Apple

Better For The World? Apple Or Google?

Arguably, Apple and Google are the largest, richest, most powerful, most influential technology companies on the planet. Across many markets their products, services and technologies directly compete with one another. Yet, in countless endeavors, each benefits the other, enabling both to earn more, reach more, do more, grow ever larger, their creations touching nearly all of us.

Which begs the question: which company creates more good in this world? Apple or Google?

Unknowable?

I think the question a valid one. Despite their many similarities, the companies have profoundly divergent strategies when it comes to the development, release and spread of technology. Seeking the answer to this question might help us better understand how we should construct future tech companies, offer insights into what we should value most and whose methods we should help foster.

Pay To Play

As both Apple and Google continue to extend their reach deeper into our lives, the more obvious differences between the two begin to peel away. Once, Apple was hardware and Google was software. Now, both are mobile devices, cloud computing, entertainment, maps, apps, payments, productivity, music, messaging and — even if poorly — social media. We have to look deeper.

Start with pricing. Apple, whose products no one is required to purchase, is regularly blasted for ‘premium’ pricing. Google, whose products are mostly free, generates no such acrimony.

Is it better to demand customers pay for a product, to enter into a covenant where value is promised at a specific price, as Apple requires? Or is offering services for free the superior model? Certainly free seems better, but the price of free in today’s world is constant advertising, payment of which is continuous mining of our personal data. Does the Google way — pulling off tiny pieces of ourselves, bit by bit, moment by moment, and then selling these off to an unknowable coterie of people and businesses — better serve humanity?

I want to be in favor of free, but in its current form, the price of free seems too steep for me. For the rest of the world, I think in pricing Google trumps Apple, whether I wish it so or not.

No Product Before Its Time

Another core difference: product development and release.

Is it better to release products only when they are ready, as Apple does, or as soon as they reach sanctioned beta stage, as Google does, allowing anyone to experiment with their creation, make it better, expand its reach? Again, this seems to favor Google.

While we wait for the next insanely great product from Apple, a hyperfast-moving Google is — right now — helping us understand the pitfalls and benefits of driverless cars. Google Glass is forcing us to consider our views on personal privacy in public spaces and it must be acknowledged, pushing the technical boundaries and design limits of wearable technologies.

Google is meeting with city leaders, exploring methods to offer cheaper, radically faster broadband. They are unleashing ‘balloons‘ to bring the Internet to all points of the world. Push, push, push, now, now, now. The Google Way seems more right for our world.

Meanwhile, Apple…what, exactly? An iWatch likely few can afford once its finally released?

Tim Cook recently tweeted:

“Remembering Steve on his birthday: ‘Details matter, it’s worth waiting to get it right.'”

Is this true? Is this best for the 7+ billion of us on the planet? To wait?

Consider Android. Android is now the most widely used operating system in the world in part because Google unleashed it, for free, even while its business model remained in flux, and without waiting for agreement from potential stakeholders like Java’s Oracle. Nor was it perfect, by any stretch. Our gain.

We are rapidly connecting with one another, linking to astoundingly low-cost information resources whose total value is nearly incalculable, thanks in large part to this essentially free, freely available and extraordinarily robust mobile operating system. Humanity has been aided by Android, clearly.

Step back. Did Apple’s deliberate plodding make all this possible?

Look at an Android device pre-iPhone: it is an evolutionary dead-end. Think of all the apps, services, knowledge, entertainment and productivity we garner from all the phones that came only after Apple and the iPhone cleared the way. Consider the rather glaring limitations of Android, pre-iPhone. Had Apple launched iPhone before it was ready, before all the “details” were just right, the entire smartphone industry, now over a billion users strong, may have taken a completely different path – and died on the vine.

Might the same thing happen in wearables — likely the next iteration of the ongoing personal computing revolution? As wearable technologies abound in type and quantity, we await Apple’s entry.

Yet it may be wearables can only achieve their fullest potential for improving our health, our fitness, our connectedness to our minds and bodies only after the details are exactly right. That is, only after Apple clears a broad, lasting path just as they did with Mac (PCs), iPhone (smartphones), and iPad (tablets).

We have significant evidence Apple’s entry into a category has disproportionately, even radically re-shaped all that came before and all that follows. Perhaps we are better served in our analysis if instead of viewing Apple as sitting atop the ‘high end’ or ‘premium’ segment of a market, we acknowledge their products as a sort of official start, or a big bang of a new product category, unleashing and enabling the full potential of such technologies.

Thus, it may be that Apple better serves humanity even as their products are viewed by many as the tools of the wealthy. Apple made possible the very revolutions Google has seized upon. I think when it comes to the development, creation and release of products, Apple does humanity better.

Origin Myths

While I harbor suspicions regarding some of Google’s actions, I deeply admire their speed and scale, along with their willingness to try, to fail, to push. Google’s fast, expansive focus seems much more aligned with our nature and certainly more aligned with our times. Google’s beliefs include:

fast is better than slow
democracy on the web works, and
great just isn’t good enough

Thanks in part to such beliefs we most likely will have faster broadband, more bandwidth, radically cheaper smartphones connecting the world, tablets everywhere, a nearly infinitely scalable and mobile-optimized real-time web, all manner of affordable information and content, search, driverless cars, and whatever else Google is cooking up in its labs or scouting for acquisition.

That’s a substantial list.

It took Google for us to have YouTube, free maps, real-time-anywhere search, and the ability to live our lives within a fully digital realm. Yes, this comes at the creeping and rising cost of advertising everywhere and aggressively lobbied laws that do not necessarily favor our privacy interests. Almost seems fair.

Apple’s mission, by contrast, is shockingly prosaic:

Apple designs Macs, the best personal computers in the world, along with OS X, iLife, iWork and professional software. Apple leads the digital music revolution with its iPods and iTunes online store. Apple has reinvented the mobile phone with its revolutionary iPhone and App Store, and is defining the future of mobile media and computing devices with iPad.

That’s it? No move fast and break things? No do no evil? Not even a computer in every purse?

In vision and purpose, I say Google bests Apple.

I suspect that despite their overlapping business interests, core differences between the companies are inextricably linked back to their founding — the mad, beautiful and deceptively detailed vision of computing borne inside the mind of Steve Jobs, versus the youthful, audacious and limitless grandiosity of Page and Brin.

Apple and Google are a mere five miles from one another, yet the difference in their work and world views appears an impassable chasm. I do not know who does more for humanity. I am greatly proud, nonetheless, that these two giants of innovation are American-born, American-led, and are both, separately and together, creating a better world.

Data on China: Apple’s Biggest iPhone Market

We have always known China was going to be a key market for Apple. The only question was when. Our research has continually turned up evidence China was a booming iPhone market. iPhones were coming through the secondary market or being imported and brought onto local networks through backdoor channels even before they were officially available on those networks. Umeng’s app analytics has always been a very insightful data source regarding mobile devices in China. As we look at their latest data set we are able to see just how big of a market China is for the iPhone.

