A Look at Intel’s Financials

Intel’s Developer Forum was last week. A number of commentators have expressed surprise or at least remarked on the fact the forthcoming line of Skylake processors was not a major focus and instead, much of the focus was on the Internet of Things and other newer market segments Intel is investing in. As such, I thought it might be useful to take a look at Intel’s financials with a view to providing some context for these announcements.

Revenue growth turning negative

The first thing to note is Intel’s revenue growth has turned negative, with a slight decline in Q1 and a much bigger decline in Q2:

Intel year on year revenue growth

Slowing growth across three major segments

What’s behind this revenue decline? Well, the answer is revenue growth in three out of Intel’s four major segments has been slowing:

Intel growth by segment

Client Computing, which includes both traditional PC form factors as well as tablets and smartphones, has been seeing slowing growth for almost a year now, and has been negative year on year for much of that time, while two of the faster-growing areas – data center and Internet of Things – have also started to see slowing growth.

Client computing suffering from PC decline

At the root of the problem in Client Computing is the decline in unit volumes over the past year:

Intel PC unit volumes

Given that PCs still dominate Intel’s client computing revenues, and this segment is over 50% of Intel’s total revenues, that by itself causes signifiant problems for overall revenue growth. However, the fact Intel now lumps smartphone and tablet sales into this category too, masking the hitherto fairly abysmal results in this area, further drags down the segment.

Internet of things growing but still tiny

All this also helps to explain the emphasis on the Internet of Things and other new areas as potential sources of future growth. Although IoT growth is slowing at Intel, it’s still definitely growing and is making up a slowly increasingly proportion of Intel’s overall revenues:

Intel revenue by segment

It’s hard to see on the chart above, because it’s still such a small percentage of overall revenues, but IoT has risen from 2.9% of revenue in Q1 2013 to 4.2% in Q2 2015. That’s still low and, at a year on year growth rate that’s now dipped below 10%, it’ll take a very long time to make a meaningful difference.

Data center growing much faster

Meanwhile, data center is doing much better as a growth driver, with both higher percentage growth and a much higher revenue base. It’s risen from 22% to 29% of Intel’s revenue over the past two years. It’s also Intel’s most profitable segment by some margin:

Intel operating margins by segment

Even at half the size of Client Computing revenues, the Data Center Group now contributes 15-20% more to operating income each quarter and makes up over half the company’s segment operating income.

All of this serves to reinforce the impression that, although Intel has very successfully gone up-market in terms of size, from PCs to servers, it’s still struggling to make the same transition down-market, into tablets, smartphones, wearables, and the Internet of Things. Meanwhile, it faces much more meaningful competition in these newer segments, both in the form of entrenched competitors like Qualcomm and new, low-cost entrants like Mediatek. Though the focus on IoT and related topics in the IDF keynote was a clear sign Intel hasn’t given up on this area by any means, it’s still not clear to me how Intel is going to turn around its performance in smaller devices.

Intel’s Edison and the Developer’s Dilemma

During the opening keynote at the Intel Developers Forum this week, CEO Brian Krazanich spent quite a bit of time sharing info on their IoT focused processors, especially the Edison platform. This is their SOC that can be used in a lot of projects that are not PC-based and can be applied to robots, drones, and, as they showed during the keynote, robotic spiders.

According to their marketing material, the Edison SOC includes:

  1. High-performance, dual-core CPU and single-core microcontroller supports complex data collection in a low-power package
  2. Integrated Wifi certified in 68 countries, Bluetooth 4.0 support, 1 GB DDR and 4 GB FLASH memory simplifies configuration and increases scalability
  3. 40 multiplexed GPIO interfaces with expansion board options for total project design and flexibility

Edison has become a powerful new platform for Intel’s expansion beyond their core PC business. It has become a star in the Maker movement since it can be used to help prototype IoT devices quickly and, at least in theory, help developers get a product to market fast.

For developers of IoT-based devices, this is good news. Intel gives them a solid platform to create all types of non PC-based products and their developers now have a broad range chips and IoT support platform to work with.

While Edison is good news for the Maker and IoT community, developers tell me it also present a dilemma for them because the price of an Edison SOC is rather expensive. One developer told me that, in one of their products, the cost of Edison represents up to 50%-60% of BOM. It will force them to price this particular IoT product in a range that makes it more difficult for them to sell to a broad consumer audience.

Intel’s pricing models on all of their chips and SOC platforms take into account R&D, design, and manufacturing costs as well as marketing, which drives up the price of all of their chips over competitors. Intel will argue they also supply a lot of support via software, security, etc. and, when choosing an Edison SOC, developers get the best of breed for use in their devices.

But I see two things that will impact their ability to be a big winner in the market with Edison. Cost is high on my concern list but the other is one of their competitors sees this pricing problem and is going to many of the maker and IoT developers and offering them a similar SOC at 2/3rd the cost of Edison.

MediaTek wants to steal this market from Intel and is being very aggressive with price and support. A couple of developers told me MediaTek is willing to even pay to redesign Edison-based boards and projects to use their chips and help developers move quickly over to their SOC and platform.

Here lies the developers dilemma. In reality, Intel’s Edison SOC probably is the best of breed for use in a lot of Maker and IoT projects. But, if the developer plans to sell their products to consumers, the price of Edison becomes a real issue. MediaTek’s prices are attractive for a direct to consumer product and, in a lot of cases, may end up being the SOC of choice for many.

I am sure Intel is aware of this threat from MediaTek and others since they have already encountered this problem when pitching their chips for use in smartphones and tablets. MediaTek and AllWinner have both undercut Intel’s prices and they dominate the market for CPUs and SOCs in smartphones and tablets today.

I am not sure how Intel responds to this competitive threat as they believe quality trumps pricing. That may be the case for some but I suspect price trumps this for a lot of Maker and IoT products where the cost to consumer drives the final designs. If they are not careful, they may win some battles but ultimately lose the IoT war to others as they did with smartphones and tablets.

For Makers and IoT, Intel is at an important juncture and it will be interesting to see how far they will got to ensure the role in this market — one that will produce tens of billions of devices yearly in the future.

Target Makes Us a Bit Crazy

Readers who have been following my postings know I have been at least semi-crazed by what Target is up to, improving everything except a system open to the loss of vital credit card information. Yet, the system fails at everything designed to improve transactions (for example).

targetThe latest is an effort by Target at 50 U.S. stores in Chicago, Denver, Minneapolis, New York, Pittsburgh, Portland, San Francisco, and Seattle. The approach uses a large assortment of small, local connections known as beacons to promote sales on goods within the store. (Currently, only  Apple’s Phone is supported. Android backing is on the way.)

