Google’s Long HARDware Road

Google is the new kid on the block with smartphones, but they are being treated like an established player. Their sales of the Pixel 1 and likely sales of Pixel 2/XL are likely to be very small, maybe 5m units total in 2018, but because they are Google, they are being taken seriously. While I completely agree Google should not be graded on a curve, and many media outlets are slowly waking up to this reality, I am willing to give them the benefit of the doubt for at least the next few years.

Why should we give them the benefit of the doubt? Well making hardware is hard. Microsoft made a decent product with their first Surface, but it took them until generation 3/4 of the Surface before it became a great product. The Pixel 1 was decent, and the 2/XL is better, but I know Google is playing the long game here and knowing this product will not be mainstream anytime soon, they have a little bit of time to get things right. But there are an awful lot of things they need to work out before any reasonable person would recommend a Pixel to a loved one.

I have experienced a number of these issues first hand, so I want to talk about my observations buying, and using a Pixel 2 XL since last week.

The Purchase
There are a few observations about purchasing a Pixel through Google’s online store worth pointing out. The purchase process was fine, a few too many steps for my liking but I easily picked the Pixel 2 XL and checked out. The pain didn’t begin until about the time my product was ready to ship.

I got a notice from Google that my Pixel 2 XL had been shipped and the delivery date would be November 2th; it was October 31st when I got this email. November 2nd rolled around, and nothing came, so I decided to look at the tracking number to see if the delivery date had changed. Google’s tracking software showing the package delivery time said the package should have arrived. However, upon clicking the link, I was taken to OnTrac’s website and saw that the package had still not been received to be shipped out.

My first thought was one about OnTrac. While there may be nothing inherently wrong with OnTrac, despite a few issues I’ve had before, as a consumer I felt Google was cutting corners using OnTrac instead of FedEx or UPS. Right or wrong that was thought that crossed my mind. If I’m not alone then by not using a service like UPS or FedEx Google may cause consumers to concern and worry about their package being delivered safely and on time. But the fault here was not OnTrac’s it was Google’s.

As soon as I saw OnTrac had not received the package from Google yet, I called OnTrac to understand what was happening. I quickly was patched into a customer service rep, and they explained to me that Google printed the shipping label on the 2nd and confirmed they had not yet received the package from Google to get it on a truck and out for delivery. So it was time to contact Google.

I went through the steps to contact Google customer support. It had been a while since I last had an experience with Google support, so I was a bit concerned because those didn’t go so well. As luck would have it, a customer support representative came into the online chat within two minutes.

I explained what was happening and the customer support agent started looking into it. After about 25 min I was told they would need to check with a specialist and the process will take 24 hours before I get an email with an update. 24 hours later, no email, no update. I got onto Google’s customer support chat again and was again told a specialist was needed and it would take 24 hours. Next day, no email, no update. Checked OnTrac, still nothing from Google.

I gave up and figured it would just get here when it gets here. This was not going to be my primary phone, so I was fine being patient, even if minorly irritated. The Pixel 2 XL showed up five days later. IF I had been super excited to order this phone and couldn’t wait to get it, I would have been extremely angry at the whole situation. I asked around on Twitter and found this was common with those who ordered Pixel’s, cases, and Daydream headsets, that they commonly missed the delivery window. Not a good experience for Google’s current customers wanting these products who tend to be fans and techies who love Google/Android.

And to make an observation, Apple has been shipping iPhone X orders in advance of their estimated shipping dates to the surprise and delight of their customers and Google is missing delivering windows by days and weeks in some cases.

Device in Hand

The Pixel hardware is pretty great regarding design and fits and finish. I liked how it felt in hand and, the OLED screen was great. I had no issues that others had with the OLED screen. But the camera is really what I wanted to test since so many reviewers were remarking on how it was better than the iPhone 8 Plus and iPhone X. I’ll be doing a separate post analyzing the camera between the iPhone X, Pixel 2XL, and Galaxy Note 8 shortly.

I got the Pixel 2 XL set up and went right to the camera. I took a few portrait’s using the rear-facing camera for some tests then moved right into testing the front-facing selfies. I took around 10, and the portrait feature was never applied to any of my photos. I talked to a few friends who had Pixel 2s to make sure I was doing things right, and I was. Nothing I did could get the portrait selfies to work.

After some searching on Google, I found a article on Android Authority addressing this issue and saying I needed to update the camera app but had to use the link in the article because the app isn’t actually in the Play Store. Shocking.

So I clicked the link, updated the camera app, and now portrait selfie mode was working. Google didn’t ship me a device with the most recent camera app on it, which contained the more anticipated feature most people would get most excited about. Furthermore, I had to dig into the interwebs to find a solution, which was entirely non-obvious, just to get the feature working. How many normals would do that? Not many.

Concluding Observations
These are two examples of things that just can’t happen when you ship a mainstream piece of hardware. Nor can the larger display issues and other hardware problems that have led most review sites to no longer recommend the Pixel. That being said, There are some things Google can build on.

The camera is very good. In the post where I’ll compare cameras, you will see that the iPhone rear-facing portrait photos are better than Google’s but Google front-facing selfie portraits are better than the iPhone X. What’s more interesting to me over the long-haul for Google is how they can seemingly update their camera technology via a software update thanks to machine learning. So, to make a point, an element about Google’s camera with the Pixel 2 that is interesting is how they can further upgrade it or add new features via software instead of hardware. The camera can get better through software which would allow Google to be quite nimble in adding features faster or catching up to Apple faster through hardware.

Software enhancements to the camera is an area I wish we could see Apple do more. A software or app update to the camera, like making portrait lightning mode work better, or fixing a problem I keep having with portrait selfies where it says subject too bright because of how much light is coming off the subject making portrait mode selfies not work. Little things like this, if they could be fixed via software updates, not entirely new hardware or even OS updates would allow Apple to add new features quickly to the camera. Continually updating the camera to get better without new hardware would be highly attractive to the market.

Lastly, using both the Pixel 2 XL and the iPhone X makes Apple’s custom silicon efforts stand out. If you have used Android for any length of time, you know techies have criticized its lack of smooth scrolling for years. Recent years it has gotten much better, but I was surprised using the Pixel 2 XL, running Qualcomm’s latest and greatest, how there were still jitters when you scroll. Scrolling down websites, Twitter, Facebook, Instagram, etc., all still had visually apparent jitters and was not buttery smooth (official technical term) like the iPhone.

All in all, if I were forced to use another smartphone other than iPhone, I’d pick the Google Pixel 2 XL. Mostly because I have always favored the cleanest version of Android and the only Android smartphones I liked using were Google Nexus devices using stock Android. I like the design, and the camera is really good, and will only get better. But Google has a long hard road to go down with hardware, and if they can’t fix some of the basic issues I addressed then I have no hope Pixel brand will ever go mainstream.

Google’s Machine Learning Backbone

Last year at Google I/O, the term AI was thrown around frequently. This year, Google didn’t use AI as much during their opening keynote but they did use the term machine learning much more. It was a subtle but important shift, which speaks to how Google is orienting themselves around their mission statement to “organize the world’s data”.

Google calls their smart agent the Google Assistant but, looking at a number of their demos, this is simply the front end naming they are using for a much smarter and transparent assistant that will manifest itself in many ways throughout Google’s services. One of the main apps they updated and introduced new features for was Google Photos. Here is a great example of Google’s smart assistant showing up in many ways but blending into the background while still adding value. The assistant will recognize people in your photos and suggest those people as ones you can share your photos with. Google photos can create mini movies or photo albums which you can have printed, and intelligently selects the best photos from a group for you to insert into a photo book. All of this is powered by the many years of work in machine learning Google has embarked on and the fruit of this labor is starting to show up in somewhat invisible yet useful ways.

Gmail is another place they quickly demonstrated this smart agent. In Gmail, users have the options to use smart replies — contextual recommendations of phrases or sentences to use in reply to an email. The machine learning algorithm understands the context of the text in the email and can offer common or learned responses from you based on your conversation style. As creepy as this sounds (and, in some ways is), it is also very useful for the end user. While I do believe a great many consumers do care about privacy, the historical evidence also suggests that convenience trumps privacy in many situations like this one.

What was most apparent to me during the day one keynote from Google I/O was how much machine learning/AI has become the backbone for virtually every service/app Google offers. It is deep in search, Google Assistant app, YouTube, Google Photos, Gmail, calendar, contacts, Allo, The Google Assistant app, Maps, etc., and becoming a staple of the ways Google is trying to add more value to users of their services. Again, things that save us time, are convenient, and truly useful can, in many cases, trump privacy.

Google Services Everywhere
As Carolina articulated well yesterday, the platform or consumer engagement battle has moved away from the core operating systems in many cases to the software and services layers of value. This is why Google will continue to be as aggressive as they can to put their services everywhere. Bringing the Google Assistant to iOS is evidence of this strategy and one similar to Microsoft, where they are looking to battle for consumer engagement and, in some cases, look to steal Apple customers in the core areas where Apple wants to compete as well. Google Assistant and Google Photos are the two that come to mind of areas where Apple cannot lose iOS customers to Google but where Google wants to get customers from Apple.

This strategy has deeper implications in developing or emerging markets where Android dominates the mobile landscape. Places like India, Indonesia, SE Asia, and many other countries are largely Android strongholds. The better these AI/smart assistant services become on Android and become deeper engrained into the core OS, the more likely it is those customers will stick with Google services/Android and make it harder for Apple to acquire new customers to the iPhone. If my thesis is correct that things like Siri or the full smart assistant experience from Apple become a stickier glue then the same is true for Google with Android customers.

This is likely why Google has re-launched their low-end emerging market Android play with Google Go, which has learned from the failing of Android One and will attempt to unify the low-end of the Android device market.

The Cloud TPU
Lastly, Google is tying this machine learning backbone to continued advancements in specialty server hardware and custom chips, whose sole purpose is to accelerate training networks with data and inferencing (querying) the data to turn it into actionable intelligence.

This new Cloud TPU board is furthering their work on the TensorFlow TPU, which was a custom designed ASIC (not an FPGA as many originally thought). That chip was only designed for inference, where this new board includes custom chips that also aid in training networks with data. From the sound of it, I’d say this board does include an FPGA off the shelf or custom design, but Google hasn’t confirmed this observation.

Google is, no doubt, doubling down on machine learning and all the backend network, software, training, inference, and anything else they need to be the leader in machine learning from beginning to end. All the while, their success depends on pulling their users, and getting new ones, deeper into their ecosystem so they can make sense of not just the world’s data but each individual’s as well.

Questions for Google at I/O

Google is holding its annual I/O developer conference this week in Mountain View, California. Some news of what’s going to be announced is already leaking out but there’s likely quite a bit more to come. With that in mind, here are some questions I’m hoping Google answers at the event, along with a brief explanation of each.

How is Google Managing Android Fragmentation?