Some time over the past six months China has become Apple’s largest market for the iPhone. While our data suggested there were a lot of iPhones in China, I was surprised to learn there were more iPhones in China than in the United States. According to Umeng’s data, the iPhone accounted for 80% of the $500 dollar and above premium smartphone segment in China. The premium handset market in China is 27% of the install base, up from 15% in Q2 2013. This means from Q2 2013 to Q4 2013 the premium handset segment grew 12% in China. From our smartphone data of the current smartphone install base in China we conclude there are approximately 139m premium handsets in China. With the iPhone having 80% of that install base, it means there are approximately 111 million iPhones in active use in China. Compared with our estimate, there are approximately 90m iPhones in active use in the United States. In fact, China is Apple’s largest market for the iPhones.

Key Data Points: (All estimates, from my firm Creative Strateiges, Inc)

Apple has 80% of the >$500 premium segment of the smartphone market in China
The premium segment grew 12% between Q2 2013 and Q4 2013
Apple has approximately 111 million iPhones in active use in China
Apple has approximately 90 million iPhones in active use in the United States
China makes up 32% of the current iPhone install base worldwide
The US makes up 27% of the current iPhone install base worldwide
China and the US combined make up 60% of the iPhone’s total install base

Given how different the two markets are with carrier subsidies, it is remarkable the iPhone install base in China has surpassed the US. A point to ponder: the iPhone has not been available on the single largest carrier in China and was no where near the most affordable device in China. Yet it has surpassed the US in install base. It is phenomenal in a market where the iPhone has not been on the largest carrier and is not the most affordable device is now the largest iPhone market for Apple. The cheapest iPhone currently in China, the iPhone 4, costs several hundred dollars more than a subsidized iPhone 5s in the US market.

Overall, what we observe – even without the conventional wisdom that said Apple needed an extremely low-cost iPhone in China to gain share – is the Chinese have surpassed the US market. The level of optimism for Apple in China could not be higher given this most recent data. Particularly if they do launch a larger screen iPhone that can truly fit the insatiable demand for a combined tablet and smartphone in China.

With China’s continually growing middle class, projected to be 512m people by 2015 (Chinese Academy of Social Sciences) it is becoming more clear why China is a key growth story for Apple and one they can continue to service within their existing strategy, with some additional regional focus as well.

Big Questions about the Big iPhone

I have stated publicly I believed Apple would launch a larger screen iPhone than the current 4″ model this year. The market is simply at the point of its maturity where options are necessary. As markets mature, consumers become more self-aware of their needs, wants, and desires. It’s at this point the competitive dynamics change and segmentation occurs. Form factor (screen size) options, pricing, colors, etc., are all results of consumers looking for products that suit their needs as they also refine what those needs are. This is why a range of product options is important to Apple in my opinion. It was important when they built out the iPod line for the same reasons. The difference was they eventually owned the iPod market out right. This time they own the premium market, mostly out right. But they are up against a competitor who will offer every form factor under the sun in the mid-high end segments of the market.

For Apple, the question is not whether they need to offer more screen size options, but what screen sizes to focus on. Current rumors are they are looking to offer two different larger screen form factors. Something in the 4.7-4.9″ screen size range and a 5.7″ device. I believe the 4-7-4.9″ screen size rumor to be in the ballpark. The 5.7″ device? I’m not sold on the rumor but let’s take a closer look.

The first thing we have to remember about any Apple hardware rumour is, like every other company, they build and test a number of designs. Simply because they built and tested a 5.7″ screen sized iPhone doesn’t mean they will ship one. The big question around releasing several larger screen options revolves around how many SKUs Apple wants to manage. Will their current generation lineup be a 4″, a 4.7-4.9″, and a 5.7″ screen? This is hard to believe given the way Apple has done things.

What is interesting about the rumor on the 5.7″ device is the point that they will be positioned as high-end 5cs. This would be counter to several other rumours saying the devices would specifically target the high-end, when in fact this is exactly what a larger iPhone should do. The 4.7-4.9″ screen iPhone particularly (I like the name iPhone Air) would be a premium product targeting the premium segment of the market. However, should a product that fits the design build of the 5c that is not targeting premium be in the lineup then it makes sense it would specifically target a market like China.

If a 5.7″ screen iPhone comes out it would not be targeted at developed markets like the US and Europe. I’m not saying it won’t appeal to some consumers in those markets but I don’t believe it will appeal to the masses in those markets. It would appeal to markets like China where phones with screens between 5.5″ and 6.5″ do quite well. These markets buy these large-sized phones rather than buying the combination of a smartphone and a tablet. It could be very interesting for Apple to position an iPhone as a type of “minnier” iPad. While we know there is demand in China for both iPhones and iPads, many consumers can not afford both, and many can barely afford one. However, should the two be combined at a decent price point in a single product I wonder if consumers in China or even India would be compelled to make the investment even if it costs a bit more than the competition’s solutions.

I’ve been of the opinion if Apple really wanted to take China by storm they should release a product that is China only or China first. Doing so with a product like a 5.7″ screen iPhone/iPad could be a very interesting strategic move that would do very well in the Chinese market. While I still have my doubts about the 5.7″ device offering, I believe it could make sense in the context I just outlined.

Why China is More Strategic to Apple Than India

There has been a good discussion recently on our site about Apple and India. I try to maintain as global a perspective as possible. I study in depth markets like China, India, Latin America, and more. I look for data from these markets; I search for trends, and try to get a handle on each market needs, wants and desires. With that said, I think China makes sense as the primary target for Apple for the foreseeable future.

The first thing we need to establish about both markets is their consumers are very different. Sometimes particular global markets have similarities to other ones. Other times they are very different. This is the case with China and India. Chinese consumers have some similarities to American consumers. Studies are showing large percentages of consumers in China are more emotional when it comes to purchasing. Other markets such as India, and even parts of Europe such as Germany, for example, are filled with more pragmatic consumers rather than emotional ones. The best way to understand this is these markets are filled with a majority of value for the money consumers. This is not to say they are cheap but that value is defined differently and often with less emotion. Consumers with primarily a value for the money mentality tend to look at price first and often times foremost.

Looking at both markets, Android is the dominant operating system. China has nearly 500m mobile Internet users while India has just over 100m. Depending on whose estimates you trust, there are likely five times as many Android smartphones in use in China (mostly brought in through the back door to local carriers) while there are likely 10 times as many Android smartphones in use in India than iPhones. With that context in mind take a look at these two charts showing web browsing via mobile platforms in both China and India.

China and India Web Usage via mobile platforms

Despite there being significantly more Android users in China than iPhone users, we still see heavy usage of iPhone’s browsing the web. I continually point out web browsing is not the only metric that matters for measuring mobile engagement. Especially in China where consumers do most of their engagement through messaging apps like WeChat. But the fact that general web browsing is this high in China on iOS is a key point. It is also one that is not lost on Apple since they see most of the same data that I do.

Now let’s take a look at the same data source for India.

India is still in the early stages of its growth curve for smartphones. Estimates are that India will just about more than double the number of smartphone users in 2014 alone. China as a market is nearing maturity. India, on the other hand, is still a very immature smartphone market. Apple has no chance in immature emerging markets. Especially those filled with first time buyers. They do have a chance in mature emerging markets. This point alone is why China makes the most sense strategically for Apple in the short run.