Each beacon, a device typically egg sized, sends local information to customers’ Bluetooth-equipped phones. Items include specific sales, bargains, and good deals aimed at particular customers. The system follows customers’ interests so that looking at one class of product in the store may put together an image on products that may be different but still of interest the customer.

Let’s say you’re shopping in the Baby Department. Once you opt in to this new technology, product recommendations from BabyCenter may pop up on your iPhone (via push notifications or in-app updates) on the Target app’s “Target Run” home page. The “Target Run” page is like a social media site’s newsfeed, so the latest content—i.e. product recommendations or coupons based on your location—is added to the top of the page.


Cleaver, but something is really missing. What you need is a way to sell the additional product right there, giving the customer a way to pay for the purchase in a safe transaction. The sad truth for Target, however, is they have managed to lose information on thousands of customers’ credit cards. Target promises, some day, it will began to provide safe card transaction when CurrentC is introduced–whenever. Meanwhile, the continued demands on CurrentC prevent the adoption of the safer Apple Pay and Google Wall.

The poor and unsafe treatment of card data is foolish and enduring. But it is going to continue until the big native retailers stay in–and so far, they are not intent on challenging CurrentC.



Mcity: A Fresh Experiment in Self-Driving Cars


Efforts led by Google and joined by a number of companies in the auto industry have been building and testing self-driving cars, mostly in California. It’s a fascinating experiment but it’s going to be quite a while before these robotic cars that drive themselves become common, let alone commercial.

Still, the new automatic cars are only part of the changes that are likely. Mcity, a big startup by the University of Michigan, is more likely to produce improvement in the near term for cars. The key is a 32-acre test zone created in the university’s northern campus, a fake and unpopulated town for testing vehicles. Cars that drive themselves are only part of the experiment. Much more important is building cars that take advantage of technology to make driving safer.

Part of the experiment is self-driving cars. For example, auto parts manufacturer Delphi has supplied an automated Audi SQ5 SUV. Qualcomm is demonstrating its Halo technology designed to charge electric cars, through chargers while parked, without cables, and while driving on roads with built-in power distribution. Companies including Verizon and Xerox, as well as traditional auto system operations such as DENSO and Bosch are involved with car manufacturers.

A lot of the research is working on technology that will produce improvements to car behavior in the near term. One of the ways to improve the behavior of vehicles is with V2x communication, which increases the control of vehicles. V2V—vehicle to-vehicle–is the farthest along. Each car, of course, already has systems that collect information on speed, direction, motion, timing, and everything else that reflects the vehicle’s performance and intention. However, there is currently no way to do anything with the information off the vehicle.

mcity-wolverineV2V is based on radio systems that allow the cars to communicate with each other while in motion. It uses a relatively low-powered communication protocol so the car can share its information with other vehicles, either directly or through a cloud link. Each individual vehicle can behave better because it knows what its neighbors are doing on the road.

Dirk Wollschlaeger, general manager of IBM Global Automotive Industry says:

What does that add up to practically? A car linked to the cloud, tapping into your apps, devices, and preferences will tailor the driving experience to you. When you’re getting ready to go out in the morning, your car will link to the cloud and check the weather, your to-do list from your calendar, and the traffic to help you plan your route for the day, rerouting you when you’re on your way if you get behind schedule or run into traffic. Or a rental car would recognize you when you slip into the driver’s seat and automatically adjusts to your preferences — changing the mirrors, giving you an update from your calendar of your schedule, and lining up your iTunes playlist.

The Mcity experiment will build on being V2V with additional services such as V2I, which creates improved communication with the infrastructure, and V2P, a further down the road approach that will allow cars to communicate directly with pedestrians for safety. The advantages of these approaches will be limited until they are included in a large volume of vehicles—in theory, of course, all—but the federal government is already moving toward requiring V2V.

Other trials are also in the Mcity works. For example, the university robotics expert Edwin Olsen is building low-speed robot vehicles for driving people around the territory, providing convenience without endangering others.

Overall, the space of Mcity, though a very small town, should provide the capacity for a lot of improved transportation technology development—and provide development toward the next generation of self-powered vehicles.

The Carrier Challenge for Consumer IoT

Much has been written and discussed recently with regard to Internet of Things (IoT) applications, generating a great deal of interest among many potential participants in the value chain of this burgeoning area. Telco carriers in particular have shown a strong interest and view it as a large potential opportunity for future revenue growth. Verizon, for example, has announced it already has generated $600 million in IoT revenues and expects the category grow at an impressive 45% annual rate. Similarly, AT&T has talked extensively about its M2M and other IoT applications.

The vast majority of the efforts by major carriers have been for industrial purposes, including fleet management for the transportation industry, package tracking, industrial equipment monitoring, building HVAC system monitoring, digital signage, and many other applications.

On the consumer side, the picture is less clear, but there are a few applications that stand out:

  • Connected Car
  • Connected Home
  • Connected Wearables

In addition, there are some applications that involve consumers from a general usage perspective but are typically driven by businesses, such as connected health, driver monitoring and others. In many cases, these applications involve subsidized business models that remove the consumer from direct payment of the service but offer some type of benefit to the consumer. For example, auto insurance companies may reward consumers who use their tracking devices with lower insurance rates if they find they drive “responsibly”. Similar, some health care providers have started experimenting with medical device monitoring equipment they can use to better track the status of patients and ultimately reduce their costs. In both cases, the businesses pay for the service (and the connectivity), but consumers benefit.

In the case of Connected Car, there is a strong move by car makers to bring connectivity to their cars for multiple reasons. For consumers, the electronics in a car have become a major selling point and the ability to have internet access for passengers as well as potentially update certain aspects of the car’s electronics (such as maps for the navigation system or streaming content for the entertainment system) are highly valued. Only a small percentage (probably in the high single digits) of the installed base of cars feature the capability to connect to cellular networks and only a percentage of that is actually using and paying for the service. Over time, this number represents the best opportunity for carriers to tap into the IoT market for consumers as their expectations for connectivity in cars is bound to increase significantly.[pullquote]Given the current low penetration rates, connected cars represent the best opportunity for carriers to tap into the IoT market for consumers as their expectations for connectivity in cars is bound to increase significantly.”[/pullquote]

In the case of car makers, they have been experimenting with and trying to find new business models that can help them generate ongoing revenues from their cars for a very long time. Early efforts like satellite radio, connected telematics (e.g. OnStar), etc., have proven reasonably popular with consumers and have generated modest income for the carmakers. Carmakers are also interested in connectivity solutions for the ability offer over-the-air updates to cars, similar to what Tesla Motors offers today. In addition, car makers are interested in collecting real time diagnostic information from cars to help them pinpoint and solve potential problems.