One of the biggest challenges for Android continues to be the fragmentation in adoption of its various versions. As I writing this, the version of Android with the most adoption among the active base is Lollipop, which was released in 2014. Just behind it is Marshmallow, the version released in October 2015, while the most recent publicly available version, Nougat, has just 7.1% adoption, nine months after launch. Google has already announced Project Treble, an attempt to make OEM and chip vendor’s customization of new releases easier and quicker but, despite all its efforts over recent years, the fragmentation has remained.

How are Android and ChromeOS coming Together?

At last year’s event, Google announced Android apps would begin to run on ChromeOS but it batted away long-rumored suggestions the two operating systems would merge anytime soon. A year later, that Android-on-ChromeOS effort remains in beta, with many apps performing poorly. Google needs to demonstrate progress and, ideally, an end to that beta label with performance levels to match.

What’s the Role of Progressive Web Apps and Other Hybrid Models?

Last year, Google talked up Instant Apps for Android as a new model for installing Android apps but it has also worked hard for several years now on progressive web apps and other hybrid models which mix web and native components. We need both an update on those efforts and more clarity around the role of these various models alongside the pure native and web models and where Google sees them each fitting. As of right now, there’s more muddle than clarity.

Where is Android TV Going?

Android TV debuted two years ago at the event and it hasn’t gained significant traction since (as far as I can tell from my notes, it had no meaningful time in last year’s keynote at all). Some vendors, such as Nvidia, have built on it, but many others remain committed to either proprietary platforms or alternatives like Roku. Google needs to demonstrate it remains committed to the platform and it has unique features to offer to entice more vendors onboard.

How is Google Assistant Going to Grow?

One of the highlights of last year’s keynote was the introduction of the Google Assistant and a preview of the Home device which would debut in the fall. But one of the oddities in Google’s rollout of the Assistant was the way it hamstrung it by limiting it to its own devices at first. That’s begun to change but it’s reinforced the perception that Amazon, and not Google, has the winning open platform for voice, something Google can’t be happy about. Google needs to tell a story at I/O about how it’s going to change that and get the Assistant into more places with more vendors.

How will Daydream become More Relevant in the VR mMarket?

Another big announcement last year was the Daydream VR platform as part of Android and in the fall, we saw Google’s own first-party hardware in this space in the form of the Daydream View. However, the key challenge facing that platform remains the same as it was a year ago: with Samsung by far the largest player in mobile VR with its own platform, how will Daydream become more relevant in the broader VR space? Are more OEMs getting on board, not just by implementing Daydream support in smartphones but by releasing their own headsets? Also on the VR topic, how is Project Tango going and are we finally going to see some more meaningful progress with that?

What is Google’s Ambition in Cars?

One of the bits of official pre-I/O news from Google this year has been its partnership with Audi and Volvo under which a version of Android will now power the center consoles in those manufacturers’ cars. This goes beyond Google’s earlier Android Auto effort, which merely acts as an overlay on third party systems along the same lines as Apple’s CarPlay. It suggests Google has deeper ambitions there. It’s apparently not charging the car OEMs for Android, so what is its motivation? Is this just about getting the Google Assistant in more places?

How is Google Democratizing AI?

One of the big themes of last week’s Microsoft Build event was putting AI and machine learning tools in the hands of every developer, something CEO Satya Nadella has previously described as democratizing AI. For companies that create broad-based developer tools, like Microsoft and Google, that should be a key focus and it’s something Google has begun to talk about at its other events, including its cloud-focused Next event earlier this year. But we need to hear that message in the context of I/O too and see how it compares with what Microsoft shared last week.

Like many of you, I’ll be watching the keynotes and other sessions at I/O closely for answers to these and other questions.

Computing Platforms and Value Creation

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

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

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

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

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

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

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

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

Where Alphabet’s Growth came from in Q4 2016

Alphabet reported its financial results for Q4 2016 last week and posted very healthy year on year growth of 22%, its strongest growth since 2013, and far higher than its average growth from 2014-2015 of 12%. For Insiders today, I thought I’d dive a little into where that growth actually came from, with a view to seeing what it tells us about how Alphabet might grow in the future.

Where Alphabet’s Revenue Comes From

The best starting point for this analysis is looking at where Alphabet’s total revenue comes from. The pie chart below shows the split between four categories in Q4:

Those four categories are:

  • Ad revenue from Google’s own websites, including everything from to YouTube to Gmail
  • Ad revenue from Google Network Members’ sites, which is all the non-Google sites it serves ads on
  • Other Google revenues, which are all non-ad revenues in the Google segment, including revenue from Google Play, enterprise cloud services, and hardware
  • Other Bets, which is all the revenue that comes from non-Google subsidiaries of Alphabet.

As you can see, Google’s revenues are 99% of the total and Google ad revenue contributes around 86% of Alphabet’s revenues. That second percentage was as high as 97% a little over five years ago, so things have changed considerably, but it’s still fair to say that both Alphabet and Google’s revenues are dominated by ads.

What Grew Over the Past Year

Other Bets – growing fast from a tiny base (and losing lots of money)

The growth rates of these various businesses are very different, however, so it’s worth looking at how the composition has changed over time. The fastest-growing segment is also the smallest: Other Bets. That segment grew by 74% year on year but, of course, the actual numbers involved are very small – that was growth of just $111 million over last year’s fourth quarter. Alphabet doesn’t break out the details here at all, except to say (as it has in the past) that the only subsidiaries within Other Bets that generate meaningful revenue are Nest, Verily, and Google Fiber.

Management did talk up Nest growth but only during a very narrow window around Thanksgiving, so there’s a good chance Nest contributed some of the overall growth but it’s impossible to know how much. It’s also worth noting the Other Bets collectively continue to lose money hand over fist, though the scale of the losses in margin terms has shrunk ever so slightly.

Google Other – Play and Cloud Get a Boost from Hardware

The next-fastest rate of growth came in the Google Other segment, which grew 62% year on year. This is one of the most interesting aspects of Alphabet’s results this quarter because it’s where Google’s new first party hardware, such as the Pixel and Home, sit. That segment had been growing by between $400 and $700 million year on year before Q4, driven by a combination of stronger Google Play app and content sales and Google’s enterprise cloud business. Again, the company has given very little insight into how big each of those businesses is or how fast each is growing but the run rate gives us some sense of what hardware might have contributed. That run rate for Play and Cloud has been accelerating, so I’ve estimated it likely accounted for $600-700 million of the $1.3 billion in year on year growth in Google Other. As such, the other $600-700 million of growth came from hardware sales. Within that, of course, there’s Pixel, Home, Google Wifi, and Daydream View but there’s a good chance much of it came from Pixel sales, which had by far the highest average selling price, likely around $700. I estimate Google sold 600-700,000 Pixel devices along with a similar number in total of the other three categories. That’s not bad for a first quarter, especially given the fairly limited distribution and apparent supply constraints but, of course, it’s a blip in the overall smartphone market.

Google Ad Revenues – Google Sites Vastly Outpacing Third Party Sites

Let’s turn to Google’s ad revenue, which grew by 17% year on year overall but was made up of those two distinct buckets: Google’s own sites and third party sites. Of these two, Google’s own sites grew far faster, at 20% year on year relative to just 7% for third party sites, though that 7% was well up on the recent rate of growth for this segment, which has been 1-3%. That’s been the picture for some time now, with Google’s own sites driving the vast majority of overall ad growth for Google, while third party sites barely grow at all. The underlying ad metrics Google provides show why this is: the price per click across Google’s own and third party sites has been falling pretty consistently, the number of clicks on third party sites has been essentially flat, and clicks on Google’s own sites has been rising somewhat. In other words, falling prices and almost stagnant traffic have been responsible for the flatlining of the third party business and it’s only rapidly growing clicks on Google’s own sites that have driven growth.

What, is responsible for these trends? Well, it comes down to three things: the transition from desktop to mobile, the growth of YouTube, and Google’s increasing presence in programmatic advertising. The transition from desktop to mobile means traffic is going from desktop, where there are many ad slots, to mobile, where there are far fewer and where people are less likely to click on them. As such, it’s inevitable the total number of clicks will struggle to grow even as overall traffic does, while the price per click comes down as Google expands into additional geographic markets with lower ad spending. The other wrinkle with the shift to mobile is Google has to pay out a higher portion of its ad revenues (as traffic acquisition costs) to mobile device makers like Apple and Samsung – Google Sites TAC in Q4 was up 48% year on year, even though revenue only went up by 20%, suggesting Google is having to pay out at a higher rate as more ad impressions come from mobile.

In its own business, YouTube has been a bright spot, as traffic on YouTube continues to grow rapidly and with it clicks (whether measured as actual clicks or merely people sitting through video ads). YouTube was an obsession for analysts on the Q4 earnings call because it’s the driver of much of the growth at Google. That’s clearly a good thing, but there’s a question about whether it can sustain that growth over the long term as other online video services continue to gain steam. The underlying model is still fantastic for Google – all it pays for is hosting expenses, while its users contribute all the content for free or merely a cut of the ad revenue. Lastly, there’s programmatic advertising, which isn’t necessarily a new revenue category at all but a way for Google to scoop up a bigger slice of the advertising value chain and potentially at higher prices thanks to better targeted ads. Google has repeatedly called out the growth in programmatic as another major growth driver, including in Q4.

Where Growth Comes from Next

So let’s return to the question of what all this says about where Alphabet’s growth comes from in the future. Other Bets will continue to grow, especially as businesses like Verily start to drive higher revenue from various partnerships, but that’s still a tiny contributor to overall growth and will continue to be so. Google Other revenue should continue to see a big boost from hardware sales in the next few months and, assuming we see a Pixel 2 and potentially additional hardware from Google later this year, this should become a useful revenue driver over time, boosting overall revenue growth for Alphabet. Play store revenue and enterprise cloud revenue will also continue to drive growth, with those two areas likely roughly matching hardware in terms of new dollars each year. Then there’s the Google ads business, where almost all the growth will continue to come from Google’s own sites and that growth, in turn, largely driven by YouTube and programmatics, while growth in mobile search merely offsets desktop declines rather than necessarily driving net growth.

Microsoft and Qualcomm’s New Partnership for Low Cost Laptops

Chromebooks have been selling well, especially in education markets. These stripped-down notebooks basically run web browsers and anything you can do in a web browser can be done on a Chromebook. Education markets value them because they are cheap; some go as low as $179 while others with a few more bells and whistles can go for as much as $299.

While IT departments in schools like them because of price and the IT-related software administration tools, many teachers do not like them as they are too limited when it comes to having kids use them for more than just web browsing and web apps. Google will soon add the Google Play store to Chromebooks, which means they have found a way to run Android apps on Chromebooks and that should give kids and Chromebook users more versatility in what they can do with a Chromebook.

While the sales of Chromebooks are small compared to “normal” laptops, it is a market that has potential. Even some mainstream IT departments have used them as terminals and for other functions inside an IT shop, although their use in business so far has been minimal.

But the low end of the laptop market is an interesting one. Although there is not a lot of money to be made at the low end, it turns out that, with smartphones and tablets becoming the major way people connect, there appears to be a real interest by some consumers — should they buy a laptop if they have a cheaper option available to them? This is where we see consumer interest in Chromebooks and low-cost Windows laptops showing up and, while it may not be a big market, it is a real one that could pick up steam over time.