I don’t doubt there are many interested customers for the iPhone in India. I do believe this is a market Apple is still feeling out and gathering data around as well as experimenting in. India is an incredibly important market for any technology company. The issue for Apple is timing. I feel the timing is ripe for Apple in China and not quite ripe enough yet in India.

The Big Question

The big question is whether or not markets are lost to Apple if they are not active in the development stages of a market. Could a point come where a market is lost to Apple or it is too late for them to enter? This is the question Apple watchers and investors must wrestle with. Apple is hoping their loyalty rates among their customers is something that works in their favor. Apple’s devices will always be highly differentiated in every market they enter. Apple does not want to just sell hardware. If they were only a hardware company, we would see them act very differently. I would also be less optimistic of their future if they were only a hardware company. Apple wants customers for whom the hardware is a portal to their ecosystem. They want customers, who once in their ecosystem, will start investing in things like software and services. They want customers who value the whole experience.

Apple is targeting China because, as of right now, their ecosystem is extremely differentiated. Apple has also been investing in China from a software standpoint by making specific iOS customizations for Chinese consumers. Things like catering to their service providers for deeper integration into iOS is a good example.

With regard to India, a key market development to watch is the entry of Xiaomi. Xiaomi is looking at the market in a way I think will be competitive in India. Xiaomi has an interesting model of selling hardware at cost and monetizing their software and services ecosystem. However, it has become clear as of late when Xiaomi enters markets outside of China that they will include Google’s services in those markets. How Xiaomi competes in China with a unique experience but also by integrating the same Google services as their Android competitors will be a true test of Xiaomi’s ability to operate outside of China.

Whether or not a market is lost to Apple will all depend on the nature of the competitive market in emerging regions. We will only know the answer to this question when a particular market like India gets closer to maturity. Apple needs mature markets to compete and their entry to a market will simply be a matter of timing.

Chart: Android Install Base

Google recently released their latest platform numbers for each version of Android. This chart shows what percent of each platform is still in use on an Android device in the market. A couple of things are worth pointing out regarding this data. These metrics from Google only track a piece of hardware that has passed Google’s certification process and has access to Google services. What Google is showing us with this data is the number percentage of each platform, active in the market, that has access to Google’s services. This is important context because these percentages do not reflect the entirety of the Android install base. They only account for the install base of Google’s version of Android. Most the devices sold in China are not accounted for in these number from google, for example. Here is Google’s chart with a breakdown per Android version.

I have done my own research to work out the non-public data and have come up with estimates on the Android install base of Google’s version of Android. Below is my chart.

It is incredible to look at the install base of Gingerbread. This version of Android was released on Dec 10th, 2010 and was updated until September of 2011. Even a device updated toward the end of Gingerbread’s lifecycle is over two years old. I am at a loss at how to explain this. The only explanation which seems plausible is that these were customers who purchased an Android phone, but are only using it as a feature phone to make phone calls. This period correlates with strong sales of both the Motorola Droid brands and several HTC phones. Knowing that some manufactures were still shipping Gingerbread into 2012 may also help explain this number. Still, the fact that there are over 200m smartphones in the market, being used, that are over 2 years old is remarkable.

India And The Future Of The Smartphone Wars

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

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

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

Consider the following about India:

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

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

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

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

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

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

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

2014 could prove a watershed year, considering that:

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

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

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

That’s $115.

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

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

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

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

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

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

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

Predictions

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

Meh.

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

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

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

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

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

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

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

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

Google

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

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

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

Nokia

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

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

As Ben Bajarin states:

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

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

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

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

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

Apple Is The Richest And Most Under-Staffed Company In Tech

Posit: Apple Is The Richest And Most Under-Staffed Company In Tech ~ Benedict Evans (@BenedictEvans)

Anyone who follow Apple closely knows that they are a bundle of paradoxes. One of the most baffling of these is that Apple has literally tens of billions in excess cash but seems always to be chronically short of critical software engineers.

Benedict Evans, above, wonders aloud “whether” Apple was understaffed. Rene Ritchie, below, wonders “why.”

How much by design and how much by scarcity of resource is interesting to ponder. ~ Rene Ritchie (@reneritchie)

I think I know the answer to that question, but I’ll let you be the judge.

Two Possible Reasons

Quality

Quality is more important than quantity. One home run is much better than two doubles. ~ Steve Jobs

Apple values quality over quantity and quality takes time, regardless of how many software engineers one puts on a project. A reasonable explanation.

Simplicity

When you first start off trying to solve a problem, the first solutions you come up with are very complex, and most people stop there. But if you keep going, and live with the problem and peel more layers of the onion off, you can oftentimes arrive at some very elegant and simple solutions. Most people just don’t put in the time or energy to get there. ~ Steve Jobs

Apple values simplicity and simplicity takes time. Another valid explanation for Apple’s seeming tardiness.

The Real Reason

Here, in my opinion, in the real reason why Apple is always chronically understaffed:

I found that there were these incredibly great people at doing certain things, and that you couldn’t replace one of these people with 50 average people. They could just do things that no number of average people could do. ~ Steve Jobs

Apple tries to hire only exceptional people and refuses to fill in the gaps with average employees.

The following quote is rather long but it is — again, in my opinion — the answer to the question of why cash rich Apple seems to be so continuously understaffed:

[pullquote]It is infinitely better to have a few good men than many indifferent ones. ~ George Washington[/pullquote]

I observed something very early on at Apple, I didn’t know how to explain it then, but I’ve thought about it since. Most things in life, the dynamic range between “average” and the “best” is, at most, two-to-one. If you get into a cab in New York City with the best cab driver, as opposed to the average cab driver, you’re probably going to get to your destination with the best cab driver maybe thirty percent faster… Or a CD player, the difference between the best CD player and the average CD player is what? Twenty percent? So two-to-one is a big dynamic range in most of life. In software — and it used to be the case in hardware too — the difference between the average and the best is 50 to one. Maybe one hundred to one. Very few things in life are like this, but what I’ve been lucky enough to spend my life in is like this. ~ Steve Jobs

Is It Worth It?

[pullquote]Two Eskimos were sitting in a kayak chatting. After a while they got a bit chilly, but when they lit a fire in the craft, it sank . . . I guess this just goes to show that you can’t have your kayak and heat it, too.[/pullquote]

The problem with the above philosophy is that it seems to fly in the face of Jobs’ other mantra that “real artists ship.”

In typical Steve Jobs fashion, I think he expected his people to do the impossible — to be understaffed AND to ship on time too. And in typical Steve Jobs fashion, they sometimes — but not always — did the impossible.

Query: Is the tradeoff worth it? Can Apple continue to operate continuously understaffed? Because I believe that it is no accident but, rather, a very conscious policy and a key component of their business model.

Perhaps only posterity will be able to accurately judge.

Stay hungry, stay foolish. ~ Steve Jobs

Trying To Understand How The iPhone 5c Failed

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

How could this happen?

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

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

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

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

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

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

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

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

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

Go on – do your best sales job with that.

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

Failure 1. Losing the Narrative

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

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

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

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

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

Failure 2. Anti-Apple design

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

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

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

Failure 3. Devaluing Hardware

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

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

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

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

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

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

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

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

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

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

Failure 4. Peeking behind the iCloud curtain

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

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

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

5c We Hardly Knew You

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Big Tablets and The Shift in Mobile Computing

I believe 2014 could be a big year for bigger tablets. The bulk of the tablets sold over the past few years have been tablets in the 7-8″ range. By our estimates the install base of tablets 9″ or larger is only 33%. Which highlights the point that most tablet sales over the past few years have been in smaller tablets.

