Streaming and the Music Business

Streaming has become the big thing in the music industry over the last few years. On the one hand, it’s the fastest growing form of consumption for music but, on the other, it’s a medium the music labels seem to feel pretty ambivalent about, given their frequent spats with YouTube in particular. The real picture, of course, is always a little more complex than it seems. Here are some data points on what’s happening with the three big music labels and how streaming ties in.

Streaming Achieves what Downloads Never Did

Digital music has, of course, been around since the late 1990s in one form or another. At first, its rise precipitated a massive decline in the music industry, as the upgrade cycle driven by CDs faded and online MP3s suddenly gave people a cheap and easy alternative to buying music on physical media. Eventually, Apple and others created legitimate digital music storefronts and paid downloads became a thing. However, it took until 2006 for digital music to generate even one tenth of the sales of physical media globally and until 2014 for total digital revenues to finally catch physical revenues.

However, one thing downloads never did during that time was become the prevalent form of music consumption, eclipsing physical media because, even though total digital music revenues matched physical revenues in 2014, they did so with the help of the first streaming revenue. Now that streaming is taking off, downloads are in rapid decline and, in fact, have fallen to the third largest contributor to recorded music revenue for the three major labels, behind both physical media and streaming:

Streaming has, therefore, achieved what downloads never did and become the dominant form of music consumption by revenue for the three major labels. Its growth has been far faster than the growth of downloads ever was, enabled by the near universal availability of broadband in mature markets, in particular, mobile broadband. In fact, Q1 2017 was the first quarter in which total revenue from streaming for the big three labels outweighed physical and download revenues combined.

Streaming has been Good for Margins Too

The growth of streaming has, in turn, helped the record industry get back to revenue growth after a period of stagnation but it’s also helped to grow profits:

As you can see, since the time streaming music took off, the major labels have seen both a return to overall revenue growth and increasing margins. In large part, the revenue growth has driven the margin growth as costs have remained roughly constant, even as streaming consumption and total spending on recorded music has risen. At the same time, however, streaming is now eating into not only physical consumption but download revenue, which is dropping far faster than it grew and even faster than physical revenues.

If Streaming is so Good, Why Fight It?

If streaming is so good for the industry, why would the labels constantly appear to be fighting it? Well, the answer lies in the oversimplification implied by the single word “streaming”. Streaming, like downloads and physical consumption, is merely a description of the medium but, unlike those other two media, it doesn’t directly describe the business model. Whereas the download and physical models both relied on the same basic model – payment per unit consumed, whether albums or singles – streaming actually has two fundamentally different business models: subscriptions and ad-supported free streaming.

That’s where the mismatch between the industry’s benefit from streaming and its objection to streaming comes in: the industry loves paid subscription streaming because it delivers consistent revenue per customer which is above the long-term average spend on either physical or digital music per customer. But the industry is far more skeptical of ad-supported free streaming, because it delivers far less revenue per user or per song, and because much of it happens through platforms like YouTube where the labels feel they have relatively little control.

By way of illustration, in 2016 I estimate paid subscribers generated an average of $75 per year in revenue on the services they used, such as Spotify and Apple Music. By contrast, ad-supported streamers generated an average of $3.50 per year. So, even though there are ten times as many users of these free services, the 100 million or so paid subscribers actually generated more than twice as much revenue. Of course, the labels get a proportionate cut of each of these revenue streams, so the same economics apply to them. Subscription streaming is the savior of the music industry but ad-free music streaming looks a lot more like Napster and other free file sharing services than any of the business models the industry has officially endorsed over the years in terms of the amount of revenue it generates.

Yet the free tier of these various services is arguably the best possible funnel for creating future paid subscribers because it introduces users to the basic model but with limitations, whether those are ads between songs, limits on how many songs can be skipped or the order in which they play, the ability to play offline or on mobile devices, and so on. That’s why, despite all their bickering and complaining, the labels stick with YouTube year after year and even sign new deals which they then describe as unfair. They may not like the revenue streams coming from free streaming but they know they’re a necessary evil to keep paid subscriptions growing over time.

Going forward, we’ll continue to see this somewhat schizophrenic behavior on the part of the music labels. On one side, rubbing their hands together over the new revenue coming from streaming and, on the other, bemoaning the ongoing dominance of the free services and exerting pressure on their owners to pull back certain content and reserve it for their paid tiers. In the meantime, users get to benefit as well, from both better and cheaper services and from the ongoing competition between the providers.