At WinHec in Shenzhen, China a few weeks ago, Microsoft and Qualcomm announced a new reference design for a 32-bit, Windows-based laptops that uses Qualcomm’s 835 processor and runs a full version of 32-bit Windows 10. While one might be tempted to say this is a rehash of Windows RT, Microsoft has assured their customers this is a newly designed version of Windows 10 that will work seamlessly with all Win 32-bit apps.

While we already see some basic Windows laptops on the market for as low as $299, the processor and features of these systems are at the bottom of the performance barrel. But what makes the Qualcomm/Microsoft spec interesting is that Qualcomm’s 835 processor is one of the most powerful mobile processors and delivers significant performance that, when applied to a low-end laptop, gives these devices more bang for the buck.

If Microsoft has really solved the problem of being able to run a full Windows 32-bit 10 experience and all Win 32 apps on ARM, plus give these low-end systems more powerful speeds and features than either a low-end Intel solution or even an ARM-based processor in a basic Chromebook, laptops using this new spec could be a very promising alternative to those who want a low-end laptop but still want some oomph in their portable computer.

Conceptually, a laptop using this spec could also become a solid alternative to a Chromebook although, at the moment, Microsoft has not stated how a laptop with these specs will be positioned.

Either way, this new spec Qualcomm and Microsoft announced at WinHec needs to be to watched. This could evolve into an interesting new laptop option in 2017 that could garner real interest for those who don’t need a powerful laptop but want something more powerful and with more functionality than a current low-end laptop or perhaps even a Chromebook.

Of course, the proof will be in the pudding. The announcement was just a spec and we have yet to see any actual products based on this to understand its performance capabilities and how Windows 10 works on this Qualcomm processor. But if Microsoft and Qualcomm do deliver a low-cost laptop with good power and that works with all Win 32 bit apps, it could revive the low-cost laptop market in the New Year and give consumers who want a basic PC with more flexibility another good option.

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.

Why “Made by Google.”

Understanding the why behind so many things is perhaps the single most important knowledge we can strive for. I’ve been saying all week I was hoping Google would explain why they needed to make their own first-party hardware in a range of categories, smartphones in particular. They have just told us all we needed to know without actually spelling it out.

As I have written before, Microsoft and Google’s first-party hardware strategy is remarkably similar. Both companies are now, technically, in direct competition with their partners, with the caveat that they are playing in the market space many of their competitors do not–premium. In both strategies from Google and Microsoft, they are focused on areas dominated by Apple where their partners generally avoid. Apple has the lion’s share of premium PCs and smartphones. Microsoft and Google seem like they want to help balance the equation. With Microsoft, their focus on premium was a direct statement to the market that their partners have been letting them down in the premium Windows PC department. So Microsoft decided to fill that gap themselves. What makes this move of Google’s interesting is Samsung is doing a pretty good job in premium smartphones (exploding batteries aside) and, therefore, there is less of a void in premium smartphones as there was in PCs. Should Google be successful with smartphones here (a big if), it would actually hurt Samsung more than Apple. It is hard to know if this is by design and Google simply wants Samsung’s share or if Google mistakingly believes this move will help them take some premium share from Apple. This is, however, extremely unlikely.

Interestingly, as solid as the design and specs of the Pixel devices are, they are Google’s least well-positioned products of the bunch announced. Neither of these devices will sell in any substantial volume, so the real question we have to ponder is, how long is the long game for Google with smartphones? I’d say they are in this for the long haul and their goal is to continue to develop credibility in the high-end of the smartphone market. I’m sure part of their hope is these devices will serve as the gold standard of Android and Google integration and they hope others may be inspired to do the same. This is a page from Microsoft’s playbook with Surface and it did not work. Nor will this work with Pixels. Google and Samsung will remain the only ones going after premium.

The low-end market disruption dynamic will always be in play when companies can not meaningfully and sustainably differentiate themselves. When you ship the same software experience as your competitors, the threat of low-end disruption is remarkably high. When you ship the same software as your competition, you are only as good as your lowest priced competitor. We will see sub $300 Android phones with specs and Google cloud + AI and all the trimmings from Google’s partners. This likely would have happened anyway, even if they didn’t do the Pixel.

Nonetheless, it is a good showcase device for the best of all things Google. I’m just less optimistic of their chances here than the other two products they launched.

Daydream and Google Home
While their smartphones are the weakest positioned devices, their Google Home and Daydream products are quite well positioned. Here, Google has a chance to be in the market with first-party hardware, from this “Made by Google” initiative, and be in on the ground floor of these markets as they develop. They may be early, but they are not late. Unlike with their smartphones where they are a few years too late.

What stood out to me most about the products not named Pixel was the aggressive price points. Note their pricing lineup.

Pixel – Starting at $649
Google Home- $129
Daydream View – $79
Chromecast Ultra – $69
Google Wifi – $129

One of these things is not like the other. From the demos I saw, Google Home was the clearest expression of their AI vision, even though they pitched the Pixel as the best manifestation of that vision. The reality is, people will get a Pixel smartphone and not use it all that differently from their current smartphones. Meaning, not fully utilizing or buying into the AI due to behavioral debt. However, Google Home is the product that can create entirely new behaviours around voice and UI. That’s the product Google should push and, at $129, that seems like a good possibility.

I believe the voice platform, something I am calling the invisible platform, is a key battleground technology. Current platform companies like Google, Microsoft, and Apple, can not lose this battle or be left out of the conversation. This plus AI is a key part of the future and can strengthen or weaken current players if they aren’t careful.

When it comes to all the hot buzzwords like Voice, AI, AR, VR, etc., it is actually not anyone’s game. It is a handful of companies’ game. These markets are likely not to be a “winner take all” market either. So, while the battle will rage, it is still early and we can expect much innovation ahead in those core areas by many of our favorite companies.

Questions for Google’s Big Event

Google is holding an event today where it’s expected to unveil several new products — a new phone, its Home speaker device, and possibly a new operating system named Andromeda. As usual, what’s leaked are specs, pictures, and some other details but none of the rationale or strategy behind these moves. As with Apple’s event last month, the most interesting questions are often the whys rather than the whats of the announcements. So here are some detailed questions I’m hoping to hear answers to at the event.

How is Pixel better than Nexus?

The single biggest question about the phone Google is expected to announce is how it’s going to be better than the Nexus phones that proceeded it. We’ve seen pictures that make the phone look like a close relative of the iPhone, at least from the front, but little of the hardware and software features that will set it apart. As I wrote ahead of last year’s Google event, the Nexus phones have never enjoyed significant sales or market share, even within the Android community. They’ve served a specific need – cheap, pure Android phones for developers and a handful of enthusiasts with similar interests – but have never gone further. How is Pixel different and, more importantly, how is it better?

How will Home get to know you?

One of Google’s big messages about Home when it was first teased at I/O was that it would get to know you over time. My question then as now was, what does that really means when most Home devices will be shared by multiple people in a household? Whether roommates, cohabiting couples, or families with kids, the default setting for Home will be homes with more than one individual, not all of whom will have a Google account (have you ever tried setting up a Google account for someone under 13?). How will Home distinguish between the people in a home and learn about each of them individually? Will it use voice recognition and will that voice recognition be able to effectively distinguish between siblings with very similar voices? Will it provide generic responses to most users and customized responses only to those with Google accounts? There are lots of questions with associated privacy implications if information is shared with the wrong people. This is something Echo doesn’t really deal with but people will expect Home to be good at.

How will Pixel and Home be distributed?

One big question relevant for both the hardware products we’re expecting to see announced relates to distribution. Nexus phones have rarely enjoyed broad carrier distribution and it appears Google has (predictably) struggled to get carrier distribution for the Pixel, too. Without distribution, the Pixel phone is likely dead in the water for that reason alone. Where will the Pixel phone be sold and will Google offer carrier-like installment plans through its own site (as it does for Nexus phones on the Google Fi service)? Amazon benefits enormously from being able to market the Echo through the largest e-commerce site in the world. What will Google do to make people aware of and want to buy Home? Where will it be sold? You can find the Echo at my local Home Depot but only if you know where to look. That doesn’t matter enormously to Amazon, but similar placement would be enormously problematic for Home and Google.

Why Andromeda? And when?

The third big thing we’re expecting to see at Google’s event is a new operating system, Andromeda, which allegedly combines elements of Android and ChromeOS. The big question is why Google is introducing a third operating system rather than simply consolidating around one of its existing operating systems (preferably the massive Android rather than the marginal ChromeOS). What benefits does Andromeda offer over ChromeOS on laptops? Closely related is the question of whether Andromeda will eventually become the “one OS to rule them all” and displace not just ChromeOS but Android. If that is indeed the case, the next big question is when – when will Andromeda be available and how long will it be before it replaces Android on smartphones and tablets? If it is to coexist, that will be confusing to users and OEMs alike, so Google needs to have clear messaging here.

What’s the role of Daydream hardware?

The last element of the event is likely to be a play around Daydream, Google’s VR platform, also announced at I/O earlier this year. What we’re expecting here is hardware from Google which will presumably be closely tied to the Pixel phone and potentially available as a bundle with that device. As I see it, the role of Daydream as a platform is to provide a route to VR hardware for Android vendors not named Samsung. But it’s less clear why Google needs to produce its own hardware here, especially if it’s also trying to encourage Android OEMs to develop their own. With both the Pixel phone and the Daydream hardware, the big question is, why does Google want to compete with OEMs? We’ve seen Microsoft walk a fine line here with the Surface line, prodding its OEM partners to do better while not alienating them, but can Google do it as well? We all remember the awkward quotes from Android OEMs about the Motorola acquisition, reeking of Stockholm Syndrome, but those were reflective of the balance of power between Google and the OEMs then. How will they react now, given the current dynamics?

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:


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: 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.

Google’s Custom Chip may be the Biggest I/O Announcement

Near the end of Google’s two hour I/O keynote, they snuck an announcement in which may be the biggest deal of the whole event. Google officially announced a project they have been working on for over a year — building their own custom ASIC designed specifically for machine learning applications. Google calls this chip a Tensor Processing Unit and it is tailored for their TensorFlow machine learning intelligence.

From a server standpoint, it appears Google is tiptoeing toward vertical data center hardware to run their software in the same way Apple designs their hardware to run their software. In this blog outlining the TPU, Google says:

“But one thing we know to be true at Google: great software shines brightest with great hardware underneath.”

A statement similar to one used frequently by Apple quoting Alan Kay who said, “People who are really serious about software should make their own hardware.” I’ve often said I believe Apple designing their own SoCs in the A-family series processors is one of the most brilliant things they have done to differentiate and give them an edge over their competition. Similarly, this move from Google is looking to add similar elements of differentiation when it comes to artificial intelligence. I view what Apple is doing in SoCs custom-tuned to their software to yield a distinct advantage and Google making custom chips to give them an edge in Artifical Intelligence in the same strategic light.