As a result, there’s a potential business opportunity for connected cars both from the car makers and for the car buyers. The challenge for carriers is to get their solutions integrated into cars, typically through Tier One automotive suppliers such as Delphi. One of the many challenges in cars is the production cycles are often several years long, so it takes significant time for new technologies and services to be made available to consumers. In addition, as mentioned above, car makers will likely expect a portion of the consumer’s fees to go to them to help drive ongoing revenues, which could limit the profitability to carriers.

Another IoT solution for consumers is connected home services, such as what AT&T is offering with Digital Life. The challenge here is the investment necessary to put together a complete suite of hardware products for both home security and automation and, most importantly, the training and staffing necessary for the numerous truck rolls, installations, repairs, etc. This business is likely better suited for cable providers and other companies who already have these types of assets. In addition, it’s highly dependent on broadband services and would need to be tied to those services to succeed. While it’s theoretically possible to put together a service designed for smart home do-it-yourselfers, who buy and install their own equipment, the enormous technical and logistical challenges of achieving this vision seem difficult to overcome. In addition, the ongoing (and soon to get worse) standards battles for home control combined with the poor quality of many of the current smart home products make this an unlikely scenario for several years. Finally, the few reasonably interesting home automation products now available do not require cellular connections, but use WiFi and a local broadband connection.

Connected wearables are another potential consumer IoT solution and have some interest for athletes and others who want to track their activities while they’re without their smartphones. Right now, interest in these types of broadband-connected wearables is limited, but part of that is due to the high cost and demanding power requirements of many broadband cellular radios. Given some of the lower cost and reduced power requirements for radios on the horizon from vendors like Qualcomm, we should see slightly higher adoption over the next few years.

One of the few areas where there has been interest in connected wearables has been in smartwatches designed for small children so parents can easily track them. However, this has only occurred in Asia and only been with carriers that have completely subsidized the cost of the watch. Here in the US, these types of devices have little to no success as of yet.

Despite these concerns, we do believe there will be some opportunities for connected wearables because it will essentially be a very low cost add-on and some device vendors will leverage these lower costs as a means to differentiate their product. This could particularly valuable for those people interested in constantly measuring certain health-related data (the “quantified self” movement) as well as more serious athletes.

In the most recent TECHnalysis Research forecast on wearable devices, we predict connected wearables will grow from 1% of US shipments this year to 15% by 2020. This represents a growth in units from a half million this year to 9.3 million in 2020. The chart below shows the US connected wearable forecast.

US Wearable Connectivity Share

©2015, TECHnalysis Research

Though the discussion level around IoT is reaching fever pitch, we remain concerned that, other than the connected car, the opportunities for consumer IoT for carriers remain relatively limited. There is some business to be had, but we believe expectations need to be kept in check.

The Power of the Social Graph

With Facebook, Twitter, Pinterest, Snapchat, Meerkat, Periscope, and so many other companies in the social landscape making news lately, I’ve been thinking about something that doesn’t get talked about much — the “Social Graph”.

I’m going to share what I think about the social graph in the hope it is a helpful framework for our readers as well. It is my conviction a heavily curated social graph is and will be one of the most powerful, convenient, and useful things in the digital world. Especially related to content creation and consumption.

I first experienced this with Twitter. For the record, I’m exceptionally bullish on Twitter. Twitter is like the air waves that  broadcast TV and radio ride on in my opinion. I’ve spent a great deal of my time carefully curating sources of information of use to me through Twitter. Twitter acts as my filter of all the noise out there. I use Twitter, not as a social network, although no other network has befitted me more professionally than Twitter, but as a curated filter of information, since a primary role of my job as an analyst is to make sure I do not miss anything that happens in the tech industry. Prior to Twitter, I’d spend my mornings sifting through tech blogs and news sites to make sure I didn’t miss anything. When important news broke, I generally found out via email from someone who saw it first or from a reporter who called me to ask my opinion of what just happened. Thanks to Twitter, this has all changed. A heavily curated Twitter feed, or Twitter list in my case, allows me to narrow the sources of information to the essentials I choose. A quick scroll through my “tech list” and I’m caught up since my list is made up of people who break news, add insight or commentary, or companies who make the news. In the world before Twitter, I wasted a great deal of time staying on top of things. Now my time can be allocated to other equally important things. I have no idea how I did what I do before Twitter.

I also realize I’m different than most people both in interests and job function. I happen to not only be a source, or content producer/broadcaster on Twitter but also a consumer. I know most people are consumers, but this is where the social graph becomes key. Once consumers curate their sources of information, Twitter acts as a broadcast medium, or air waves for content, and helps them streamline how they receive content of interest. This is where the value lies. Once you have a heavily curated social graph, notifications get extremely powerful.

Once a heavily curated information source is developed, notifications enable something that did not exist before. If you think about the limitations of broadcast radio or TV, it is all based on scheduling. What notifications of a heavily curated social graph allow is a content producer to have a captive audience whether or not they are looking at a screen at that time. This paradigm has huge potential and we are only scratching the surface of notifications in this way.

Think about this. Your address book is a heavily curated social graph. Getting texts is a better example than phone calls in this analogy so let’s focus on that. Usually when you get a text message, you know who it’s from. So most people take a moment to pause what they are doing and view the notification of the text to see who it is and what they want. Now, extend this to content sources of interest. I assume a news or sports junkie does this today with apps that notify them of breaking news related to topics of interest. With a notification, the value of the information becomes unbundled from the app itself. I don’t need to unlock my phone, open the app, and take any steps to engage. I’m already engaged even if I’m not staring at the screen, because I have predetermined (via my curated social graph) what I want to be notified of and what I don’t.

There is a high level of maturity required of the users for this to work. However, that is a level I believe will happen among mainstream consumers as they realize the value of notifications. Curating what to be notified of and what not to be notified of is an evolution I believe will happen both in software, with the capability to further customize our notifications, and on behalf of the user.

A few examples. I certainly don’t want to be notified every time someone in my tech list tweets. Even though I get many hundreds of people mentioning me (wanting to start a conversation with me), I still value these notifications due to the interactions. However, I would like to be notified specifically whenever Benedict Evans or Horace Dediu tweets a chart. I know this level of granularity or intelligence around notifications does not exist yet but I am optimistic it will evolve. The power of this curated social/content graph plus notifications is to grab me as a captive audience even when I’m not engaged with a screen.

