Apple – Page 10 – Tech.pinions

Where Can Intel Find Growth?

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

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

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

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

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

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

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

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

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

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

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

A Deeper Dive on Android and iPhone in China

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

First, Android Context

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

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

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

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

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

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

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

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

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

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

The Danger of the $200 PC

There have been rumors of the return to netbook pricing in the PC market. We believe this could have an irreversible impact on overall PC prices. When we study the PC market, we see a high degree of health in the higher end segments of the market. Companies like Apple and other vendors who have legitimate premium offerings have secured their slice of the PC pie with a sustainable hardware strategy. Our concern on the Windows front is, if the price of Windows PCs drop significantly, those price points will become the “new normals” and eliminate any real chance of premium offerings by other Windows PC vendors. Currently, the ASP of notebooks is approximately $700 and desktops approximately $550. But those high ASPs are because of Apple’s Macs. The ASP of a strictly Windows PC is about $430 which is about as low as a full featured Windows PC has ever been (excluding netbooks). At that price, it is already difficult for many Windows OEMs to make much money on hardware. They are all currently looking for more software, services, and accessories revenue as a point of emphasis.

Competing with Apple is hard enough for vendors in the Windows ecosystem. A significant drop of ASP will likely eliminate any chance of premium offerings by them. There will still be an enthusiast Windows community but that community is already quite small. The build-it-yourself PC community and the hard core PC gaming category, while extremely healthy, are still too small to sustain the ASPs of the entire Windows PC market. So as of right now, this is a look forward forecast of the ASPs of certain categories.

However, given this article I posted a few days ago on low cost tablets, I’m already due to update my outlook for tablet ASPs in 2015. Should the notebook and desktop space truly become a race to the bottom, then I will have to adjust the 2015 ASPs of notebooks and possibly desktops to trend more into the negative than I think is healthy for the category.

Part of the drive to bring down the ASPs of PCs is to kick start the broader upgrade cycle in consumer markets and perhaps compete more with tablets in the entry level PC space (first time PC/tablet buyers). There is some sound logic to this. However, with “good enough” computing established in these markets, the concern would be that nearly the whole market would gravitate to these lower cost PCs and cause a sweeping shift in price points to the lower end where margins will be even further squeezed for the OEMs. Overall, our concern is the destruction of the “value and premium” segments of the market with “good enough” options being offered in the <$400 PC market.

Using my viewpoint of what happens with low cost tablets in consumer markets, I feel it would be smarter if vendors left the bottom to those tablets and focused on features and functions that will remain “valued” by end users. I can see a scenario where consumers start to gravitate to desktops in their homes instead of notebooks. They can use the tablet or their smartphone as their mobile PC and pair it with a desktop for their fixed PC usage. Due to the lengthy refresh rates, our research indicates consumers would spend more on these PCs because they intend to hold onto them because they want to them last longer than previous upgrade cycles. Those who need notebooks because they are traveling or are mobile workers will still utilize and spend on the product because of its value to them from a productivity standpoint. Bottom line, I believe there is still money to be made in PC hardware if Microsoft and the vendors can avoid letting certain players collapse the ASP of the PC category. Should the race to the bottom happen, even those who would pay more because of the intrinsic value the PC provides will no longer have to since they can get the same features as mid and even high end PCs at rock bottom prices.

Eventually, I can see the PC market going one of two ways. Either it becomes a race to the bottom and only a few current vendors are left standing or value can remain in the category. Ultimately, it is up to Microsoft and the Windows OEMs to decide which future they want.

IBM Leads Apple Into the Corporate Market

The last time Apple and IBM did serious business, the companies were fighting over the processors that powered the Macs of the day. IBM had no interest in meeting Apple’s desire for G5 chips for laptops and the end of the quarrel pushed Apple to Intel (and fabulous success for Macs).

Almost a decade later, when Apple has grown far larger than IBM, the company that now mainly sells corporate services is in another partnership with Apple. With the deal revealed in detail on Dec. 10, IBM will be selling iPhones and iPads to its industrial services customers and supplying them with secured, Apple-designed iOS business services.

For Apple, this is largely a payoff of iOS 8. A key step in the operating system was the redesign of the security operating structure. Of course, the attention has been focused on how Apple Pay is structured. But the improved security design can support a broad range of applications, including corporate security desires.

Although Apple acts as though the consumer market is the only thing it really cares about, when it comes to the iPhone and the iPad, the corporate market has looked increasingly attractive. Corporate employees have lots of Apple mobile devices, usually bought on their own (though often snuck into the T&E budget). Apple and IBM are now creating iPhone and iPad-based offerings with IBM corporate services installed.

Secure applications have been difficult to provide for Android since Google has mostly left the development of security features to manufacturers. Samsung has attempted a service called Knox but it has sold poorly and the company is rumored to be hoping Google will take over security in a future Android version. With Android struggling and corporations generally moving away from BlackBerry’s offerings, Apple has a huge advantage.

That gives the Apple-IBM partnership a big opening. The IBM service, called MobileFirst, starts with programs aimed at key industry partners. The travel and transportation offerings include Plan Flight, a fuel expense management program and Passengers+, which provides rebooking, baggage information, and special services in-flight. Advice & Grow provides small business with financial communications, while Trusted Advice allows advisors to get confidential information on customers’ investments even when they are away from their secure office machines. Other initial applications are designed for insurance, government, retail, and telecommunications. Applications for additional industries are coming.

From “frenemies” to full scale partners, the Apple-IBM history has been fascinating to watch. With this latest association, it promises to bring more to the table for both companies and make the rest of the industry take notice.

Apple in 2015

I’ve been getting calls from reporters working on end-of-year pieces looking towards 2015. While I always enjoy these conversations, one problem is only a fraction of what we discuss ever makes it into an article. So I thought I’d do a series of posts for Tech.pinions Insiders on what I see in store for some of the major tech companies in 2015. I’m starting with Apple this week, but I envisage doing similar pieces on Microsoft, Google, Samsung and others in the weeks to come (some may spill into January). In this piece, I’ll focus first on Apple’s newer products and services and then cover some of the more established product and service lines.

Apple Watch – fleshing out details, selling tens of millions

2015 will be the year of the Apple Watch. Announced in September 2014, it will go on sale in “early 2015”. Detailed pricing, market positioning, channels for retail sales and many other details remain unknown and the subject of considerable speculation. These details will emerge in the first few months of 2015 and the rest of the year will be about execution. Specifically, Apple still needs to provide key selling points for the Apple Watch, which the original announcement was short on. I think that’s fine – the keynote represents a sort of teaser trailer along the lines of the Star Wars one which debuted recently. The actual announcement and the ads are the key to positioning the device in the market. But retail channels, which may well include quite a few Apple hasn’t used before in non-tech sectors, will be equally important and interesting. I’d expect tens of millions of sales in 2015, but until we know more details about many of these issues I’m not willing to stick my neck out any more than that for now.

Apple Pay – expanding geographic, retailer and bank reach

I’ve written a fair bit here before about Apple Pay and the best summary of my view is Apple Pay will be a slow burn success, as its limited retailer, bank, device and geographic reach will make it an occasional use service for the time being. 2015 will be about expanding the reach of Apple Pay in those four areas. Late in the year, we’ll get more devices that will support it, but earlier in 2015 the key priorities must be increasing retailer, financial institution and geographic reach. The payment card industry in the US is somewhat unique (and backward), and one of the critical questions is whether card issuers in Europe and elsewhere are as eager to get onboard as some US ones have, given lower levels of fraud and fees. It’s possible Apple Pay will remain a mostly US service, which will be somewhat unusual for Apple, but it will be most transformative if it finds success overseas as well.