The benefit to Google in making their own custom ASIC is their software will yield significant performance benefits. Google states:

“We’ve been running TPUs inside our data centers for more than a year, and have found them to deliver an order of magnitude better-optimized performance per watt for machine learning. This is roughly equivalent to fast-forwarding technology about seven years into the future (three generations of Moore’s Law).”

If that is true, it is pretty impressive. This ASIC, essentially a co-processor specifically designed for their machine learning applications, was powering the AlphaGo according to their blog.

Many did not understand what it meant when Apple started designing their own custom CPU/GPU solutions by utilizing the customization flexibility offered by ARM and Imagination Technologies and what it would yield in terms of competitive advantage. Similarly, this custom silicon work by Google may be underestimated in its long term potential.

AI in some shape and form is clearly an important part of our future. Google is looking to lead here and I expect even more attempts at verticalization through the hardware and software stack in order to lead in Artificial Intelligence. I remain convinced that, in many areas of personal computing, custom silicon will play a much more important role in helping competitors differentiate going forward than at any other time in this industry’s history. Keep an eye on the few companies with the talent to build custom chips for their own proprietary applications.

The Big Six in Q1 2016

Every quarter, once earnings season is over, I put together a set of comparisons for the “big six” consumer technology companies: Alphabet, Amazon, Apple, Facebook, Microsoft, and Samsung. The full analysis goes into a deck which is part of the Jackdaw Research Quarterly Decks Service, which you can read more about and sign up for here. This post summarizes some of the key findings from that analysis in the form of four charts, representing four of the key metrics I look at. As I’ve said in past quarters, Facebook isn’t in the same league as the others in terms of scale – it’s significantly smaller. But it’s one of the most profitable mid-to-large-sized tech companies out there and also one of the fastest growing, so that’s why I include it in this analysis.

Revenue growth – Apple falls to last place

This quarter was notable, among other things, for the fact that Apple, which was briefly one of the fastest growing of these companies, dropped to last place as its revenue growth was negative for the first time in a long time. Even Microsoft, which has struggled with growth since the anniversary of its acquisition of Nokia’s devices business, grew slightly faster in Q1 2016:

Screenshot 2016-05-13 15.33.31

It’s notable Facebook continues to be far and away the fastest growing of this group and has been for the last three years. Apple came closest to matching its growth rate in the throes of its iPhone 6 year but even then was several percentage points behind. Meanwhile, Microsoft continues to ride the doldrums of the maturity of its business, while Samsung is beginning to recover in earnest from its own crisis and was back in positive territory in Q1. Amazon and Alphabet, on the other hand, have been duking it out for second place since Apple’s growth stalled, with Amazon consistently slightly ahead.

Margins – Facebook back on top

The chart below shows margins on a trailing four quarter basis, which helps to eliminate some of the cyclicality in each of these companies’ margins. As you can see on that basis, Facebook came out on top this quarter, having dipped below Apple and Microsoft last quarter:

Screenshot 2016-05-13 15.31.28

Despite Amazon’s recent progress in generating more operating profit, this chart also puts into stark perspective just how little margin it still generates compared with its peers. Even Samsung, whose margins were squeezed by its shrinking mobile business from 2013 through 2015, is now back well into the mid-teens. Alphabet, meanwhile, has had the most consistent growth trajectory over this period, with modest increases over time.

Capital investment spikes at Facebook, falls at Alphabet

Facebook has always been one of the heavier spenders among this set of companies on capital expenditures, but this quarter its capex spiked to over 20% of revenues, a milestone it hasn’t hit for three years and hasn’t exceeded regularly for even longer. On the other hand, Alphabet’s spending has been trending downwards for the better part of a year, though it saw a brief blip this quarter:

Screenshot 2016-05-13 15.32.04

It appears Apple curtailed capital spending fairly significantly this quarter, perhaps in response to its lower revenues and a broader attempt at greater fiscal discipline to try to keep margins on track. It’s often been the lowest spender in this group in percentage terms and occupied that position again for the last two quarters, but this quarter was also the lowest in dollar terms for the first time. Meanwhile, Facebook’s spending, in dollar terms, eclipsed Amazon’s for the first time this quarter as well.

Revenues per employee – Apple and Facebook closer than usual

For the most part, Apple is miles ahead on the metric of revenues per employee, generating almost half a million dollars per quarter on average. This quarter though, with the overall drop in revenue, revenue per employee dropped as well to just over $400,000, a level it’s only hit once before in recent memory, in Q2 2014. Meanwhile, Facebook’s revenue per employee keeps rising and this quarter was just barely behind Apple:

Screenshot 2016-05-13 15.32.16

Amazon continues to be the laggard on this list, with declining revenue per employee as it continues to hire ten thousand or more new employees each quarter. In the past year, Amazon added 80,000 new employees, which is more than Alphabet employs in total and over five times as many as Facebook employs. Microsoft continues to widen the gap with Amazon on this metric, thanks largely to its workforce reductions over recent quarters, though its numbers are still declining, as are Alphabet’s.

Google’s EU Antitrust Battle

In a less than surprising move, the EU has declared Google in breach of antitrust regulations and has abused its dominance. There are three major arcs to their claims:

In today’s Statement of Objections, the Commission alleges that Google has breached EU antitrust rules by:

  1. requiring manufacturers to pre-install Google Search and Google’s Chrome browser and requiring them to set Google Search as default search service on their devices, as a condition to license certain Google proprietary apps;
  2. preventing manufacturers from selling smart mobile devices running on competing operating systems based on the Android open source code;

  3. giving financial incentives to manufacturers and mobile network operators on condition that they exclusively pre-install Google Search on their devices.

The Commission believes that these business practices may lead to a further consolidation of the dominant position of Google Search in general internet search services. It is also concerned that these practices affect the ability of competing mobile browsers to compete with Google Chrome, and that they hinder the development of operating systems based on the Android open source code and the opportunities they would offer for the development of new apps and services.

In the Commission’s preliminary view, this conduct ultimately harms consumers because they are not given as wide a choice as possible and because it stifles innovation.

The emphasis of this case seems to be more about the search dominance than anything else. As I digested this yesterday, I thought about all the angles I could take with this case. I can certainly sympathize with the EU’s position. They have a point that Google Search being the default search solution stifles any chance for a competing search product. Power users certainly have the choice to change their default search engine to something else and I’m sure some do. However, the issue here is the choice made by the OEM. One could reasonably claim that, if an OEM loaded DuckDuckGo or Yahoo as their default search engine, the consumer experience would suffer, because in reality Google Search is dominant because it is the best. Similarly, the claim that Chrome must be pre-installed as well on Google-approved Android devices. OEMs still ship a different browser in many cases to Chrome and put it on the home screen while they hide Chrome in a folder or buried in a sub-menu. Again, Chrome is the better browser and even without it being on the home screen of many modern day Android devices shipped, Google reported they passed 1 billion active users of the mobile web browser. Seems consumers are playing a role in choosing as well. I’d have an easier time accepting this claim if Google forced the OEM to load the Chrome browser into the default dock but they don’t.

It also seems the EU has turned a blind eye to the existence of Cyanogen, which comes quite close to providing an entire counter case to each of the EU’s claims. Google allows Cyanogen to provide a flavor of AOSP to customers with a host of bundled services. You can ship a version of Cyanogen that only comes with the bare basics of Google services like Play Store and Search and provide all the other solutions yourself. Cyanogen allows a vendor to pass only device level certification meaning said brand can also sell generic non-Google Android AOSP code, something the EU says is not possible when, in fact, it is. They claim once a vendor ships a Google certified smartphone they can no longer ship an AOSP version yet brands who are Google certified do this very thing in China every day.

The main point I landed on as I reflected on this is, even if the EU wins and Google provides even more flexibility than they already do, I honestly don’t think anything would change. This is the main point. Even if someone could bundle an alternate search engine, I doubt most would except for financial benefit which again could hurt the user experience. I don’t think someone is going to create a new startup focusing on search just because now they have an opportunity to be bundled on Android (this is the innovation claim they would). I firmly believe, even if the EU wins and Google changes their tactics, most OEMs would keep doing exactly what they do today.

While there isn’t much strength either in Google’s rebuttal blog post, as the examples they use don’t really help their position, it at least gives some updated terminology on the open yet controlled/managed dynamic of Android.

I understand why Google has the process they do in place to make sure their approved partner devices are capable of certain hardware requirements which is capable of running certain software experiences in order to provide as good of an Android experience as possible. I also sympathize with the OEMs who need to make money while still passing Google’s certification requirements. While I’m more on the side of Google than the EU here, I still believe they need to make more structural changes to Android to provide partners with more revenue opportunities.

Why Google needs an iOS Keyboard: Desktop Search is Dying

An iPhone, a keyboard: can Google replace Apple’s?

Casey Newton’s scoop at The Verge, revealing Google is developing a third-party keyboard for iOS, is one of those revelations which doesn’t surprise, it just slots in to make perfect sense. Of course Google would want a keyboard that would feed back the data about what users are searching for in return for fast searching. Especially on mobile and especially on iOS.

That’s because, as I pointed out via some straightforward calculations based on data Google gave out last year, on any given day more than 50% of people don’t do a single Google search on their mobile phone. By contrast, on any given day, more than 50% of people do at least one search on the desktop. (I did show my work, but in brief: if mobile search is bigger than desktop search, and there are 100bn searches per month, but more Google-capable smartphones than PCs, there are fewer searches per day on mobile than on desktop.)

We know, though, that mobile browser search ads don’t monetise as well for Google as desktop ones do. But there’s another problem for Google, at least in the US: people are doing fewer desktop searches.

That is the picture that emerges from studying data from ComScore, which provides monthly updates on browser share and number of searches carried out in the US. There’s an obvious, immediate criticism: this data doesn’t come from Google but instead from a third-party company which relies on people allowing it to monitor their web browsing habits. The key point though is even if the ComScore data is wrong (and it’s sure to be wrong in some way), it’s going to be consistently wrong, in a consistent way. It should be correct in the general trends it shows us.

With that in mind, take a look at the pattern of Google searches revealed by ComScore’s latest search engine rankings.

Search volume for Google on desktop Source: ComScore. Later data for YouTube and for ‘other’ sites (eg Blogger, shown in green) not available.

Explicit problems

The labeling does need some explanation. ComScore says it measures “explicit core search” which, I was told by Andrew Lipsman at ComScore, is “just searches on the five core engines – Google, Yahoo, Bing, AOL and Ask.” (ComScore also has an “expanded view” which looks at searches on sites such as eBay, Amazon and Craiglist, but that’s for subscribers only)

The reason for shifting to “explicit” search was, in 2010 or so, he says, “Yahoo and Microsoft both began auto-generating searches as people navigated throughout their portals. For example, if somebody clicked on a slideshow about zebras, it might auto-generate searches below about zebras. Since there wasn’t really any intent with these searches, they generated almost no clicks but they were having a significant impact on overall search query volume. So we created a definition that excluded these searches as a better representation of the monetizable search market.” That means it includes searches via “browser bar” searches on Safari and Chrome, of course.