And as you can imagine, it is within this framework the idea of the smartwatch starts to get interesting.

The Real IoT Opportunity? Industry

Given all the discussion around the Internet of Things (I0T), it’s tempting to think there are some interesting consumer-focused opportunities. But let’s make it clear from the start — consumer-oriented IoT products aren’t really ready for prime time.

The recent news of the small number of Android Wear watch shipments and the limited success to date of any kind of smart home products are just two of many examples of the challenges facing consumer IoT. As mentioned in another column I wrote earlier this week, in many cases, the challenge is with the business models associated with smart consumer things. The biggest problem, however, is there really aren’t that many clear cut cases of useful applications for consumer IoT.

When it comes to industry, thankfully, that isn’t the case. There are quite a few useful, cost-effective applications of IoT for business. The problem is, well, they’re kind of boring: monitoring and automating building HVAC (Heating, Ventilation, Air Conditioning) systems, tracking shipping containers, etc. These aren’t exactly the kinds of things I think most tech industry observers were expecting (or hoping) IoT would turn out to be. [pullquote]There are quite a few useful, cost-effective applications of IoT for business. The problem is, well, they’re kind of boring.”[/pullquote]

Just because they aren’t exciting doesn’t mean they aren’t real business opportunities, however—far from it. There are a number of companies creating sensor networks, analytics tools and other IoT-related products that are allowing businesses to save real money on their operating expenses or reduce costs in some aspect of their businesses.

At Fujitsu’s Technology Forum event, held this week at Levi’s Stadium in Santa Clara, the company, affiliated subdivisions and its corporate R&D lab demonstrated a wide range of real-world IoT applications and forthcoming concepts. They ranged from sensors that enable highly sloped terrain near Taiwanese roads to receive the proper amount of watering and care to keep the land from eroding, to a major Japanese grocery store that’s leveraging IoT sensors to maximize the crop growth at a number of small farms they’ve recently created.

Are these applications practical? Yes. Useful? Yes. Valuable? Yes. Likely to make a Wired cover story or the lead story on The Verge? Not so much…

Nevertheless, Fujitsu’s demos also served to illustrate how many different elements often need to go into an industrial (or, for that matter, any kind of) IoT solution. From sensors to radios to networks to data centers to software of many types, these really are pretty sophisticated systems. To Fujitsu’s credit, they are actually one of the few vendors in the world that make products in every single one of these areas. Plus, they’re spending a lot of time and attention working on developing many applications that can leverage all the component pieces they design and manufacture.

There’s no question that IoT is real and offering important benefits to companies around the world. The likelihood it’s going to directly impact your life anytime soon, however, is a different story.

Research: Understanding Twitter’s User Habits

One of my focus areas from my consumer panel research is what consumers do, not just on their devices in terms of activities, but with the software and apps as well. I run regular panels on most the major apps to understand usage trends. Twitter is interesting because it is very different than Facebook. I’m not sure how many people realize Twitter is not really a social network but a broadcast medium. This becomes quite clear when I look at the usage patterns between Facebook and Twitter (a subject for a future research report). While active accounts is the current metric to judge Twitter by, understanding the “active” part of their user base helps us find more insight into what the service is and how it is being used.

When I look at where Twitter ranked in terms of monthly visitation among the other top 75 brand websites/apps, they are 8th in our global consumer panel. This was of a panel of over 30,000 global respondents and my data lines up with Alexa’s ranking worldwide as well. Interestingly, my data shows more people visit Twitter on their PCs than their mobile devices, but by a thin margin right now.

Twitter’s heaviest users are in the United States. Their earnings announcement also points out how they monetize this region more right now. No big surprise here since Google and Facebook also monetize their US user base. While I have this data broken out by region as well, globally, Twitter’s most active users (those who say they use it more than twice a day) are males 25-35 followed by females 16-25. Followed closely by males 16-25, females 25-35, then males 35-45. After that, the age demographic usage falls off a cliff in our panels. Meaning Twitter’s sweet spot is a user of either gender between 16-35. This data is quite different than the same data I have on Facebook where nearly every age group has very high percentages indicating they visit the site/app twice a day or more.

I have access to research on Twitter users I’ve charted below. This is a global view but, keep in mind, Twitter’s heaviest users are in the US. This chart lists the results of Twitter users’ most common actions, weighted numerically. A 10 is a use case done very frequently and a 1 is a use case done very little.

Screen Shot 2015-02-06 at 8.11.21 AM

A few observations on this data. The first is how the actions users say they do most frequently are actually more in line with a social network than a media consumption tool. Despite how myself or others view the upside of Twitter as being a media consumption/real time information network, users seem to be using it like they would a social network. The way Twitter makes money depends heavily on people coming to Twitter with other interests than talking to their friends. Therefore, searching trending topics” and “reading a news story” being in the top five of use cases is a positive sign. However, contrast this with similar research I have on Facebook users where “read an article” is the second most common task done on Facebook. Facebook, while still a social network for many users, has essentially become what it seems Twitter needs to be–a destination to consume/discover media.

Where Does Twitter Go From Here?

Ultimately, I’ll be watching this data to see if habits begin to change. As more people get on Twitter and the service starts to cater to content discovery (the kind that can be monetized), we will see if user habits start to line up more with how Twitter can grow to make more money. It’s key to understand Twitter is unlikely to ever be as big as Facebook. Facebook and its assets, Instagram, WhatsApp, etc., is the kind of service that can appeal to nearly ever mobile consumer on the planet.

Twitter monetizes their heavily engaged users. Today, those are customers in the US. As Jan Dawson points out, Twitter’s monetization levers seem clear.

Screen Shot 2015-02-06 at 8.49.37 AM

Ultimately, it is the usage patterns I find fascinating to observe. As these begin to more closely align with Twitter’s monetization strategy, we will begin to see more of the upside of the service. It may also be a chicken and egg scenario, where making these adjustments makes the service more appealing to new users.

Understanding Xiaomi Part 2: As an Internet of Things Company

In part one of this series, we looked at Xiaomi as a smart phone company. While smart phones are essential to their lineup, I don’t believe Xiaomi is a smart phone company. In the same way companies such as LG, Samsung, Apple, are in the smart phone business but are not smart phone companies. Every company has a lineup of products. These product portfolio’s are generally quite strategic. Xiaomi is also in more categories that just smart phones. They also make TVs, smart set top boxes, routers, portable power bricks, and even air purifiers. I fully expect the number of connected products Xiaomi makes to grow and grow quickly. For Xiaomi, I believe the smart phone is the gateway to not just the lifestyle but the connected ecosystem they want to build.