Beats – building iTunes 2.0

Apple’s Beats acquisition has long since closed, but it likely won’t be until 2015 we see what the company plans to do with the assets it acquired. It’s fairly clear to me the Beats music service technology will eventually be repackaged and rebranded and form part of what I think of as Apple’s iTunes 2.0 relaunch for music. From various public statements by musicians, it appears Apple is creating a new kind of music service; more artist friendly and beyond the music itself. The Beats acquisition was clearly part of making that happen. The timing is uncertain, but I’d guess it’ll be in the first quarter of 2015 we’ll start to see what Apple has in store in music. The other side of all this, of course, is what Apple does with the Beats headphone brand. We’ve already seen the first Apple-owned Beats headphones, but there were no signals regarding a new direction. The most interesting things to me are what Apple does beyond the current Beats brand and segment, if anything, and how Apple builds value with iPhone-specific functionality, such as using the Lightning port rather than the headphone jack as a connector.

HomeKit – 2015 is the year, after a very quiet 2014

Though HomeKit got some good stage time at WWDC, Apple has been quiet about it since. It didn’t get any coverage at all at the iPhone launch event in September and, aside from a couple of forward-looking announcements from hardware vendors, there’s been little activity from third parties either. The main reason was Apple didn’t provide the necessary components in terms of chips until November 2014, so 2015 will also be the year when smart home devices supporting HomeKit and Siri integration begin to show up in large numbers (we might see one or two launch before the end of 2014). I’m very curious to see whether Apple starts to make more of HomeKit as this happens, too – it’s been oddly quiet until now. The other interesting question is will Apple makes its own HomeKit hardware and whether it will be a hub or other function-specific devices for the home. The Apple TV might be a trojan horse for the hub functionality, but there have been signs Apple might be working on its own separate hardware, too. As it stands, HomeKit is mostly about adding value to the Apple ecosystem, but a direct push into hardware would have the potential to drive significant revenue too.

iPhone – massive growth, but hard to follow?

The iPhone should see massive growth in 2015. All the indications from Q3 reported results and early signals from third parties suggest it will have a huge end of year and this should easily spill over into 2015, especially given the supply constraints around the iPhone 6 Plus in particular. 2015 will easily be the iPhone’s biggest year ever and will likely drive a significant increase in share at the premium end of the market, at the expense of Android as a platform and Samsung as an OEM. The biggest question for me is what competitive levers Apple has still to pull in 2015 when it launches the successors to the iPhone 6 and 6 Plus. Can it possibly deliver as big a bump in 2015-2016 as it did in 2014-2015? That’s a nice problem to have, of course!

iPad – the year we discover its future

The iPad’s stagnating sales have been a topic of endless discussion with multiple pieces from me and others here on Tech.pinions and elsewhere. To my mind, 2015 will be the year we find out whether my thesis about upgrade cycles is true or not – it’s the five year anniversary of the product, and the four year anniversary of the big ramp in sales that happened with the iPad 2. If my thesis is correct, we should see a ramp in sales in 2015, as upgrade rates increase and new sales continue to be strong. If that happens, I foresee a good long term picture for the iPad as a growth driver for Apple. If it doesn’t, it’s hard to see how the iPad will grow significantly beyond its current size as a business for Apple. It’s an enviable business, to be sure. One interesting wrinkle is the possibility of a larger-screened iPad, perhaps at 12 inches, potentially with some sort of split-screen multitasking. I don’t see it enormously increasing the addressable market, but it might be a way to get sales growing again even if upgrade rates remain relatively low.

Mac – after a surprisingly good 2014, what next?

The Mac surprised many observers in 2014, especially in Q3, with its strong growth and sales performance. Apple’s share of the PC market continues to grow and it’s one of only two major suppliers (along with Lenovo) whose fortunes seem to be consistently improving. As others exit the PC market, Apple is bucking the trend with high ASPs and growing sales. All the drivers of the Mac’s successful 2014 are still in place, and I’d expect it to continue to grow its share of the PC market in 2015, which should put it on solid footing going forward. But it’s a stagnating and likely declining market as a whole, and it’s unclear to me how long the Mac can keep growing in that overall environment.

iPod – RIP, 2001-2015?

Sales of the iPod continue to drop rapidly, though Apple continues to sell several million every quarter. As the iPad becomes the device of choice for many (especially kids) who would have once asked Santa for an iPod touch, and as hand-me-down iPhones meet the needs of many others, it’s unclear how long the iPod line will go on. With no significant upgrade in quite some time, and with the iPod Classic finally killed off in 2014, how much longer will the iPod stick around as a product? I think it’s quite possible it will finally be dead in 2015.

iTunes and the App Store in transition

I’ve already talked about the potential for new music services from Apple using the Beats technology. But of course, iTunes is far more than that, especially if you include the App Store in the conversation. Music sales have been declining for some time now and I suspect video sales haven’t been growing as rapidly either, as subscription and streaming content become the preferred methods of consumption for many users across both music and video. The App Store is the shining light here, driving overall growth and offsetting the decline in traditional content revenues. That growth will likely continue, driven by both the ever-expanding base of Apple customers and by growth in in-app purchases, which appear to be driving up revenue per app download after several years of declines. I think so many of us want for Apple to disrupt TV in the way it has other industries, but I’m increasingly skeptical it has the skill set and will to do so. But unless it moves to some kind of subscription video service, I would expect its video sales and rentals to start to stagnate soon too, if they haven’t already. I’m also still hugely skeptical that Apple will ever make a TV set.

2015: Tim Cook’s year

In summary, I think 2015 is best seen as the first year when products overseen by Tim Cook will really drive Apple’s revenues and growth. It’ll be a great test of his leadership and his ability to continue Steve Jobs’ legacy of creating great products which not only delight customers but drive significant growth and profits for Apple as a company. And of course, Tim Cook has hinted there are products in the works which people aren’t even speculating about, so there could still be some significant surprises coming in 2015!

How Apple can get to a Trillion Dollar Valuation

For the first time in Apple’s history, its market cap reached approx $750 billion dollars recently. Articles have come out stating Apple could become the first trillion dollar business on the planet. It is hard to believe a company so close to bankruptcy in 1997 has come back to become one of the largest companies in the world with a brand recognized everywhere and a market cap of over $750 billion. Thanks to the brilliance of Steve Jobs and his iPod, iMac, iPhone and iPad, Apple has reinvented itself from the computer company it was in its early existence to the powerhouse consumer electronics company it is today.

However, I wonder if they can achieve another $250 billion of market cap with just the products they have on the market today. iPods are slowing dying as iPhones have literally taken their place as the go to music player. The good news is the market for smartphones is still growing and will continue to be a growth market for at least another three years, if not longer. Also, Apple seems to have won the higher end of the smartphone market which carries very good margins, thus allowing the product to drive the core of profits for some time. iPads, while still an important product, have seen some market decline given the strong competition for tablets all over the world. The good news is Apple is still selling a lot of iPads with good margins and, even if it is not a growing business, it is a relatively stable one. Another bright spot is the Mac line of computers. iMacs are still selling very well and demand for Apple’s MacBook Pro and MacBook Air are at all time highs. In fact, during the last quarter, Apple sold five million Macs compared to only four million in the same quarter in 2013. These too have great margins and add to Apple’s bottom line.

There are four other products in the wings I believe will need to be successful if they are to ever top that trillion dollar market cap. The first is a product that used to be a hobby but is now quite a serious business. Apple has sold over 2 million Apple TVs and Steve Jobs made clear to his biographer Apple still has major plans for TV in the future. While I don’t think Apple will do an actual television, I do think they are going to drive a lot more innovation with the Apple TV external box and link it with a newer, immersive, and interactive UI and content deals that could reinvent the TV experience. If they get this right, it could add a significant new revenue stream in the future.

They also have the Apple Watch, ready for market in early 2015. While it is too early to tell if this will be a big hit, I have watched Apple enter new markets and make big waves and I have a sneaking suspicion this product may be another one that captures the imagination of a lot of people, especially those committed to the Apple ecosystem. We will all have a better handle on this when they finally ship in 2015 but I do expect it to be another financial success for the company that could add a significant amount of revenue and get them closer to this trillion dollar valuation.