Should Facebook come under FCC Regulatory Rules in the US for Live Broadcasting?

Last week, Facebook announced they would hire up to 3,000 people to monitor and scrutinize Facebook Live content and other posts that use Facebook to share or broadcast heinous crimes such as the recent live streaming of a murder and a couple of suicides. Facebook has also been a place where people have posted taped incidents of crimes committed and these live editors would be tasked with catching them and making sure they never see the light of day on Facebook.

Facebook has close to 1.8 billion users around the world and we estimate that, at any given time, at least 3-5 million people are live broadcasting some type of event or situation on Facebook Live.

Today, Facebook has about 1,500 live editors. Adding 3,000 more would surely increase the amount of eyes and ears to keep watch over live broadcasts and look for other posts that may post images or information not allowed under Facebook’s rules and/or not in line with the spirit of Facebook. After all, it was designed as a sharing site for communications with friends and family. While Facebook understood what was being shared could be both good and bad, I am not sure they ever anticipated the site being used to share murders, suicides and posts about hatred and bigotry.

Until they added live video sharing, their algorithms and live editors where looking for key words that included things like “murder”, “hate”, “kill”, and terms that could be literal or figurative. For example, A person might post, “This picture is hilarious and it kills me,” which even though it used the word “kills”, the sentence in this context is harmless.

However, if the post says something like “I just killed a person” or used as a threat like “I am going to kill you”, the AI behind these algorithms and rules used by live editors should catch these posts and keep them from public view and, if considered a real threat, reported to authorities. Facebook’s AI software is even smart enough to catch things like images such as the ISIS beheadings that were posted on Facebook and keep them from public viewing.

But when Facebook introduced live streaming, it created a new type of medium for sharing and a new set of problems and challenges for its AI software and live editors. The virtue of live streaming of events, parties, concerts etc., is that it is live. At a concert, you want to share that experience live. In a group setting or at a sports game, you also want it to be a shared real time experience.

At the moment, Facebook is not regulated by any form of government body even though that type of government intervention has been suggested in countries where freedom of speech is not a right. And in the US, the idea of Facebook having to come under any regulatory agency would be onerous to all. However, I have to believe the FCC, at the very least, is looking at Facebook’s live broadcasting program and trying to determine if these types of broadcasts would need to come under scrutiny and if they should apply their seven second delay rules to this part of Facebook’s program in the US.

As I understand it, these FCC rules are applied to live broadcasts of any programs or content that goes over any form of live video distribution that uses sanctioned bands. However, I am told that, even if live video is distributed through cable networks, under many circumstances, the seven second delay can apply too.

According to Wikipedia, this rule was established in 1952.

“A short delay is often used to prevent profanity, bloopers, violence, or other undesirable material from making it to air, including more mundane problems such as technical malfunctions (i.e. an anchor’s lapel microphone goes dead) or coughing. In this instance, it is often referred to as a seven-second delay or profanity delay.”

I have reached out to my FCC contacts for comment but have not heard back from them on this issue as of yet. I will update this piece if and when they respond. However, as I stated earlier, I do know the FCC and other government agencies in the US are looking very closely at how Facebook and other social networks that could be used to communicate content via live streaming will try and keep things like suicides and any other violent content out of the public’s view.

More importantly, if Facebook, Twitter, and others cannot solve this problem in real time, I would not at all be surprised if, at some point, the seven second delay will be forced on them to make sure this type of content never sees the light of day over these social networks, at least in the US.

The Big Six in Q1 2017

Since all the major consumer tech companies have now reported their results for the March 2017 quarter, it’s time for my quarterly comparison of the “Big Six” – Alphabet, Amazon, Apple, Facebook, Microsoft, and Samsung. While not strictly the biggest six consumer tech companies (Facebook is considerably smaller than the others in the group), they’re certainly among the six most important.

Revenue Growth – Second Quarter in a Row of Growth for All

Last quarter was the first in some time all six companies saw year on year revenue growth and each company managed growth again this quarter.

Notably, growth accelerated for the three companies at the bottom of the chart, while it was flat or down for the three at the top of the chart. Interestingly, as the bottom three have returned to growth, they’ve each done it through a different set of products than those which drove their earlier strong growth: at Apple, Services, the Mac, and the Watch provided growth the iPhone provided in the past; at Microsoft, cloud has replaced Windows and Office; and at Samsung, semiconductors are now the darling of the company as mobile results remain flat. Facebook continues to see a slight slowing in percentage growth over time, in part because of the sheer size of its business but also in part as the beginning of the slowdown it’s been warning about with regard to ad load saturation in the News Feed. This should worsen over the course of the year but I continue to believe other drivers will keep it growing well above the rate of the other five companies in this set. Amazon and Alphabet both saw very healthy but flat growth too, with Alphabet benefiting in part from more hardware sales of its Pixel and Home devices.