There are also “other” searches within Google’s network of sites – YouTube being by far the biggest, followed by Blogger, Picasa, Photos, Google+ and so on. But Lipsman suggests all but YouTube are insignificant compared to the activity on the main search engine (and YouTube).

Growth: gone

Growth on the desktop isn’t promising. According to the ComScore data, core search alone (not including YouTube or others), peaked in February 2013, and has been shrinking since January 2014. Desktop search on Google is now at the same level, by ComScore’s measure, as at the end of 2010.

Google desktop search: in decline ComScore data says Google desktop search has been declining since January 2014

Two obvious questions: why is that? And what will Google do about it, given the pressure as a public company to keep delivering rising financial returns from its business when 90% of revenues (and perhaps more of profits) come from advertising around search?

The first – why – is pretty easy: mobile. ComScore’s other major public-facing dataset, on the installed base of smartphones in the US, shows that, since December 2010, ownership has risen from 63.2m, or 28% of adults, to 198.5m, or 79%. People who have a mobile phone in their hand are less likely to turn to a desktop to type a query. In fact, they’re not that likely to type a search query at all. Despite the presence of Google search in the Safari toolbar on iOS, and as a front page marquee feature on Android, most people go directly to apps such as Facebook, Twitter, Instagram or Amazon.

ComScore’s dataset tracking the use of the “Google search” app on smartphones in the US shows monthly use bumping along at between 53.5% and 47% of all iOS and Android users, respectively, with the average figure for January 2016 being 50.2%. On the desktop, it has around 64% search share in the US. (It’s much higher outside the US in countries where Google is the top-ranking search engine – up to 95% in some European countries.)

The second question – what will Google do about it, given the pressure to keep revenues rising – is pretty easy as well: pursue all possible avenues of extra monetization.

That’s why when you type pretty much any monetizable query into Google on desktop now you’ll be confronted with more ads directly above the search results than ever before: up to four, as well as the “OneBox” of Google-related subjects such as maps or YouTube videos. SEO analysis says that as a result, “click through rates for these ads should significantly rise” and “cost per click will rise”. Previously, when there were ads on the side of results, small advertisers could catch the searcher’s eye and get 5% of clicks despite having paid the lowest amount for their position.

On YouTube, Google has also become creative. After you watch one video, a “next” will play automatically and show an ad too. Google said YouTube revenue “continues to grow at a very significant rate” in its fourth-quarter results for 2015.

New avenues

What else can Google do? Given that desktop search is unlikely to come back, it has to explore all avenues on mobile and other formats. Which is why producing a keyboard for iOS makes perfect sense. It will be personalized, know what you type, and offer search results whenever you want – but the benefit to Google is any searches through the third-party keyboard won’t be part of its search deal with Apple. They’ll be pure profit.

Whether it will be popular is a different question. Even Google Maps isn’t that big a hit on iOS. If Apple’s report that only one-quarter of iPhone users use it is correct, that puts it at 13.4 million users on the iPhone in the US (because ComScore says that 53.8 million, or 28.1% of iOS users, used Apple Maps in January, consistent with a longer-term trend), against nearly 80 million on Android. We don’t have any data for takeup of third-party keyboards on iOS, but it’s doubtful they come close to that 7% Google Maps has on iOS.

In sum: it’s a nice idea – but may struggle to justify its development time. As Michael Love observed on Twitter after Newton’s scoop, “The people who want a keyboard that uses [Android font] Roboto and their favorite Material Design colors are already on Android.”

What We’ll Learn from Alphabet’s First Earnings

On Monday, Google holding company Alphabet will announce its first earnings under its new reporting structure. This past week, the company provided some information about exactly how it will break down its reporting between the core Google business and its “Other Bets” and, in anticipation of the earnings announcement, it’s worth thinking about what we’ll learn that we haven’t known before.

The Core Google Business

Let’s start with the core Google business. The biggest thing we’ll learn from the new reporting structure is the true profitability of the core Google business. We already know the revenues from this business, because they’ve been reported under the “Google websites” and “Google Network Members’ websites” segments but, because operating income has only been reported at a company level, we’ve never known how profitable this business was. Now, we will (though operating profit will still include the “Other” segment – more on this below). It’s almost certain this core business will look more attractive following the new breakout, because all the loss-making Other Bets that have been dragging down overall margins will be stripped out. I think this is actually one of the biggest reasons the company is adopting this new reporting structure – it wants investors to see the true performance of the Google business.

A (slightly) smaller “Other” segment

Google has always reported an “Other” business in addition to its two advertising ones. Interestingly, in the description of this business in its SEC filings, the only “Other Bets” business that has ever been mentioned is Nest:

Other revenues consist primarily of:
•Sales of apps and media content in the Google Play store;
•Sales of all hardware in our Google online store;
•Sales of certain Google and Nest branded hardware;
•Subscription fees paid for Google for Work, including Cloud Platform and our Maps API; and
•Licensing-related revenue.

All the elements of “Other” listed there, apart from Nest, are sticking with the core Google business. What I’m really curious about is how much is left in this “Other” line once the Other Bets are taken out because that will give us a better sense of the combined Google Play, Google hardware (excluding Nest), and Google Enterprise businesses. We still won’t get any direct visibility over the individual components, but it will allow us to see the combined size of these non-ad-supported businesses within Google proper. Revenues in this segment have been through an interesting period over the last several years, with hyper-growth followed by stagnation more recently:

Google Other Revenues

Other Bets

The other really big news, of course, will be the performance of the Other Bets under the Alphabet umbrella. Sadly, we won’t get a breakout of the individual Bets, but we will have a sense of how they’re performing overall. To my mind, the biggest insights we’ll get are:

  • The size in revenues of this combined business. It’s a subset of that Other segment above, so the ceiling is roughly $7 billion on an annualized basis, but it’s likely a tiny fraction of that. Is it $1 billion? Less? Given that Google has only mentioned Nest in this category and since many of the Other Bets don’t generate any revenue yet, the total may be significantly under $1 billion annually
  • The profitability (or rather the scale of losses) of this business. Is it massively loss-making?
  • The trajectory of both these items. In other words, are revenues growing rapidly? Slowly? Is profitability increasing or worsening over time? How does management characterize the trajectory of this business, in terms of how long it will be before it can make a meaningful positive contribution to Alphabet?

The overarching question with the Other Bets as a whole is whether the bets Alphabet is making on these initiatives are worthwhile, and whether they’re going to pay off over time in such a way as to justify the investment.

R&D Spend

Sadly, although we’ll get capital expenditures for the Other Bets, we won’t get R&D spending broken out. That has been very significant over recent years – annualized spending has been over $11 billion (see chart below), so I’m curious to see how this is split between Google and the Other Bets. Clearly, Google has some big R&D projects with Deep Mind and AI in general, but certain other projects, like self-driving cars, robotics, and so on, are in the Other Bets category. How much of Alphabet’s R&D is in that business?

Google R&D Spend

No Visibility in Other Areas

Sadly, even with this new transparency over the non-core areas, we won’t get any new visibility over the mobile business, Android, YouTube, or any other individual aspects, from a revenue or profitability perspective. Although the core Google business as a whole will look healthier in the new breakout, we won’t know whether YouTube is making money, how fast mobile advertising is growing, or how much it’s spending on Android. And, unless there’s evidence the mobile business in particular is growing and highly profitable, the continued unfavorable comparisons to Facebook are likely to increase the pressure further to provide that transparency too.

Dissecting Google’s Apple Relationship

Bloomberg reported this past week that, based on a court transcript from the Oracle-Google lawsuit, Google paid Apple $1 billion in 2014 to be the default search engine in Safari on iOS. The transcript has since disappeared and neither Google nor Apple have commented on this figure (now or at any previous time). I thought it would be worth dissecting this figure, putting it in context, and discussing what – if anything – it means for the future of the Google-Apple relationship.

Financial context

The financial context for the $1 billion figure is that it sits within broader reporting categories at both Google and Apple. For Google, this payment likely sits within the “Traffic acquisition costs (TAC) to distribution partners” category. This category reflects the payments Google makes to various third parties for sending traffic to Google’s search engine and its other websites. The trend for these payments is shown in the chart below:

Google TAC

Of the various parties Google pays for sending traffic its way, Apple is almost certainly the largest. A smaller player in this category is the Mozilla Foundation, maker of the Firefox browser, which received around $300 million from Google in 2014. The Firefox browser obviously has a much lower share of the search market than iOS does, so it makes sense Apple’s cut would have been much higher. Google paid out a total of around $3.6 billion in this category in 2014, so even $1 billion is only a third of the total. To my mind, it’s quite possible the payments to Apple were actually larger, with the $1 billion number representing some sort of floor for payments rather than the total amount.

The other way to look at the financial context is by way of Apple’s segment reporting. Unfortunately, these payments from Google are in a fairly opaque and crowded segment at Apple, namely Services. As a reminder, Services includes iTunes and App Store revenues, AppleCare revenues, licensing revenue from the Made For iPhone program, Apple Pay revenue, and revenues from the sale of software, among other items. As such, you have to make a lot of assumptions about the size of those other buckets to even get close to an estimate for Apple’s revenue from Google. For reference, though, here’s revenue for that segment at Apple:

Apple Services revenue

Whereas at Google the reported $1 billion payment is equivalent to about 25% of total annual payments in the category, at Apple it’s well under 10%. I’m inclined to believe the payments are actually a little higher, perhaps as much as $500 million per quarter at this point, but even then it’s just 10% of the total revenue in this category.

Broader significance

The reaction from several quarters has been to ask why, if Google was paying “so little” to be the default search provider, someone else hasn’t come in and trumped it. But even aside from the fact the actual payments may be higher, there are several other reasons why this isn’t so straightforward. To start with, there are only a couple of real alternatives to Google in most major western markets: Microsoft and Yahoo. To further complicate matters, Yahoo still uses Microsoft for a lot of its search results, so we’re really talking about Bing as the underlying search engine for both of these options, at least today (Yahoo is working on building its own search capabilities back up). There are other search engines, but they’re so small they’re unrealistic as potential providers of this default position. DuckDuckGo in particular is very interesting in that its privacy stance is well aligned with Apple’s, but unless Apple acquires it (itself an interesting prospect), it’s very unlikely to become the default search provider in iOS.

At Microsoft, search advertising has grown nicely, but it’s still under $1 billion per quarter in revenue (including its cut from Yahoo), which means making such a significant financial commitment would be a huge jump in its costs. To be sure, it could come with significant rewards, but it would entail significant risk for Microsoft. Search revenue at Yahoo, meanwhile, is less than half a billion a quarter, meaning the $1 billion commitment alone would be half a year’s revenue from search. With all the uncertainty around Yahoo’s core business at the moment, this would be a really tough time to make such a big bet there, too.