Now, if you read what I wrote a few weeks ago you know that we believe we are on the cusp of a new buying cycle for more computing capable devices. While we can argue that even some smaller tablets are computing capable, we can’t argue that the more productive someone wants to be the more they may value a larger screen.

We believe we are on the cusp of a market buying cycle for larger screen computing devices. Some of these may be notebooks, some may be desktops, but we think the larger screen tablet has a real opportunity to take a percentage of sales in this upcoming refresh cycle.

Bigger Tablets Trending

It seems like most of the larger PC OEMS and tablet OEMs sense this opportunity as well. Samsung introduced their Tab Pro 12.2 at CES this year. I got to spend some time with this product and can attest to it being more impressive than I originally thought.

I was somewhat skeptical of the 12″ tablet form factor but after seeing the Tab Pro 12.2 I can see this being an attractive form factor for many large screen tablet intenders. One of the things that impressed me the most with Samsung’s new offering was the virtual keyboard. I am a heavy iPad Air user and I can type faster than most people on the virtual keyboard with ease. Samsung’s keyboard was even a bit larger than the iPad’s allowing me to incorporate my pinky into they typing process, which is a finger I don’t use on the iPad.

Ultimately Samsung’s, and all the other Android OEMs, challenge with larger tablets will be with the apps. The iPad is the uncontested leader in tablet optimized apps and I don’t see any evidence that is changing anytime soon. For larger Android tablets to have a strong case as more productivity devices the way the iPad Air is the tablet optimized Android app ecosystem will need to grow dramatically.

Emerging Market Growth

Interestingly the potential for larger screen tablets to grow as a percent of overall tablet sales in not limited to developed markets like North America and Europe. I met with several of the main SoC companies providing chips for tablet OEMs in China and India who told me they are seeing demand for larger tablets as well. While the US and Europe had a higher install base of tablet 9″ and larger, emerging markets had a very low install base of this form factor.

Several of the devices going into emerging markets are also slated to be a duel-boot Android and Windows tablet. Micromax, a popular brand in India, was showing off their LapTab dual-boot Windows 8 and Android tablet device. They were telling me the demand for this product in India was quite high. I remain quite skeptical of the dual-boot Android and Windows tablets in developed market but I can see them doing moderately well in emerging markets.

Consumers in many of these markets have never owned a PC. And while they are increasingly purchasing small tablets for primarily entertainment use cases, at some point in time they may graduate to more computing capable tablets. The likely-hood is that many of these will be larger screen devices.

All these points add to narrative that leads me to believe that 2014 could see strong growth of larger tablets. The reality is that bigger screen computing devices remain relevant for hundreds of millions of consumers. In emerging markets we are seeing new computer users coming online with tablets first.

Larger screen tablets will play a critical role in the future of computing and we think 2014 is the year we start to see progress in that direction.

Below is my firm’s slide showing forecasts for larger tablets.

The Future of Microsoft, Apple, and Google

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

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

Microsoft

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

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

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

Apple

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

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

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

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

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

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

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

Google

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

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

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

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

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

Why Apple Does Not March to the Drumbeat of Wall Street

I just saw an absurd Fox headline that says “After iPhone: Pressure mounts on Apple to unveil the next ‘insanely great’ product.” Had these guys been following Apple even for a short time they would know that Apple does not release products under pressure and especially just because some Wall Street Analysts want them to rush a product to market so they can make more money off Apple.

All throughout Apple’s history the release of a product is driven by when all of the hardware, software and services align properly; then and only then will they release a product or service to delight their customers. Apple does not do vaporware. And as Tim Cook consistently tells reporters and analysts who ask probing questions knowing full well that Apple will not answer them, Apple lives to surprise and delight their customers and that will not change.

However, the idea of pushing Apple to create the next Insanely great product is redundant. Apple shook up the market with the original Mac. They introduced the first all in one’s followed by the iPod, iPhone and iPad. All of these were insanely great products and to think that Apple can’t do that again is short sighted. Cook has even hinted that they have some revolutionary things in the works and before Jobs died he even gave of some hints around TV and suggested Apple would “nail” the TV of the future.

Calling for Apple to move faster is just folly. Insanely great products take time. Sure they continue to evolve current products to advance them within their individual categories but before they enter any new category that could be disruptive Apple’s smart enough to get all of their ducks in a row first. An Apple official told me years ago that when Apple breaks new ground they want to make sure they have all the pieces in place to not only create a new market for a product but also to give them at least a two year lead on the competition so that they can secure their leadership position in any new category they enter. That has been the mantra since 2000 and I don’t believe that has changed.

Apple does not nor should not ever march to the drumbeat of Wall Street or media types that think pushing them to get the next insanely great product out fast just to appease their agenda is smart. Insanely great products take time and thankfully Apple is much smarter and wiser than Wall Street and the media combined.

I completely understand Wall St and all investors desire to see Apple grow. Growth is possible within Apple’s strategy but it will also require patience. Something I know many investors do not have. Ultimately, Apple did not meet the expectations of Wall St, a group that understand financial markets but not the trends in product markets. Apple is less interested in meeting investors expectations of them but more interested in meeting, and exceeding, their customers expectations of them.

Apple’s Premium Smartphone Dilemma

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

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

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

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

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

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

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

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

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

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

Whom Apple Pleases

Premise #1: Apple’s Number One Priority Is To Make Great Products

[pullquote]It is key to understand that Apple puts the experience first. Everything else flows from that priority. ~ ßen ßajarin (@BenBajarin)[/pullquote]

“The most profound contribution that Steve Jobs made was in demonstrating a radically new way of a running a company: the goal of the firm shifts from making money for the shareholders to delighting the customer. As Jobs said: “My passion has been to build an enduring company where people were motivated to make great products. The products, not the profits, were the motivation. Sculley flipped these priorities to where the goal was to make money. It’s a subtle difference, but it ends up meaning everything.” ~ Steve Denning

Apple has restated this priority over and over and over again.