This by itself does not sound too terribly unfamiliar, since you could make a case Apple, Samsung, LG, Sony, and others are oriented the same way. Xiaomi, I feel, may be in a slightly different position due to their relationship with the Shenzhen manufacturing ecosystem. For his TIME column, Tim Bajarin highlights a high level view of our thinking on this ecosystem. The Shenzhen manufacturing ecosystem, known by insiders as CTE (China tech ecosystem) is potentially extremely disruptive, something I will look deeper into for subscribers in the coming weeks. What you need to know for now is their capabilities to make things fast, at high quality, at scale, is increasing at an incredible rate. Using this ecosystem, the connected products Xiaomi can make is nearly limitless. A wide array of smart home and other Internet of Things products are all options for them using this ecosystem. And as Xiaomi is able to keep lowering costs of components even as devices are being made and sold, they increasingly generate more margins with current products in real time using their model.

Many will rightly point out Xiaomi simply can’t make every connected product. This is certainly true. They may not make them all but they want to build around this category whether they make the hardware or not. My guess is the hardware that has a static fit, like routers, TVs, tablets, and power bricks are all related. In no time they will have a smart watch. Connected security cameras, home automation, etc., are all within their ecosystem as I understand it today. What the China tech ecosystem allows Xiaomi to do is quickly get into connected product markets that fit their ecosystem and strategically help drive the lock-in loyalty they seek. When we analyze platforms and ecosystems, we like to use the word “moat.” Companies are trying to build a moat to protect their castle. Xiaomi is building a moat and I believe the combination of the China tech ecosystem and accompanying connected products are part of this moat.

Xiaomi is also looking to enable the third party ecosystem by offering modules and platforms for other connected products companies to utilize. Ben Thompson in his daily email update after the Xiaomi event shared how the module was positioned:

Lei Jun, though, went on to say that this would not be the only way to get devices that can be a part of Xiaomi ecosystem. Instead he announced a new Xiaomi module, available to manufacturers for $3.50 that, if added to their appliances would allow them to be controlled by Xiaomi phones, greatly expanding the ecosystem of devices.

Lei Jun, has gone on record saying Xioami is an internet company. He broadly and loosely uses this term but the core of it is significant. The Internet is clearly an enabler for their connected systems, but even the software and services components of this idea have significance to the kind of connected products Xiaomi can make. Ben Thompson also took this picture, which is not just an image of Xiaomi’s vision but of how they position their products in the ecosystem.


Look where the smart phone is in relation to the cloud, then where the cloud is in relation to other connected products. The cloud sits right in the middle. I bring out this point because the name brands I mentioned earlier, LG, Samsung, Apple, etc., all seem to have varying degrees of difference on this chart and the role of the cloud. All are similar in that the smart phone is the primary endpoint, but the relationship of the cloud seems to differ depending on what cloud means to their ecosystem.

Years ago I used this slide to articulate the concept of the smart phone at the center of a connected products ecosystem. Here is my slide.

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In my slide, I talk through how not all products may be connected to the internet. Some may be more machine-to-machine communication. Meaning, something like a connected door lock may only be able to be connected from a short range wireless solution like ZigBee or Bluetooth. Connected product vendors will ultimately make these decisions but the cloud still plays a holistic role in each platform player’s vision.

Everything I see from Xiaomi related to their cloud solution, apps, services, and connected products beyond phones, still appears to be very China specific. It will be interesting to see how Xiaomi can take this connected product vision and create regionally relevant connected products and services. It seems Xiaomi’s ultimate goal is not to just sell smartphones into other areas like India, Indonesia, Brazil, etc., but more connected products. Yet things like air purifiers aren’t necessary in other markets like they are in China. Ultimately, this is Xiaomi’s challenge. To not only provide localized software and services, but also hardware. The Shenzhen ecosystem is their wild card in this venture but it is no slam dunk.

I said in part 1 of this series Xiaomi is not a smart phone company. I believe as we analyze them as an Internet of Things company we are getting closer to the type of company they are. However, in part three of this series we will analyze them as an internet services company.

Smartphone winners, the car and the home

Last week, I prepared a presentation on the connected car and smart home for one of my clients and I had the opportunity to present the resulting slides on Monday this week. I wanted to elaborate on one of the ideas that came up during the presentation and the resulting discussion and something that, while appealing on the face of it, I believe is ultimately wrong.

It’s becoming clear who the smart phone winners are

It’s becoming increasingly clear who (at least some of) the biggest winners in the smart phone market are. Google and Apple own the two dominant ecosystems, with Apple gaining majority share among premium users and Google mopping up most of the rest. Samsung has been a significant winner among the OEMs, while Xiaomi, Lenovo and others are rising rapidly in the category. Although it’s possible we’ll still see new OEMs emerge to capture significant share, I don’t think any other platforms will rival iOS and Android in scale in the next five to ten years.

Smart phones are at the core of smart home and connected car experiences

Further, smart phones are not just a lucrative category in their own right. They’re increasingly the hubs and controllers for many of the new areas technology is moving into, including the connected car, smart home and wearables. Essentially, none of these new experiences would be possible without a smart phone at the centre and those who control the major smart phone platforms and OEMs are in a strong position vis a vis these new opportunities. It’s no surprise three of the most promising smart home ecosystems are owned by Apple, Google and Samsung.

This doesn’t mean that smart phone winners will be home and car winners too

There’s a natural conclusion that can be drawn from all of this — these smart phone winners will also be the winners in the smart home and the connected car market. While I think it’s actually quite likely this will be true in the wearables space (a topic for a future column), I don’t think this is necessarily true in the connected home or connected car space, for a few reasons.

Connected car and resistance by OEMs to Android Auto and CarPlay

One of my focuses at CES last week was the connected car space and I took as many briefings and visited as many booths connected to this topic as I could. I’ll talk in more detail about my findings in a future post and an in-depth report for my clients, but one of the most interesting conclusions was that the car OEMs are terrified of Google and Apple and their potential to take over the in-car technology and entertainment experience. For all that Google and Apple like to talk about the car as an extension of the smartphone, car OEMs see things very differently. The technology aspects of the in-car experience are key areas for OEM differentiation and they want to own both the experiences and the associated revenue opportunities. They see what Google and Apple have done to smart phone OEMs and they’re desperate to avoid the same fate. As such, there’s a strong opportunity in the car for players that will support OEMs in building differentiation in the technology and infotainment stack rather than simply enabling the takeover by Apple and Google.