But even aside from the financial considerations, I’ve written here previously that Apple is likely to be very cautious about switching the default search provider in Safari, especially after its experience with replacing Google Maps with Apple Maps a few years back. For all Apple’s qualms about Google as a competitor/partner and about Google’s privacy issues, Apple wants to provide the best possible experience out of the box for iPhone and iPad users. And the reality is that, while all the alternatives to Google search are decent, they are not truly competitive. There’s something of a 90/10 problem here, where 90% (or more) of searches are likely handled equally well by Bing, Yahoo, or DuckDuckGo, but for the other 10% or so the results on Google continue to be better. I’m doubtful Apple is willing to sacrifice that part of the user experience at this point. Rather, I suspect it will keep Google as the default option in Safari for now, while continuing to build up its own search operation in the form of Siri/Spotlight, with help from its Topsy acquisition and search results from Bing where necessary.

Fairly Confident Predictions for 2016

A couple of other Tech.pinions contributors have already outlined some predictions for 2016 but, in my first Insiders post of the year, I thought I’d chime in too. The predictions below are mostly ones I’m fairly confident about, but I’ll sprinkle in a couple that are a little more “out there” and identify those clearly.

Amazon: Both AWS and E-Commerce Driving Growth

The big success story for Amazon over the last several years has been AWS, even as its e-commerce business seemed to lose some steam and margins evaporated. But, in late 2015, it became clear Amazon still had a lot of headroom left for its e-commerce business, as that business regained momentum and the combination of AWS and better-performing sales in e-commerce helped boost margins. I still believe Amazon faces some major obstacles in replicating its US model (which relies heavily on infrastructure density) in some overseas markets like India and China, but it’s likely to have success in 2016 in expanding in the UK and other markets where its infrastructure is already strong and the geography and population density are more favorable.

Apple: Continued Growth, Including iPhone

The biggest single question about Apple in 2016 has to be whether it will grow revenues significantly, which in turn is heavily dependent on its ability to grow its iPhone business. I wrote a piece a while back in which I did something of a deep dive into the various factors driving (or holding back) Apple’s growth in 2016, so I’ll refer you to that for the details. But I believe the iPhone will grow for Apple in 2016, albeit at a significantly slower rate than in late 2014 and 2015. However, I don’t think the iPad will return to growth just yet, even with the launch of the iPad Pro. I also think we’ll see significant investment from Apple around iMessage in its 2016 software releases, including peer-to-peer payments and other advances. My long-shot prediction for Apple is it will launch its own smart home hardware in 2016. Its HomeKit strategy just doesn’t seem to be delivering results, and I think the only way to fix that is for Apple to get into the business itself.

Facebook: Another Acquisition, Possibly an Asian Messaging App

Facebook has made several high-profile (and high-value) acquisitions in recent years, including Oculus, Instagram and WhatsApp. I suspect it’s not done yet and one big gap in its strategy continues to be messaging in Asia. As I and others have written about here, Asia continues to be a fragmented market when it comes to messaging and Facebook’s presence in Asia in general continues to be weaker than elsewhere. Acquiring one of the major Asian messaging apps might be one way to help address this weakness, with LINE and Daum Kakao being the obvious candidates.

Google: Alphabet Split Reveals Dichotomy in Businesses

One of the biggest things that will happen in Google’s world this coming year is the first reporting under the new structure created by the new Alphabet entity. What we know is this reporting will come when the company reports its results for Q4. What we don’t know is what those financials will look like and financial analysts have widely divergent views on the performance of the “other bets” business in particular. My prediction is the core Google business will emerge from this new reporting structure looking better than ever but, conversely, the other businesses will look pretty awful from a financial perspective. That increased transparency will, in turn, lead to more pressure and scrutiny for those “other bets”, and my out-there prediction is one of these businesses will be shut down, spun off, or otherwise scaled back as a result in 2016.

Microsoft: Surface Phones Launch, With as Little Success as Lumia

With the launch of Windows 10 and new devices optimized to work with it in 2015, Microsoft has got some of its biggest news out of the way already. But there are signs and reports Microsoft still intends to launch a revamped line of Windows Phones, possibly under the Surface brand, and it’s possible this will happen in late 2016. However, I predict these phones will ultimately suffer from the same fundamental challenges as Windows Phone in general and Nokia/Microsoft’s Lumia line in particular. As such, Windows Phone will continue to struggle, though it will likely limp on in some form indefinitely, especially if it gains any sort of meaningful traction in the enterprise, which is clearly a major focus now.

Samsung: Smartphone Business Fades, Chips Ascendant

Samsung spent 2015 stabilizing its smartphone business, at least in terms of revenue and shipments, but at the expense of margins. 2016 will likely see more of the same, even under new leadership, with an inevitable tradeoff between driving shipment growth and falling selling prices further pressuring margins. It’s going to become clearer than ever in 2016 that Samsung’s heyday as a consumer electronics powerhouse is behind it and that its future lies at least as much in providing components to other manufacturers as in making its own consumer-facing goods. Its chip business should continue to flourish, driving more and more of its revenue and profits and helping to offset the poorer performance in smartphones and elsewhere.

Twitter: Still no Core User Growth, Slowing Revenue Growth

As a heavy Twitter user, I’m invested in its future and its success, but it’s becoming increasingly difficult to believe Twitter will get user growth going again. Jack Dorsey’s leadership seems to have breathed some new energy into the company and he’s outlined a plan for returning user numbers to growth, but I suspect we’ll see very little of it in the core, monetizable, user base (i.e. excluding “SMS Fast Followers” and “Logged-out Users”). As user growth continues to stall, it will be harder and harder for the company to grow revenues as it has to date and revenue growth will slow.

Revenue Streams Automakers Reap from Smarter Cars

At CES in 2013, I had lunch with Glen Lurie, then the GM of ATT’s mobile business. At the time, he told me of his vision of equipping all cars with a cellular wireless radio and using this to deliver more intelligence to a car. Part of the vision was to use the cellular radio as a mobile Wifi hot spot but he saw the time when the car’s entertainment system and its diagnostics would need to be tied to wireless communication so it could help carmakers deliver smarter and more intelligent cars. This meeting took place before Apple introduced their Auto Play or Google rolled out Android Auto.

Two years later, his vision is becoming more of a reality with just about every carmaker adding a cellular radio as an option and integrating Apple and Google’s systems or their own to make cars smarter and safer.

I recently saw a Business Insider report on Connected Car Revenue streams and was intrigued by their forecasts. Here are the highlights of the report:

• Connected-safety features bring in the most revenue of all of today’s connected-car services, at $13 billion. These features alert customers of road conditions, such as severe weather or an approaching hazard, as well as collision avoidance.

• Entertainment is one of the most popular features available for the connected car, but it is not a major revenue driver. The category will account for only $13 billion in revenue in 2020. Entertainment features include integrations with apps such as Pandora, Yelp, and Facebook.

• People who actually use connected car services are satisfied with them. About half of those who have a connected car actually use the car’s connected features and those who do use many of these features show high levels of satisfaction with them.

• Consumers are pretty split on how they want to pay for these services. 25% of global consumers would be willing to receive in-car advertising if it meant they got free basic services in exchange. This means marketers are likely to have a big opportunity to tap into the connected-car market.

You will notice in the chart below that driver’s assistance and connected safety features are projected to bring in the most revenue, followed by entertainment.


The fact safety is at the top of the revenue list should not be too much a surprise as drivers have always considered safety a key priority when they buy cars. But, as I listen to the various automakers outline their short term ideas about increasing driver safety, I am coming to understand that, if this is where the money is, then creating a self-driving car needs to be their biggest priority for the future.

Indeed, if these forecasts are right, people who buy cars are willing to pay extra for safety. If you follow the whole autonomous car concept and study Google’s experience with their driverless car, you can see how these types of vehicles have the potential of being the safest cars on the road in the future.

But I have to admit smart entertainment system revenues in this forecast seem low to me. If a car has Google or Apple’s auto systems and they are tapped into apps and services, it would seem the revenue potential should be more. Also, since most cars on the market today do not have a smart entertainment system built in, the new retrofit kits coming from many of the top line audio companies should surely bump these revenues up.

In fact, I think millions of car owners who have cars without these new connected entertainment systems will want to buy these retrofit systems and/or kits in the next few years. I see those who own iPhones and Android phones wanting to extend these smartphones features to their cars to give them the special apps and services Google and Apple and their app providers will deliver for Apple’s CarPlay or Android Auto. In fact, this may be one of the most untapped and more important market opportunities for auto makers, Apple, and Google when it comes to these special extensions of smartphones.

Although Business Insider estimates that “of the 220 million total connected cars on the road globally in 2020, we estimate consumers will activate connected services in 88 million of these vehicles.” The report also states, “By 2020, nearly 40 million cars will be using Android Auto and 37.1 million will be using CarPlay, according to IHS, and that will cover nearly all cars launching connected car services”, according to BI Intelligence estimates.

But this is just in new cars that have these services built in. If the industry is not looking at the retrofit market in a similar way, they will be missing a big opportunity. I know most retrofit systems today are expensive. But we should see some moderately priced models as CES. I happened to lease my last car before newer cars came out with Apple’s CarPlay in them and I am one of their target customers, along with millions of others that would like to extend their iPhone or Android phone with their car apps to their existing cars. This could be a very large market opportunity that to date I just don’t see the car makers or even the top line audio suppliers pushing to their current customers but I sure hope they get behind this and make it possible for millions of smartphone users to take advantage of these new auto services by Google and Apple.

Why Google is at a Major Crossroads

For the last few months, we have been writing about the fact that millions of people, especially the younger generation, came into the digital age via smartphones. More importantly, their primary OS has been Apple’s iOS or Google’s Android. While Windows is still an important OS, it is mainly used for PCs. For billions of people taking part in the digital revolution, they have never used Windows and most likely never will.

This has led us to believe that, when this younger generation of users moves into the workforce, they will want to have the OS, tools and apps they grew up with and will want to use them as they go off to school and work as they grow older. We believe Apple understands this well and is moving more and more to make iOS important for all of their customers. With the iPad Pro, they are even creating a new set of devices using iOS targeted at business. I believe we will even see an iOS-based laptop in the not too distant future.

I think Google understands this to some extent as they continue to push Android developers to create more productivity apps and ones that can be used in all types of business settings, albeit mostly targeted for use on smartphones and tablets. But Google’s approach differs from Apple in that they have also introduced another operating system into their program called Chrome. This is an HTML-based OS and is the OS they push to laptops and even some all-in-one desktop computers as an alternative. To date, Chrome and Chromebooks have made some progress including major inroads into the education market.

But I see Google at an important crossroads. While Chrome is an interesting OS in its own right, it is Android in both an official and unofficial form that dominates the market for mobile. I believe it should be the principal OS Google pushes to a younger generation as they move into the workforce. At the moment, Google has what I would call a hybrid solution. Instead of working with hardware vendors to create Android laptops and 2-in-1s, they are pushing them towards using Chrome as the core OS and then creating a way for any Android app to work within Chrome.

The key reason they are doing this is because they have lost control of Android and, at the moment, they are not making the kind of money off Android they originally hoped they would. By fragmenting the OS and making it open source, mobile vendors have created their own versions of Android and, in millions of devices that use it, they are not tied back to Google’s services or ads since these vendors customize their version and create their own apps and services instead.