I’ll tell you what our goal is. Our goal is to make the best personal computer in the world and to make products that we are proud to sell and that we would recommend to our family and friends…we just can’t ship junk. ~ Steve Jobs

Sure, what we do has to make commercial sense, but it’s never the starting point. We start with the product and the user experience. ~ Steve Jobs

We have never worried about numbers. In the market place, Apple is trying to focus the spotlight on products, because products really make a difference. You can’t con people in this business. The products speak for themselves. ~ Steve Jobs

[pullquote]Apple tries to make the useful enjoyable. Sometimes they succeed. ~ Ángel Lamuño (@AngelLamuno)[/pullquote]

The goal of Apple is not to make money but to make really nice products, really great products. That is our goal and as a consequence if they are good, people will buy them and we’ll make money. ~ Jonathan Ive, Apple’s design chief

Our goal isn’t to make money. Our goal absolutely at Apple is not to make money. This may sound a little flippant, but it’s the truth…Our goal and what gets us excited is to try to make great products. ~ Jony Ive

Our north star is to make the best product. Our objective isn’t to make this design for this kind of price point, or for this arbitrary schedule, or line up other things or have X number of phones, it’s to build the best. ~ Tim Cook

For us, winning has never been about making the most. Arguably we make the best PC, we don’t make the most. We make the best music player, we wound up making the most. We make the best tablet, we make the most. We make the best phone, we don’t make the most phones. ~ Tim Cook

Our objective has always been to make the best, not the most. ~ Tim Cook

We believe that we’re on the face of the Earth to make great products, and that’s not changing. ~ Tim Cook

Premise #2: People Who Are Willing To Pay For Quality Make The Best Customers

People who buy expensive phones that are sold on quality and UX are generally the best customers. Shock. ~ Benedict Evans (@BenedictEvans)

Premium products attract high value consumers; for Apple, remaining highly profitable and driving revenue from its entire ecosystem is of greater importance than market share statistics. ~ Tim Coulling, a senior analyst with Canalys

Premise #3: The best customers — not the most customers — support the best platforms

Beleaguered Apple reports biggest quarter ever. ~ Kevin Fox (@kfury)

iPhone ASP/volume clearly shows that it remains strong among their most valuable customers, but is losing their least valuable buyers. ~ Sameer Singh (@sameer_singh17)

FACT: Apple’s customers willingly pay higher prices.

Apple doesn’t slash prices of slow sellers.

There is no point in addressing unprofitable segments and no point addressing segments that do not enhance the platform.

FACT: Apple doesn’t target bargain hunters.

If the iPad was losing sales to competing tablets, Nexus 7 sale wouldn’t be tiny. ~ Benedict Evans (@BenedictEvans)

FACT: Apple generally dominates the premium portion of the sectors that it targets.

Apple has 0% market share of those paying less than $400 for their phones.

FACT: Apple does not target that portion of the market that is least capable of sustaining its platform.

No sign of large-scale switching (from Apple). Quite the opposite. ~ Benedict Evans (@BenedictEvans)

I don’t see Apple’s valuable, identity-driven customers going anywhere. Less profitable ones, not so much ~ Sameer Singh (@sameer_singh17)

FACT: Apple’s customers are extremely loyal.

More & more time on Apple earnings calls is on painting a clear picture: the goal is 2 win the ecosystem war not just the smartphone battle. ~ carolina milanesi (@caro_milanesi)

FACT: Apple’s customers are best able to support the best ecosystem.

In 2013 Apple passed 1bn cumulative mobile devices sold (1056m iPod, iPhone & iPad). ~ Benedict Evans (@BenedictEvans)

In a few years, annual smarpthone sales will be close to 2bn. Apple’s % share of that is not terribly interesting. Share of value is aim. Benedict Evans (@BenedictEvans)

(Apple’s) current high-end position is secure and only pricing will drive a change in growth. ~ Benedict Evans

Talking about market share of smartphones is essentially meaningless at this point. Phone share, rev share, engagement share mean far more. ~ Benedict Evans (@BenedictEvans)

I’m unconvinced an ecosystem w/ 400m users and $10bn annual sales would collapse if there’s another one with more users and less revenue ~ Benedict Evans (@BenedictEvans)

FACT: Apple’s customer base is large enough to be self-sustaining.

Jack Benney once quipped: Give me golf clubs, fresh air and a beautiful partner, and you can keep the clubs and the fresh air. I suspect that Apple could equally say: “Give me the best client’s, the best profits and the best ecosystem and you can keep the market share.

Conclusion: Whom Apple Pleases

There are two kinds of companies, those that work to try to charge more and those that work to charge less.

We will be the second. ~ Jeff Bezos

Apple will be the first.

Apple has never, and never will, try to please everyone. That’s a PC and Android behavior. ~ Ken Segall

The primary motivation of Apple is to make the best. They cannot accomplish that unless they both sell their products for a premium and sell their products to premium owners.

If you want the best — and are willing to pay the price necessary to obtain the best — then you are amongst those whom Apple pleases. On the other hand, if you’re not on that exceedingly short list, then you’re probably not pleased with Apple.

I doubt if they care.

Apple First Quarter of 2014: All Eyes on the iPhone

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

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

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

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

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

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

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

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

Three Growth Story Lines for Apple in 2014

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Google and Nest: Why Now and Why Not Apple?

After spending many days at CES and perusing the show floor it was clear to me that the big theme at this years CES was The Internet of Everything. I was also struck by the fact that one trend many have been tracking for years, home automation, was up front and center in IOE and this was the first year I saw new products for automating the home that convinced me that we are really close to seeing the home automation dreams of many finally come to fruition.

Nest itself is the darling of home automation at the moment as their Nest connected thermostat has reinvented how a thermostat should work in a connected home and their connected fire alarm adds a new dimension to a very important device that should be in very home. While these products in themselves are great, the genius behind them is Tony Fadell, long time Next and Apple executive who is one of the smartest guys I have met in tech. More importantly, Fadell and team are zeroed in on creating easy to use, powerful home automation platform and devices and surely must have had a powerful roadmap in the works to garner a $3.2 billion cash buyout from Google.

While Google has not said much to date about IOE, their Android OS is at the software center of many IOE related devices and while they had an internal team working on their own version of home automation, buying Nest jumpstarts a major push into home automation Google style. This gives them a powerful platform to build out Google branded devices connected to a host of current and future Google services.

At first, Nest will continue to run generic Linux but you can bet running Android is not far behind. Nest’s platform and future products will also help Google become a powerhouse in home automation faster than if they tried to build their own solutions from scratch. Buying them now gives them the core platform to build on and helps them move to a strong position in IOE that will drive much of the next generation of Internet infrastructure, networks, devices and services over the next three years. Nest delivers them the framework for Google’s Home automation solutions.

So, why Google and not Apple?

Apple is the only major player that has the entire framework to build all types of IOE devices at any level. They have infrastructure, devices, software and services and I believe that they have had an advanced team of engineers who have been working on their own home automation products for years. You will notice that they did not bid for Nest. Nor had they invested in Nest. They had no interest in Nest since they are probably pretty far along in their own home automation roadmap. I believe that this will just be another significant area for them to connect to Apple’s iOS, devices and services and will have their own dedicated home automation devices in the future that helps give them an even stronger Apple and iOS solutions approach to the market.

What is fascinating about this move is that is highlights the reality that our connected homes, and our personal devices will run a number of different operating systems. In essence a consumers connected lifestyle will consist of a heterogeneous mix of operating systems rather than a homogeneous one. Some level of interoperability and standard supports will be key for this to take off in any meaningful way.

The iPad Advantage

Apple’s new commercial, which aired yesterday, sent a message that I feel is the defining theme which sets the iPad apart from the competition. Here is the commercial in case you haven’t seen it.

Beyond the video Apple, has dedicated the landing page of their iPad website to this theme. The tagline “what will your verse be?” In a similar vein I pointed out in this article that the power of the iPad is in its potential. Which is why the marketing around the iPad from Apple all centers on this idea that the iPad is not only powerful but its advantage is in its multiplicity.

The iPad is without question the most powerful general purpose computer in the market today. In order to grasp that statement there are two fundamentals to understand.

