Weekly Stat: Top Brands Fueling iPhone Gains

Last week, we completed our fall smartphone market study and came away with a pretty clear picture of the market and confidence outlook for the next year. You can read the top level results at our company blog here.

One of the things that has been top of mind the past few years has been the dramatic increase in customers leaving competing brands and ecosystems for the iPhone. Years ago, a colleague named Carl Howe, who was then an analyst at the Yankee Group, put forth the theory of “The Android Leaky Bucket”. Carl’s position was Android’s ecosystem was less sticky than iOS. Consumers who owned Android devices tended to shop with more of a focus on hardware capabilities than any specific pull of the Android OS when they looked for new devices. His conviction was loyalty in the Android ecosystem was far weaker than loyalty to iOS.

I agreed with Carl then and I still agree with him today. His theory has played out and we have been able to track and quantify it for the past few years. Since the iPhone 6/6 Plus cycle, the leak in the Android bucket got a little larger and is leaking faster than before. We also noted a significant correlation of length of smartphone ownership to the likelihood of switching to iPhone, which I point out in our findings. Our interpretation of that point is, the longer consumers have owned a smartphone, the more refined their interests become. At that point, the iPhone, combined with the proven lack of loyalty to Android, begins to become more attractive.

When looking at the iPhone as a continued long play for Apple, I’m convinced this way of understanding the story (over time, as consumers value basis refines and matures, the iPhone becomes more attractive) is a key way to look at Apple’s prospects to grow their base. This is a patient game Apple is playing and they are waiting for customers to come to them, which, while appearing to be contrary to popular wisdom, is exactly what is happening in many markets.

We dug into the catalysts for switching brands and ecosystem quite a bit in our study but I wanted to share the top brands consumers are firing in order to hire the iPhone. We architected a series of questions that allow us to look at brand switching by year but, at a high level since 2007, these are the top brands consumers said they left behind to buy an iPhone.

screen-shot-2016-10-17-at-9-38-46-am

It is quite interesting how the corporate factor worked so well for Apple with iPhones when it did not work out well originally with PC hardware. As the market moved away from Blackberry, Apple benefitted the most. Gains coming from Samsung were predictable but also a much smaller part of the yearly switcher pie as Samsung’s brand loyalty and re-purchase intent remains the highest of all other brands. This has only changed slightly since the Note 7 incidents and we do not expect dramatic defections from Samsung to iPhone any more than is usual per the brand switching rates we currently see.

While I can isolate brand switching data by year, this chart paints a picture of the brands consumers have left to jump into Apple’s ecosystem since 2007. One quite fascinating point is the top write-in answer for “other” was Verizon Droid. Lots of consumers got their first smartphones around the Verizon Droid timeframe and, while at the time it was viewed as negative for Apple, the data suggests this actually helped Apple in the long run as those customers onboarded with Android but, over time, a good chunk of them switched to the iPhone.

Overall, from the depth of market data we acquired from US and UK consumers, we stil believe there are gains ahead for Apple. The Android Leaky Bucket theory remains intact and we are observing points of time in the year when the leak is slow and times when it is faster.

Could Apple Bring OLED to the Masses?

I have recently been testing the new Lenovo Yoga with its brilliant OLED screen. If you have not seen a laptop with an OLED display, try and do so as it is a game changer when it comes to delivering stunning images and overall visuals on a laptop. This experience has caused me to lust after having this type of screen on all of my laptops, actually all my screens, and more importantly, my smartphone.

Of course, the problem with OLEDs is that, besides its higher price, the yield rates are still low. Quantity has been a real challenge for the makers of OLED screens. Lenovo’s OLED-based Yoga costs over $3000 while most high-end laptops without this screen are well under $1800.

But, in an important new development last week, Sharp announced it will invest around $500 million in a new OLED display factory. This is important as Sharp is now owned by Foxconn, the manufacturer of Apple’s iPhones. Since this news was announced, I spoke to a contact in Taiwan who told me Apple is considering also investing a significant amount into this factory. It would pretty much guarantee they would always have a strong supply of OLED screens for iPhones and makes it harder for competitors to get these screens — at least from Sharp/Foxconn. LG is also maintaining their commitment to OLED and remains committed to bringing costs down and also increasing yields.

So how could this translate into something Apple could use in the short and long term? Since Sharp is already doing OLED screens in limited quantity, Apple could potentially use them in a limited run as early as next fall in what might be an anniversary edition of the iPhone. As you know, the iPhone was introduced in 2007 and the fall of 2017 would mark the 10th anniversary of the iPhone. Most analysts expect Apple to create an iPhone that has significant design changes and one thing could be an OLED screen in perhaps a high-end anniversary model.

But, if Sharp creates a larger factory that Apple also invests in, I would suspect this would translate into all iPhones having OLED screens by 2018.

While other smartphones have a type of OLED, like Samsung’s AMOLED, critics in the display world suggest the color customization is not natural and is modified to look more pleasing or enhanced. With Apple’s current focus with iPad and iPhone 7/Plus to provide a more natural wide color gamut it would be very interesting to see how they would adapt this strategy to OLED, perhaps universally across their products. It is possible we may even get an indication of their direction if the rumors are true about OLED Macs coming the near future.

If Apple did jump in and invest directly into an OLED display factory would give them the kind of volume they would need to make the next generation of iPhones distinctive as a mass market product and help make it a cornerstone display design for the next ten years of iPhones, and all Apple products.

An interesting twist on this is the potential impact this will have on OLED TVs. Many people believe OLED screens would be important for use in next-generation televisions. But with Sharp and others focusing on meeting the demand for OLEDs in smartphones, it may be some time before they or other display makers can get OLED screens for TVs to market in any serious quantities anytime soon.

Net net is we need a critical mass of high-resolution displays in order to keep moving the content ecosystem forward. This move to 4k and beyond is moving slower than HDTV for a range of reasons. The more high resolution, 4k and beyond, displays out there the faster we hope content starts to support it. An example of this is my frustration that I can’t watch 4k Netflix content on the OLED Lenovo Yoga. Netflix can enable this, but my guess is they don’t feel there is a critical mass of mobile-centric devices that support 4k. A critical mass of these types of technology will inevitably help move the content world forward as well we hope.

Google’s Potential Strategic Blunder with Pixel

A few posts came out yesterday that provided greater clarity on Google’s ambitions with Pixel and how those ambitions may impact the overall Android ecosystem.

First, an interview with Hiroshi Lockheimer came out yesterday where he explained in detail how Google is separating the hardware team from the Android team. Hiroshi leads the Android team and said he would basically treat Rick’s internal Google hardware team just like any other OEM. He is telling us to think of the Google hardware team like any OEM. They have the ability to take what the Android team does and use it in ways they see best for their hardware ambitions. Here is the full answer giving a little clarity at this point:

Lockheimer: Being a platform provider and knowing a manufacturer on the other side will take your platform customize it and commercialize it — that’s one model, and it’s worked great for us at massive scale. That is a different kind of engineering than Rick’s team. We’ll continue to develop the platform — that’s my job. Rick’s team will take that to a level of completion, polish, thoroughness that a platform by itself in abstract won’t get. That’s a pretty big shift. The Nexus devices have been the purest form of Android in the past. Pixel is the purest form of Google, which is Android plus a whole lot of other stuff like the Assistant, our VR platform and so on.

It makes sense to have the Google hardware team isolated from the Android team. In many ways, Microsoft’s Surface team operates under the same organizational structure to keep them at arm’s length from the Windows team. Both companies’ platform and software efforts view their hardware divisions as just another partner.

The question I still wrestle with is what will Google do to differentiate Android on their hardware? This article from Techcrunch may provide some additional clarity.

Google is bundling on the new device things like Allo, and their Photos app, along with a few other things where OEMs have choices. OEMs can ship any number of different email, calendar, contacts, photos, and more type apps when they make Android. Users can generally install other things from Google on the Play Store and use all the core Google services they are bundling on the Pixel. But most people don’t do that, which is why the core bundling of all the Google services out of the box is the big differentiator here. As Hiroshi says in the Bloomberg interview, the Pixel is not just the best of Android, it is the best of Google bundled onto one device.

However, this section from the Techcrunch article is a little puzzling and the root of what would be a strategic error potentially:

Most notably, Android 7.1, the updated version of Nougat that powers the Pixel and Pixel XL, is lacking Google Assistant. This smart virtual helper is Google’s answer to Apple’s Siri, Microsoft’s Cortana, and Amazon’s Alexa. It’s a lot more robust than Google Now, the current digital assistant that ships on today’s Android devices and in the standalone Google app.

People were tweeting this article yesterday commenting on the percieved exclusivity of Assistant. This would be a huge strategic blunder, even though I understand why they may consider it. The AI piece of this is critical. Google needs as many people as possible using it to create some lock-in around the personal assistant. I maintain, whoever cracks this “most personal” assistant for me has as a customer for life. There may be no single more sticky feature than a powerful assistant that knows me intimately and works on my behalf to make my life easier. The personal AI will be the critical consumer battle over the next decade.

Pixel phones will represent such a small share of the overall Android pie for some time (if not indefinitely) that, by keeping this most critical element of the future exclusive to a small minority, is a tactical mistake. However, I don’t actually think that is what Google will do. In Hiroshi’s interview, he makes this statement:

Lockheimer: Rick’s team will use our platform, but they will also work very closely with Google’s Search team, or the Maps team, or the Assistant team in ways that perhaps other OEMs may not want to. Other OEMs may want to differentiate and do their own thing, their own Assistant for example.

The answer he provided sound like Assistant is or will be exclusive. It does sound like there is flexibility on how Assistant can be used and integrated, but it also sounds as if an OEM came to them and wanted to use it, they would be able to. It also may be likely that Assistant comes as a dedicated app or something from the Android Play Store and iOS someday as well. Again, Google can’t leave potential users on the table here given how important AI is to the future.

They do recognize other OEMS may want to do their own assistants and that is fine. But what if I buy a Samsung phone and a Google Home? What assistant will I want to use? Am I forced to use Samsung’s when I may want Google’s? Google may say, well that’s why you buy a Pixel. However, this is not how consumers actually work nor is this how Google’s business model works. If Assistant stayed exclusive to Google Pixel, then it will likely never have as big a userbase as Siri. At which point we would conclude Apple won the personal assistant war over Google? This is why I doubt Google keeps it exclusive.

Trying to balance the horizontal and vertical is exceptionally difficult and we are honestly in new territory with Google and Microsoft attempting to do something that has not been done before and has a great many strategic issues surrounding it.

I like Google’s positioning of “the best of Google” on a device. That will likely always be true of the Pixel experience. However, should any OEM come to them and want to bundle many of the things bundled on the Pixel, it would be impossible for Google to say no. Yes, Pixel will always be the best experience at a premium, but an OEM can build a “good enough” Pixel and bundle many of the same features and sell it for less. I have no doubt this will happen, particularly in India and other emerging areas.

Apple’s margin, meaning the premium price consumers are willing to pay over a low-end, good enough option, have everything to do with the exclusivity that is iOS as a whole. This is where Pixel and Surface differ dramatically from Apple’s strategy and the core reason why both Surface and Pixel will always be subject to a good enough competitor — thus limiting their full market potential outside of some niche areas in the high end of the market.

Reading Project Titan’s Tea Leaves

Immediately after rumors reported Apple had laid off a group of people involved with project Titan, I received calls from media who took this to mean project Titan is dead and Apple is no longer doing some type of car. The death of Project Titan is absurd. If they were going to kill it, why would they bring back Bob Mansfield to manage the project, one of the superstars at Apple whose most recent job was to manage all of their hardware.