Smart home fragmentation won’t be entirely overcome by single ecosystem approaches

I’ve written before (here and here) about the huge fragmentation in the smart home space, and CES last week brought even more announcements from a plethora of different vendors about their new solutions, devices, and ecosystems. Among these players, of course, are three of those smart phone winners we discussed earlier: Apple, Google, and Samsung. Apple’s efforts around HomeKit have been very slow to get off the ground, with both the chipsets and the certification process taking a long time to get into the hands of device vendors. Google’s efforts were jumpstarted by the acquisition of Nest, but Google’s ownership has engendered some skepticism and wariness on the part of would-be smart home adopters who are worried about Google’s long term intentions. Samsung’s strategy is the only one of the three designed to create a truly open ecosystem somewhat separate from a specific smart phone platform or OEM. I think there’s a clear role for this kind of strategy, especially one backed by a major player. While I think some consumers will absolutely gravitate to an all Apple or all Google/Nest approach to the smart home, I think others will want to buy devices from a variety of vendors or simply avoid lock-in to a specific ecosystem. Those consumers will welcome platforms and ecosystems which are inherently open and interoperable and, as such, I think some of these may well thrive alongside the platforms owned by Google and Apple in particular.

The role of the smartphone, and the rest

None of this is to say the smart phone is irrelevant in these two domains – far from it. Those who control smart phones and smart phone platforms are in an enormously powerful position, but I don’t think it’s the only position of power. I think there’s room for players focused on the apps and services layer in particular to build experiences around interoperability and cross-platform development which enable consumers to be more flexible in their technology buying choices and to mix and match technology from multiple vendors. As such, despite the strong position the smart phone winners hold in the connected car and smart home spaces, these markets are still so immature there’s plenty of room for both established and new players to innovate with new approaches to the market and take both significant share and revenue as these markets evolve.

The Myth of TV Disruption

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

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

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

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

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

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

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

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

The Future of Retail

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

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


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

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

Contextual Shopping

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

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

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

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

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

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

Understanding Apple’s Ecosystem Strategy

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

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

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

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

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

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

Why Google Glasses is 10 years away from Consumer Success

Like many in the tech world I have watched, with great interest, the Google Glass project develop and evolve. I even became a Glass Explorer and have used it for about nine months. Like many who bought Google Glass, it now sits on a desk at home. It has proven to be less then easy to use and even worse, pretty bad at what it is even supposed to do correctly. For some, its novelty lives on but as most who bought Google Glass have discovered, this version’s UI is very bad and the dearth of any true consumer applications pretty much doomed it from the start. If I sound bitter, I am. Asking me or any other Google Explorer to pay $1500 for the privilege of beta testing a product for Google is absurd. Of course I made the decision to buy it knowing it was a wounded product and, at least in my case, I had a research motive behind it. But if I were a mainstream consumer, or early adopter, and bought this I would be pissed Google released a product to the open market instead of the actual market any Glass project should have been focused on in the first place — vertical markets.

In 1984 I was asked to look at a product for IBM and make a suggestion as to what they should do with it since it was not selling well. The product was the IBM PC Jr. Three years earlier IBM introduced their highly successful PC and it took off in business like wildfire. They made the assumption if the PC was doing well with business users, it should do well with consumers too. So they released what turned out to be a wounded product for consumers. It had a lot of limitations since it was much cheaper than IBM’s business PC; they did not want a cheaper product eating in to demand for their business product. But when I went to Boca Raton to do my presentation about this to IBM’s brass, I did not point out the PC Jr was a crippled machine and that’s why they should kill it. What I did present was a very strong and rational study on the fact that historically all new technologies first get targeted at vertical or business markets and showed them in almost all cases it took at least ten years from a new technology targeted at business users to eventually become cheap and easy enough to use for it to be brought to a consumer market successfully.

IBM was a tech company and at the time had not done anything for consumers. More importantly, they were not even a marketing company back then. Few at IBM understood the concept of the “marketing pyramid”. In the tech world, it must go through the early adopters who then suggest to people interested in what they are doing with the technology that they look at it. Over a 2-3 year period, it moves from early adopters to the next layer of adopters for any particular technology. However, in my experience I have found for any new technology to get broad adoption from consumers it takes on average 10 years to get the kind of apps and prices needed for consumer adoption. Then and only then does a new technology hit the mainstream. I told IBM they we were 10 years too early with the PC Jr and to kill it since it was going nowhere for the time being. It was not until 1994 the demand for consumers PCs kicked in — exactly ten years after the PC Jr was originally released.

I could go on an on about this tech marketing pyramid and show how things like VCRs, HDTVs, and dozens of tech products had to go through the pyramid of early adopters and ride at least a ten year slope down to delivering and acceptance of this core technology to consumer markets. This is especially true with hardware products that need to then pick up software apps and an ecosystem before it can go mainstream. Google putting Glass into the consumer market either showed their complete lack of understanding tech marketing pyramids or, even worse, targeted consumers knowing full well this market would not be ready for Glass for at least another decade and instead milk it for their own profitability.

For those of us who have put Google Glass through its paces and seen its glaring problems with consumers, it is not a surprise Google Glass will not gain mainstream acceptance for at least another ten years. While one could argue we are well into the early developer stage with Google Glass, which always goes through vertical markets first, the fact remains only now are vertical markets actually opening up their purse strings and starting to test Glass-like devices in earnest. This is interesting as Glass-like devices were introduced in 1997 and have been struggled to get serious vertical market adoption until only recently.

Google Glass also has some other problems, including social acceptance, privacy issues and how geeky one looks when wearing the current model. I have no doubt over the next decade Google and others will find ways to make the glasses less geeky and perhaps fold into eyeglass design so people don’t even know you are wearing a digital display. By then, Google and others may have worked through the issues of privacy, social acceptance and more importantly, found the killer app needed to drive this into high consumer demand. I see this tech marketing pyramid only now kicking in and am convinced Google Glass are at least 8-10 years away from being something the consumer market will adopt. During this time there will be money made with Glass in business and vertical markets but if history is our guide we won’t see Google Glass going mainstream until at least 2020.

Intel Strategy Moves Forward

After a long period of relative stasis, it’s becoming clear that relatively new CEO Brian Krzanich and his leadership team are driving forward with some important new strategic directions for Intel. The company is moving aggressively to shed its image as little more than a PC and server component supplier—a welcome and long overdue move. They recently unveiled a forward-looking guiding principle/strategy catch phrase, “If it computes, it does it better with Intel,” which is a concrete reflection of their desire to extend their reach and influence to other new markets.