Form Factor

The iPad’s form factor is the basis for its diversity as a general purpose computer. Anyone who designs hardware will tell you that the form defines the function. Yet what is unique about the slate form factor is how many forms it can take that other computing platforms can not. To grasp this, simply look at the many use cases and stories Apple uses to showcase how the iPad is being used and ask yourself whether the slate or the notebook form factor are more ideally designed for each.

The PC is for certain a general purpose computer. Yet its form factor limits all its general computing capabilities to only be taken advantage while in a fixed position either at a desk, or with the device sitting on your lap. The iPad, and the slate form factor take this idea of mobile general purpose computing to an entirely new level. The iPad enables its general purpose computing power to be used in both stationary and mobile situations. The iPad liberates general purpose computing from the lap or desk and enables it in contexts where computing was absent before.

Apple is showcasing how the iPad is being used on the sidelines by sporting teams, going into the depths of the oceans to do underwater research, on movie sets, in art studios, by DJs in clubs, and a host of other use cases. All places where a notebook form factor could and never would have gone.

One thing that goes unmentioned in this is the iPad’s aspect ratio. Apple has gone against the grain of Android OEMs and Microsoft tablet OEMs by staying with 4:3 as the aspect ratio for the iPad. At first glance the value of this is not recognized yet it is significant. By using 4:3 as the aspect ratio the iPad is able to be used in portrait mode and in landscape mode interchangeably. Microsoft’s Surface and other 16:9 tablets are nearly unusable in portrait mode given that 16:9 is largely a wide screen format and while Windows 8 supports portrait mode nearly every attempt to use it this way is clunky and burdensome.

While its not as bad as Android, there is simply not many apps that support large screen portrait mode to begin with so the use cases are fairly minimal simply due to the lack of software. Which brings us to the second fundamental.

Software

As important as the hardware element of the iPad’s advantage is the software advantage is equally important. I don’t need to beat this point over the head since it is common knowledge that the iPad software ecosystem towers over the competition. But it is this fundamental point that I feel enforces the iPad’s value as a general purpose mobile computer. This is why I think Apple is showcasing its software advantage so heavily. Because if you can do more with this product then it should be worth more.

Apple knows the iPad is not the cheapest thing on the market and it never will. Therefore the software advantage, which Apple will have for the foreseeable future, will be a key message to communicate to potential customers. The tablet market is past the early adopter stage and has gotten quite a bit more competitive. Therefore Apple’s positioning of the iPad over the competition is key. And it is the iPad’s diversity to support each and every use case a consumer would want to use it for which is the iPad’s advantage. This is what Apple needs the market to understand. And if they can they will clearly demonstrate why you should not only buy an iPad but why it is worth paying more for an iPad.

Apple has an incredible opportunity with the iPad. Smartphones are a great category and they have changed how we communicate and having a pocket computer will change public spaces more than many realize. But tablets get me excited about what they can represent as the future of computing. Many Apple observes put much of Apple’s future on the iPhone and I don’t think many realize how important the iPad is to Apple’s future but also the future of computing.

Why I am Skeptical About Smart Watches

There is significantly more hype than substance around the smart watch category. While I completely agree there is a market for these products, I am still unconvinced the size of the market / opportunity is as large as others do.

Smart watches appeal to me entirely. I am an early adopter and a techie so I like many things that more normal consumers do. So I grasp the appeal of a smart watch. But I also know that my gadget desires to not reflect the mass market in most cases. So in order to understand the smart watch opportunity we need to land on what the form factor offers your mainstream consumer who represents the largest market opportunity.

Notifications

The primary value proposition being touted of the smart watch is notifications. These are the same notifications which a consumer would receive on their phone. So the logic behind the value proposition goes like this. You have your phone in your purse or pocket and when a notification like a incoming call, text message, email, etc., comes in it will alert you on your smart watch.

The strongest value proposition is one of convenience. The only problem with this value proposition is that the percieved value of this proposition is not universal. The conveneince of getting a notification on your wrist so you don’t have to pull out your phone of your pocket or purse has a limited appeal.

From my use with smart watches I’ve encountered and interesting dilemma. While I am in a meeting or at a lunch or dinner and I get a call or text or other notfication it is convenient to get a message on my wrist but I’m not in a context where I can do anything about it unless it is an emergency. In fact, in the same way that it is viewed as soically rude to be checking your phone every time it buzzes or makes noise in a meeting or lunch or dinner it feels equally rude to be chekcing your watch all the time. So where I thought I would want notifacations, I came to realize I didn’t unless it was an emergency.

Enter the need for smart filters for your smart watch. Meta, the rebranded name of the company Meta Watch, has filters built into their software that lets you choose which notifications to alert you and which to not. While Pebble does not have filters they have recently added the addition of a “do not distrub mode.” Which I found that I used to turn off notifications in nealry every context where I initially thought I wanted notifications.

The watch by itself requires the smartphone or another connected device to derive its value. The value features of the smartphone are extracted from the phone and placed elsewhere. Again, I don’t doubt this is valuable to a segment of the market. I simply struggle to believe it is a mass market solution.

Not a single product I use today is anywhere near ready of the mass market and I often struggle if it is even a mass market solution at all.

An iWatch

This leads us to the inveitable question about what Apple could do in this category. On this question I have several thoughts.

Let me first start off and state that while I understand those heavily vested in Apple’s future there is a sense that they need to attack a new or disrupt an existing category in order to march forward. I don’t personally believe this is true, although I see the investor point of view on this, but I will address this at a later date. Let me just say on this point, that China is Apple’s growth opportunity. More on this at a later date.

The fundamental challenges facing Apple with a watch form factor is in the required diversity of design in order to come remotely close to addressing the mass market. This is an area where one product design will not cover all the bases. Watches, for those who wear them, are extremely personal choices from a fashion standpoint and even more than smartphones in this regard. In order to Apple to be able to address a larger market they would need to offer a lineup from of these products. Perhaps not on day one but diversity in fashion is the key for every brand that choses to compete there. This tact is required if they are going after existing watch market customers or ones who are at least interested in a watch.

The other point worth considering is whether Apple can attract customers who aren’t watch wearers already or didn’t have any previous interest in a watch. Again, this is a harder sell than any other offering Apple has made in personal electronics. While our firm didn’t predict the iPod we saw and projected the market opportunity for music devices embracing the shift from analog to digital. And with the iPhone the market opportunity was clear even before Apple entered it. Even before the iPad we outlined outlined the market opportunity for tablets as we continue to do today. So it is within this industry and market context that we still remain skeptical of Apple’s offering being a watch at least at this point in time. While Apple’s products were not necessarily foreseen a market opportunity was. Many fundamentals of the technology market would still need to evolve for this category to make sesne outside of just the predicable early adopter category. These are not things we are certain even happen. Even before things like the iPod, iPhone, and iPad, as we speculate what Apple could do we could a market play that appealed to a wide audience. We don’t see this for smart watches.

I certainly understand the logic that people believe Apple can come in and do it right and show the market how to make one of these products. This is certainly how they operate, however, as I outlined above the market opportunity was clear before they entered with the right product. The smart watch is a category where this is not the case and may never be.