What I think happened is, when Mansfield got to look at Project Titan, he quickly determined what the real goal of the project was and let people go who were working in areas that were no longer relative. I suspect that early on Apple hired a lot of people from many disciplines as they were researching this subject and playing around with what they should do if they had a product related to automotive. Knowing Apple as I do, I would not be surprised if they entertained everything from doing their own car to new ways to integrate their technology into new or current vehicles with the goal of providing more Apple services to one of the most mobile devices we have.

My personal belief is Project Titan is not about creating an Apple Car. It just does not make sense to me, given the fact that just about every major car manufacturer is already working on their own versions of a smart or self-driving car. However, if you look at what I believe the biggest opportunity in automobiles really is, you would see it would be to make existing cars smart or self-driving on their own.

I believe this is the most plausible explanation of what Project Titan is all about. At its simplest level, it could involve beefing up Apple’s CarPlay in vehicles that support it now, as well as finding a way to add it to existing cars of all makes so any user could have Apple Play in their car and tie them to Apple services. But there is another possible moonshot idea I find most interesting and it is what I consider a holy grail of autonomous vehicles.

If you have seen one of Google’s autonomous vehicles, you would notice two things. The first is they have taken an existing car and given it intelligence, sensors, and many cameras so it can operate as an autonomous vehicle. The second thing you will notice, since it stands out in a big way, is it has on its roof a 360-degree camera that is large and ugly. Clearly not created to make the vehicle design sleek or attractive.

What if Apple could create a “kit” or special self-driving package that is relatively easy to deploy at a dealer or by a mechanic that could integrate those sensors and cameras into an existing car. It would include a dash-attached iPad to deliver the kind of intelligence and navigation needed to operate a self-driving vehicle, as well as Apple CarPlay. Instead of an ugly camera on top, Jony Ive and team could design a very sleek attachment for the roof in neutral colors that has cameras in it to handle more of the sophisticated visual needs for a self-driving vehicle.

Think of what a gold mine that would be. Even if it is expensive to add this feature to an existing car, it will be much, much cheaper than buying a new autonomous driving vehicle from major car companies. And it allows people to take their own cars and retrofit them for what appears to be the future of personal vehicle transportation.

Of course, the other benefit is Apple brings more people into their services ecosystem and allows them to grow their services business well beyond what they can with just iPhones, iPads, and Macs.

I realize doing this type of “kit” is not easy but, given the fact Google has already done this to an existing car, it is in the realm of possibility Apple could do it as well and do it much better.

BTW, regardless if Apple is the one to deliver something like this, I believe retrofitting existing cars to make them self-driving will become one of the biggest automobile businesses in the next 5-10 years.

So if Apple did something of this nature, what type of timeline could we expect from them to deliver a product like this? My belief is they would probably do it in two stages. The first stage would be a retrofit kit to add Apple CarPlay to any vehicle. It would need to include an iPad that is dash-attachable and a better way to integrate into a vehicle’s existing entertainment system. I would not be surprised if they could get something like this to market in late 2017 or early 2018.

As for an autonomous driving retrofit kit, there is probably still a huge amount of work before they could deliver something like this but a good guess, and it’s just a guess as to when they could get something to the market, would be 2020 or somewhere around that time.

This is pure speculation on my part but I have never believed Apple was going to do a car of their own. It would be smarter to buy Telsa than to go down that path. On the other hand, it is highly plausible Apple could deliver a CarPlay retrofit kit for existing cars and a self-driving retrofit kit for existing vehicles sometime in the relatively near future.

Apple and the Bar By Which All Tech is Measured

During Apple’s iPhone 7 unveiling, executives made a statement that got me thinking. They said from the stage that the iPhone is the device by which all others are measured. It is not hard to quantify this statement while Apple competitors butt themselves up against the iPhone. The iPhone has become the gold standard — if you can’t even draw a comparison to your product you are nothing. It is a desire to be in “the iPhone Class”. Some smartphones are, the vast majority are not. However, it is the North Star nearly everyone shoots for.

The more I thought about this, the more I reasoned it applies to all of Apple products and Apple as a whole, not just the iPhone. The Mac, the iPad, the Apple Watch, etc., are the north stars for all other competing companies. Why does Microsoft keep bringing Macs up in their commercials? It is because the product they are comparing themselves to is the king of the hill and they want to challenge that position.

Interestingly, if you recall, Apple used this tactic against Microsoft. The entire Mac vs. PC ads were, at their roots, this exact point. Microsoft was the default, the standard (we can argue whether gold or not but that’s moot). Apple, while touting the benefits of the Mac’s ease of use and other features, was positioning against Windows because it was the standard.

As you can see this works both ways but, in the end, I feel this is good for all involved.

Good for Apple
This is good for Apple in many ways. First, it helps keep them motivated. I’ve made the point many times that Apple believes their only true competition is themselves. More specifically, the last product they released. The new iPhones, Macs, iPads, Apple Watch, Apple TV, and anything else they dream up, are the gold standard for not just the industry but to Apple. This is the product which they will seek to pass in the next version. However, what great incentive for employees to also know everyone else considers your product the best. So long as that keeps them from resting on their laurels, it should act as a motivator to keep setting the bar higher with each new product release.

You will also hear me talking more about the importance of brand, globally, as consumer technology markets mature. I have been compiling quite a bit of evidence to showcase the strength of position those technology companies with a strong brand are in. Apple is one of those the data overwhelmingly points to. By having others compare themselves to Apple products, it only helps to strengthen the belief Apple’s products are the standard. I know it sounds counterintuitive but when Microsoft, Samsung, Huawei, etc., and others compare themselves to Apple, it only strengthens and affirms what the market already knows to be true.

Good for Competitors
This should be obvious but, competition is good. And honestly, competition is only just getting started. Think about where we are going with wearable technology (on wrists, in ears, on the head, in shoes, etc.). AR/VR have fascinating futures ahead. Artificial intelligence and machine learning practices to increase customer experience is just now seeing ground broken in mass market ways. We need competition in this industry and, if others are adamantly chasing Apple in all these areas, it is good for consumers.

Where my take on this may differ with others who have strong feelings about other brands is that I feel it is good Apple is the benchmark. Especially since Apple can teach them all a lesson on how to do customer service. Just take the Samsung Galaxy Note 7 debacle as an example. Samsung is probably the next closest consumer electronics brand to Apple at the moment and the customer experience they are providing is a disaster.

Apple as the standard across the board is a good bar for others to try and reach. Like Apple or not, they are good this for industry. No reasonable person could argue otherwise.

Contrasting Apple and Alphabet’s Approaches to Healthcare

A little while ago, I wrote a post on tech companies’ efforts in the education sector and how I felt they were lacking (I subsequently wrote a follow-up post about Apple’s Swift Playgrounds app being a step in the right direction). In that post, I mentioned there were other areas where large tech companies appeared to be making significant bets, including healthcare. Today, I wanted to dive deeper into that area, since we’ve seen another big partnership announcement from Alphabet’s Verily division this week and we’re also fresh off a set of announcements about the Apple Watch last week.

Alphabet’s Verily Bet

One of the more prominent and established “Other Bets” at Google’s parent company Alphabet is Verily, its life sciences division. It’s one of the three Other Bets said to be generating meaningful revenue, along with Nest and Google Fiber. But it’s also very unlike those other two businesses, in that it’s not a consumer-facing product or service company. Rather, Verily has been mostly developing technologies and then partnering with other established firms which can provide the clinical, research, and marketing expertise to take inventions to market. So far, Verily (and its predecessor, Google Life Sciences) has announced several of these partnerships with various companies, as shown in the table below:

verily-partnerships

What’s interesting about Alphabet’s approach is it is diving very deep into specialized areas within healthcare, developing technology designed to diagnose and treat specific conditions. Several of the partnerships outlined above are focused on diabetes specifically, for example – this isn’t about general purpose technology being applied to healthcare as an afterthought. That makes Alphabet somewhat unique among big generalized tech companies, most of whom have lent more generic technology to the specialists rather than diving deep themselves. The business models are also curious, featuring a mix of joint ventures, licensing payments, and others. And of course, most of these projects are expected to take years to produce results, in keeping with the normal development cycles for clinical treatments.

If you read enough about Verily’s various efforts, you’ll also find some skepticism from experts in the field. Some of this can be written off as sour grapes from would-be partners, but some of it also comes from people Alphabet has actively consulted on its various efforts and who have come away unimpressed. The main focus of Alphabet’s diabetes work is on miniaturization technology and its partners have spoken highly of its efforts there, but some of its approaches have been tried before and failed, so it will be interesting to see how the contact lenses effort, for example, pans out.

Apple’s ResearchKit and HealthKit

When Apple first announced ResearchKit, I wrote it up as a unique approach to healthcare, though very different from Google’s. Whereas Google’s approach is to work in a very direct fashion on specific, narrow fields within healthcare, Apple’s approach has been to leverage its general purpose technology to help doctors and research institutions do what they do more easily and consistently, all the while making life easier for the patient or research subject. Having covered enterprise service providers for a long time, I found it striking Apple had turned the usual model on its head by focusing on the end user – the patient – rather than the institutions.

This approach, too, has pros and cons. On the plus side, Apple makes its massive installed base of devices, including a growing base of Apple Watches, available as conduits for collecting, tracking, and gathering data on various conditions as part of both treatment and research projects. What’s more, Apple isn’t charging for this capability, but is making it freely available to whoever wants to use it. On the downside, this is general purpose technology not designed for the diagnosis or treatment of specific conditions but designed first and foremost with more generic purposes such as fitness tracking in mind. As such, Apple’s approach can never go quite as deep as technology designed for narrow use cases, although we’ve already seen many applications of both HealthKit and ResearchKit from inventive researchers and care providers.

Above, I talked about the unusual business models for Verily’s various efforts but in contrast, there is no business model at all for these two initiatives from Apple, at least for now. What is clear, though, is Apple is taking this new area of R&D very seriously and Tim Cook’s recent comments about the sheer scale of the healthcare market suggests he sees a financial opportunity here too. I’m very curious to see what shape Apple’s future efforts might take – it’s easy to imagine the partnerships today with Hermès and Nike with the Apple Watch could find counterparts among the major pharmaceutical companies and healthcare systems. These partnerships might develop more specialized versions of the Apple Watch or, perhaps more likely, additional devices which could serve as accessories to the Watch or iPhone and add additional sensing and tracking capabilities. Tim Cook has already suggested he doesn’t want to have to put the Watch itself through the FDA approval process, but these other devices might be better suited for that route.

Doing Good a Motivating Factor

While I’ve focused on the structures and business models of Alphabet’s and Apple’s healthcare initiatives, it’s clear there’s more than just financial incentives at play. If you listen to executives from either Apple or Verily, it becomes clear they’re motivated by a desire to do good in the world. As I’ve mentioned in several previous posts, I believe big tech companies have a duty to use their technological expertise to move the world forward in meaningful ways, changing lives for the better and solving significant problems. It’s great to see both these companies operating in this way. And I’d be remiss if I neglected to acknowledge that these are far from the only two big tech companies doing good work here – I simply wanted to focus on these two today, to keep things simple.

Unpacked: Minimal Headphone Jack Impact and Interest in Wireless Headphones

I’m certain many of our readers will agree that the media is blowing the perceived negative consumer sentiment about Apple’s removal of the headphone jack way out of proportion. In reality, this move will have very little to no impact. Consumers who buy either of the new iPhone 7’s will naturally use the headphones provided in the box or the supplied adapter.