There is one other area slightly related to the Apple Watch. I believe this will be Apple’s foray into the health care mediation system. When using their health app and the Apple Watch, Apple will, with a user’s permission, collect health related data that will be useful for the user and other health monitoring devices that dump data into Apple’s health app. That data could also be useful to a person’s health provider. I believe, eventually, Apple will become a broker of that health data between a patient and their health providers. Of course, they will need the permission of the users to give data to their doctor but if it helps the doctor monitor health conditions and can be used to keep them on track, I think a lot of people would be willing to let Apple send their health data to health care providers. That data will become very important to these providers and they will be willing to pay for it as part of an Apple driven mediation system. If this works as I think, it could eventually become one of Apple’s biggest cash cows.

There is one other initiative that could really be a big winner. Earlier in the year, Apple did a deal with IBM to serve as a partner in enterprise programs that includes dedicated IBM software ported to Macs and IOS and taps into IBM’s direct sales force and service organization. This is a big deal and has serious potential for helping Apple extend their presence in corporate markets. While we have not seen the fruits of their labor yet, we should get a glimpse of how this relationship and strategy will work shortly. Do not underestimate the potential impact of this deal to bring additional profits that would contribute to a trillion dollar valuation.

Combine these other products and their long term potential and it is at least conceivable Apple could, at some point in the next 5 years, become the first trillion dollar company in the world.

Apple’s Huge and Profitable Niche

After reflecting on discussions I had regarding my article on disruption of last week, another train of thought began. I captured the fundamental concept in this Tech.pinions subscriber article called “profitable niches.” As pointed out in the comments on my article, in every market, even heavily commoditized ones, a premium player(s) can always exist. The difference between the premium and the commodity player is one of scale. In examples I used — automotive, food, fashion — the premium player’s total market and overall volume are not that large. Which is why we call them niche players. The word carries with it an assumption they are not a large or majority player. However, thanks to mobile, Apple has blown this assumption apart.

Apple is playing as a niche player. Meaning, they are not the market leader in smartphones and they likely won’t be. However, their niche is gigantic. And if we add up their endpoints in terms of potential market sizes of Macs, iPads, and perhaps even Apple TV (I don’t include Apple Watch yet until it becomes a standalone product that does not depend on the iPhone) then Apple’s user base gets even larger. The sheer scale of personal computing means Apple is a niche player in one of the largest niche markets we have ever seen. More importantly, their position is one of influence, even though they are not the market share leader, they are the market leader.

But there are still interesting dynamics of this reality to tease out. Not only does Apple have a large, profitable niche, they also have very loyal customers.

Marc Andreessen tweeted:

He followed up a few tweets later, saying he knows many don’t agree with this point but it is his belief. The tweet caused me to reflect on something Ben Thompson wrote earlier today about Apple’s focus on being the best. While I don’t necessarily agree entirely with Marc’s tweet, I do believe there is a percentage, no idea how large, of Apple’s existing base for which that may be true. Apple has a huge loyal fan base. How big, I’m not certain, but it’s likely there are some on the fringe when it comes to the technology adoption curve for whom Apple still must compete for them each product cycle, a small percent who could be swayed by good enough. In the US, carrier subsidies help level the playing field when it comes to the cost of a device. But in other markets people pay upwards of $600 for Apple’s products because they feel they truly are the best.

What is interesting about Marc’s tweet is that, even if it were universally true, I would not be worried about Apple. Primarily because I believe Apple sees themselves or last year’s Apple as this year’s primary competitor. Last year’s product is the bar to beat. Apple’s culture, people, process, and priorities all validate their commitment to being the best in the areas they can choose. That means Apple’s commitment to being the best would be unchanged whether their user base was 1 million or 1 billion. Apple’s customers know Apple is moving forward and not backwards. That next year’s product will be better than this year’s product. That even if they aren’t perfect in areas, like the cloud, they will make progress.

Apple’s niche is huge. It sounds silly and contradictory but that is the fascinating point. Looking at niche players across the board, you realize they are hard to disrupt. Usually because their values and priorities reflect that of a user base with similar values and priorities. What’s unique is how big this niche is for Apple and, more importantly, how profitable and influential.

For reference, and because it is a good read, here is the full tweet storm by Marc Andreessen @pmarca

Takeaways From IBM’s Black Friday E-Commerce Report

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

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

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

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

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

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

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

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

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

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

Should Apple reinvent the iPod?

One of the most beloved tech toys I have is my prized iPod Classic with a hard drive that holds over 10,000 songs and still has 30 gigabytes of free space to use as extra storage. In fact, iPods in general have had a wonderful impact on my travel and exercise life. They have been faithful companions since the day they came out.

Apple has now “retired” the iPod Classic. They can no longer buy the parts to make them and, while flash based ultra thin iPod’s are still sold in their stores, it is no longer the cash cow is was before the iPhone came out.

Indeed, the iPhone has pretty much replaced the iPod, especially for those who have iPhones. The same goes for competing smartphones–all are now capable of playing back music and videos. You would think there would be no need for iPods anymore. Which is why Apple has done very little with the iPod in terms of new versions in the last 18 months.

Yet, I suspect there is a good number of people who still use iPods while exercising or traveling, especially if they have smartphones whose battery life is challenged.

That is one key reason I still use an iPod, especially before I got much better battery life on my iPhone 6 Plus. On long trips, I would pull out my iPod Classic, holding my entire music, audiobook and music video library and use it for well over 12 hours continually with no problem.

There is probably no reason to innovate on the current iPod design, but perhaps there is another platform in which an integrated iPod could be of interest to some people.

At the last CES, a smart headphone was introduced known as the Muzik headphones. The Muzik headphone has touch controls for high definition audio, voice command, long range wireless capabilities, motion sensors, one touch phone answering, and social sharing. All these are controlled directly from the side of the headset. It is designed to be connected wirelessly to your smartphone.

The company has created a software development kit (SDK) so developers can create apps for the platform. They say “it can send updates, applications, and new features to listeners as they are released — allowing the product to evolve over time, beyond the capabilities of traditional headphones”.

What if Apple created an iPod in a Beats headset and gave it touch and voice commands so a user could have a significant amount of their personal music content in the headset itself and not have to rely on a connection to their smartphone? As a traveler who uses wired headphones connected to my iPhone once in a while, I would love to not run the battery down on the iPhone on a long plane flight yet still have the ability to listen to hours of music. Same goes for when I do my two hour walk on the weekends. If my headset had the iPod built in, I could just touch it or give it voice commands to search for different music, change the volume, etc. This would add an interesting dimension to these particular activities.

And if the Beats headset also delivered extremely high quality audio with an integrated iPod inside it, Apple could deliver a new iPod design I think would garner a lot of interest from people who want to have their music on a local device and not have to always carry their smartphone with them too.

I have no clue if Apple is doing anything like this but it seems to me an iPod still has value. If they wanted to still innovate on the iPod platform, integrating it into a Beats headset could give them another interesting product that connects people and their music in a new way.

How Apple Forces New Technology to Improve the Future

Apple’s decisions on redesign of the technology of just about everything are an endless source of criticism, especially by those who have a right to tinker with their devices. History suggests Apple has the sense to choose the right technology for the future.

As GlennC777 said in a comment on my article on Apple Pay, “Apple Makes Old Security Business Lead to the Future,” Apple’s decisions have been both mistrusted and missjudged:

When the Mac was first introduced I was enough into computers to be a young reader of Byte magazine, and I remember the reader letters complaining that the too-simple “pointing” and “pictures” interface was a backwards step that would hobble “real” computer users. A real computer was operated by command line, and if you weren’t willing to go to the considerable trouble of learning how to use it then you probably weren’t worthy of the privilege. With binary blood running through my veins I was very much one of these people at the time, and very much wrong.

Let’s take a look at some history.

USB: The Universal Serial Bus was introduced in 1996. Intel quickly started doing everything it could to force the USB port onto the motherboard of PCs. Those ports sat there idle since most people could not figure out what to do with them. Then Steve Jobs came out with the original iMac. It did not just add USB; it eliminated all of the ports for mice, keyboards, printers, and everything else. In time, Windows PCs that came equipped with other ports were using nothing but USB.