Margins – Mostly a Continuation of Past Patterns

On margins, we see broadly a continuation of past patterns, with Facebook largely continuing an upward trend over time and still by far the most profitable in percentage terms. Amazon and Alphabet were largely flat and Apple and Samsung seeing a little recovery.

Microsoft, meanwhile, continues to see a downward trend over time as less profitable cloud businesses replace very high-margin software businesses in its revenue makeup. The decline isn’t dramatic and the fact the unprofitable phone business is now essentially gone is helping too. But, for now at least, Microsoft will continue to be less profitable than it has been in the past. Samsung saw a spike in margins in the last couple of quarters, driven entirely by its semiconductor business which is not only driving growth but also higher margins, in part because of tight supply and in part because it’s growing in some high-margin new areas.

Facebook sees seasonal spikes in Q4 and drops in Q1 but each year the spikes are higher as its revenues continue to outpace its costs. We may see some margin squeeze later this year as Facebook invests more heavily in video content, so that line is worth watching over the next few quarters.

R&D Spend – Alphabet Dominates in Dollars, Facebook as a Percentage

I’m adding a new comparison metric this quarter: R&D spend. This is a hot topic at the moment because of new areas like cars, AI, and more, and the fact both Alphabet and Facebook are spending heavily (and publicly) on long-term moonshot projects. In dollar terms, Alphabet spends more than any other company in our group, slightly ahead of both Samsung and Microsoft, with Apple not far behind:

Facebook, as you can see, brings up the rear, though given its far smaller size (its revenues are 15% of Apple’s), it’s remarkable it spends over half as much as Apple. We can better see quite how significant Facebook’s R&D spending is when we look at spend as a percentage of revenue in the next two charts:

Here you’ll note Facebook comes out on top by some margin and you may wonder why its number is so volatile. The simple answer is that big acquisitions such as Oculus, WhatsApp, and Instagram have added significantly to R&D spend not just in operational terms but also in stock-based compensation. Those numbers have spiked around key events like the IPO (seen right at the beginning of the second chart above) and vesting periods for acquired employees (seen in the second big spike). Even excluding those spikes, Facebook is consistently above Alphabet and Microsoft, which spend the second highest percentages of their revenue on R&D.

Interestingly, Alphabet’s spend on R&D as a percentage of revenue has come down over the last year or so. Arguably, it’s due to what I call the Porat effect, after Alphabet and Google’s CFO, Ruth Porat, who has tightened belts significantly in Alphabet’s Other Bets moonshots business. That’s not to say that spend has fallen – as you can see in the dollar spend chart, it’s actually continued to rise rapidly – but the rise has been at or below the rate of revenue growth recently, which is a change from the prior pattern. At Microsoft, R&D spend has risen as a percentage of revenue over the past two years, in part because revenue fell for much of that time, while at Apple R&D spend has risen steadily as a percentage of revenue under Tim Cook, from around 2% to 5%, though there are signs it’s now beginning to plateau at that 5% level, perhaps as a conscious strategy to keep R&D within certain bounds or perhaps as a reflection of the recent pullback from parts of Apple’s car project.

Employees – Amazon Slows its Hiring but Remains by Far the Largest

We’ll end with a brief note on hiring and employee numbers, where Amazon remains by far the outlier, with well over 300,000 employees, compared with 120,000 or fewer for all of the other companies. Indeed, Amazon employs more people than the other four companies on this chart combined (because Samsung’s employees are split over many subsidiaries, it’s tough to derive a total number and so they’re excluded from this chart):

However, Amazon slowed its hiring a little in the past quarter, as you can see from the somewhat abrupt change in the trajectory of the line. It still hired 10,000 employees in the quarter, more than any of the other companies have added in the past year. But the period of very rapid growth that began in 2015 seems to have come to an end, at least for now.

Apple’s iPhone 8 Positioning Dilemmas

At this point, the rumor mill surrounding Apple’s next iPhones, expected to be released in the fall, is well underway. There’s some consensus emerging around what we’ll see, at least in broad brush terms, but lots of details are still murky. Given what we seem to know at this point, I think there are a few big dilemmas Apple faces with regard to the positioning of the new phones.