We polled our panel, using our rapid response technique, to ask iPhone owners about this issue. I’ll start with some key metrics we quantified then we will look at the prospect wireless headphones hold going forward.

Overall, 59% of iPhone owners in our panel said they use the Apple provided headphones as their primary headphones. 41% said they had purchased the headphones they use as their primary ones. Interestingly, after Apple’s provided headphones, the second largest brand owned was Beats followed by Bose to round out the top three brands owned and used as primary by iPhone owners. By quantifying such a large percentage of consumers who are content to use what is provided in the box, it assures us this is a non-story. In fact, I would argue the switch away from “swipe to unlock” to “press to unlock” in iOS 10 will be noticed by more consumers than the removal of the headphone jack.

Looking at where we go from here, a central question many are proposing is if and when the market may adopt wireless as the new normal. Today, wireless headphones make up roughly 30% of sales, according to Piper Jaffrey internal research, with a market size of around 310-320 million units sold globally each year according to GFK. Apple’s AirPods may very well be the future but, as we all well know, the future may be here but it is not evenly distributed (love that William Gibson quote).

If I was to poll the owners of wireless headphones today, as well as the main purchase motivations, I’d put them largely into two buckets — fitness/athletes and travel. Looking at the wireless headphones that sell most today, those are the clear targets of the products. Which makes sense — for an active lifestyle, wireless is more convenient. Similarly, many of the best-selling over-ear headphones have noise cancelling and, design-wise, cater largely to business travelers, one of Bose’s biggest audiences. The mainstream has not yet caught onto the value and, while optimistic, the question is when that may change. We added to our poll some questions around sentiment for wireless. We asked our panel how interested they are to have their next set of headphones be wireless.

We found 32% of consumers outright state they are not interested in wireless. Slightly more encouragingly, 24% said they may become more interested once the price drops. 18% said they were very interested. Those round out the top three responses from our poll.

What Apple is doing is beyond just wireless headphones. In fact, we believe you should think about this product as a form of smart wearable technology. There is quite a bit more that can be done with technology in the ear, think health in particular, than anywhere else on the body. An always on, smart connected computer in your ear opens up many possibilities. Especially when that smart computer is tied into the more powerful computer in your pocket, purse or on your wrist. This is the angle I would keep in mind if you try Apple’s AirPods, or see how people write/review them.

More on this topic in future analyses.

Unpacked for Friday September 9th, 2016

Apple Music Numbers Show Continued Rapid Growth – by Jan Dawson

One of the numbers mentioned in Tim Cook’s “Updates” section at the beginning of this week’s Apple keynote, which may well have been missed in the focus on the latest iPhone and Apple Watches, was a new number for paid Apple Music subscribers. Apple now has over 17 million paid subscribers, which puts it over half of Spotify’s most recent paid subscriber number of 30 million.

Perhaps more significantly, if you assume a $10 per month average revenue per user (this is the standard price in the US, whereas lower pricing in some other markets is likely offset somewhat by family subscriptions at $15), this number puts Apple over the $2 billion annualized revenue rate for the first time. Spotify’s revenue last year was around $2.2 billion in total, so Apple is now getting very close to Spotify’s scale in revenue terms. Spotify has around 100 million total users, with about 70% on the ad-supported service, so Apple achieving similar revenue numbers with a fraction of the subscribers helps explain why the music industry has been so supportive of Apple’s efforts.

The broader financial benefits together with more direct financial incentives are likely the reason why Apple has been able to secure 70 first-run and exclusive releases for Apple Music in its first year or so, another stat Tim Cook touted during the keynote. Those exclusives, in turn, are driving interest in Apple Music and Apple seems to continue to turn trial subscribers into permanent paid subscribers at a decent clip. Since the launch of Apple Music, Apple has added around 50 thousand subscribers per day, with a more recent average closer to 30 thousand. At that run rate, it might hit 20 million subs by the end of the year.

In the grand scheme of things for Apple, Music is still small – even at $2 billion a year, it’s well under 10% of Apple’s Services revenue, which in turn is only around 10% of total revenue. But the healthy growth indicates Apple can successfully launch paid content services to its installed base, something that should give it confidence to try this approach in other areas, notably video.

Traditional IT Companies Announce Major Changes: Dell, HP Enterprise, Intel – By Bob O’Donnell

Though most of the world was focused on the relatively hum-drum announcements Apple made this week regarding their new iPhone 7 and Apple Watch Series 2, there were several very important announcements from the large, traditional IT companies this week. Dell announced they completed their merger with EMC to form Dell Technologies; Intel sold off its McAfee security arm to investment firm TPG, and HP Enterprise unloaded its software business to little-known Micro Focus International, a British-based software company that typically focuses on applications that work with older computer systems.

Individually, each of these announcements was definitely newsworthy but, collectively, they demonstrate that what many consider to be the “boring” old part of the tech business is very much alive and eager to make important strategic changes. Interestingly, the HP Enterprise and Intel deals reflect a desire to slim down and specialize, whereas the Dell/EMC merger represents the complete opposite. Chairman Michael Dell’s vision is to build a powerhouse of key hardware and software technologies, with a single perspective, in order to control all the tools necessary to build and deploy comprehensive solutions to today’s leading tech problems.

Throw in the fact HP, both Enterprise and Inc., remain public companies, while the vast majority of Michael Dell’s empire remains private, and you have a nearly perfect lab experiment of opposite strategic approaches to compare. It will be several years before we truly know which solution proves to be the most successful, but the dichotomy between the two approaches couldn’t be more distinct.

From a big picture perspective, the announcements reflect some strategy readjustments that were long overdue. Arguably, the Intel deal is the most obvious in the sense there never seemed to be a great fit between Intel and McAfee, nor was there much cross-fertilization between the two companies. For HP Enterprise, their deal gives them the opportunity to fix the widely-recognized blunder of their $11 billion Autonomy purchase.

For Dell Technologies, it’s clearly more of a bet that owning several key components necessary to drive changes—the transition to public and hybrid clouds, the move towards the Internet of Things in business environments—will be key to driving successful deployments. Frankly, I like the potential of what this Dell/EMC combination has to offer but executing on the core principles will be key to long-term success.

Nintendo Decides They Finally Like Money – By Ben Bajarin

Years ago, during my first writing gig for Slashgear, I wrote this column titled “Does Nintendo Hate Money?” My argument was they were missing mobile and thus missing being a key player in one of the largest computing shifts we have ever seen. Luckily, they have finally seen the light.

Mario Runs was likely in the works well before Pokemon Go hit the market. But my hope with Pokemon Go was that Nintendo would finally see why they need to bring their iconic brands to smartphones. I’ve long toyed with the scenario of Apple buying Nintendo, since these games as iOS exclusives would only strengthen Apple’s differentiation, as well as add a big upside in software/services revenue. Unfortunately, had this even been an idea for Apple, they should have done it before their stock went on a run, thanks to their waking up to the smartphone gaming era.

I understand why Nintendo took so long. They were, in fact, deploying a philosophy not that dissimilar to Apple where they make their own hardware and software. The problem here is the video game console market is niche and very small compared to smartphones. The notion that Nintendo needs to define the hardware experience in order to differentiate their games is no longer defensible. There may be some experiences Nintendo leaves to their consolers but that is for a niche segment. The time has come to bring Mario to hundreds of millions of consumers who have never played this franchise or others from Nintendo. And it’s time for Nintendo to make money off customers they never had a chance of selling a console to.

Lastly, I like the business model Nintendo is utilizing. Coming from a gamers perspective, many of the freemium games are designed in a way to manipulate the game play so you have little to no chance to progress in the game without spending a lot of money. While I understand why, the game dynamics are the exact opposite of consumer friendly. As controversial as this statement may be to some, freemium needs to die because it creates really crappy games. Pay a small fee once is the way to go as it yields a much more consumer friendly experience. Let’s hope this model works and is used as an example for others to learn from.

Added Revenue Might Not Be The Most Valuable Benefit AirPods Bring to Apple – by Carolina Milanesi

Apple talked about the removal of the audio jack as a courageous move and, while it might be a little exaggerated, it is true that every time you try and fix something that is not broken you are playing with fire. Humans do not like change, not even when change might be bringing them a better experience or simply a futureproofed one.

What is interesting is the options Apple has given users to deal with the change. There are Lightning EarPods in the box, an adapter for older EarPods in the box, the new AirPods, Beats Headsets and all other headphones and earphones for sale. So plenty of choice for iPhone 7 users. This made me wonder what the AiPods buyers can tell Apple about themselves:

  • They appreciate good sound quality
  • They value the full ecosystem of products that can connect to the AirPods
  • They engage with Siri
  • They value Apple even over an Apple-owned brand like Beats
  • They are not price sensitive
  • They are early adopters
  • They are making a statement

Looking through this list, it is apparent to me many of the statements would apply to Apple Watch owners. This in turn makes me wonder if AirPods are a way for Apple to test the next step in wearables and/or the role voice UI could play going forward. A way to test how far they can push the more engaged group of users they have.

The fact AirPods came to market under the Apple brand rather than Beats is also significant in my view. It means Apple sees them not only as innovative but as a key part of the experience going forward. An experience that users who appreciate the end to end offering will seek out first and therefore become ambassadors for Apple exactly as they have been doing with Watch.

Will the Next iPhone’s Jumpstart a New Super Cycle of iPhone Sales?

Over the last two quarters, Apple suffered the first downturn in iPhone sales and caused quite a stir in the financial community. Some financials analysts said iPhone sales had peaked. Others predicted sales would be flat for the next four quarters. But another theory emerged from some analysts — Apple iPhone sales were only at a lull and there is a possibility we will see the next “super cycle” of iPhone sales starting in 2017.

I suspect, with the introduction of new iPhones this week, Apple could be jumpstarting this super cycle of iPhone sales and upgrades due to potential key product features and the introduction of their “iPhone a Year” program that finally kicks off this fall.

There is one feature the rumor mills have been talking about for some time — the possibility Apple will add dual cameras to this year’s iPhones. If they do, I believe this will be a huge draw not only for early adopters but even for mainstream users who want their smartphone to have the best possible camera.

One of the things Apple did with the first iPhone with a camera was impact the point and shoot camera market. As people with an iPhone found out, the best camera is the one they have with them at all times. That turned out to be the one on their iPhone or smartphone. Since Apple introduced an iPhone with a camera, every year, iPhone users hoped for and expected the camera on their iPhones would get better.

Thankfully, Apple continued to evolve the quality and capability of the iPhone cameras and the current 12 megapixel, one lens, rear camera on the iPhone 6s and iPhone 6s Plus are some of best in any smartphone today.

However, should Apple add a dual lens camera and its quality and capabilities are closer to a DSLR instead of point-and-shoot cameras, the interest in these new iPhones could be significant and drive many to upgrade their iPhones in the next year. Dual lens cameras that infringe on the DSLR market could be a game changer for Apple and DSLR vendors and force all premium smartphones in this direction.

The second feature that could draw interest in upgraders is the rumored removal of the  100+ year old 3.5 mm audio jack. If Apple does remove it, they are saying it is time to start moving the smartphone to a true wireless metaphor and I would not be surprised if this is their first step to eventually adding wireless charging to iPhones in the near future.

Remember, Apple has a history of killing off old technology to drive the industry forward. They did this when they introduced the 3.5 inch floppy that eventually killed off the 5.3 inch floppy drive. They added CD-ROM and CD Read Write drives to the Mac and forced the entire PC industry to follow suit. They created the All-in-One category with the candy-colored Macs in 1998 and now this is the main form of desktop computers from them and the PC makers.