Floppy drive: Back in the Apple ][ days, the Apple beat out some competitors PCs by replacing tapes with the floppy drive. Later, Apple replaced the 5.25 inch floppy with the 3 inch hard-covered floppy on the Macintosh and later Apple ][. But the iMac got rid of the floppy all together. The CD had already replaced the floppy for software distribution and, with relatively large (for the time) hard drives, the introduction of network storage, and USB thumb drives it eliminated the need for floppies. Eventually, Windows began to see the advantage of eliminating drives from laptops, though they lingered on desktops for a very long time.

CD/DVD: By 2011, Apple decided users didn’t need the CD/DVD drive on both the iMac and the MacBook. The network had replaced disks for software delivery, iTunes had replaced DVDs and CDs for video and music delivery, the cloud was there for storage. The desire to shrink the size of laptops led Windows devices to accept the no-drive design relatively quickly.

Wi-Fi: In the early 1990s, wireless networking was used mostly in industrial communication, but in 1998 Apple worked with Lucent (now Alcatel Lucent) to take advantage of the faster and less expensive wireless networking. It wasn’t even named Wi-Fi until 1999, but it gained popularity quickly.

Modems: Macs got internal modems in 1984 but they disappeared in 2008. The availability of the network in homes, offices, and hotels–Wi-Fi everywhere–has eliminated the need for a dial up connection. Modems hung on in many Windows computers for a long time, especially those intended for business use, but have now disappeared. A built in radio for wireless data on a phone network was never offered on the MacBook. It was widely offered as an option in commercial laptops, though it never became very popular.

Phone keyboard: The Palm Treo and the BlackBerry, the most successful early text and later internet content phones, depended on keyboards. The introduction of the screen-only iPhone in 2007 attracted a lot of criticism because of the decision to eliminate the hard button keyboard. The BlackBerry continued to dominate the market and the first Android phone featured a slide out keyboard. But it didn’t take long for the iPhone to nearly kill the BlackBerry and all but eliminate keyboard Android phones.

Interestingly, Apple’s success generally did not come on the invention of these components. Apple supported Firewire, which it designed with Texas Instruments, as an alternative to USB. But it was more complex and more expensive, and has lived on only as a super high speed connector. Even LG had brought out the touch keyboard Prada ahead of the iPhone. Wi-Fi technology was probably the only technology where Apple deserves credit for being the first and even here it is not responsible for the invention.

Apple’s actions leverage the company’s ability to see the consumers’ use of new technology before the competition and, almost as important, its willingness to get rid of technology as better becomes available. It has been a key to Apple’s success, with Apple Pay just the latest such innovation.

Data: The iPhone 6 vs. the 6 Plus in China

Internal data I have access to from Baidu in China allows me to see a picture of what is happening at ground level in terms of daily active users by device on Baidu’s network/app distribution platform. Baidu is the largest search engine in China both by use and revenue and their app distribution platform represents over 50% of the app distribution share and is growing. This data comes from analytics of devices that are accessing Baidu’s app platforms, not their search engine. They point out this data covers over 600m users.

There are a number of key takeaways from the most recent October data that relate to the iPhone 6, the 6 Plus, and the iPhone 5c.

First let’s look at the chart:

When the iPhone went on sale in China at the end of September, it showed up on Baidu’s network at 0.9% of active use of all iOS devices. The 6 Plus didn’t show up at all. At the end of October, the iPhone 6 registered 2.6% of all active iOS devices and the 6 Plus 1%. Obviously, this suggests there are more iPhone 6s being sold in China than the 6 Plus–for now. Speaking with friends and colleagues in the region, it appears the shortage of availability of the iPhone 6 Plus is one of the major factors for this. I had several of them tell me customers were waiting more than a month, sometimes two, just to get their hands on the 6 Plus they ordered.

Knowing what I know about the region, I assume this will balance itself out and the anticipated 50/50 to 60/40 6 Plus to 6 split in China mix will play out. While I can’t quite use this data to interpret sales volume for these iPhones in October, I can use other means to estimate it in the coming months.

While these data points are interesting and I will continue updating this chart every few months, the uptick of the iPhone 5c may be the most interesting story line. As you can see from the chart, the iPhone 5c maintained a relatively steady flat line. But over the past few months the iPhone 5c has been gaining share in China. This seems to be counter to many of the assumptions of China as only a super premium market for Apple. Many were quick to point out the 5c was not targeted at China and thus expectations for it were tempered. However, things may be starting to change for the 5c and I believe there are a few reasons why.

One thing you realize when you study Chinese urban, and in particular, youth culture, is sometimes certain things/trends take a little while to make an impact in China. Many trends which start out global do not hit China and go big overnight. When I talked to some fellow researchers in China about this, a point was made that for the youth culture (who we believe is the source of the uptick in 5c sales) certain trends need to be established as culturally cool before they buy into it. It seems this is the common wisdom on the ground in China with regards to the 5c. It was not viewed as cool initially, since it was the “cheaper” iPhone but influences from metropolitan areas like Hong Kong have helped change the initial perception and it has become acceptible as an “entry level” iPhone. More succinctly, the 5c took a little while to be viewed as culturally acceptable since it is/was not the premiere iPhone.

If you read what I wrote about Xiaomi and Apple, you will recall I said Xiaomi’s phones are viewed as a cultural symbol for a young person who is upwardly mobile or moving up in society. From some dynamics I can see around the 5c, it seems it is also perceived now in a similar light as Xiaomi’s phones as a cultural status symbol. It helps the iPhone 5c is now also much closer in price to Xiaomi’s phones, especially the Mi4, with the heavy discounts coming to the later generation device. Given the iPhone 5c has a limited shelf life and no similar product was released last year, this dynamic may not last forever. However, I have a feeling once the iPhone 7 line come out and the iPhone 6 and 6 Plus are discounted in the region, we will likely see even greater penetration of iPhones in the exact same markets Xiaomi is looking to capitalize on. But, for the time being, it is interesting to see the dynamic of the 5c starting to play into the middle smartphone price tier of the Chinese market where Xiaomi has and continues to be quite strong.

There is one more important data point for the iPhone in China this report tells us. It relates to jailbroken iPhones. The number of jailbroken iPhones has been steadily decreasing. This is part of the reason why UnionPay being supported is a big deal. As I studied behavior of jailbroken iPhone users in China, the heaviest of whom were on the iPhone 4 and 4s, it became clear those who jailbroke their devices were not investing in Apple’s ecosystem. Which would have been a concern to Apple’s overall China strategy.

The Baidu data shows us since the 5s and 5c, the number of jailbroken devices is less than 10% of those devices, and less than 1% on the current iPhone 6 and 6 Plus models. Meaning, more and more iPhone consumers are not jailbreaking their devices and thus investing, to some degree, in Apple’s ecosystem. UnionPay helps this and both are very positive signs for Apple’s ecosystem story.

How Worried Should Apple be about Xiaomi?

I’ve been asked this question often and feel there is a great deal of misunderstanding regarding the dynamics and strategies of the two companies. I was quick to point out during Xiaomi’s rise that they pose more of a threat to Samsung and this has proven to be true. Samsung’s issues are a combined double whammy from both Apple on the premium end and Xiaomi in the mid-to-low end. Xiaomi is on my radar first and foremost because they are building a brand. My belief is a good brand is one of the hardest things to build globally but also one of the most sustainable efforts a company can engage in, especially in the worldwide consumer market. Xiaomi is a threat for this reason. But to believe Xiaomi disrupts or threatens Apple is an incorrect assumption. Let’s look at a few data points to highlight this.

In a report from Morgan Stanley where their analysts model the iPhone 6 and 6 Plus upside, several charts from their survey data are insightful. First there is this one:

This chart highlights repurchase intent by brand. Notice which companies decreased in “brand repurchase intent” — Samsung and Lenovo. This chart is telling of consumer sentiment more than anything else. Apple and Xiaomi remain “sticky”, while the rise of HTC and Huawei show many global consumers willing to look at new options in the Android hardware landscape.

Another chart from the survey is insightful of the dynamic between Apple and Xiaomi.

Owners of the specific devices and brands that were interested in the new iPhones were plotted. Xiaomi was included due to the lack of intent to switch from the Xiaomi brand to the new iPhones. This is a notable data point, but it is one that does not tell the whole story.