What We Think We Know

At this point, there seems to be reasonable consensus on a few points:

  • Apple will release at least three phones, two along the lines of those it has released the last three years and one a high-end premium entry taking a new place at the top of the lineup
  • That premium phone is likely to be the only one with an OLED screen, as well as several other possible features, including special 3D sensors, upgraded dual cameras, new materials, and others
  • That premium device will be priced above the usual price point for the Plus model, possibly significantly above, to account for the additional cost of components and materials.

What We Don’t Know

However, there is still much we don’t know, including:

  • Whether Apple will revamp the iPhone SE, now eighteen months old and the only device in the lineup still to be using the old sharp edges rather than the rounded ones of the 6 and 7 ranges
  • Which new features will make it into the standard models and which will be exclusive to the new premium model, including smaller bezels, dual cameras, and so on
  • How much the price differential between the premium model and the Plus model will be
  • Whether all the phones will launch simultaneously or whether the premium model will become available later due to supply constraints, as reported this week by KGI.

How Apple Might Think about All This

The Push to Raise ASPs

It’s worth thinking through how Apple might think about all this, and where it might come down on these various issues. By way of context, it’s worth recalling what Apple has done with the iPhone portfolio in the past few years and what that’s done to average selling prices. The chart below has a summary:

iPhone ASPs were steadily declining from 2011 to 2014 as a result of expansion into new markets, keeping older models around longer, and so on. But, in late 2014, the iPhone 6 and 6 Plus changed all that dramatically, raising the base price of one of the models by $100 and raising ASPs by a little less than that as a good chunk of buyers opted either for the larger device or the higher storage tiers. Things slowed down as the year-old devices dropped in price and Apple subsequently introduced the iPhone SE, but they got another bump this past fall when Apple introduced the iPhone 7 range, making some features and finishes exclusive to larger, more expensive devices. It shifted the mix between the smaller and larger models and ticked ASPs up again a little.

At this point, it’s fairly clear Apple sees raising ASPs as one way to counteract the slowdown in smartphone sales. It’s likely that whatever it does this Fall will be aimed in part at achieving that objective. But it has to do so in a way that doesn’t alienate customers by making them feel they’re being pushed to spend more. That’s going to be a tricky balancing act with at least three new devices in the lineup (and even more so with a new SE). The outcome will depend, to a great extent, on how keen Apple is to boost ASP and how much it prioritizes that over other objectives.

Redesigns Up and Down the Line

The biggest question in my mind is to what extent Apple redesigns the two standard models, which have had the same basic form factor, with minor changes, for three model years already. We’ve heard a lot of reports about smaller bezels and the removal of the home button but how dramatic will that change be on the standard models and how much will that change be reserved for the premium model? In my mind, Apple has to engage in a significant redesign across the board at this point. After all, competitors are rapidly moving to smaller bezels. Ideally, it will have a similar design across the line but use OLED and perhaps some materials or finishes exclusive to the premium model.

The next question is how much the price differential will be between what I’ll call the 7S plus and the premium model. There would be a nice symmetry if the price premium were $100-120 as it has been between the base and Plus models to this point. I think the $1000 price point we’ve seen reported is likely too high. I could easily see an $850-900 price point though and, of course, higher storage tiers would push some models over $1000 on that basis.

A Balancing Act

The balance Apple has to strike is between giving at least some buyers reason to buy the premium model while allowing many others to remain satisfied with the standard models. That means a sufficient upgrade in the base models to push owners of older devices to replace them, while maintaining enough of a premium for the high-end phone to make that feel worthwhile. All this, of course, gets more complicated if there are indeed supply constraints on the premium model, especially if Apple prices it attractively and it gets a significant mix of total sales.

What Apple has to avoid at all costs is creating a situation in which the premium model is the one people really want but it’s priced too high and available in insufficient numbers for people to actually buy it. That could depress total sales and maybe even put some people off buying iPhones entirely in this cycle. The best case scenario is Apple continues to see a significant mix shift towards the larger and more expensive phones while still being able to meet demand for the other models. Whether it achieves that objective will depend on how carefully it positions the various models in the new lineup in terms of features and pricing and whether it’s able to both predict demand and secure sufficient supply to meet that demand. As we’ve seen with prior launches, that’s already been a tough objective, even without the additional complexity of this year’s launch.