The company previewed some of these ideas at CES, where Krzanich unveiled a complete line of Intel designed (though not Intel-powered) wearable devices, as well as board-based products. The new boards are named Galileo, for the burgeoning “maker” market, and Edison, which the company hopes to see embedded into a whole new generation of wearables and other “smart” devices (think Internet of Things, or IOT). The Galileo is made more interesting by the fact it apparently only had an 8-week gestation period from idea to shipping product—a completely unheard of time frame for the “old” Intel. The company was late to the game for mobile phones and other mobile products, so it’s good to see them getting aggressive early on in what are expected to be higher growth areas.

One of the more interesting aspects of some of these recent announcements—based on comments Intel leaders have made—is the company is willing to acknowledge it’s not entirely sure where some of these new markets are headed—a refreshingly honest perspective—yet it still wants to actively participate to help drive innovations. Whether they actually can remains to be seen of course, but there’s clearly a new perspective from the top on how the company can and should proceed.

The company has also recently started to emphasize their developments outside of CPUs, with a particularly strong focus on communications. Again, this is also long overdue as the company is virtually unknown as the number two player in the modem market. They’ve also been making the point they want to be seen as an SOC (system on chip) company, not just a CPU company. The company has talked in detail about their achievements in LTE modems and mentioned improvements in process and packaging technology that could offer improvements for flash memory and other non-CPU components. Given their strong interest in wearables and IOT, it wouldn’t be surprising to see the company making investments in technologies such as sensors and wireless power, both of which would help them offer a wider range of key components for future SOCs. In fact, they may want to consider broadening their new strategy catch phrase to say, “Make your devices smarter and better connected with Intel.”

In the realm of PCs, its traditional stronghold, Intel also continues to drive forward, with plans to drive greater awareness for portable all-in-ones, like Dell’s XPS18, as well as continuing the push for 2-in-1 devices. The company has also targeted 40 million Intel-based tablets for the year—an aggressive target that, thanks to its many investments in Android compatibility, it could very well achieve. For PCs, things are going to be tougher because many of the same challenges that have plagued the PC market remain. But even here, Intel seems to be approaching things with a new, more realistic attitude by focusing on several potential opportunities for interesting sub-segments instead of a complete PC industry turnaround.

All told, Intel’s attitude and approach seems to reflect the beginning of some important changes stemming from the recent transition between former CEO Paul Otellini and Krzanich. The company’s view is arguably getting broader, deeper and more open than we’ve seen in some time and I for one hope it represents a sign of things to come.

How Facebook Could Become the World’s Largest Telecom Provider

When Facebook bought WhatsAPP for $19 billion it shocked even the most seasoned veterans here in Silicon Valley. Most of us analysts questioned how they came up with this valuation. We then started trying to dissect this deal and figure out why Facebook decided to pay so much for this messaging company. There have been thousands of articles written about this acquisition as analysts and media have tried to make sense of this move by Facebook. The fact that WhatsApp had 450 million users was easy to see as the main reason since it could help Facebook get to their next goal of adding another billion users to their social media platform. It was also clear that WhatsApp could add another platform layer to Facebook’s infrastructure that could eventually become an ad vehicle as well.

Although this is the largest price anyone has paid for a company of this nature, one thing I have learned about acquisitions here in Silicon Valley is that a lot of valuations are based on future opportunities and not necessarily tied to current or even projected earnings by itself. Most of the great ones are highly strategic and bring unseen value to the company in ways that most cannot even grasp at the time of the investment. I suspect there is even more behind this acquisition.

One of the more interesting features of WhatsApp is its VOIP calling feature. I use it all the time when I am on Wifi to bypass my telecom carrier to cut down on minutes used via my current voice plan. And here is the best part. It cost me $1.00 a year to call anywhere in the world and talk as long as I want. An even more interesting data point is that WhatsApp already has 450 million “VOIP” customers compared to Microsoft’s 200+ million on their Skype platform. While I also use Skype, especially when I am abroad, the way the VOIP feature is seamlessly integrated into the WhatsApp message application. Which has become an important messaging medium for me when connecting with family and my staff, makes it even easier than having to fire up my Skype App to make my VOIP calls.

Although many WhatsApp users are also Facebook users, the fact remains that WhatsApp still gives Facebook millions of new users to connect to and at the same time got a powerful communications platform that allows them to innovate with and make it part of Facebook’s services. But what many have not realized is that WhatsApp has now given Facebook the opportunity to become a major VOIP provider and could even pave the way to for them to become the world’s largest telecom provider someday.

This idea has been on my mind since I heard of this news last week. Since I am a heavy user of their VOIP calling service it got me wondering if this was not at the heart of this acquisition. Facebook itself is a great communications platform in its own right. But for many, especially in emerging markets, voice calling is still at the center of the way they actually communicate. What if Facebook could also become an MVNO at the local country level and become the major telecom supplier especially in emerging markets and end up providing a of one-stop fully integrated communications medium and telecom platform.

Mark Zuckerberg is highly focused on bringing billions of people online and what better way to do this than by creating a social, messaging and VOIP platform for these markets and then providing the pipes and very low cost links to make this happen. Mark will push to try and get the local telecoms to be more aggressive in their data pricing and reach. If he can’t, he could be the one to do it via an MVNO (in emerging markets) play and use ads and services from these local markets tied to their social and messaging apps to subsidize the telecom piece if needed.

This scenario is not too far fetched. Adding an MVNO layer could help Facebook achieve even greater WW reach and eventually become the world’s largest telecom provider in the process.

Google and Nest: Why Now and Why Not Apple?

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

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

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

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

So, why Google and not Apple?

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

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

Why I am Skeptical About Smart Watches

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

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


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

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

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

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

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

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

An iWatch

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

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

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

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

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

Samsung’s Dangerous Smart Watch Gamble

Next week, just before the IFA consumer electronics show opens in Berlin, Samsung is expected to introduce their first smart watch apparently called the Samsung Galaxy Gear. By my count, this will be at least the 14th smart watch introduced in the last 18 months. I have had a chance to work with and review at least six of these so far and members of my staff have reviewed at least two more recently.

One thing to note about all of these watches so far is that they are all rather big, not very stylish and to be truthful, aimed mostly at male geeks. I can’t even imagine any woman clamoring for any of these early models and suspect that Samsung’s version will be just as geeky as the others given the technology available today for use in building this first generation of smart watches.

Most of these new smart watches are focused on being an extension of our smart phones and delivering glanceable data or information tidbits from our smartphones on a wearable screen. After using a couple of smart watches with this feature I can attest that this is a very cool idea and in fact, the watch will most likely become the #1 wearable computer in the market over the next few years, trumping things like Google Glasses that may take a decade before it hits consumer stride.