A report in the Financial Times last week had a very specific sentence that highlights an incredibly important distinction between how Chinese consumers view Apple and Xiaomi respectively.

As one Beijing-based entrepreneur puts it, “the tech grad who has worked at Baidu as an engineer for two years, that’s their target gatekeeper and prestige consumer. In China’s tier two and three cities, that is someone people look up to. People want to see what kind of phone such a guy is using.”

Creating an aspirational brand at the low end of the income scale is an accomplishment, and it is difficult to replicate. Xiaomi’s products are seen as a cross between a commodity and a luxury item, although one techie notes that while many of his peers use its phones “eventually they end up making more money and buy Apple”.

Several key takeaways from this statement back up a lot of the feedback we hear from China. Xiaomi is doing as good a job as any of creating a premium brand for the low-to-mid range of the smartphone market. Young Chinese consumers who are upwardly mobile are choosing Xiaomi as their starting point. This has an effect on the aspirational middle class at the early stages of their mobility. They are not the phone for the poor but also not the phone for the rich. The previous quote makes this clear. Xiaomi is an aspirational brand for those on their way up. Apple is their ultimate aspirational brand once they have “made it”.

External appearances and what that says about your status is central in China. A Xiaomi phone says, “I’m not at the bottom. I’m on my way up”. An iPhone says “I’ve made it.” This is a powerful and important distinction to understand at a psychological level about Chinese consumers.

Xiaomi is the Gateway for Apple

The more I study these dynamics, the more I am convinced Xiaomi is paving the way in China for Apple. I say this for a few reasons. The first is because what Xiaomi has copied from Apple is more than just hardware and software UI. They have actually copied their ecosystem. MiCloud is, in concept, just like iCloud. Store images, documents, and more in the cloud and access them from any browser. They have their own app store, messenger, TV box and interface, and more. Many of the things about Xiaomi’s ecosystem beyond hardware and software are similar to Apple’s. They are providing the Apple ecosystem but with a lower cost of entry.

At first I believed this would be a challenge to Apple but then realized it is good for Apple. Xiaomi is grooming customers to understand the value of an ecosystem with multiple touch points. Customers are getting content across a number of different screens and seeing the convenience of the multi-screen era. This is new in China and nonexistent in other emerging markets for now. Xiaomi is giving low end and mid-tier consumers a small taste of the Apple ecosystem but without the significant lock in.

Obviously, for many who can’t afford to move up or get Apple hardware, the Xiaomi ecosystem will suffice. But in China specifically, the transition of Xiaomi customers to the Apple ecosystem will increasingly become attractive due to the Chinese consumer psychology. Many Xiaomi customers may start in their ecosystem but many will also not stay there.

This “moving up” mentality of consumers is exactly what Apple hopes, I believe. Their strategy is to play at the premium tier and hope that, as emerging market consumers mature from their first device and begin to refine their needs, wants, and desires with technology, over time they will consider Apple’s full solution.

In China, I believe Xiaomi is unknowingly paving the way for their customers and leading more and more of them to Apple’s door. Those who believe Apple should be worried about Xiaomi miss the point that Xiaomi should be worried about Apple, at least in China. This is a story line I will maintain throughout 2015.

Apple Accepts UnionPay: A Huge Step for Their Ecosystem in China

Apple has just announced they have added UnionPay support as a payment option for customers in China for purchases in the iTunes App Store. This is a big deal. There are dynamics at play with regard to the China commerce market and particularly around e-commerce trends I will get into for our subscribers when I do a global e-commerce update before the end of the year. Several years ago, I began studying why there were so many jailbroken iPhones in China. It turns out apps were the answer. To use Apple’s app store, even to download free apps, you have to have a supported payment method like a credit card. While Apple in China accepts many global credit cards, there is a card they did not accept and it is by far the most dominant offline payment card method in China — UnionPay.

From Apple’s press release, Eddy Cue offered the following statement:

“The ability to buy apps and make purchases using UnionPay cards has been one of the most requested features from our customers in China,” said Eddy Cue, Apple’s senior vice president of Internet Software and Services. “China is already our second largest market for app downloads, and now we’re providing users with an incredibly convenient way to purchase their favorite apps with just one-tap.”

UnionPay is so dominant an offline payment method in China it is common knowledge to global retailers that, to attract Chinese consumers, accepting UnionPay is essential. This move opens the door to Apple’s ecosystem in China in ways that were a huge roadblock in the past. Even though Apple has a significant number of extremely high end users in China and who are likely have a credit card there is, thanks to the secondhand market, probably upwards of 50m or more users who are more likely to have a UnionPay debit or credit card over anything else. I strongly believe there was a significant number of iPhone users in China who were not investing in Apple’s software or services ecosystem for this very reason.

UnionPay is also a member of the EMVCo which means the foundation for ApplePay in China is currently being laid.

There is always the question of how much software the Chinese actually pay for. We know from Xiaomi’s ecosystem their revenue comes from hardware not software and, in all likelihood, their software revenue-per-user is less than $10. However, Apple has an entirely different kind of customer base than Xiaomi — one that does and can spend. For them, UnionPay opens the door for Apple to generate more revenue from apps and services in the greater China region. This is also a boon for developers who now have a viable way to monetize their apps in China as well.

The big question will still remain around AliPay. Remember that AliPay is the leader in e-commerce in China where UnionPay is the dominant offline purchase method. The three largest online payment methods are AliPay, Tenpay, and UnionPay in that order. AliPay is likely next on Apple’s list as doing so aligns nicely with Apple’s focus and execution in China.

Overall this is another key step for Apple and their ecosystem in China. Hopefully over the next few quarters we will get data to help us quantify the impact of this deal.

BlackBerry and Samsung: Will a security partnership help either company?

Yesterday, Blackberry held an event where one of their announcements was a deal with Samsung to help add a deeper layer of security to Samsung/KNOX devices. Given the criticism of KNOX’s security, questions surrounding its integrity aren’t surprising. In my view, it’s a recognition/admission that Samsung needed help in the security arena if they wanted to be viewed as a valid player in more secure enterprise accounts.

I view this deal more as a necessity for Samsung than for Blackberry. Blackberry’s BES 12 operating system already supports Android in general, along with iOS and Windows Phone. But Android at large continues to have a negative opinion held by many IT administrators and since Samsung is hands down the leading Android vendor in the enterprise, this view carries over to Samsung to a degree. This move could help Samsung fill the void in their offerings, assuming Blackberry is successful in growing their software and services accounts of BES 12 over the next year.

While BES 12 is a cross-platform enterprise mobility management product, iOS is still standing in Blackberry’s way. iOS continues to increase its dominance in many of the key accounts where Blackberry’s value adds are relevant. In fact, I have heard from many IT managers that more and more groups inside their enterprise are using or being deployed only iOS devices for their teams. For teams where heightened security is more of a need, this is happening even more frequently. If this trend continues then it raises the question of the need for cross-platform, outside of a very general solution to cover all employees which can come from many different providers.

Blackberry is at least moving in the right direction with BES 12. By bringing Samsung along for the ride, it gives them a partner they can have deeper integration with in the hopes a higher degree of cross-platform security is needed within a specific group or company function.

As both RIM and Samsung pointed out in the release, it is about choice. Ultimately, that is the angle they hope to exploit.

The Idiocy of CVS and Rite Aid

By now you have probably heard CVS and Rite Aid have disabled their NFC radios in check out terminals in order to block Apple Pay and Google Wallet. The reason is they, along with Walmart and about 45 other merchants, are working to create a competitor called CurrentC that eliminates their paying a fee to the credit card companies and gives them the ability to track what you buy. This so they can send you ads and follow up on offers you might be interested in based on what you have bought in the past. They already have loyalty card programs that do this but many don’t use these loyalty cards and therefore the retailers have no clue what a person bought. With CurrentC, they get everyone to tell them what they purchased so they can target everyone with ads and offers.