The third thing is, by killing off the subscription model by the carriers, we are moving to what is more like a monthly leasing model for new iPhones. So a new iPhone from any of the carriers will start around $30 or so for the lowest end iPhone and then be priced a bit higher for models with more memory in them. This program, which is touted as “a new iPhone every year”, will be very attractive to a lot of iPhone users. This too could help jumpstart this next super cycle.

The super cycle theory believes the iPhones introduced in the fall of 2017 will accelerate the sales of the next generation of iPhones. The belief is Apple would introduce a new design on the 10th anniversary of the iPhone and that model would drive huge upgrades across the board for the following two years. I have no clue what Apple is going to introduce in 2017 but, if that model has a significant design change, it certainly could drive exceptionally large iPhone upgrades next fall.

I personally believe a new iPhone super sales cycle is in the cards and it is possible the new iPhones Apple introduces this week may jumpstart a very strong upgrade cycle that could last for a full three years.

Some Educated Guesses About iPhone 7 and iOS 10 Availability

On Wednesday, Apple will announce its new iPhone models, the availability date of new hardware, and the date on which iOS 10 will be available to download. The content of the iPhone and Apple Watch announcements themselves have been the subject of continuous rumors for months, with even more specific rumors emerging over this past weekend. But it’s also worth speculating on the likely release dates of the hardware and software based on past patterns.

It’s worth noting these patterns only hold until they’re broken and last year, Apple broke a couple of them. So take all that follows with a pinch of salt – these are still just educated guesses, not guarantees of what will happen.

iPhone 7 Release Date

The challenge with predicting the release of the iPhone 7 is Apple broke its release pattern last year. For three straight years before, new iPhones were released on the second to last Friday in September. But last year, Apple moved the launch to the last Friday in the month. So it would be at least somewhat reasonable to imagine the iPhone would be released on the last Friday of the month again, except that would be the 30th, the last day of the month, pushing the opening weekend into October. Moreover, whereas Apple’s 2015 fiscal year ended on September 26th, this year it’ll end on the 24th, which would put all sales from the release into the following quarter. Apple has never done that with a September release (the lone iPhone release in the first fiscal quarter being the iPhone 4S, which debuted in October), so that seems very unlikely.

The other thing to consider here is time from announcement to launch, which again was very consistent from 2010 through 2015, at 9-10 days:

iPhone Announce to Launch

Apple broke this pattern last year, with a release 16 days after the announcement. And again, we’re left wondering whether it will now stick to that longer gap or go back to the more conventional 9-10 days. September 23rd would be 16 days after the event this week. I’ll bet that’s going to be the gap again this year. The only reason to suspect it would move forward to just 9 days after the announcement would be to try to get a full three-day weekend of sales in the current fiscal quarter. That introduces a little bit of uncertainty.

The other question around the hardware release date is when preorders will open. Here, Apple’s pattern has been very consistent, even last year, with preorders opening 2-3 days after the announcement and I would guess that will be the case again this year. That would put the start of the preorder process at 12:01am PT on September 10th.

iOS 10 Release Date

The best guess for the iOS 10 release date is September 21st. Why? Well, Apple has now fairly well established a pattern for iOS releases, with two key characteristics:

  • For four out of the last five years, the new iOS release has been made available two days before the new devices are available (the one exception in that period was last year, when iOS 9 was released nine days earlier)
  • For three out of the last four years, iOS releases have been made available to the public exactly 100 days after they were announced at WWDC, with the lone exception being iOS 8, which was made available 107 days after announcement

The charts below show these two patterns:

Days between iOS release and iPhone release

iOS Announce to Availability

Again, that first chart shows last year’s exception, when iOS 9 was released over a week before the iPhone 6s was released to customers. The September 21st date would get us back to a two-day gap and would be consistent with the 100-day pattern Apple has largely stuck to for the last several years.

Uncertainties

I’ve already mentioned these uncertainties briefly, but it’s worth recapping:

  • With regard to the hardware release date, while I believe September 23rd is the most likely date, it could be September 16th. That would be the first time Apple has released an iPhone on the third to last Friday of the month, but it would also be the third Friday of the month (this is a five Friday month) and, in that sense, it would be consistent with the 2012-2015 pattern
  • If the hardware release date is the 23rd, it’s possible we get another 9-day rather than a 2-day gap from iOS release to hardware release. I tend to think the software and hardware release dates will remain two days apart. In which case, a September 16th iPhone release date would suggest a September 14th software release date. But, on balance, I’ll go with the 21st and 23rd for software and hardware respectively.

Why does all this matter?

While this can be an interesting exercise and we’ll obviously know soon enough, why bother? Well, the timing of the hardware release in particular is critical for understanding in which quarter that first weekend of sales will land. As I mentioned earlier, with a financial quarter (and year) ending earlier than usual, there’s a possibility the bulk of sales fall into Apple’s fiscal first quarter instead. Its guidance from last quarter makes it hard to tell which way Apple is thinking about this – revenue guidance is down on last year’s actual revenue number, but up on the number from two years ago. The downward trend would certainly be consistent with recent ones from Apple. But the drop isn’t as significant as it has been, suggesting fairly decent sales overall and perhaps implying a good number of iPhone sales. But analysts’ estimates for Apple’s current quarter all have to be based on guesses like we’ve been making above about when exactly new iPhone hardware will land and, therefore, which quarter’s sales they’ll contribute to. Given that Apple could sell several billion dollars’ worth of iPhones in the first day alone, that’s a fairly significant bet to have to make.

Why the Ruling against Apple could have Negative Impact on EU’s Future

I was involved with the Irish Development Agency (IDA) during the early days of Apple deciding to go to Ireland. At the time, the Irish economy was a disaster and they were losing their college graduates to other countries because there was no work for them at home. This particularly impacted two universities that were producing some top engineers and IT pros.

The tax incentive program IDA developed at the time was groundbreaking when it came to luring tech companies to Ireland. In those days, they and other European countries had employed a tax incentive program for other industries, mostly in Europe, but none were tech-related.

Apple took advantage of that program and came in and created many jobs. As a result, both Dell and Lotus followed Apple to Ireland. Some years after Apple set up operations in Ireland, I went to visit the Apple Cork facility with IDA officials. They were proud of their tax incentives that helped bring these key US tech companies to their country. They acknowledged this tax program, which got unanimous support from the Irish government, helped provide jobs for university graduates and others and stabilized their economy at a critical time in their history.

In fact, in the early 1990s, I introduced other US tech companies to IDA who then took advantage of this program and their overall tech community grew. IDA is still very active in trying to bring companies from all over the world to Ireland but this EU ruling would hit them hard if it goes through.

Interestingly, the program IDA developed was so popular, many European countries copied it. They have been successful in France, the UK, Germany and with other EU partners as well.

This ruling from the EU, which basically demands Ireland collect retroactive taxes from Apple, is both absurd and dangerous and would have a major impact on the EU’s future.

In Tim Cook’s letter to the Apple Community in Europe, he lays out the real problem with this ruling:

“The Commission’s move is unprecedented and it has serious, wide-reaching implications. It is effectively proposing to replace Irish tax laws with a view of what the Commission thinks the law should have been. This would strike a devastating blow to the sovereignty of EU member states over their own tax matters, and to the principle of certainty of law in Europe. Ireland has said they plan to appeal the Commission’s ruling and Apple will do the same. We are confident that the Commission’s order will be reversed.

At its root, the Commission’s case is not about how much Apple pays in taxes. It is about which government collects the money.

Taxes for multinational companies are complex, yet a fundamental principle is recognized around the world: A company’s profits should be taxed in the country where the value is created. Apple, Ireland, and the United States all agree on this principle.

In Apple’s case, nearly all of our research and development takes place in California, so the vast majority of our profits are taxed in the United States. European companies doing business in the U.S. are taxed according to the same principle. But the Commission is now calling to retroactively change those rules.

Beyond the obvious targeting of Apple, the most profound and harmful effect of this ruling will be on investment and job creation in Europe. Using the Commission’s theory, every company in Ireland and across Europe is suddenly at risk of being subjected to taxes under laws that never existed.”

Part of my educational background was studying the potential of a European Union back in the early 1970s. As part of this study, I spent time in Geneva, Paris and other European capitals looking at the potential impact of a proposed European Union. Back then, the issues were so complex the movement to create an EU was killed and did not get revived for another 25 years. But one of the major things that came up, even back then, was how the individual countries would handle their taxes at a country level and how a federal tax could be implemented.

When the new EU was finally created, the EU governing body made concessions on this and each country could determine its own tax structure. This ruling goes against their own agreements with their EU partners. Given that Germany, the UK and France have similar tax incentive agreements, I suspect they will also be against this ruling and will weigh in and support Ireland and Apple at some point.

The Irish government and Apple are right to appeal this ruling. If it stands, it could impact the EU’s ability to lure new companies and impact jobs growth as well. This ruling is bad for Apple, Ireland, and all EU partners who want their economies to grow and not be negatively impacted by an over-reaching EU commission.

Keep in mind, this tax incentive program was created well before Ireland became part of the EU. It literally saved their economy. They have no interest in turning back the clock, given what this program did for them then and will do well into the future.

For another important perspective on this subject, check out John Swartz’ piece in US Today that points out this ruling could effect other tech players, too. Also see how US officials view this move by the EU to require Apple to retroactively pay back taxes to Ireland.

Unpacked: The Health/Tech Market Opportunity

When looking forward to big future market opportunities, the health and technology intersection is one that is commonly brought up. The health/medical industry is, broadly, ripe for continued integration of new technologies. However, from what I see at the moment, it may be wise to separate consumer driven health tech from technologies deployed by the medical community and given to consumers with a health condition. The latter market is likely much greater in terms of size than the former.

Right now, when we look at consumer-driven health tech products, we look at things like health and fitness wearables, sports tech and gear, and other products targeting those with an affinity for health and fitness. The challenge is that is not a large market in reality. Looking at data we have both at a global and local level, we only find pockets of consumers who self-identify as having a health and fitness focus representing between 14-18% of the market.

Data from one of our research partners revealed that globally, those with a fitness-focused lifestyle (those who exercise in some capacity four times a week) only make up 14% of global consumers. Similarly, in our own health and technology focused research study, we found 17% of the US consumers say they are obsessed with their health, eat right, and exercise several times a week. Similarly, only 19% indicated they consider their current health level “very healthy.”

What our data suggests is that any product with a specific health and fitness focus and value proposition has a limited global addressable market that is likely only in the 100-200 million range. Not small, but also not super large. Given other data points we have, it would suggest this market is roughly only 20% penetrated if we add the percentage of consumers in each market who say they have a fitness band or smart watch, so there is still headroom. The key takeaway is the market size is not massive for dedicated health and fitness technology products being sold direct to consumers.

A larger segment of consumers indicated they were not health-obsessed but also not suffering from major illnesses. While this is a big part of the market, I’m not convinced the health and fitness tech is poised to penetrate this group. So the current crop of wearables and smartwatches need to have greater appeal outside of health and fitness if they want to grow their market size. Smartwatches are better positioned here, given they add a lot more utility overall than fitness bands but today, the largest part of the smart watch consumer pull is coming from a health and fitness angle.

At the other end of the spectrum are those who say they have a chronic illness they are treating. This represents less than 20% of the market. This is the market for which a medically-focused technology product would be suited, such as one prescribed by a doctor to a patient to help monitor health. This is also not a large market but still represents an important one as we look at the integration of health and technology.