The iPhone and China Mobile. Impact and Expectations

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

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

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

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

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

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

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

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

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

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

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

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

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

Big Tablets Could be a Big Trend

There continues to be a lot of talk around tablets which are larger than the traditional 10″ screen sizes. Rumors have it that Apple is working on a larger iPad and that Samsung is as well. While I don’t think it makes sense for Apple to make a larger tablets, and Samsung will experiment with every screen size, there may be a small role for larger tablets. Before I dive into this topic I want to level the discussion by establishing some definitions.

By tablet I mean a device that is designed as a pure slate. Something like the iPad for example. This can be used with our without a keyboard but is not dependent on one as a part of the design. Devices like convertibles and hybrids (which Intel now calls 2-1 computers) are not tablets in my opinion. Some of them may bleed over and include tablet features but they are not pure tablets.

There is no question in anyone’s mind that tablets are stealing sales from traditional PCs. IDC estimates that 2013 will end at a negative 9.7% for the year. In their press release from last a few months ago they stated”

The market as a whole is expected to decline through at least 2014, with only single-digit modest growth from 2015 onward, and never regain the peak volumes last seen in 2011.

Thanks to tablets, the market will never regain the peak volumes last seen in 2011. Very telling.

Yet even with this “PC is dead” narrative there are still many complexities. For example, if you have used a tablet for any length of time to do something considered more productive then you know these task are better experienced on larger screens. In fact in our consumer interviews they continually explain how when they go to edit a video, image, write a lengthy email or document, manage finances, etc., they choose to go to their PC to do these tasks. So in line with the theory that people love their tablets but also want a larger screen to do some tasks the question is whether or not there is a market for larger tablets.

The answer is yes. How big of a market there is for larger tablets is still the real question. In the short term I don’t believe it is that big but as certain technologies evolve the demand could get larger. But in the short term there is an interesting exception happening in the market.

The One Interesting Exception
I have been using the Dell XPS 18. Which is a tablet disguised as a desktop PC all-in-one. This product has been an interesting experiment for myself given my questions both around big tablets and my ideas on how the technology evolves to make the market interesting.

The first thing worth pointing out is that these larger “slates” actually have much more appeal from a collaborative standpoint than anything else. Things like working together, learning together, playing together, etc., all start to become more interesting when we can gather around a large touch screen and interact at the same time.

Imagine doctors being able to show patients digital images or other material and interact with it in real time. Or teachers using these larger screen tablets to collaborate on an assignment or teach something specific to a student. Even at home my family has been using the XPS 18 to play board games together. One of my daughters is taking piano lessons on it. But then as soon as you want to use it as a PC with a mouse and keyboard you place it on the dock and it is ready to go.

Large tablets have a place in certain verticals this I am sure. I can see tablets at 13-20-inches doing well in these spaces where the value of a larger touch screen for productive and collaborative use cases are more prevalent. For the mass market consumers, I’m not sure sure. For this market I can see tablets playing out differently when it comes to big screen use cases.

I mentioned that the technology may not be there yet and this is specifically where. I believe that consumers would find value in “docking” there existing 7″ or 10″ tablets into a large screen set up. And by large screen I mean something 20″ or greater. My view on this is the crux of why I am skeptical of Intel’s 2-1 category and personally feel it is a solution in search of a problem. It seems to me the more interesting solution for buyers interested in tablets is to get a pure slate tablet in the 7-10″ range and then also get a larger tablet like the XPS 18 and use them together as a solution. This way you get the benefits of a smaller more portable tablet for mobility and then the larger tablet/detachable desktop for more big screen productive desktop modes as well as more collaborative ones.

This is the advice I would give to hardware companies asking me about screen sizes. I would say for tablets focus on 7-10″ because those are the volume sellers. Then look to innovate around these larger screen detachable all-in-ones and create value in having the small tablet and larger tablet being used together as a solution.

In an ideal vision of the future, consumers will use their 7″ or 10″ tablets as their primary computing devices. Given that consumers primary needs are not that intense and mostly consumption over productivity, this device is well positioned for that. However, when they want to do something like edit a video, picture, write a long document, etc, they can “dock” their tablet to a larger screen and begin using the tablet + dock as a full desktop PC.

This vision has been shared before by many but for technical reasons has not made it to a useful reality. In the future if the technology enables this solution, it could literally mean the end of the notebook as we know it.

Whether big tablets would be an instant hit with certain verticals I’m not sure. But the common wisdom is that the larger the screen the more productive you can be.

Did Samsung use Apple as an R&D Center?

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

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

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

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

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

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

The State of Tablets in 2013

Tablets represent one of the greatest opportunities to expand and enhance computing. However, it is a very mis-understood product. I want to share some statistics about tablets and then add some key points on the market as it stands today as well as a projected outlook for Q4 and beyond.

85% of tablets sales have been to existing PC owners
Sub $100 make up 20% of quarterly tablet sales
55% of those who spend less than $200 had buyers remorse
52% of those who spent less than $200 intend to spend more on their next tablet purchase
More tablets will be sold in the US in 2013 than any other region

What this data tells us is that consumers are latching onto the idea of a portable larger screen device. Currently, there is a heavier mix of lower-cost small screen tablets being purchased primarily as media devices. But it seems that early market data suggests that while these low-cost media centric tablets are being used primarily for media today, consumers appear to be graduating to tablets that are more capable than just consuming media. In fact, consumers in many emerging markets primarily appear to want to use this tablet form factor more like PCs than smartphones.

The Current Landscape

The real point of clarity needed for the tablet market as it currently exists is the two distinct tablet markets emerging. On one hand we have tablets in which a degree of computing is possible. That is tablets that can be used and to a degree replace PCs. The large iPad, Surface, and many 2in1 devices coming from PC OEMs running Windows 8.1. At the moment we are looking at breaking these out by screen size. 9.7-13″ tablets would be considered computing tablets. 8″ and below would be considered media tablets. But right now any and all slate devices are being counted as tablets. So while this works for now as a category, it will need to become more granular in order to gain the right perspective about what is happening in the market for tablets.

While the 9.7″ and above more computing centric tablets are cleaner to understand and track the sub 8″ devices are where all the growth is and have a much more blurry picture. Branded OEM tablets from Samsung, Amazon, LG, Apple, etc., in the sub 8″ screen size form factor are clear but it is the ‘other’ category that muddies the waters. In all conversations with service providers from areas like China and India we do not see much evidence of the existence of these tablets showing up on anyones networks. We here more often then not they are simply being used as portable TV players to side load movies on to watch. We have heard of upticks on Flash media in certain regions so this theory could be plausible. Another explanation is evidence pointing to smartphone chips like a Cortex A5 being used in many of these low-cost white box tablets. Which would mean they would run a smartphone OS and perhaps show up on service providers networks as smartphones. Lastly, it is possible that the numbers of white-box tablets are simply inflated and not accurate. There are a number of new SoC vendors popping up giving out numbers to the tracking firms and these new companies could be inflating their own numbers simply to get attention. Those are a number of the theories I have but it is extremely difficult to confirm any of them.

What is interesting as well is what is happening in the US in two areas.