From what I hear, CurrentC does not work well and, while it may be good for the retailers, it most likely will anger many customers if they try to push this on them. The concept of tracking what a person buys has not worked well for Google Wallet. Google Wallet also tracks what you buy and the credit card companies are obligated to send that data back to Google so Google can then target you with contextual ads. For example, if I bought a lawn mower at Home Depot, Google wants to know so they can send me ads about lawn fertilizer, leaf blowers, etc. I spoke to a couple of credit card companies who did not want to support Google Wallet because they did not want to be the middle man sending private data back to Google so Google could target their customers.

This is one of the reasons they don’t like Apple Pay. Apple does not share what a person has bought with the retailers and only uses a token from the banks to create the transaction. Of course, the merchant can track what they bought through their terminals but they have no way to target customers with ads if they don’t have personal information in their database to target after the sale.

What irks me the most about this is, from what I know of retail, the goal is for me to buy stuff from them and for them to take my money. They should care less about how they get my dollars. Their reason to exist is to serve the customer and take my hard earned cash. Putting up barriers to taking my money is idiotic. Now, I have to admit, the root of my thinking lies in the fact so many times when I go into a store there are long lines of people waiting to check out because they don’t have enough cashiers. When this happens, I always ask myself, “Why in the world don’t they have more people taking my money and servicing me and others in a timely fashion!”

I also admit I am spoiled by Apple. I can walk into an Apple store, pick up what I want, take it to any of their services reps who then use a handheld scanner to take my credit card and I am out the door in minutes. Now, with Apple Pay, that experience will be even faster.

The backlash against CVS and Rite Aid is pretty strong. From what I have read, CVS has conveniently not commented on this and Rite Aid’s official position is they continue to review options on the way people can pay. All Walmart has to add is CurrentC is in the best interest of the customer. Really? As a consumer, I am already bombarded by ads from Google and others and am not inclined to now have CVS, Rite Aid and even Walmart join in the fray. That is why what Apple is doing is so important and is the better business model when it comes to the consumer. They protect my privacy and keep me from being besieged by merchants who could care less about my privacy and only want to bombard me with ads.

I understand the need for ads and, in fact, there are some ads I want. I happen to be an avid traveler, foodie and am very interested in scuba diving gear. Ads related to this get my attention. However, as I was researching this column I decided to check how many ads I get in email and via unsolicited ways each day and found out that, on average, I get about 120 ads I have no interest in. If I used CurrentC I would get even more.

Rob Pegoraro over at Yahoo has written a great piece — “Why Some Stores Won’t take Apple Pay and how to Punish Them“. It is a good read and gives even more details on how CurrentC works and why these retailers want consumers to use it.

CurrentC is only in beta now and won’t actually launch until 2015. On a personal level I would never use CurrentC and if I should have to buy something from these retailers I would just use a credit card with the highest transaction fees. I also suspect a lot of people will not use CurrentC either when they realize you have to give them your social security number to even sign up. These retailers need to wake up and understand they should not dictate how people pay them. Their goal is to take my money and make it easy for a consumer to do it in any reasonable way a transaction can take place. If not, they can expect a backlash from customers and they would deserve it.

Google’s Ads: Defense or Offense?

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

North American Advertising

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

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

India

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

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

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

Why Apple Pay Will Win

When Apple announced Apple Pay as part of the iPhone 6 and 6 Plus, it failed to tell consumers something it clearly knew: Many retailers would prevent iPhone owners from using Apple Pay for quick and simple payments. For the time being, a lot of retailers, especially big ones such as Walmart and Best Buy, will reject Apple Pay. But in the end, Apple is likely to win.

Apple is, in fact, a player caught in the middle of a massive fight over new technology between banks and some big retailers. These retailers have invested heavily in Merchant Customer Exchange, or MCX, and a consumer technology called CurrentC. Banks, which have invested a lot of money over the years in credit card technology, seem OK to let Apple (and the so far not terribly successful Google Wallet) do the work.

The biggest advantage for MCX is a promise to support “new and old” iPhones and Androids, whereas Apple Pay is limited to the iPhone 6 and 6 Plus. But Apple has a number of advantages of its own. The most important is Apple Pay is out there working now and will run through retailers’ existing NFC readers. CurrentC requires the phone to give information through a QR code displayed on the phone screen. It’s not yet known when CurrentC will be available or how well it will work.

So far, Apple Pay seems to be reasonably secure. CurrentC has just been embarrassed by the theft of email addresses from subscribers. It’s not a serious loss and apparently most of the names belong to test accounts, not real customers. But delivering security accounts is an important CurrentC promise and this cannot help it.

The banks and credit card companies, who do not want to see retailers take control of the payment mechanism, were actually smart to trust Apple with the design. In addition to Apple’s security and software design strengths, the arrangement doesn’t leave a place for a lot of fighting over the details, things that seem to be both complicating and slowing the development of CurrentC.

When Apple first launched the iPhone 6, customers discovered retailers with any NFC processor were able to accept Apple Pay transaction. MCX demanded CurrentC participants, including CVS and Rite Aid retailers, cut off Apple Pay, which they promptly did. MCX has made it clear it will enforce contracts prohibiting use of competing payment services on its subscribers, and it’s going to be messy.

The big question for Apple is whether it fundamentally sees Apple Pay as a way to serve iPhone sales or a way to to enhance its role as the manager of sales technology. The latter would require Apple to supply software to manufacturers such as Samsung or to Android and Windows — and neither Samsung nor Android are on good terms with Apple. Still, it provides a new and potentially lucrative market for Apple.

My Apple vs. Samsung Conspiracy Theory

The Samsung issues we are seeing has me thinking about something. It’s a conspiracy theory with zero evidence but something that strategically intrigues me. Tim Cook said in a recent interview with Charlie Rose that Apple could have made a bigger iPhone years ago. So the question is, why didn’t they? The writing was on the wall that larger screens were trending upwards. The pundits read this as Apple’s inability to see market demands and hailed Samsung as the rising star who will dominate forever and ever. Apple must have known that all they needed to do to shut everyone up and crush Samsung in the high end Android camp, where it would really hurt them and Google combined, was to release a larger iPhone. Well, my theory is they did know this and they let Samsung and perhaps even Google have their time in the sun intentionally. In the art of war, this tactic is referred to as a feigned retreat.

A feigned retreat is a military tactic whereby an army will pretend to withdraw or that they have been routed in order to lure an enemy into a position of vulnerability. Feigned retreats are one of the more difficult tactics for an army to undertake, and require well-disciplined soldiers. This is because if the enemy presses into it, undisciplined troops will lose coherence and the rout will become genuine.

Samsung knew the large screen iPhone poised the greatest threat. Yet Apple had no sense of urgency. I recall many conversations with Samsung execs who asked with genuine surprise, “What are they waiting for?” Over time, I heard them convince themselves Apple just must not be interested in larger phones. That the one handed operation conviction will trump where the market is going. All the while Apple was sitting back patiently waiting to employ their thermonuclear war that had less to do with the battlefield of the courts and more to do with the battlefield of the market. Knowing that, once they released larger phones, they would gain share in the premium smartphone segment mostly at the expense of Samsung. From every data point I see globally that is exactly what is happening. In fact, I just read a report from Baidu today in China that highlighted data from a survey they did. Over 40% of current high end Android buyers are planning on switching or strongly considering switching to the iPhone 6 Plus. 21% said they would absolutely plan on buying it and 21% said they would strongly consider buying it. All primarily because of the larger screen.

Obviously this is just a theory. I could poke many holes in it with counterpoints. Perhaps I’m giving Apple too much strategic credit. Nonetheless, I thought I would put it out there to spur some fun conversation.

First Half 2014 Tablet Report

The tablet market is easily the most fascinatingly diverse consumer electronics category I have ever studied. If you have read my commentary on tablets, it is the unique form and function of the product that allows it to be so nuanced. Both the smartphone and the tablet are relatively small pieces of glass. Both are brought to life by their software. However ,with smartphones, we see more clear consistency in application. We don’t see the rich segmentation in smartphones we are seeing in tablets. The tablet is a blank piece of glass that can take on many general computing use cases and unlike the smartphone which has a focus, the tablet can be many things to many people. This, at a root level, is why I believe so many people misunderstand the tablet category.