But with Chrome, they can enforce their control again since you can’t get into the OS without your Google ID and password. Then, once you are in, you are immediately tied to Google’s products and services including search and their productivity tools. This might be OK for some people but, for most of the world, this would not be acceptable. Indeed, we are starting to see some vendors, especially in emerging markets and one’s that are trying to bring PCs to a younger generation, starting to create Android based 2-in-1s and cheap Android laptops. They believe the iOS and Android generation could, at some point, want a device with a larger screen to be used for things like productivity, education, etc.

Today, companies like Xioami, Huawei and MicroMax have moved from smartphones to are either making laptops or rumored to be making one soon and, while they are–or will be–low-cost Windows laptops now, we expect them to soon offer Android-based 2-in-1s and laptops very soon. They are not the only ones planning Android 2-in-1s and laptops. I expect even some of the bigger PC vendors to do Android portable PCs in the not to distant future as well.

If Google continues to think Chrome running Android apps will work in emerging markets they are delusional. And, if they don’t find way to support these Android 2-in-1s and laptops as they come out, they will lose this Android battle too. Google is at a serious crossroads with this. At the moment, they are not backing any Android based 2-in-1s or laptops in the works and I see that as a major mistake. Hoping to attract the Android crowd to a PC platform by giving them Android apps, which may or may not run well within Chrome, may work in the US but this strategy is a dead end for them in the rest of the world.

Comparing the “Big 6” Consumer Tech Companies

After earnings season ends, I always like doing some comparisons between some of the largest and most important consumer technology companies to see how they measure up on key financial and operating metrics. I’ve shared some of this data with Tech.pinions Insiders once before, and I thought I’d do so again now we’re through the Q3 2015 earnings season. The charts here come from the Jackdaw Research Quarterly Decks Service. You can sign up for them here. The full deck, with about 15 charts, has gone out to subscribers today. The companies included in this comparison are Amazon, Apple, Facebook, Google, Microsoft, and Samsung. I used to include Sony, but it seems to be exiting more and more aspects of the consumer technology business so I’ve dropped them this time around. It’s also worth noting that capex figures for this quarter and employee figures for all periods aren’t available for Samsung.

Revenues – Apple is now the biggest of the big 6

The last time I did this analysis, Apple had just barely passed Samsung as the company with the highest trailing 4-quarter revenue of any of these companies and, since then, its lead has only expanded. As Samsung has suffered revenue declines due to its struggling mobile business, Apple has gone from strength to strength with its strongest period of revenue growth in years, thanks to the new iPhones. Further down the pecking order, Amazon has also now passed Microsoft, which benefited from the acquisition of Nokia’s devices business for a time but is now seeing revenue declines year on year as that business shrinks and currency effects detract from overseas performance in general:

Big 6 Revenues

As you can see, Facebook is by far the smallest of this “big 6” and is included for its outsized influence in the market and its margin performance, not for its modest financial scale.

Margins – Facebook is taking a dive

From a margin perspective, Facebook has been the leader for quite some time, but was pipped by Apple and Microsoft over the past four quarters on operating margin:

Operating margins

What’s behind the decline in Facebook’s margin? Acquisitions of new businesses such as Oculus and WhatsApp, which incur substantial costs but no revenues. At the same time, you’ll also note Google’s margins have been steadily improving, while Samsung has begun to turn its performance around in the last couple of quarters, largely thanks to its semiconductor business. And of course, Amazon comes in last place, even with its recent uptick in profitability thanks to AWS. In dollar terms, Amazon’s operating profits over four quarters continue to lag even those of Facebook, which has revenues around one sixth those of Amazon:

Operating profit

Amazon is out-hiring everyone else

As I’ve written elsewhere, Amazon is on a hiring spree at the moment, adding 72,900 employees in the past 12 months alone, significantly more employees than Google has in total:


At this point, Amazon employees around 225,000, or twice as many as either Apple or Microsoft. Apple, Google, and Facebook have been hiring significantly too, but at nothing like the rate of Amazon, while Microsoft has been laying off workers following the Nokia acquisition. Because many of Amazon’s new employees are warehouse workers, and because its revenues are growing at a much slower rate, its annual revenue per employee has been steadily falling and now sits at under $500,000, at the bottom of the pile. Meanwhile, Apple has crossed $2 million per employee in annual revenue, and Facebook passed Google sometime last year.

Very different business models drive these financials

The last thing I’ll mention here is these companies have fundamentally different business models behind their financial performance. Facebook and Google share ad-based business models, with around 90% of their revenues coming from that single source, while Apple and Samsung are most similar in that they derive the bulk of their revenue from hardware, though their execution and strategy are quite different. Amazon and Microsoft each derive the bulk of their revenues from other categories – e-commerce in the case of Amazon and software in the case of Microsoft, though both also have growing cloud businesses. The chart below shows the composition of their revenues by business:

Revenue by business model

All of this is a useful reminder there’s no single recipe for success in consumer technology and that each of these companies has achieved impressive metrics by ploughing its own unique furrow, rather than by following a single formula.

Google’s Continued Onslaught of Microsoft with Pixel C

I’d like to dive in a little deeper on Tim’s article of earlier today and address a few points. Over the past few months, we have been having some heart to heart conversations with those in the PC ecosystem — Dell, HP, Lenovo, Intel, Microsoft and so on. The meat of these conversations is what I wrote about a few weeks ago regarding the split in computing operating systems between consumer OS’ and commercial OS’. Suffice it to say, this was a hot and somewhat controversial topic.

While Tim and I had no idea Google was making the Pixel C, we referenced the one made by Jide as an interesting example. My premise is simple. But let me share some statistics first.

There are now globally almost 3 billion active computers in use running a mobile operating system. Contrast with the fact that there are roughly 1.3-1.5 billion devices running a desktop OS in use. Narrow in on the desktop OS number and we observe about 800-900 million are used by pure consumer markets, in a home or a purely personal environment. The rest are used commercially for “work” in a work setting. We note the market for desktop operating systems is not growing and is, in fact, contracting.

What is key is a healthy percentage of those 800-900 million consumer PCs in use are not used every day. It is not a stretch to conclude the desktop operating system in pure consumer environments is not utilized nearly as much as desktop operating systems in enterprise/commercial environments.

I make these points simply to articulate how the desktop OS plays different functions in pure consumer and commercial settings. Within that context, it should come as no surprise when I say the smartphone is the primary computer for several billion people. More time is spent globally per day computing on a mobile operating system than a desktop one and this imbalance will only skew more in favor of mobile operating systems.

This is where I think Google believes the Pixel C is skating to where the puck is going. The Pixel C, like the iPad and iPad Pro, is not directly targeting becoming a desktop OS replacement. The “PC” as a truck and the desktop OS as its engine metaphor holds up. Both these moves by Apple and Google are simply a recognition that the market for desktop operating systems is simply much smaller than the market for mobile operating systems by a factor of 3-4x. They seem to have also concluded a mobile OS can play a role in the broader computing landscape than simply on screens 4-6″ large. I believe they are right.

For nearly two billion people who use a smartphone as their only computer, and many of them Android as their only operating system from a literacy perspective, should they ever want a product that gives them more machine than what they have in their smartphones, are they going to buy a Windows PC? Will they learn a completely foreign OS where many of their apps will likely not exist? My gut tells me that, for many of these consumers who on-boarded to the internet with Android, they would be more willing to stick with Android when it came time to get more machine if they ever need it.

The software angle here is notable as well. All of the exciting global software plays are happening on mobile operating systems, not desktop ones. If you follow the software that gets consumers excited, makes developers money, and marches computing forward, it is all happening on mobile. So are those developers all of a sudden going to start paying attention to desktop operating systems? I think both Google and Apple are betting they don’t. Both these companies are betting on their mobile developer ecosystem to embrace larger screen computing form factors.

This discussion is around the 2-and-1 PC form factor but, in the case of Android, you could even make a case it could work on a notebook or even a desktop form factor. The momentum of software consumers are getting excited about is mobile and, if there is upside at all for larger screen computers, I feel it will be on the back of mobile operating systems, not desktop ones.

You will be tempted to argue with me and say things like, “You can’t do real work on a mobile device or operating system”. However, this statement is not true and has a very limited view of what work is. Microsoft has embraced that even something like spreadsheets and word processing could and should be done on mobile devices by taking Office to mobile operating systems. Slack and Quip are two prime examples of work getting done on mobile. With the cloud, we can now manage our photos, music, and media all on mobile. I can edit two simultaneous 4k video streams on my iPhone — I can’t do that on several older PCs I have. The world skews mobile and, if it can be done on a mobile device, it will be done on a mobile device/operating system.

Google and Apple seem to believe, just about everything can be done with a mobile operating system.

Google Event Preview

Tomorrow, Google will be announcing a range of new devices as well as finalizing the latest version of Android, code-named “Marshmallow”. At this point, a great deal is known about what will be announced, based on leaks and reporting from various Android blogs, including the names of the two Nexus phones and some of the details of the new Chromecast devices. However, it’s worth putting all these things in context.

Chromecasts for video and audio

The new Chromecast is supposed to offer faster WiFi, a new design, and possibly some other features as well. In general, however, it’ll be broadly the same product Google has offered until now – a device almost entirely reliant on a smartphone or other smart device to feed it content, in marked contrast to the smart TV boxes sold by Apple, Roku, and others. This more smartphone and search-centric approach is a good fit for Google’s overall strategy and the dirt cheap pricing ($35) has also helped to shift a large number of Chromecast devices up to this point. Chromecasts have been some of the best-selling devices in this category over the past 18 months or so, outselling Apple TV and Roku in some markets.

But, of course, the Chromecast is only one prong of Google’s two-pronged strategy with the TV. Android TV being the other. That strategy has so far largely failed to take off, despite a number of partnerships with OEMs, so it’s arguably a good thing Google has the Chromecast as well. However, with both Amazon and Apple pursuing a very different strategy for the television, it remains to be seen whether the Chromecast can allow Google to keep up over the long term. The only thing the Chromecast can do is cast content from a smartphone, tablet, or computer to the television. It can’t in and of itself serve as a gaming console or an independent video consumption box. As such, it’s never going to have a hope of achieving the single-input dream Apple and Amazon are aiming for. And yet, given how much content we now discover on our smartphones, it also cleverly circumvents the problems of content discovery and search Amazon and Apple have struggled in the past to overcome. While its two competitors now use voice to get around the awkwardness of text input on the television, Google simply uses a device better suited to such input – the smartphone.

Then there’s the audio version of the Chromecast, which will perform some of the same functions but for audio devices like stereos and standalone speaker systems. In some ways, it promises to do for the audio category what the existing Chromecast did for video – offer some of the same functionality as far more expensive systems like Sonos for far less money. I almost wonder whether we’ll see Google offering multi-packs of Chromecast audio devices so people can buy them for multiple rooms in their homes. Pricing will be very interesting too – there’s no reason to expect this device to cost more than the existing Chromecast and it’s quite possible it’ll cost even less. With the addition of audio functionality, Chromecast (and the Google Cast technology) will have landed in much the same place as Apple’s AirPlay, albeit in the opposite order (video first, then audio).