Although I think Samsung’s smart watch may actually be cool in functionality, one thing I am pretty certain is that it will not be stylish and be attractive to anyone but male geeks. While Samsung has created stylish smartphones and tablets, let’s be honest here; this design basically copied Apple’s iPhone and iPad designs and literally rode Apple’s coattails into these markets.

This is where introducing a smart watch now is a real gamble for Samsung. I fear that they are rushing this to market so they can say they beat Apple to the market but their model will be very similar to the smart watches already available. Sure, they have a strong marketing machine and big bucks to try to drive this into the mainstream but Samsung’s track record in creating ground-breaking designs in any product is historically weak.

While creating a product for male geeks is not bad in itself if these male geeks buy them, there is one very key issue about watches that will prove problematic to Samsung and that is “stylish” designs. Watches are fashion statements and very little about functionality to most people.

I believe that this will be at the heart of Apple’s eventual smart watch in which functionality will be important but stylish design will be equally important to whatever they finally deliver to the market place. And it is doubtful that Apple does not understand the difference in style design between men and women and will factor this heavily in their actual product designs.

Notice that Apple is not rushing a product like this to market just so they can have skin in the game. If you look at Apple’s history, they usually wait to see if a product takes off and then, and only then, do they re-invent the product with an eye on form, function, design and eco system that lets them control and drive their products into a broader mass market. Apple did not invent MP3 players. They reinvented them. Apple did not invent smartphones. They reinvented them. And Apple did not invent the tablet. They reinvented it and along with their iPhone launched the post PC era.

I suspect that Samsung understands this and is taking a calculated gamble by introducing the Galaxy Gear now. However, I think it is a dangerous gamble. While smart watch functionality is cool, in watches, style and fashion play a key role in its ultimate success. By introducing something before Apple does it runs the risk of not even coming close to what Apple will deliver and in the end, Apple will do the Apple thing and reinvent the smart watch that transcends the geekiness of todays models and be the one that drives the smart watch wearable revolution to the masses.

Now they have to wait for the other shoe to drop from Apple and if history is our guide, copy Apple again if they really want to be a player in the smart watch wearable revolution for the masses.

TV and Killer Apps

The Financial Times recently released a special report titled “Digital and Social Media Marketing.” The folks at Social Commerce summarized the lengthy release and drew out several bullet points I find especially interesting regarding the state of television:

  1. The average American still spends about five hours a day glued to TV; the smart money in digital is being invested in making TV advertising better
  2. TV is not dead, it is just evolving into a two screen experience, the TV display and a tablet or smartphone. “Lean-back” TV experiences, passively consumed from the comfort of the couch, are giving way to “lean-in” TV experiences, where viewers multitask viewing and interacting on smartphones and tablets
  3. A survey by Time Warner’s Medialab found that 65 per cent habitually multitask with a digital device while watching TV. Much of this activity is in social media discussions of TV shows (tripled in the last 12 months), stimulated by TV networks to sell TV advertising space by showing their content is more engaging
  4. This report only confirms what I had previously suspected: multitasking is now widespread. I used to think only younger demographics multitasked but it seems that these days people of all ages use tablets or smartphones while doing other tasks. It’s done by business execs but also by those in the home. People use their smartphones or tablets while talking on the phone and while watching TV.

    Since the late 1990s I have used a laptop while sitting in front of the TV. I now often use a tablet, but until the devices came out, I was the only one in my house who took advantage of a second screen. Now my wife and the grandkids play games or surf the Web on their tablets while watching TV. In a sense this qualifies as part of the two-screen living room experience but I believe this model has enormous potential when the device is intrinsically tied to TV viewing itself.

    There are currently a lot of apps designed to enhance the TV viewing experience. I have Comcast’s XFINITY TV app, which lets me record programs remotely; the IMDB app, which gives me info on movies, TV shows, actors, and entertainers; the TV Guide app; and more. All better my TV experience but I believe that this is only the tip of the iceberg when it comes to the future of two screens in the living room.

    When the Apple II came out in 1978, Visicalc, the first PC spreadsheet, was developed for it. It became the killer app that moved the machine from hobbyist stature to the business world and it quickly became a tool that even large businesses started using to manage their financial forecasting. When the IBM PC came out, a product called Lotus 1-2-3 became its killer app that caused the IBM to take off like wildfire in a short time. The key for both of these products’ growth was what the industry calls an SDK, or a software developer kit, which provides tools for developers to write applications for the machines. In fact, tens of thousands of apps fueled the growth of the IBM PC and PC clones as well as the Mac and to this day remain an important part of their software ecosystems.

    Various companies have been creating smart TVs, Web browsers, and their own apps but what is missing is a dedicated SDK that can work on one or multiple PC platforms and encourage the development of apps for the TV. More importantly, this SDK focus should be more on the tablet or the smartphone and how they connect to the TV to deliver a richer viewing experience. I think we will soon see a model in which the TV is just a smart screen with apps designed to work with it via tablet, smartphones, and perhaps PCs or laptops.
    There has been a lot of talk about an Apple TV and I actually have a bet with my son on this. I think it will make a physical TV as well as a new souped up set-top box that gives all digital TVs access to its program. My son, on the other hand, believes the real magic will be with the SDK and a new Apple TV box. He says it doesn’t make sense for Apple to make an actual TV at this time. However, we both believe that the Apple TV focus will be on the iPhone and iPad; the TV will be more of a screen that is tied to and interacts with an ecosystem. It could ultimately change the way we view television and, in true Apple fashion, redefine the second-screen concept.

    Just look at what Google is doing with Google TV. It too has a similar model in mind. Android TV apps are already popping up but the platform needs a dedicated SDK that just focuses on the TV to give developers the ability to create products that make the two-screen experience fly. Microsoft is also trying to drive a two-screen experience, albeit through the Xbox at the moment. I expect the company to flesh this out further in the near future.

    It will be very interesting to watch what happens in the coming months with this two-screen concept. Google, Apple, and Microsoft all have their big software developers’ conferences within weeks (and miles) of each other. (Google I/O begins on May 15, Apple’s WWDC on June 10, and Microsoft’s Build 2013 conference on June 26.) They will all likely announce big news around their new operating systems and development tools for their core products, but I also expect that they will make clear their plans for a future TV.
    The connection between smart TVs and mobile devices is still in infancy. This could be the year however, when these mobile devices take on a more interactive role within the TV viewing experience. By July we may finally get a real glimpse of what the two-screen TV future will actually look like.