Not surprisingly, the biggest segment of the market is more nominal in their health awareness. There is certainly overall value technology can bring to this market but the pull, at the moment, is coming largely from those with a fitness focus or someone dealing with a health issue. Wearables may be on the cusp of going mainstream and we will see how close we are when we do our dedicated wearable/smart watch study this fall.

Apple and Revenue per User

There’s a particular statistic in the news this week because it’s been both widely shared and widely criticized. It comes from this Fast Company article on Apple. Here’s the key quote (emphasis mine):

Apple does an extraordinary job of extracting revenue from the worlds in which it already plays a role, and its future revenues will depend on this even more. Horace Dediu, an influential analyst now working with the Clayton Christensen Institute for Disruptive Innovation in Boston, estimates that Apple customers deliver an astronomical $40 per month apiece to the company, versus the pennies per month that Facebook and Google collect, and the few dollars a month that Amazon receives.

On Monday morning, I got pulled into a Twitter thread about this quote and the reasoning behind it but, because of Twitter’s character limit, I found it almost impossible to continue the thread in an intelligent way with six others (and their various usernames) taking up almost 90 of the 140 characters available. But it’s worth picking that quote apart a bit and looking at the actual numbers here.

Why revenue per user matters

Revenue per user (often abbreviated as ARPU for average revenue per user) is a much used metric in various services businesses because they generally know who their users are and can easily quantify them and know how much revenue each user generates. It is one of the two key drivers of revenue, along with the number of users itself. It’s generally much less useful outside of services businesses because others don’t have the same tight, predictable relationships between individual buyers and a regular monthly spend or revenue. If there’s growth in ARPU, that acts as a multiplier on user growth when it comes to revenue which is, of course, what all services companies aspire to.

Apple as a services company

Apple is not primarily a services company but a company that largely makes money through hardware sales. It describes itself as a company that provides hardware, software, and services in a tightly integrated fashion. Non-hardware items make up a small minority of sales at Apple, with just 10% of total revenues over the past twelve months. However, the company has been keen to talk up its Services segment and the revenue that flows from it, in part, because services are thought of as producing more predictable revenue streams than hardware sales, which have recently been less predictable as drivers of growth for Apple than in the past.

ARPU comparisons for Apple and online services companies

In that context, it’s inevitable people should start wanting to compare Apple’s Services segment with online services businesses to see how they measure up. Apple doesn’t report an ARPU number per se but for Apple, Twitter, and Google, we can come up with reasonable estimates while Facebook provides an official ARPU number. For Apple, we have two Services numbers we can use – one is the segment revenues reported under generally-accepted accounting principles (GAAP) and the other is its more recent gross revenue number for installed-base purchases (essentially that GAAP number plus the cut of App Store purchases that goes to developers, minus AppleCare+ warranty revenues). Note I’m using an estimate of Apple’s total user base which comes to around 800 million in Q2, on the basis that Apple’s total devices in use number of a little over a billion includes secondary devices for some subset of users, such as iPads and iPhones owned by the same users (I’ve assumed 20% of the total device base).

The chart below shows how some of these numbers stack up:

Annual revenue per user

A few things stand out almost immediately:

  • Apple’s gross services per user comes out on top in this peer group, with a little over $50 per year per user, while its net revenue (which is what it actually reports to the SEC) comes in quite a bit lower, and below the  number for Google
  • Apple’s revenue per user number is dropping but that shouldn’t be surprising – the new users that come on board are going to be spending less than existing users, because they’re disproportionately in countries with lower incomes and have fewer paid Apple services available (something I previously looked at in this post a couple of years ago)
  • Twitter and Facebook are far lower on this metric, with Facebook in the mid-teens and Twitter still in the single digits per year, though both they and Google are seeing rising numbers

Given services aren’t Apple’s main business, it’s impressive it’s able to drive such significant spend simply off the back of its installed base of devices, especially as most of its Services revenue comes from services less than ten years old (notably the App Store, which debuted in 2008). If you were to take a step back and look at Apple’s total revenue per active user or device, you’d obviously get far larger numbers and those would obviously be much higher – you’re talking about somewhere between $250 and $400 annually over recent months, depending on whether you use the active device base or user base. But then you’re also talking about a less comparable business to those online companies.

To return to the quote we started with, if you’re being pedantic, you could argue Facebook did indeed generate “pennies” per month per user through 2015 (in that its annual ARPU was $11.96). So just under a dollar per month per user. But since the beginning of this year, Facebook has been generating over a dollar a month per user globally and Google has been well above that number for years now. On that basis, then, the Fast Company article is misleading.

US versus global revenues per user

Where things get really interesting is when you look at revenues on a geographic basis because the online companies generate dramatically different amounts in various regions and especially generate far higher revenues in the US than in the rest of the world combined. The chart below shows a US-focused split for the online services companies, with a couple of Apple’s global numbers for context:

Annual revenue per user US

As you can see, you get a very different picture when you look at things this way – Google’s US revenue per user is likely over $150 per year, while Facebook’s reported ARPU for US & Canada was over $50 for the past twelve months — roughly the same as Apple’s gross revenue per active user globally. Even Twitter’s US ARPU is almost up to the level of Apple’s global net services revenue per device. These numbers put the Fast Company quote in an even starker context – in North America, the online services companies generate much more than pennies a month and Google generates far more in revenue than Apple does in Services revenue per user, while Facebook is roughly on par with Apple. On the other hand is the trajectory, where Apple’s number has been falling as Facebook and Google’s numbers (and to a lesser extent Twitter’s) rise rapidly. That doesn’t actually matter that much from an Apple perspective because its installed base of devices and users continues to grow rapidly, driving overall Services growth.

No one way to measure a company

I’ll close with this observation: all these metrics are interesting to look at and can tell us something interesting about these companies, their business models, their growth trajectories, and so on. But these are fundamentally different companies, each of which has unique characteristics that make single metric comparisons overly simplistic (my post last week compared some of these companies and others on another set of metrics, for example). Yes, it’s interesting as Apple sells itself more and more as a services company to put those claims into context, but the reality is Apple as a company is still ten times the size of its Services segment. It’s far less dependent on ARPU growth for its overall revenue growth than are pure-play services companies. Regardless, Apple doesn’t need observers to make false comparisons of its revenue per month per customer with other companies – I’m pretty sure Apple can handle being compared accurately with its competitors and peers.

Apple’s Possible Strategy for removing the Audio Jack in New iPhones

At Samsung’s Galaxy Note 7 announcement this week, one of their execs stated, when talking about this new phablet, “You know what else it comes with? An audio jack. Just saying.” Clearly, a knock at the rumors Apple may not have an audio jack on future mobile products.

At this point, ditching the audio jack is still a rumor as Apple does not confirm any specs on any products until the day they release them. But it begs the question: if Apple is doing this, is there some method behind this madness? The media and even some customers have decried the idea of Apple not shipping an iPhone without the popular audio jack and I have seen some comments asking if Apple even knows what it is doing when it comes to changing the rules of the game.

As an Apple follower for three decades, I have come to understand that anything they do has some strategic goal for them and, in some cases, a strategic goal for driving broad industry innovation. My sense is both of these are in play if they do ship an iPhone without an audio jack.

From a historic perspective, Apple has always been a contrarian. It started with the design of the Mac and its introduction of a GUI and mouse. But, at that time, the one item they changed in the Mac’s original design that caused them serious consternation was the decision to go from a 5 1/4″ floppy disk to a 3.5” rotating storage medium in a hard shell case. You should have heard the screams and yelling the PC insiders had with that one. Yet, this one move by Apple drove the entire PC industry into ditching the bigger floppy drives and moving to the 3.5” storage format.

Then in 1989, Apple shocked the industry by creating a Mac that had a CD-ROM drive inside. Apple was visionary and saw the value of mixed media and needed a new one for storage that went well beyond what they could get on a 3.5″ disk. Again, industry vets mocked them but this move ushered in the era of multimedia and changed the way we used PCs as both a creation and communication tool. Apple took similar gambles when they introduced the candy colored iMacs and got us away from the square battleship grey PCs most people were used to.

Lessons from Apple’s past show us that, while many moves they made may have gone against the current industry trends, in most cases, these decisions turned out to be something that forced the industry in a new direction that, in the end, was better for Apple as well as their competitors.

I suspect this is the case again with the audio jack. If Apple does ship an iPhone or any other mobile products without an audio jack, the key purpose I see will be to drive the industry closer to the overall vision of wireless headsets, charging and communications. I myself have not used a wired headset for two years. When I go for my walks, I use a Bose Bluetooth over-the-ears wireless headphone. When taking calls on my iPhone, I use a in-ear bluetooth headset. In my car, my iPhone connects to the wireless system in the car’s audio system. Yes, I have dozens of wired headsets and earphones that still have a 3.5 mm audio jack but all are sitting idle in drawers around the house and office.

Also, the price of wireless headsets has come down rapidly. You can get a pretty good quality Bluetooth headset for under $100 now. And, if Apple does make this move, they would most likely ship a Lightning adaptor for a 3.5mm audio option or, at the very least, sell one dirt cheap for the first six months to a year as they did when they moved from the old iPhone connector to the Lightning connector.

Ultimately, a hands-free wireless audio and charging world is the future. I believe Apple wants to push the industry in that direction sooner rather than later. Also, while Samsung disses Apple today, if Apple does this, you can be sure Samsung will be one of the first to follow, given their track record of copying Apple on many things.

Apple Earnings: Look Beyond the Year Over Year Comparison, Judge Opportunity

Apple reported its fiscal third quarter results on Tuesday and Wall Street seemed to like it. But, you know as well as I do, using Wall Street’s reaction to earnings does not make you any wiser to how a company is actually doing.

What I thought was interesting about the call, both on the Apple comment side and the questions coming from the analysts, was the focus on the longer term strategy. Both AR and AI were mentioned several times by Tim Cook, not to mention a hint to a car business when talking about the DIDI investment:

“From a Didi point of view we see that as A) A great financial investment, 2) We think that there’s some strategic things that the company can do together over time and 3) We think that we’ll learn a lot about the business and the Chinese market even beyond what we currently know and Didi has an incredible team there. And, so, that’s sort of the rationale for why we did that.”

The focus on the longer term is unusual for Apple, which tends to never comment on future products. While there was not much substance to the comments, it was clear in my mind Cook was trying to reassure investors that VR and AI are all areas they are investing in (increased R&D figures hint at that) and they will not be blindsided once the market is ready.

In these areas, there were two specific comments I found particularly interesting. On AI, Cook said, “We are going to excel at AI because we excel at customer experiences.” While this sounds a little bit like a salesperson pitch, the point is nonetheless important. It does not matter how intelligent your bot or assistant is going to be, consumers will not adopt or interact with it unless the experience feels natural and if they feel whatever they are interacting with works with them and for them. Apple does user experience and customer experience – in a retail sense – very well and both these will be key in creating stickiness with AI.

The second interesting comment in my view was on VR. Cook said, “I know there’s people that want to call it a new computer platform, and we’ll see. I think there’s a tendency to call everything new the next computer platform, however, that said, I think AR can be huge. So, we’ll see whether it’s the next platform. Regardless, it will be huge.” I might be reading too much into this statement but it seems to me Cook is seeing VR as a feature (and possibly more of an entertainment feature), rather than the answer to everything. If I am correct, this might give us an indication of how Apple will be approaching AR from a hardware perspective: dedicated devices vs an experience for a device that does more than just AR.