Without question, the tablet saw explosive initial growth. This was driven primarily by Apple and benefited from a latent PC refresh cycle. Looking back, there are certain market dynamics which contributed to the tablet category allowing it to be rapidly adopted. I would argue those dynamics have changed and, if the tablet was released for the first time in 2014, the product would not have the same initial ramp up. That in no way means the tablet category is dead or, more importantly, not a viable category. It simply highlights the tablet market is still not fully mature.

Coming Back Down to Earth

Many of the charts I’ll be showing are a part of a much larger and in depth PC/Tablet Report I’m publishing through my industry analyst firm Creative Strategies. I’ve broken a few of these charts out to give a high level view of the tablet market.

As you can see, YoY growth of tablets has come back down to earth. For nearly a year, the tablet was experiencing anywhere from 120%-220% growth YoY in certain markets. YoY growth prior to Q1 2013 remained high — 70% up to 135% depending on the quarter. But after Q1 2013, the growth normalized and as you can see, the tablet category is now performing similar to desktops and notebooks.

I’ve included in this chart my estimates for the next few quarters and into 2015. These of course are still subject to revision should we see any major trends which cause us to revise. But as of now, we believe the tablet will still remain in slightly positive, but low, growth territory, where notebooks and desktops remain slightly off going forward. The one caveat to the tablet line could be the effect of large phones on tablet growth. This is the one factor that could cause the tablet line to move closer to the notebook and desktop line.

Another interesting way to slice the same chart is to add Apple’s YoY growth of iPads. I’ve done that in this chart and you can see the impact iPad sales have on the tablet market as a whole.

Tablets vs. Notebooks

A key discussion point for those of us who analyze both the tablet and PC market is what impact tablets are having on PCs? There is little evidence to suggest tablets are replacing PCs but that they are more of an extension to them. Perhaps a good way to understand the tablet vs. the notebook is to think in terms of computer literacy. To use a notebook one has to be PC literate. Users need to know their way around a desktop OS, mouse, and keyboard. Not every person on the planet is computer literate. However, thanks to smartphones, many are touch computing and touch OS literate. This is why the tablet running a mobile OS provides greater upside in our view.

The notebook form factor has taken the mobile PC as far as it can go. At this point, if you need a notebook for your day job, student life, or any other use case, you know it. Therefore, we believe the notebook addressable market is tapped out. However, the tablet represents a form and function of a device that can bring a “computer” to those who did not use one before either in their life or work place. For example, corporate field workers are being given tablets to replace walking around with clip boards on the job site. Tablets, as a work opportunity, bring computing to field workers who did not use a computer in their day job. For these workers, the notebook was simply not mobile enough. Tablets are filling those holes.

We also believe the tablet represents an opportunity for first time PC owners. Those who are not computer literate but looking for more capabilities than their smartphone offers. It is within this view we continue to watch tablets as a category.

The last point to make on this topic is not all tablets are created equal. If we count tablets that are not branded and being sold sub-$80 in many emerging markets, we can probably argue the tablet market may be larger than the PC market. But when we only look at branded tablets from PC or mobile companies, we see the tablet market may be shaped more like the notebook market than the entire PC category.

Here I charted only branded tablets from companies like Apple, Samsung, Lenovo, Asus, etc. You can see the tablet category is comparable to the notebook category when we attempt, as best we can, to compare apples to apples.

Seasonality

While I try to point out there is some comparison to be made to the notebook and branded tablet market, there is one area the tablet category is quite different than the PC market. Tablets, including branded tablets by the vendors I mentioned above, are more seasonal purchases. Part of this has to do with the more consumer focused play of tablets for now, but also their pricing. PCs maintained a fairly high ASP for most of their life. Even now the ASP of PCs is still over $600 while the ASP of the tablet category is just over $300.

As you can see from this chart, the seasonality of tablets is more dramatic than any other class of PC.

Note, the chart looking forward includes my estimates subject to revision depending on the trends we see.

Tablets, in essence, operate similarly to both the notebook and the smartphone. The smartphone category also experiences dramatic seasonality purchases in the calendar Q4, although we are seeing smartphone seasonality slow down as the global audience comes online.

The seasonality of tablets is also visualized when we look at QoQ growth since Q1 2013. While YoY growth, charted earlier, smoothes the tablet line, QoQ growth highlights the seasonality of that growth.

From a marketing standpoint, this chart tells us tablet marketing is best spent in calendar Q4. Bottom line, I don’t see the seasonality of the tablet category going away any time soon.

ASP

I talk a lot about the the white box tablet market. These are non-branded tablets coming from the China tech manufacturing ecosystem and selling for less than $80 on average. Knowing that, when we plot the ASP YoY growth of tablets, it shows how dramatic both the low cost Android push and the white box tablet market have had on tablet ASPs.

As you can see, the tablet market as a whole has been a troublesome one to really make money at for nearly all but Apple. Vendors like Samsung would move many as a promotion through the carrier channel with the purchase of another Samsung smartphone. Other than those two, no one really sells tablets in any meaningful volume.

As we look at ASPs going forward, the line is still trending down. One caveat on tablets would be if we see fewer branded tablets on the market as certain companies get out of the market due to lack of volume or monetization. In which case, the tablet market would be driven by Apple and white-box as far as volume goes.

Conclusion

As many of my charts highlight, much of the key growth in tablets appears to have slowed and, in some cases, disappeared entirely. Revisiting the question of whether or not the tablet category is as large as the PC category seems like a re-kindled debate. From what I see right now the answer is both yes and no. If we combine all tablet sales, including those low cost white box tablets from the China tech manufacturers, then I can see how we sell more tablets than PCs worldwide annually (not necessarily quarterly). However, since not all tablets are created equal, this may not be a metric worth spending more time on.

Comparing branded tablets like the iPad for example, and tracking them against notebook sales does seem like a valid metric worth tracking. But, as a few of my charts point out, it is questionable whether the branded tablet category is bigger than that of PCs. Rather, it seems it is more similar in terms of volume to notebooks than the entire PC category. Given its form factor and use case, this makes sense.

As we track tablet sales and try to articulate the bigger picture of how they fit into computing as well as the broader consumer electronics picture, we strive to look at ways the tablet is extending computing in meaningful ways to those who were not true “computer users” before. We know nearly everyone on the planet will have a smartphone. We have reasonable assumptions the smartphone is not the only computing product they will own. We have strong doubts, based on the point of computer literacy, that the notebook or desktop will be the first computer of choice for current smartphone-only customer. We believe, for this market, the tablet represents the most interesting opportunity as the first large screen computer of choice.

What cannot be overstated in this discussion is the meaningful impact of bringing computers to the masses. It should not matter the shape or manner, only that we deliver on that promise. Each form factor — the desktop, notebook, tablet, and smartphone — will play a role in bringing computing and the internet to the masses. Some form factors will be more affordable than others. Some more capable. Some more portable. No matter their size, shape, or capabilities, we are seeing computing advance in ways we never could have before thanks to the many shapes a personal computer can take in the 21st century.

The Future of Retail

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

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

Payments

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

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

Contextual Shopping

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

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

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

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

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

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

Further Thoughts on the Apple Watch and Smart Watches in General

After spending more time digesting the Apple Watch announcement and talking to dozens of journalists, doing several radio shows, reading many articles, and doing two podcasts, I have some updated thoughts.

If you have read many of my posts on smartwatches, namely this one and this one, you will know it has been a category where the value proposition has not been clear. I’ve been very specific that notifications alone, or at least in their current form, are not entirely useful for your wrist. The value can not and is not in notifications alone. That is the primary value Android Wear has implemented and as myself and many others who have tried every version point out, it is unclear if there is any real value there. So what have we learned from the little bit of information we have on the Apple Watch? Does this product extend the value proposition in any meaningful way? At a high level, Apple brings several assets to the category.

User Interface

As Tim Cook said, in a recent interview with Charlie Rose:

Apple’s goal is to be the best, not necessarily the first, but the best.

