has just finished wrapping up new contract rights for live events. As the media execs explained to me, those deals are now secured by the major networks for the next decade and longer. Meaning, the networks can offer all the a-la-carte services they want at whatever prices they want but their offering will not include live sports. Hopefully, I don’t need to convince anyone how important live televised sports are in the United States. Cut the cord and you don’t get live NFL, MLB, NHL, NBA, Tennis, Futbol/Soccer, NASCAR — nothing. This will be true for at least the next ten years if not longer.

When you think about how many channels you get and how much you pay for your bundle, your cost per channel is no more than a few dollars per channel and for many customers it is a lot less. When you consider a subscription to only a small handful of networks’ a-la-carte offerings would likely end up costing you the same amount you pay for hundreds of channels today, it becomes clear that cord cutting is actually not the best value. Sure, a small few can pay “less” if all they watch is a handful of shows but that is not representative of the mass market US cable subscriber.

As I look at the market today, and speak with execs in media companies, it becomes clear we are nowhere near having the cable companies disrupted. Should a tech company like Apple or Google or Amazon want to embark on such a task, their only option would be to buy the networks or a cable/satellite company. Which seems unlikely. I have no doubt smart set-top boxes will evolve and a small few customers will be happy cutting the cord. Anecdotally, I don’t know a single person who has cut the cord who hasn’t gone back, largely because of sports.

Another point that came out, was how the smaller networks would be crushed if unbundling became the norm. How would they be discovered? Discovery, Animal Planet, and the many niche networks would have a hard time in an unbundled world.

Unfortunately for now, the disruption of the TV market remains a myth.

Understanding Apple’s Ecosystem Strategy

Reflecting on where we are with wearables, the Internet of Things, smart homes, smart cars, smart cities, smart malls, etc., keeps opening up interesting holes in Apple’s ecosystem strategy. The more we look at how fast electronics are becoming connected, the quicker this market could get out of hand for Apple.

We start with the important observation that Apple will not make coffee pots, refrigerators, cars, light posts, dog feeders, thermometers, etc. However, they do want those devices to work with iOS. Right now they can through apps. The problem is, all these apps offer walled garden experiences. My thermostat app does not connect to my smart bed in order to adjust the temperature of my room depending on my current body temperature, for example. More importantly, the company that makes my smart bed and my thermostat are likely not to be the same company. Therefore, there needs to be a way for them to work together. What I am outlining is the case that the Internet of Things needs to be open. More specifically, built on open standards. This is, in my opinion, the only way the Internet of Things will move forward meaningfully.

What will be fascinating to watch is how Apple will insert itself in the middle of this. I’ve championed a “best with iOS” strategy I think is part of how they can address this issue. Apple has a hardware accessory program called “MFI” that allows third party hardware companies to make accessories that work with Apple’s proprietary ports like the Lightning connector for iPad and iPhone. Where IoT will differ is these devices will not connect to the iPhone or iPad with a physical cable but rather via an open standard like Bluetooth LE, WiFi, or something new in the future. The point is, these devices will not connect into Apple’s ecosystem with proprietary ports unique to Apple hardware. Any software platform like Android or Windows can come in and enter this new IoT ecosystem. Apple could, however, allow for unique differentiation and integration giving third parties ways to integrate into iOS in unique ways.

CarPlay I feel is an example of this to a degree. Apple is enabling automobile manufacturers to take a solution packaged for them that works uniquely with iOS. What is rumored about Apple’s smart home strategy sounds like it could be similar. Tech.pinions columnist Jan Dawson shared his thoughts on Apple and the smart home and it is worth a read.

The point worth thinking about here is how the broader connected device ecosystem will grow beyond Apple’s control. They will control computing devices that sit in the center of these connected experiences but will have to also work well, and work uniquely, with third parties as well those who will build the connected home, car, mall, city, etc.

In a very strange way, Apple competing in the Internet of Things will require the support and shared vision of many third party partners in a way they have not had to deal with before. I believe they can do this through unique hooks to iOS but we will see if this or some other path is the one they take.

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.

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The Freemium Model May Be Going Away

SugarSync, one of the pioneers of freemium cloud storage, announced today it was ending its free service. From now on,the minimum account will be 60 gigabytes of storage for $7.49 a month or $75 a year. SugarSync had offered a permanently free 5 GB account.

“There are many companies in this space that are giving away free storage, however, most of these companies will not be viable,” SugarSync CEO Mike Grossman said in a statement. “We are already in a solid financial position and this shift will further strengthen our business. Also, this change will allow us to better serve loyal customers and expand our service offerings. ”

SugarSync will continue to offer a 90-day free trial of a 5 GN account or a 60 GB plan free for 30 days.

Unless free accounts generate a high conversion rate to the paid service, free just isn;t a very good business model for businesses not supported by ads. Storage has gotten cheap, but it is not free, and the bandwidth required to move data in and out of storage is even more expensive. Other freemium services, such as Dropbox, which offers a 2 GB free account, are likely feeling similar pressures. (Free services are more likely to persist where they are part of larger offerings with broader monetization goals, such as Google Drive and Microsoft SkyDrive.)

If you use more than one computer with any regularity, SugarSync, which provides many-to-many sync, not just cloud storage, is a terrific service well worth the cost of a paid account. I use it as a complement to Dropbox (and occasionally GoogleDrive and SkyDrive.) I use SugarSync to keep specified directories synced between different systems. I use Dropbox for ad hoc sharing of files among my own systems, and for selective sharing with others, especially for files too big to move by email.