This focus on the future left some questions unanswered when it came to the short term. Overall, I felt we got a little less detail on the quarterly performance and on short terms expectations than we normally get. That said, there were some interesting points to focus on when trying to evaluate Apple’s performance going forward.

iPhone

Both Cook and Maestri stated several times the iPhone SE had a successful launch and ASP declines for the iPhone certainly confirms that. ASP reduction was also impacted by a channel reduction of 4m higher-end iPhones. As I expected, the iPhone SE is doing its job in attracting new users to the Apple ecosystem as well as allowing users of older models to upgrade to a fuller experience. Both these factors are good news for the overall ecosystem, not just hardware sales.

Apple was not very clear on what they were expecting when it came to the next upgrade cycle but they did admit they misjudged the opportunity for the 6s and 6s Plus and they remain optimistic for the future:

“On the upgrade rate is that the iPhone upgrade rate for 6s is very similar to the 5s, and I guess in retrospect, maybe that was a predictable thing, although we didn’t predict it at the beginning it took us a little time to realize that. The iPhone 6 was significantly higher than that. And so it likely accelerated upgrades that would have been in the current year ahead of those.”

There are two factors at play here in my view:

  • Cook is correct some upgrades that would have normally happened this year happened earlier thanks to the appeal of the larger screen introduced with the 6 family. This meant the usually smaller cycle for the “s” iteration had an even smaller addressable market to cater to
  • The installed base the iPhone now has is very large and, while this is great for the ecosystem, it makes it more difficult to predict upgrade cycles. Not all the users are hardcore Apple users who will be looking for the next iPhone no matter what. Price and therefore, the role subsidies play, has more of an impact. This is where both the SE and the upgrade programs will certainly help. For the hardcore iPhone fans, the rumored iPhone 7 Pro might help drive upgrades for customers that have a 6s or 6s Plus. This tactic seems to be working for the iPad so why not the iPhone? Overall, I expect the iPhone 7 upgrade cycle to fall in between the one we had for the 6 and the 6s

iPad

Performance was certainly more encouraging this quarter. While sales were still slightly down year-on-year – 10m vs 10.9 in 2015 – revenue was up 7%. The iPad Pro 9.7″ was certainly the reason for this. It will be interesting to see how much the iPad Pro will be able to contribute to the back to school quarter but there is no question there is a sizable opportunity for Apple in the enterprise segment with these devices, especially the 9.7” version.

Services

Apple generated $6 billion in revenue in services, an increase of 19% over the June quarter of 2015. While as a proportion of the overall business services remain small (14%) compared to the iPhone, I find the year over year growth and the focus Apple is putting on Apple Pay, Apple Music and Apple Watch very promising. While it will take a lot for services to create the revenue the iPhone can generate, Apple’s early move will give them the time to build up. I do not see any other traditional hardware vendor being able to make a similar transition to make up for a hardware sales slowdown. Google, Microsoft, and Amazon are all trying to verticalize their offering in a similar way to Apple while of course coming at it from different point of strength but are all missing key pieces of the puzzle.

If this year’s schedule follows previous ones, we will see the iPhone 7’s initial impact in the last week of September. Then we should prepare for a calendar Q4 with new iPhones, new Macs and new Watch products. With so much hitting in one quarter, Apple might be setting itself up for another tough year over year comparison for 2017 but they’ll cross that bridge when they get there.

Why I’m Worried about the iPhone 8

If you read the various articles and message boards that discuss Apple’s upcoming iPhone 7, you already know it is being portrayed as a minor upgrade of the current 6S+ series. Apparently, suppliers and prognosticators believe Apple is not doing much to the next iPhone that most likely will debut in September. Most believe, at best, it gets a speed bump at the processor level and could even have a better screen and better camera but there will be no radical changes to its design — something that, when Apple does a design change, sets off a super buying cycle for the next 5-6 quarters. Of course, all of this is speculation and we really won’t know what Apple will deliver in a new iPhone until it is finally revealed in the fall. However, it is already being written off as just a so-so product and, while a lot of people will buy it because they are in an upgrade cycle or their current iPhones are on their last legs, these soothsayers believe it will be the iPhone 8 or whatever they deliver in the fall of 2017 that will potentially drive huge sales of iPhones in late 2017 and all of 2018.

I profess, I have no clue what Apple will deliver in this next iPhone although I suspect it will be a much better model than what is on the market today and would not be shocked if Apple has some surprises up its sleeve. But, while I consider most of the scuttlebutt about some new spectacular redesign of the iPhone for the fall of 2017, I don’t completely discount that, perhaps, there is a nugget of truth somewhere in there. We know from patent filings Apple has at least one design in which the entire iPhone is glass encased and there is no home button. All functions would be performed only on the screen. I also believe Apple has been working on new cameras, health-related sensors, new sound and audio processors as well as chips dedicated to enhance AI voice and speech functions that could come out in an iPhone sometime in the future.

All of this talk about a minor upgrade in a new iPhone this year and a super iPhone coming in 2017 is worrisome for two key reasons. Apple has just had three quarters of iPhone sales declines and I suspect that will be the same in this quarter when we get Apple’s next financials in late July. In the past, most new iPhones drove sales into record territories — that is not happening anymore. To some degree, that is OK since it probably reflects the new normal of iPhone sales going forward and, for the financial markets, it resets their expectations going forward. But it also reflects the possibility that all of this speculation of a minor iPhone upgrade will actually keep people from buying new iPhones in the next four quarters as some wait for an iPhone 8 and, as a result, it impacts Apple’s overall sales goals well through next fall.

But the second reason I am worried about a new iPhone in 2017 is that, between now and then, there will be continued speculation as to what they will deliver. It will be expected to be another “Jesus” phone like the original one was called before it came out in 2007.

In other words, the speculation of what an iPhone 8 will be until it launches will be so outrageous and probably over the top that Apple could never live up to the expectations of market prognosticators.

The good news is Apple does not listen to these rumors and just keeps their head down working on new iPhones and delivering the best of breed from what technology is available for that iPhone’s cycle. However, these reports of a minor iPhone upgrade this fall and the possibility of a “super” phone in late 2018 has to have an effect on the buying public’s perceptions of the next iPhone and, in the end, it could cause problems for Apple’s bottom line late this year and early next.

There are two interesting articles I have a link to that are worth reading on this subject.

The first puts forth the assumption the iPhone 8 is the one Steve Jobs really wanted and was the last one that has his design touch on it.

The second has a theory that not bringing out a new design this year is part of a major strategy to drive what it calls the next “super cycle” that will start in the fall of 2017. Time will tell.

Why Apple has not Entered the VR Scene Yet

Over the last few weeks, I have fielded a few media calls asking why Apple has not entered the VR space. Anyone who really knows Apple knows the answer to this question. Apple almost never leads the charge when it comes to new or even cutting edge technology. Instead, they watch a new technology enter the market and study closely what type of interest and impact it will have. Then, if they see the technology has real demand, they enter with a product that is well thought out and can be tied to their large ecosystem of apps and services.

Apple did not invent the PC. But, with the Mac, they made it better and introduced the mouse, graphical user interfaces and made the floppy drives smaller. Apple did not invent MP3 players. But, once they entered this market, they made sure they had all of the right pieces together and dominated for over 10 years. This same analogy goes for smartphones, tablets and, most recently, smart watches.

I believe that as Apple has looked at the current market for VR, they are viewing it as they did the early MP3 player space. While this time there are some early VR headsets that are gaining high interest in gaming and with early adopters, I don’t believe this is a market Apple has high interest in. For one thing, these devices are not high volume. And, at the low end, with the Samsung Gear VR headset that works with a Samsung smartphone, they are low quality and not a mass market item either.

So, the big question related to VR would be when will Apple enter the VR space?

The logical way to answer this is to look at how Apple has attacked new market opportunities in the past. First, they watch and study closely to see if there is market demand. If this passes the smell test then they focus on creating the best of breed in that category of devices and third, they tie it to a platform, an SDK and a set of services so that, when they enter the market, they bring a complete solution to the user. Then, and only then, do I see Apple entering the VR space.

But as I look at what is in the market today, I really don’t believe Apple, should they enter the VR market, would do it with a tethered solution or a low-end headset where you pop an iPhone into it to make the dumb headset a VR player. Rather, I believe Apple would enter this market with the equivalent of the guts or full electronics that would somewhat resemble an iPhone’s motherboard and put it inside the headset itself so it would work as a standalone device.

Knowing Apple, I suspect they would also opt for very high quality optics and make the overall VR experience a fully hands free one as much as possible by applying AI via Siri for many levels of input and navigation.
Then they would create a special version of iOS optimized for this, deliver a dedicated SDK so software developers could create apps for it, and make it part of their overall store and services.

I think this is very likely the way Apple would approach any entry into the VR space. So the question is, when would they be able to bring a product like this out that would interest a mass market and sell in the millions-of-units a month? My best guess is they still need more powerful mobile processors and GPUs and other components to create the actual VR headset that meets their criteria for a market entry.

What is interesting is that, in talking with key semiconductor players, they also see a similar model for what they believe will be the most acceptable VR headset for a broader audience. They too don’t believe a tethered headset will ever gain mass market adoption. In Apple’s case, I suspect they will need at least another one to two years to advance their A series processor before it meets their basic needs for an Apple-acceptable VR headset. And, in talking with various ARM-based players, that seems to be the same thinking for the ARM camp.

If you are going to create a headset that is completely powered within the headset, it needs much more processing power than what exists today. And the optics need to be at least 120 Hertz and, at the moment, there is only one or two suppliers who can deliver this type of optics and the quantities are nowhere near what Apple would need.

So I don’t expect Apple to enter the VR space anytime soon. However, if history is our guide, even if Apple is “late” to the VR game, they could end up delivering one of the best solutions that could drive unit sales in the millions per month and be a major leader in VR some day. Of all the players out there, Apple is probably in the best position to bring VR to a mass market. Just don’t expect anything from them soon.

Unpacked: Most Used Messaging Apps by iPhone Owners

To set the table for how important iMessage is to the overall iOS experience and how much iPhone owners rely on it, I’ll share these stats around messaging apps. This is why bringing a developer store and inevitably deepening the capabilities for developers to hook into iMessage is so interesting.

78% of iPhone owners (mostly from the US and the major areas of Europe) say they use iMessage daily to send a message, photo, or video to someone. The next closest app for the same tasks is Facebook Messenger at 49%. When it comes to apps used more than any other on a daily basis, 55% of iPhone owners say iMessage. Facebook Messenger again comes in second place at 29%.

In certain markets, the messaging app of choice varies. Particularly with WhatsApp in India and WeChat in China, however, what will be fascinating to watch is now that iMessage has an API, it opens the door for deeper engagement of the primary app of most iPhone users. WeChat has arguably the most advanced API for a messaging app which has allowed it to create a vast ecosystem of third-party integrations to the platform. In fact, the best way to understand WeChat is as a platform and now iMessage is trending in that direction as well with arguably as many, if not more, daily active users than WeChat. Overall, WeChat users do more than iMessage users, thanks to the more advanced API, but all of that may be about to change.

As I look at usage data by messaging app in all major markets, simply sending a message to someone is the primary task. Which shouldn’t be too surprising. However, this may speak to the nature of the way interactions may evolve. This is why the conversational interface is the hot term to use. People are comfortable using these apps for messaging. For apps like iMessage where many of these new advanced tasks like banking, booking dinner, paying someone, etc., will be so new the conversational element may make it easier to advance the behavior more naturally.

While I’m not suggesting iMessage will replace WeChat in China, I have been very skeptical of the idea that conversational commerce and conversational platforms will be successful in the West. I’ve observed many friends in venture capital invest in companies like Magic, Operator, and even several I’m currently trying that are still in beta. All want to be your messaging platform to engage with businesses and in transactional commerce. With what Apple is doing with iMessage, I’m more confident what we see in Asia with WeChat can come to the West.