This is achieved by their user experience prowess. Apple takes things, related to computing in this case, and simplifies them from the current complex state they are in. If I was to articulate why an average consumer would not like any of the smartwatches I have tried, the word complex would be front and center. For this category to take off, Apple’s user interface and user experience design chops will need to be front and center.

Philosophy

Apple has stated their screen philosophy as “the right screen for the right moment.” This is their argument for not merging iOS with OS X the way Microsoft has with Windows 8. So the interesting question with the Apple Watch becomes, what is the right moment the watch is the right screen for?

Even though I am critical of smartwatches, there are pockets of time where I have found them valuable. All of those instances when I have found value have been when my smartphone is not near me or I’m not in a place where I can use it. For example, when I am at home, I often take my smartphone out of my pocket and leave it on a table near my entry way. With the Android watches, I only get value from the watch when it is in proximity (appox. 15 ft) to my phone. So if I go outside or upstairs or into the kitchen, all my smartwatch is is a watch. Apple’s approach with Wifi will allow the watch to remain smart even when it is not in proximity to my smartphone. The same is true in the car. Personally, I’ve found wrist notifications quite useful during my long commutes. Exercising, bike riding, even walking down the street in the city between meetings, become interesting use cases where arguably a better device than our smartphone could exist to add value to our digital lives.

The right screen for the right moment philosophy is, I think, a key way to think about the role the Apple Watch will play in Apple’s ecosystem. Both for us watching Apple and for Apple itself.

The Evolution of Communication

If we think about it, mobile phones have played a role in the evolution of our communication. Arguably, nothing has had as large an impact on communication as SMS. Hands down, the longest conversations I have with people are when we are face to face. Audibly talking on the phone would come second, but in the digital world, our conversations are shorter and more compact. With SMS, short responses are the norm. Even though a conversation can be engaging or drawn out, it is simply done with shorter messages. Part of me wonders if we are on the cusp of yet another form of mass communication evolution.

Benedict Evans and I discussed this briefly on the Mobile Focused Tech.pinions Podcast, and we mentioned an upcoming iOS app called Popkey. Popkey, in a similar style to Line stickers, is enabling new ways to communicate but through a more visual nature than text. For example, a friend of mine named Ben Thompson who is the author of Stratechery, turned me onto Line. It is one of the seven messaging apps I use, but I only use it to talk to certain people and he is one of them. Our conversation will go along and then I’ll say something like “I’ll email you the details.” He will then follow up with this Line sticker.

This sticker is his way of saying “Ok” or “sounds good” and it is always this same sticker. It has a style and a personalization unique to him. But these stickers are somewhat static. You can create your own but how many people do that? Perhaps Apple’s doodle type method on the screen will enable similar yet even more creative ways for us to interact as a part of this communication evolution.

All of that being said, there are still questions I have that will not be answered even after the Apple Watch is released. For example, what is the replacement cycle? Is there a replacement cycle? Benedict Evans had a great tweet the other day that said, “watches replace their owners.” Meaning, a great watch outlives its current owner and is handed down or re-used by someone else. Is this a product category Apple is future proofing like a watch or is it more like a typical electronics product? Is this an annual release cycle of a product or longer? If you spend $2,000 on a watch will you be angry if it is outdated in a year when the new one comes out? I have a long list of other questions to dive into for another analysis but I’ll leave it at this for now. Smartwatches are officially a category thanks to Apple and good or bad, I have a feeling there will be some bumps in the road.

Global Implications of the iPhone Lineup on the Smartphone Market

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

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

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

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

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

1406074171709

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

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

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

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

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

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

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

Unprecedented iPhone Demand

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

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

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

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

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

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

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

Mobile Payments: On the Cusp of A New Era

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I hope everyone downloaded and enjoyed my tablet report. More to come on the matter as we believe the tablet category will begin to heat up from an innovation standpoint over the next few years.

There is a lot of relevant news in the days leading up to Apple’s fall iPhone event. Our Insiders will be happy to know four of our writers have received their Apple invites and will be at the Apple event — digging into and analyzing all we see and hear. Myself, Tim Bajarin, Bob O’Donnell and Jan Dawson will all be in attendance. We will have a healthy range of Insider content and will also do some video analysis after the event with hopefully all four of us. Doing analyst roundtables in video form with the authors mentioned above is a feature we want to start including for Insiders as well.

Enjoy your Labor Day weekend, and get ready to hold on to your seats for all the interesting developments we expect over the next few months.

— Ben Bajarin

Understanding Mobile Payments

With the latest news from Re/code that Apple is looking to partner with American Express, along with the latest rumors the iPhone 6 will support Near Field Communication (NFC), it seems as though the mobile payment era is upon us. As I pointed out in this insider article on mobile digital identity, Apple is in a unique position to provide the hardware, trusted ecosystem, and other necessary components to take a leadership position in mobile payments.

Regardless of how you feel about Apple, they move the market. Apple typically leads and the market follows. With the significant number of premium customers they own, it is arguable that it is necessary for Apple to lead in mobile payments to truly develop the market, particularly in the US.

In many parts of Europe, mobile payments are becoming more ubiquitous every month. However, in the US, the infrastructure for mobile payments is lacking. We have an interesting example about the willingness for US consumers to spend money via a mobile device if only the right infrastructure existed. Starbucks CEO gives us insight from late in 2013 about the type of volume Starbucks does with their mobile payment solution.

Today with 11% of our U.S. and Canada in-store transitions being paid for with a mobile device, Starbucks is far away the clear leader in mobile payment. We are encouraged by how our customers have fully embraced our mobile apps as the most convenient way to pay, reload and keep track of their loyalty rewards. With the current average of over 4 million mobile transactions per week and more than 8 million customers using our mobile app, Starbucks mobile platforms are fast growing customer touch points. Through them we are communicating with and delivering innovation to our customers in a way that no other retailer can and on the horizon, our enhancement to our mobile apps that include mobile ordering and digital tipping are on its way.

We continually hear from retailers in the US they are ready to embrace mobile payments and are actively looking to invest in the necessary infrastructure over the next few years. Globally, we hear the same in many regions as well. It does appear the market is ready to begin to embark on a paradigm shift to mobile payments.

Mobile payments can take many forms, but as you can see in this forecast from Forrester, proximity based mobile payments are poised for rapid growth over the next few years.

Screen Shot 2014-08-31 at 1.42.36 PM Having recently been at an analyst event with many of the Forrester, IDC, and Gartner analysts, we discussed mobile payments and there was a consensus we are on the cusp of the market developing and developing rapidly.

Ultimately, this shift will likely lead to a revolution in retail. As highlighted by the Starbucks CEO along with the leadership at Target, Wal-Mart, and many other large retailers, the ability to target and promote to a captive shopper, in their stores, in real time, presents opportunities that have never existed before.

The foundation appears to be in the process and the market appears ready. Apple will undoubtedly take a leadership position, and it will be interesting to see how this plays out in competing ecosystems.

Tablet Report: The Next Frontier of Personal Computing

I’m about to make some updates to a tablet report I publish through my firm Creative Strategies. Usually, this type of report is reserved for our clients only, or to purchase a-la-carte for $499. I decided to give Tech.pinions Insiders a promo code to download and read it for free. The code expires at the end of the month, August 31st, so make sure to download it before then.

We have, of course, been observing some interesting trend shifts in the tablet market. This report still represents the basic foundation of my thinking for how the tablet will evolve, and the future role it will play, particularly in emerging markets as you will see. The updated report, which will we will offer a brief version for free, will highlight some of the usage trend changes we are observing, and include a more clear outlook of the tablet’s future.

To download the report go to: http://creativestrategies.com/downloads/tablets-next-frontier-personal-computing/

Use the code at checkout: TPinsiders08

Below is an overview of topics covered, and screen shots of the entire .PDF.

Topics covered:
– Global Statistics of Internet Penetration
– Infographic “If the World was a Village” – global technology statistics
– From Click to Touch
– The State of the Tablet Market
– Growth in Emerging Markets
– Tablet Usage Trends
– The Touch Generation
– Food for Thought
– Key Takeaways