Nexus phones

It now seems almost certain the two Nexus phones will be made by LG and Huawei, and called the 5X and 6P respectively. I wrote a few days back about the role Nexus phones play in Google’s strategy, so I won’t rehash that. However, I will add one data point. Carolina Milanesi of Kantar Worldpanel was kind enough to supply me with this tidbit: Nexus phones account for around 0.8% of the Android installed base in the markets Kantar tracks. That gives you some sense of the size (or lack thereof) of the Nexus phone base – it’s an afterthought, well behind all the devices from major manufacturers. And yet at the same time, it’s contributed somewhat to one of the big challenges facing the major Android OEMs: by pricing these devices aggressively, Google has helped to undercut some of its most important partners, especially in those years when the Nexus devices have had decent specs.

This is the first year Google will have two Nexus phones and it looks like the 5X will have the more modest specs while the 6P will have better performance, more on par with higher-end devices. What’s interesting is the reasons people buy Nexus phones – again, according to Kantar data – is largely about price and promotions, rather than about the stock Android experience which is ostensibly the key selling point. It’s curious, then, that Google is broadening the range of devices it’s offering under the Nexus umbrella, since this just means it’ll be competing with its OEM partners across several categories. This is also a big break for Huawei, who have really struggled to break into the US market in a big way, beyond prepaid.


Marshmallow is a fairly modest update to Android, and it’s interesting that it’s landing in the same year as Apple’s iOS 9, which also focuses more heavily on polish and bug fixes than dramatic new features. Google Now on Tap is probably the headline new feature and I’d expect Google to make a great deal out of this during the announcement. Support for fingerprint sensors and Android Pay are also likely to be important elements which Google will play up, both in talking about Marshmallow and showing off the new phones. Google Now on Tap made for some impressive demos at I/O when it was first announced and I’m curious to see how it has evolved since then. Of course since that time, Apple has announced iOS 9 and the Proactive features within Siri, including some context-based ones. But these still fall short of what Google is doing with Now on Tap. One of my biggest concerns with Now on Tap has been the way in which Google appears to be trying to get users back out of apps and into its own domains (whether search, through app linking, or through Google Now), and I’m curious to see how it frames these new features during the event.

Of course, the reality is Marshmallow will be available to almost no Android users for the foreseeable future – the previous version, Lollipop, only became the second most popular version of Android this month, almost a year after launch, while KitKat, the version launched almost two years ago, remains the most popular. Despite some promises users would see faster upgrades to new versions, Google continues to struggle to make this happen in reality, thanks to OEMs and carriers who slow down the process with their customizations and certification processes respectively.

Lastly, I’m interested to see if we hear anything more about Google’s Brillo project at the event – the timeframe for this Internet-of-Things-focused spinoff of Android was supposed to be around the same as for Marshmallow, but I haven’t heard much about it since I/O. Google did launch its OnHub wireless router a few weeks back and that takes advantage of the Weave communication protocol that’s part of Brillo, but that’s about it for news so far. Hopefully, we’ll hear a little bit more about the timeline for Brillo at the event too.

Can Android save the PC Industry?

A few months ago, I wrote a piece in Tech.pinions asking if “Android is the new Windows?” In the article I pointed out that, when the PC was the center of our universe, Windows was the one constant all PC vendors and developers could back. Today, the OS universe is quite different and there are two other operating systems — iOS and Android — that have divided the attention of OEMs and app developers. In sheer terms, Android has become the dominant device OS for tech products around the world.

For the PC industry, the rise of mobile, especially smartphones, has impacted the tech market. While demand for PCs has declined, demand for smartphones has risen exponentially. But there is an interesting trend developing within the Android community that, in a strange way, could actually be the PC industry’s savior. One of the things we know from our research is, for over 1.5 billion people, their first introduction to personal computing has come through a smartphone. More specifically, an inexpensive smartphone that gets them connected and gives them access to tons of apps, but is usually of poor quality with various technological limitations. We know many of these people will eventually upgrade to a better smartphone and this is where Obi Mobile and Motorola are positioning their high quality, low priced phones.

However, there is a pretty serious school of thought developing about this audience that posits the idea that, at some point in the next two to four years, they may actually want to buy something with a bigger screen that has even more functionality. This school thinks this device most likely will be a laptop, not a tablet. Part of the reason they think so is 5.5” and 6” smartphones have already impacted demand for tablets and, for the most, smartphones with large screens already serve as a tablet as well as a smartphone. On the other hand, we know from research many of these people are very familiar with a laptop and, in a lot of cases, have coveted a laptop as a better tool for them to help educate their kids, manage media and perhaps even help run a family business with a better tool.

But, for me, the big rub with this idea is the leap of faith that says, if they were to move to a laptop, they would want a Windows-based portable computer given that the only OS they have ever used is Android. What makes more sense is to create a version of Android that can be used on a laptop. Yes, this has been tried before with the Motorola Atrix but the timing and implementation was wrong. It turns out, a few companies are already thinking along these lines and at least one solid Android OS that can be used on a PC is actually ready for the market now. It is coming from Jide, founded by three Google employees. They were part of the Android team but left to create a very rich version of Android that can run on a PC. In fact, they are already selling a 2 in 1 Android portable for $400 and taking pre-orders now.

The Jide OS is called ReMix and it runs all Android apps and includes the Google Play store. That suggests to us Google has actually blessed this version. Check out their site and click on the demo. You will see it runs Powerpoint and other Office apps as well as Android apps in native form. Our sources tell us Blackberry is also doing a dedicated Android OS that is highly secure and there is at least one other major company in the software space doing something similar.

These are interesting developments and could have ramifications for PC makers. Today, their OS loyalty is still with Microsoft although all have broken ranks to support Chromebooks, too. But we could see legitimate demand by smartphone users who will, in the near future, want to graduate to a laptop. In this case, I would be more inclined to think a move sideways to an Android laptop they are familiar with makes more sense. If so, PC makers would support Android on a PC in a heartbeat. This could be an impetus to actually help grow demand for laptops and PCs in the future.

This is an area to keep a close eye on. While Android today is a mobile OS, its reach beyond mobile, thanks to Jide and others, suggests its role could eventually be much broader. The next logical place for Android to go is the laptop and, perhaps, even a low-cost desktop.

Why Android Wear is Critical for the Smart Watch Category

Earlier this year, I published a brief report on the smartwatch market opportunity. A key part were several scenarios I laid out. Here is that section of my report:

• The vast majority of watches sold today go “smart” over the next five years and run Android Wear or another third party smart watch platform.
• Watch makers standardize on a smart watch platform and there is little to no smart watch platform fragmentation.
• Google or a third party standard platform is genuinely competitive with Apple’s.

It seems a safe assumption Apple will have the advantage in the early stages of the smart watch category. Like the iPhone, they have a five to seven-year advantage on the competition. It is logical that Apple maintains an advantage in this market for at least two years, if not longer, and we feel scenario #1 is how the market will look for at least the first three to five years if not longer.

While there is a strong case to be made for scenario #2 simply because it is logical the competition will need to contend at some point with Apple and will have to choose a platform to use or create their own and the market may likely flood with low cost Android (or another third party) smart watches. It is unclear if these products will stick or be competitive.

A mix of both scenarios is possible as well. Apple may not be destined to be the only dominant vendor in the top 20% of the smart watch market but poised to have much higher market share even if not the total majority starting to make watches.

It is certainly too early to know how all of this will play out but, from what I’ve observed and studied about the market the past year, I’m convinced the role of Android Wear is important to the smart watch category. I say this with the caveat that, if only Apple is successful in this space, then we don’t actually have a smart watch category. If that happens, there is absolutely nothing wrong with smart watches only penetrating a percentage of Apple’s approximately 500 million customers. The point is, for there to be an actual smart watch category, more companies than Apple need to be successful. If the TAM is to be larger than just Apple’s user base, Android Wear will play a critical role.

A fundamental concept of how markets mature is important to understand. At the beginning stages of any new category, the market is immature. Immature markets occur when consumers have no frame of reference for the product and are being exposed to something new for the first time. In the early stages of a new category, the landscape is also very fragmented. I use this slide to tell the story.

Screen Shot 2015-09-01 at 8.33.14 AM

Fragmented hardware and software platforms plague the early stages of a market. We see it in wearables and even IoT today — the same way we saw it in mainframes, mini’s, personal computers, and smartphones. This formula is tried and true and predictably repeatable. But what happens once a standard software platform emerges, and compatible hardware is build up around that standard software platform, is the market is driven to maturity. The hardware landscape becomes competitive, begins to scale, and market fundamentals emerge to bring that technology to the masses. Most recently, we can observe this with Android. If it wasn’t for Android, there wouldn’t have been much of a smartphone market. In fact, if it wasn’t for Android, it would have taken much longer than 5 years for the market to catch up with Apple. Offerings from Microsoft, Symbian, Blackberry, Samsung, etc., were not on a trajectory to go mass market. I’d also argue these companies were not well positioned for the broader consumer audience which is why it would have taken longer for them to adapt to catch up with Apple. Android helped mature the smartphone market by becoming the standard platform for smartphones and smartphone hardware companies.therefore, Android Wear is crucial to the smart watch category in the same way Windows was crucial to PCs and Android was crucial to smartphones.

If we are to have a smart watch category, we need a plethora of choice and Android Wear offers OEMs that choice. Choice in hardware design, price, features, etc. This is crucial for the category to grow. Google was smart to also bring Android Wear to iOS, a move we saw coming from a mile away. Interestingly, I think this will actually help Apple.

I believe Apple’s thesis is this. Consumers will enter a market buying the most affordable device they can. This could be a PC, tablet, smartphone or a smart watch. Apple knows they are not priced at entry level in most of their product offering, so they likely assume their product is generally not going to be the first choice, particularly of the price conscious first-time buyers of a new product. Therefore, Apple’s thesis is, as a market matures and those consumers who started entry level begin to want more and “spend up to move up”, their products will be ideally positioned to compete for those customers. We need look no further than China to see this play out. iPhones were not the first smartphones owned by hundreds of millions of Chinese consumers. However, as Chinese consumers started to mature and self-identify with what they like and don’t like and want and don’t want in a smartphone, they started to move up the chain. Hence, China has the single largest Android switcher numbers of any market we study. Similar dynamics are happening in the US with Android switching as well as many parts of Europe. This dynamic also explains the slow, yet steady growth of Macs. Customers are identifying value within their specific needs, wants, and desires, and many are considering Apple products. Apple is best positioned to compete when a market matures.

Therefore, if Android Wear helps mature the smart watch category, potentially both with Apple customers and non-Apple customers, it stands to reason, once the market matures, the Apple Watch may benefit from a similar dynamic Macs and the iPhone are currently experiencing.

There may or may not be a smart watch category/market. We know for sure there is an Apple Watch market but beyond that, consumers have yet to speak. Android Wear breaks this open and it may take us into 2017 before we can come to any conclusions about the category.