Apple is starting off modestly with their approach, taking an extension of an existing installed app model. But my sense is this is the first of many evolutions of the capabilities of iMessage. The messaging apps as platform wars are far from over at a global level. It makes the entire space much more interesting to observe and study. Luckily, we track each of them along with their core actions and usage each quarter, so there will be much more to say on this over the next year.

Differential Privacy. Bane or Boon?

Ben Thompson of Stratechery on Apple’s implementation of Differential Privacy:

The broader challenge for Apple is this: in a fair fight the company would have a hard time matching Google or Facebook’s big data capabilities, which increasingly means a worse user experience, but this isn’t a fair fight: Apple is tying its own arm behind its back. The focus on privacy is admirable, to be sure, but there is absolutely a conflict with Apple’s focus on the user experience, and my question is whether or not Apple is being explicit in their decision-making about balancing the chances of datasets being stolen (or abused) + de-anonymized + compromising information being found + that information being abused, versus taking reasonable privacy steps (i.e. anonymizing data) that are not perfect but make it much easier to enhance the user experience for its hundreds of millions of users.

Quote via Apple 3.0

I don’t disagree with Ben Thompson lightly. He’s one smart dude. But I think he might be missing a trick here. He says that differential privacy guarantees a worse user experience…

…but isn’t privacy a part — and perhaps a very large part — of the user experience?

The New Power of Siri and Why It Matters

After the Apple WWDC keynote, I had a couple of reporters ask me if Apple’s new prowess with Siri was reactionary. They assume that, since Amazon, Google, and Microsoft have upped the intelligence of their AI voice assistants, Apple was forced to make Siri more competitive.

But to think Apple’s new and improved Siri is reactionary shows a lack of understanding of the actual AI-based engine Apple has and, more importantly, that Apple has been working on speech and voice AI solutions for decades. In fact, in 1992, I got involved with the earliest version of their voice technology research that was tied to an early AI and machine learning engine. Apple has been building on that technology and knowledge ever since.

Back in 1992, there were a lot of reasons for the lack of success with voice recognition and speech, mostly due to low-powered PC processors and minimal internal and external storage mediums. As well, that original work was targeted at the Newton and processing power in mobile was even worse. An interesting note is the lead engineer on this project in 1992 was Kaifu Lee, who Microsoft poached from Apple a year later. He kicked off their initial work in speech and voice AIs and then went on to run all of China for Microsoft until a few years ago.

However, Apple has had a major project going in this area since then and only in 2011 did Apple believe there was enough horsepower on the iPhone to deliver the first generation of Siri. Long time readers of my columns will remember that, when Siri came out, I wrote it would become the underlying data gathering engine for Apple and could be a threat to Google’s search at some point. To some degree, that has been true. As people used it, Siri gathered all types of data points and information from user queries and started building its own knowledge database tied to an already impressive database Apple had on their own servers.

Since then, Apple has been using new forms of AI and machine learning to expand that knowledge and tap into other data sources to give Siri a much larger base of info to pull from. However, because the processing power has increased along with the way Apple handles the queries, Siri has actually become smarter and smarter each year. However, watching the demos of this new version of Siri at WWDC, it became clear Siri’s contextual skills have increased as well.

Now you can ask unstructured questions and get answers back in a more contextual and conversational manner. This uses advanced machine learning and new AI techniques that give Siri much greater range and the ability to respond more accurately.

Indeed, this is the one major area where Google, Amazon, and Microsoft all have raised their own game by adding a much more conversational and contextual approach to their own AI voice assistants. This is the reason they are all spending billions on this as whoever has the best voice assistants that delivers the most accurate information in a conversational manner has the chance to not only expand their user base but make for even more loyal customers.

I suspect Apple will continue to enhance their AI and machine learning technology and possibly make more acquisitions that could increase Siri’s range and accuracy over time. But Apple has been doing AI-based research for a long time. It is part of their DNA. Expect that to continue well into the future and be used across all of Apple’s hardware, software, and services.

What the iPhone SE Taught Me about the Smartphone Market

For the past two weeks, I’ve switched from my iPhone 6s Plus to the iPhone SE. Seeing the two devices next to each other, it was hard to imagine a more dramatic change in screen real estate for a device I use so much. But I was committed to trying the SE for a week just to make sure I had the full experience of the device. To my complete surprise, here I am two weeks later and I don’t feel the need to go back to the 6 Plus. I’ll explain why and what this experience taught me about the smartphone market as a whole.

The iPhone SE challenged many of my core assumptions about the right screen size for my usage. When I made the decision to go with the Plus sized iPhone, I did so on the singular basis of productivity. I am mobile for a good portion of my daily work routine. I take a lot of meetings and spend less time at a desk using a PC than I do out and about using my smartphone in the course of my day. My belief was the 6 Plus gave me the most screen real estate and therefore, allowed me to be more productive. This logic is the consensus thinking on the traditional notebook and desktop form factors. Bigger screen personal computers allow us to do more and be more productive. However, the tasks which require more screen real estate are generally not the most common tasks. What my time with the SE made me realize was, in general, the benefits I got from the larger screen, in terms of productivity, were things I did less frequently. Perhaps most surprisingly, this experiment caused me to reconsider the productivity and efficiency I lost in being able to operate my smartphone solely with one hand. This is the real stand out observation of my time with the SE.

My conviction that the larger the screen, the more productive I could be, was made without fully understanding the trade-offs of losing one-handed operation. The Plus sized iPhone requires two hands to do just about anything unless you have extremely large hands. Being able to reach every aspect of my screen while holding the phone one-handed might actually be the most productive and efficient scenario for a mobile device. If I was weighing one-handed operation against the many other trade-offs I’ve come across using smartphones of all shapes and sizes, I think one-handed use is the one thing not worth compromising on if possible. Obviously, as folks get older and their eyes get worse, a screen size which displays information larger may become the highest priority. This is where the lesson of the overall market comes into play.

Thanks to some research we conducted, developed market consumers have owned, on average, just over 3 smartphones in their life. In contrast, I have owned a new one every year since 2005, and in many of these years, I try for at least a short period of time a number of others. Most consumers do not have this luxury to try and experiment with such a vast and diverse set of hardware and software features. If even someone like myself had not fully internalized the trade-offs and the value associated with certain features over other ones, then how can a normal consumer have had such a chance to refine their needs, wants, and desires having only used approximately 3 smartphones in their lifetime? Understanding these trade-offs is hard to fully appreciate or understand until you have really had a chance to evaluate what you need. We hear consumers say things like “this device does all I need” or words to that effect. I seriously question if that’s true, given how little a chance consumers have to truly refine and understand what their needs are.

What I’m suggesting is the smartphone market may not be as mature as people think. It may still be in the process of maturing as hardware companies are continuing to add new features and experiences that consumers are wrapping their heads around. We may be a few years off from consumers not just understanding what they want, but why they want it. As much as I loved the Plus sized iPhone, I’ve come to appreciate how much superior my mobile experience is when I can fully operate my smartphone with one hand. The SE also has better battery life than the Plus. In my experience with the 6 and 6s, I killed the battery by early afternoon because of how much I use my smartphone. Again, all things I would not have known without trying them all. Something most people don’t have the luxury of doing.

To this point, I wonder if, as a part of Apple’s iPhone leasing program, they don’t make it easier for consumers to experiment in the future in some way. Most of the things I experienced can not be figured out in a retail store and without using the phone as your main device for a period of time. This would be tricky for Apple since they don’t want an influx of used devices but I think there is something to this point of truly helping consumers get what they want and need.

While using the SE, I feel like I discovered a secret — bigger is not always better and being able to operate your smartphone with one hand may actually be the most productive and efficient way to operate a mobile device. One handed use of a smartphone may also be the most underrated feature out there. I can’t see myself going back to the Plus even though there are something things like 3D Touch and the Taptic Engine I do miss.

This experiment clarified to me there is still room for the market to mature and try new devices to fully realize what they want and why they want it. Everything in tech is a trade-off and understanding those trade-offs by consumers is when the market will truly be mature.

Does Apple Need its Own External AI Device?

Amazon’s Echo device, with its AI voice assistant, has become the new sweetheart of the tech industry.
Most of the big vendors were caught off guard when Amazon introduced the Echo, positioning it as a home assistant. This was Amazon’s way of introducing their own version of an AI voice-assisted device, similar to what had already become commonplace in Apple’s iPhones via Siri, Android phones with Google Now, and Windows phones through Cortana. However, using it as a home hub has turned out to be one of the best things they have done, since they tie it to their store and Prime Services as well as make it a host for various IoT and home automation devices. Researchers believe Amazon will sell upward of four million Echos in 2016.

At Google’s I/O Conference, they introduced their own take on the Echo with their Home device that will ship this fall. At the moment, Apple’s way to deliver AI voice assistance comes only via Siri on their iPhone and iPad. But many have been wondering when Apple will bring their own version of the Echo to market.

In a few days, Apple’s Worldwide Developer Conference will kick off in San Francisco and rumors are flying Apple will jump into the voice assisted home hub concept in one form or another. Most rumors suggest Apple will put it into the Apple TV and this will be their answer to Echo and Home. While I do think Apple TV will get additional Siri support, I am not convinced this is the best way for them to create a home hub. In my home, an Apple TV sits in our living room but the Echo sits on the counter in the kitchen which is the hub of most of our activity. That location serves our purposes the best.

In a Tech.pinions column, I pointed out Apple tends to look at products and watch how they are received and, if they have merit, they refine the concept, add their own level of innovation and industrial design and then tie it to their overall ecosystem of apps and services. Given this is the way they operate, I am not sure they would hurry a similar product to market just to have a competitive answer to the Amazon Echo and Google Home.

While the Echo is hot and Google has responded with their own version of it, the jury is still out as to whether this is actually a hit with long-term reach. Yes, it serves a purpose and interest is high. But it has a long way to go to live up to its full potential.

Apple does not do “me too” products. If Apple does jump in, which I doubt will be this year (at least as a standalone product), they would only do it if their offering is superior to what is on the market now. More importantly, once they do bring out something in this class of product and tie it to the next generation of Siri and their ecosystem of apps and services, their first year’s sales could dwarf what Amazon will do this year.

While Apple could surprise us and use the Apple TV as more of a hub with Siri, I suspect the bigger play would be to do a more powerful version of what is already available and bring it out when they know they have advanced this product category substantially. Only then would it make sense for them to enter this market and do it their way and on their terms.

My WWDC 2016 Wish List

As we get close to an event like this year’s WWDC, I always feel it’s useless to make predictions – if you’re right, it’s often because news has leaked and, if you’re wrong, your bad predictions are still very much in the air. I’d rather talk about what I’d like to see at such an event, both as a user of Apple products and as an analyst of the market. Here then, is my wish list for this year’s WWDC.