Subsidized Tablets: Carriers are beginning to offer tablets at a subsidized rate with the purchase of a new smartphone and tablet data plan. As well as the tablet alone subsidized with the purchase of a data plan. We have heard from a number of sources that Samsung’s 7″ tablets have been doing well on certain carriers offering this discount. AT&T is also offering a free Samsung small screen tablet with the purchase of a Galaxy Note 3 or Galaxy S4. These promotions will clearly drive sales of tablets even higher for this calendar year.

New brands and unbranded: Nabi Tablets are a brand to watch in the US. They are sold in US retail and are specifically targeting kids at different age ranges. Most of these run on Android. The appeal is parental controls for the devices. They even have a tablet with a keyboard accessory that looks to compete more in the 2in1 category products like the Microsoft Surface. From retail sources I have spoken with, there is evidence to suggest these Nabi tablets could sell in the millions this Q4 in the US.

Outlook for Q4 and Beyond

We are projecting tablet sales WW in the 72m range for Q4. Interestingly we are also projecting PC sales to be below 80m for the first time since 2008. The sales of PCs and tablets are likely to be very close in volume this Q4. We remain convinced that WW sales of tablets will overtake WW sales of PCs sometime in 2014.

The CEA research department highlighted that tablets made up 29% of the Black Friday weekend and cyber Monday sales. They also reported continued increases in tablet purchasing intent. Their Chief Economist Shawn Dubravac pointed out that there were over 300 tablet specific promotions in US retail over the holiday shopping weekend.

Tablet sales in 72m range would be a 38.4% increase over last years Q4 of 52.2m. We are projecting total tablet sales in the 215-220m range for CY’13. Which would represent a 76% increase from 2012.

We expect the US and Asia to be the largest consumer markets for tablets going forward. Currently the US has the highest tablet ownership at 45% which could be as high as 55% by the end of 2013. Below are the forecasts I’ve assembled from other sources, as well as our own internal estimates.

The State of Global Smartphones Q3’13

There are a number of things worth pointing out about the current state of smartphones. The first is that from a hardware standpoint vendors are staying relatively flat with a few seeing slight growth. Here is an updated chart showing IDC’s estimates for smartphone vendor share up to Q3’13.

As you can see not a ton of change any which way. What stands out however, is the continued growth of Android. Here is Gartner’s estimate of Android’s global market share for smartphones.

As you can see this is an important chart. However, without the lacking context it is very misleading. Do spend a minute looking at the rapid rise of Android in this chart because it is important to soak in for the next few data points I will show.

With this rapid and what seems like dominating market share rise of Android we would think that we would see some change in the web browsing statistics yet that is not the case. First let’s look at America. According to StatCounter Android’s market share is declining in the US with iPhone staying relatively steady.

I’m anticipating iPhone to grow slightly in the US with regards to this statistic and even overall OS market share. I also expect Android’s continued decline as well in this statistic. I will update both toward the end of December and add more context.

Next let’s look at worldwide global browsing share. Keep in mind that the earlier Android chart plotting its market share growth is a result of emerging markets coming online and purchasing very low-cost smartphones. Devices that cost less that $150 USD. This is where Android’s growth is coming from and understanding that is key context. Here is a chart from NetMarketShare showing global mobile browser trends.

What myself–and many others–are continually perplexed by is that Android’s quarter growth at at WW level does not seem to change its low browser share. So the question we have to ask is why? There are several possible explanations.

First, and quite simply, they are not being bought to browse the web. This does not mean they are not using the devices data connection but that they are not using it to browse the web. Any data being used by the device is coming from a download of an app, media, or other in app usage of data. No network provider would really consider this a heavy data usage point and I think it is clear that these devices are not heavy drivers of data services.

Second, and along those lines, many of these devices are consumers first experience with the internet. Perhaps a significant percent do not have consistent access to Wi-fi at home. We know that data plans vary greatly in these regions and some are very expensive and to a degree extremely slow, particularly in emerging markets. So between price barriers and experience barriers, perhaps the local regions where Android is growing simply do not lend themselves to drive much data. If you have to pay for the data you consume, rather than have an all you can eat data plan, perhaps you are more cautious about the data you use. This would mean that consumers are prioritizing their data usage. We know consumers in these regions likely have a data plan but not a text messaging plan which explains the rise in messaging apps like WeChat, WhatsApp, and Line. Consumers are prioritizing using the web for communication rather than browsing, or other rich web experiences.

Lastly, perhaps a large percentage of these devices are not being purchased with a data plan at all. Only 29% of global mobile subscribers have a data plan. I was told by a carrier in India that just over 50% of their Android device sales did not include data plans. Perhaps this is happening much more than we realize and in all emerging markets.

The key conclusion is that low-end Android phones are not proving to be effective network and business model drivers for the carriers and the carriers know it. This is what makes the speculation of the iPhone’s launch on China Mobile as a part of the launch of their 4G network so interesting. China Mobile, and other Chinese carriers, know that in order for them get a return on their network investments in future networks they need devices on that network that take advantage of those investments as a premium data driver. It seems as though many carriers across the globe know the iPhone will serve as a premium network driver. So as those regions develop and add new network infrastructure it is safe to assume those network carriers will be aggressive about getting devices that drive network value, by way of data, into the hands of consumers.

Apple Upbeat About The Holiday Quarter

There were a number of key takeaways from Apple’s Q4’13 earnings call. iPhones continue to beat estimates and grow. We expect this trend to continue into the holiday quarter. Even though many are pessimistic about the iPhone 5c (some un-intelligibly calling it a dud) we anticipate the 5c to continue to do well as a mid-tier offering. Tim Cook was clear on the phone call that the 4S is the entry level iPhone, the 5C is the mid-tier offering, and the iPhone 5S is for those who want the latest and greatest. He even pointed out that we should expect demand to be high for the 5S due to the predictability of the early adopter market. We expect the 5C to gain steam once the early adopter phase passes.

The iPad sales were lower than most expected but easily explainable by the increased seasonality of the iPad for the mass market. One has to assume that the bulk of the sales last quarter came from markets like education, business, and other verticals. I also expect the iPad 2 to have made up a healthy mix of iPad sales. Mainstream consumers likely held off in anticipation of new devices for the holidays. Given no new iPads in all of Cy’13 14.1 million iPads is impressive. We anticipate significant pent up demand for iPads going into the holiday quarter and expect Apple to yet again set all time record sales for iPads.

The one growth story we are still anticipating is with regard to the Mac. It is significant that Apple spent as much time as they did at their fall unveiling on the Mac. It is also significant that the theme of last weeks event was personal computing and that Apple included the iPad in that event. Although Windows PC sales are down, the Mac has largely outgrown the segment for over two years. We believe that there is still a growth story for the Mac to continue to grow its share in the PC segment and take share from Windows. Annually we still sell upwards of 300m PCs every year and Apple has approx 6-8% of the WW PC market (higher in the US) but is poised to grow that share over the next few years.

Apple has strengthened the value proposition for Macs by making all future versions of OS X, iWork, and iLife free for customers. They have also been aggressively lowering the price of their Macs annually. I believe Apple smells and opportunity to gain share of the WW PC sales against Windows OEMs and will begin being very aggressive to capitalize on this opportunity.

Those are the three categories we expect holiday season upside with. Tim Cook said it is likely to be an iPad Christmas but is more likely to be an Apple Christmas like so many Christmases before.