Context from Past WWDCs

I’ve just gone back and looked at the last three years’ WWDCs and what was announced and how. Here’s a quick summary of how the keynote time was spent:

WWDC time spent

There are several things you can see here:

  • Tim Cook’s introductory remarks have shortened from 17 minutes in 2013 to just 5 minutes last year, as the sheer volume of other announcements has grown
  • Time spent on OS X has also collapsed. Though it was fairly consistent at roughly half an hour in 2013 and 2014, it got just 18 minutes of stage time in 2015
  • For all that people seem to speculate every year about new hardware at WWDC, it hasn’t actually had any meaningful stage time since 2013, when new MacBook Airs, the cylindrical Mac Pro, and updates to Time Capsule and AirPort Extreme were announced on stage in a 12 minute segment
  • iOS takes the lion’s share of time, at 45 minutes in 2013 and roughly an hour in 2014 and 2015
  • In 2015, two new topics – watchOS and Apple Music – took up over 40 minutes between them, which contributed to the squeeze on the introduction and OS X

It’s also worth noting the content of each of those segments. In 2013 and especially in 2014, there was a very long list of new features and enhancements for both OS X and iOS, as well as fairly significant overhauls of the look and feel of the two platforms. That led to complaints Apple had focused too much on new gimmicks and shiny things and not enough on basic performance. As such, 2015 saw something of a toning down of the new in favor of what was pitched as performance and stability improvements, along with a smaller number of feature enhancements.

My Wish List for this Year

On that basis, here’s my wish list for this year:

  • Don’t spend time on watchOS – I’d rather see Apple focus on WatchOS 3 in the fall, when they’ll have new hardware. As I wrote in my one year anniversary piece on the Watch, more than anything else it needs more powerful innards and, until it has that, there’s little sense in a new numerical release. Better to announce new hardware in September with a launch later, along with WatchOS 3. Though WatchOS got just 18 minutes last time around, it’s time Apple doesn’t really have to spend with everything else it needs to cover. Last year’s keynote suffered from feeling rushed and also ran over by about 20 minutes compared to its usual two hour run time and things need to be eliminated to avoid that this year.
  • Make Siri and Spotlight a major focus in the iOS segment – as I mentioned, iOS usually takes up about half the keynote. I’ve no doubt there will be other new useful features and functions, but what I want to see is some real emphasis on Siri, Spotlight, and the associated functionality. There’s been a strong narrative recently of Apple falling behind in AI and Apple needs to come out strongly and demonstrate why it isn’t true. That means showing off better performance, both in terms of voice recognition and natural language processing, but also in the range of things Siri can do. That, in turn, means opening up the platform to third party app developers. This isn’t just something that can be switched on – it requires careful thinking about how human beings will interact naturally with the variety of apps they have on their phones but I’m convinced Apple can make it work. Apple also needs to demonstrate how its recent acquisitions have paid off in improving Siri.
  • Demonstrate iMessage as a platform – the other big thing I’d like to see around iOS (though it also applies to OS X) is in turning iMessage into a platform. I’ve written quite a bit over the past year about the potential for iMessage as more than just a messaging app, including peer-to-peer payments, a conversational UI for Siri, a platform for third-party bots, and more. I think it’s time Apple turns this on for its developers. The best part of this is it won’t involve a huge new platform developers need to develop for a la watchOS or tvOS. Many developers are already working on the foundations for such a product and, if Apple designs it right, iMessage should be an easy extension to those efforts.
  • Apple Pay in the browser – I want to see Apple leverage Handoff and TouchID to enable Apple Pay in the browser, not just in iOS but in OS X as well. I’m still using PayPal and credit cards regularly to buy things online. I’d much rather use Apple Pay in those cases, as a more secure and easier to use alternative.
  • Fix Apple Music and iTunes – I’m not as down on Apple Music and iTunes as some others but even I can see they have their flaws. The simplest fix on OS X would appear to be separating the purchase, consumption, and syncing features into at least two, if not three, separate apps. With many people now syncing their devices with iCloud rather than a computer, the syncing element could easily be removed from iTunes and put in its own separate application. I think the store as a whole could also be separated out, much in the way the App Store already is, leaving iTunes as purely a consumption app. You could even argue for separate consumption apps as in iOS, one for videos, and another for music. This fragmentation is familiar already from iOS, and would allow each app to be much simpler and more focused on one or two use cases. I’m not as convinced that separation is the answer on iOS, where having your owned music and Apple Music side by side is a feature not a bug, both for me and for others, according to surveys I’ve conducted. But an easier UI is a must here too.
  • Deepen the uniqueness of padOS – I made a case a while back for treating the iPad Pro version (or perhaps all iPad versions) of iOS as its own fork of the OS which would free it up to be optimized for the form factor, including the Smart Keyboard and Pencil. I think the current version of iOS is a great starting point for what the iPad is becoming but it needs to be designed explicitly for devices of that size and, with its unique accessories, tying it to the iPhone just doesn’t make sense anymore. I’d love to see more emphasis from Apple on making iOS on the iPad shine in its own right.
  • Focus the tvOS segment on gaming – Apple TV is a great product in many respects, although a number of apps still feel like they’re not optimized for the new interface. Apple has made some big improvements in the first few point releases in terms of both bug fixes and user interface tweaks which make it a great device for watching TV. But the limitations on games using only third party controllers are stifling the platform and these limitations need to be removed. Apple should announce a lifting of these restrictions and other improvements aimed at stimulating great games for the Apple TV.
  • One More Thing – I suspect this is pretty much a minority cause, but I’d love it if Apple’s iWork apps on iOS featured proper integration with Dropbox. It’s one of the biggest peeves I have when using the iPad Pro for work. I use both iWork and Dropbox just fine on the Mac but can’t do so in the same way in iOS. Microsoft Office already offers this integration and there’s partial integration with Dropbox in iWork already, so I can’t imagine it would take much to fix this.

Will I get all of this? I very much doubt it. I suspect Apple will do much of this eventually, but I’m not convinced it will all come this year. In particular, I suspect we will see watchOS debut at WWDC and, as a result of that and the other ground Apple has to cover, I suspect we’ll see either another rushed or over-long keynote. But I’m hoping that at least some of my wishes do come true this year. For the rest, there’s always next year!

Unpacked: Amazon Echo, Siri, OK Google Frequency of Use

One of the thing we sought to understand in our quantitative study of Amazon’s Echo, Apple’s Siri, and Google’s Ok Google was how often people are using their voice to interact with their devices. We did this with our early adopter panel and what I want to unpack is the usage frequency of each by those who are primary users of the voice-based UIs in question.

I want to emphasize the early adopter point here. We know frequency of usage by mainstream consumers is not that high. So the initial question I had was how much different are early adopters regarding usage frequency compared to the mainstream. One would think early adopters would be heavier users of these types of solutions across the board.

Screen Shot 2016-06-05 at 10.11.13 PM

When we look at usage frequency filtered out by those who say they never use any of the above three, we get the following data. Although most people have tried Siri, it appears that, regarding frequency, the Echo is the most used voice-based user interface. There really is a lot to like about the Echo. In our quantitive interviews, we continually heard positive things from Echo owners who were impressed and found the device extremely useful in many different ways. Ok Google/Google’s voice search takes the top spot when it comes to this category by Android owners and iPhone owners mostly say they use Siri but only sometimes.

With the Echo, a key question I have is if the “very often” usage will sustain. Again, we are looking at just early adopters who get caught up in the shiny new gadget and the Echo has not been out as long as the voice-based UIs of Siri and OK Google/Google Voice. While we asked Echo owners how their usage has evolved, most said usage is staying about the same (48%) while 39% said they are using it more now than when they first bought it. This is an early sign that usage may not fade although I’d imagine Amazon needs to keep increasing the capabilities of the Echo to maintain usage.

Stepping back, the way I view the coming battle for voice-based assistants is one of tasks. Like the smartphone, which stole most of the major tasks from the PC, the voice assistant that covers the most ground regarding tasks is the one that will be “hired” by the consumer. If all a device is good at is playing a song or getting directions or returning a web search, then it will be confined to a few set of tasks. This is where the API will come in. Amazon is already letting people take Alexa (the Echo’s voice-based assistant’s name) and put the technology on anything they choose. OEMs can put the smarts of the Echo into their coffee pot, refrigerator, washing machine, car, and anything else they feel is in need of a voice-based interface. The Echo already has the largest potential ecosystem of smart home/connected home products by their support of many smart home standards. The largest is Wink (acquired by Foxconn) which has over 1.2 million active devices running Wink smart home technology. I use my Echo to control lights, tell me how much gas I have in my car thanks to the Automatic solution, turn on sprinklers, check the propane in my grill, lock my front door, and many other things thanks to the vast ecosystem of connected smart home products Amazon supports.

Both Google and Apple need to crack this wider ecosystem with their solutions or run the risk of Amazon’s technology stealing more tasks because it goes wider and deeper as the voice UI platform running on the most connected products. I’m not sure it is enough for our phones to connect to these things. I think some of this technology needs to be built into many parts of the hardware ecosystem as well. Hence, Google and Apple should strongly consider letting their voice-based platforms be portable and not just confined to their pocket computers, tablets, PCs, and whatever else. The winner here will be the one with the biggest ecosystem to capture the most potential tasks. Voice needs to be viewed, not just as a user interface, but also as an operating system.

Criticizing Apple’s Patience

I’ve noticed an interesting theme from some of Apple’s more prominent and vocal pundits. Perhaps this is a theme that has always been around or is simply a rinse/wash/repeat process. Either way, I’m sensing it at the moment. It seems much of it is focused on criticizing Apple for not experimenting more or having more moon-shot projects made public. We know companies like Google, Amazon, and even Facebook do some research in public and let people try things that are half-baked. While Apple places the “beta” tag or “hobby” moniker on some things as they did with Siri and Apple TV, these products were still good enough vs some of the really half-baked products we have seen others put into the public. The narrative today seems to be around things like Siri and AI. Too often, the Amazon Echo is the product people are using to shine a light on Apple and say they are behind. While a deeper analysis of the technology would reveal Apple is not as behind as people imagine, I’d like to spend some time to make an important point about what makes Apple so different from other companies when it comes to product or idea experimentation in public.

Apple has done something few computing companies have ever done. They have managed to make a product which is bought and loved by consumers on every part of the adoption curve. The iPhone appeals to early adopters, the mass majority, and the technology laggards. There is no single consumer product that has done this at anywhere near the scale of the iPhone. Most importantly, understanding the vast majority of Apple’s now more than 600m iPhone owners are made up of those who are less techy, less geeky, and more the “average” customers who appreciate ease of use and simplicity to do what they want to do. Most of Apple’s customers have chosen the iPhone because it works best for their needs and lets them not worry about the technology. This is precisely why Apple cannot experiment with half-baked products and release them to their customers.

Unlike the customers of many other companies, Apple’s customers do not have the patience to tolerate half-baked technology. This is why Apple has always been recognized as being patient. They don’t enter the market first, but they do enter it when the time is right, with a solution that works and works to the standards that anyone can use it simply, easily, and enjoyably. Being an early adopter myself, I have tolerated some very painful experiences trying out new flashy gadgets. Most people do not have the kind of tolerance for technologies not ready for the mainstream. Apple does not have this luxury and, as much as their early adopter customers want to see them push the limits with things like AI, or voice, or VR, and believe they are behind because they are not doing these things, they forget they are not like the majority of Apple customers. I’m confident that, if Apple was to release more experimental technology, the kind most their competitors do and get away with it, it would dramatically hurt the trust their customers have with them to provide easy to use, delightful experiences. Because I can assure you, most early technology is anything but easy to use and delightful.

We should not criticise Apple for their patience in bringing technology to the market only when the time is right. This is the very thing that made them into the company they are today. They have built a significant amount of trust with their customers which could easily be destroyed by bringing technology out too early.

I understand the perspective of those who want Apple to do more, sooner and present the perception of leadership that comes with doing so. But being visionary and leading with quality is very different than throwing half-baked tech out to the world, even if that half-baked tech contains some parts of the future in it. Yes, we would all love to know where Apple is headed and what their vision of the future is. However, their patience to bring things to the market at the right time does not mean they are void of vision. I think it just means they like to surprise us.