AR, not Voice, is the Next Major Platform for Innovation

I have had a chance to work on speech and voice projects since I first interacted with Kaifu Lee at Apple who, in the early 1990s, was brought in to research voice and speech recognition for what would have been used in Apple’s Newton. Not long after it became clear Newton did not have any real legs, Microsoft lured him away from Apple to head up Microsoft’s first serious work on voice and speech recognition.

In the 25 years or so since that time, voice and speech recognition has evolved a great deal and is now used in all types of applications. With the addition of Artificial Intelligence applied to voice, Google, Apple, Microsoft, Amazon, and others, have now been pushing their voice solutions as a platform and new user interface that helps them interact with customers and provide new types of apps and services.

Recently, Amazon opened up the Alexa voice interface to hardware and software vendors to add a voice UI with direct links to Amazons’s apps and services. Apple’s Siri, Google’s Now and Microsoft’s Cortana are also used as voice UIs that work with third party products and are tied back to each company’s services or dedicated applications. In this sense, voice has become an important new platform for companies to innovate on and AI in voice is a viable platform to use when building new apps and services.

Although AI and voice as a platform will continue to be important, I sense a real shift — AR will soon become the most significant new platform for innovation relatively soon.

PokeMon Go introduced AR to a broad consumer audience and the tech world took note. Once they started to put their strategic thinking caps on, they immediately realized the idea of integrating virtual images, video, and information on top of real world settings has a lot of potential.

To date, most AR is in games like PokeMon Go and apps like SnapChat. But the idea of AR becoming an actual platform within an OS, which could drive a host of innovative apps and services, is just around the corner.
The most likely platform for AR will develop on smartphones first and eventually extend to some type of glasses or goggles as an extension of the smartphone’s user interface. But, for the next few years, AR will be introduced and integrated into the smartphone experience and make it possible to blend virtual worlds into the real world.

Google already has an Android platform for AR called Tango and Lenovo has brought the first Tango phone to market. However, the Tango platform solution is half-baked and I am not clear how serious Google is about AR, given their first generation of AR smartphones on the market today. They still seem to be pushing harder into VR with Daydream and Tango seems to be more of an experiment. But that might change later this year if Apple comes out with their AR platform, something a lot of people believe Apple has up its sleeve with the next-gen iPhone. We should get an AR update from Google at their I/O developer conference next month.

Given the way Apple attacks markets with new software and uses it to sell new hardware, it makes me think Apple could actually be one of the companies that could bring AR to the mainstream market.

Here is the scenario I believe could evolve for Apple to make AR a household name.

First, I would expect Apple to add specific new hardware features to a next generation iPhone that could include extra cameras, incorporating a 360 degree feature, new types of proximity sensors, a new touch screen more sensitive for toggling between virtual and real worlds and perhaps new audio features such as some type of surround feature that could make a virtual scene come alive.

Second, they would create a dedicated AR software layer that sits on top of iOS that serves as an extended platform tied specifically to any new hardware-related features. That would be followed by a special SDK for developers who could create new and innovative apps for AR on a new iPhone.

If Apple does add AR to new iPhones, I suspect they would pre-seed five or six key developers with the AR SDK during the summer so when they launch the new iPhone in September, they can show off these apps along with the homegrown ones they would create themselves. This is pretty much the roadmap they follow when they introduce any new major device or significant new features for the iPad or iPhone and Apple following this plan is very likely should they use the new iPhone to introduce AR this year.

Given the secrecy of Apple, I doubt we will hear anything about AR at Apple’s Worldwide Developers conference in San Jose in early June.

But what is most important about this, should Apple enter the AR market, is the fact they would provide a powerful new AR platform developers can innovate around and serve as a vehicle to bring AR to the mainstream.
This would throw down a major challenge to Google, Samsung, Microsoft, and Amazon to create their own AR platforms and this will become the next major platform gold rush that will drive new tech growth in the next three to four years.

The other company who could bring AR to the masses quickly is Facebook. At their F8 conference this week, Facebook showed off a new camera that will be at the heart of a new AR platform that can be used to add virtual objects to their app.

Here is how VR Focus describes the role of the camera in a Facebook VR platform:

“Facebook is going to use the camera part of the Facebook app to build a new platform for augmented reality by implementing camera effects. Standard effects already used on other apps such as face masks, style transfers etc. will be available from the start. Users will be able to create their own since it will be an open platform. The new AR platform will be launched as open Beta today.

Facebook hopes to take further advantage of developing technologies such as Simultaneous Localisation and Mapping (SLAM) which allows the camera to plot out where an object is in the real world so AR can seems to be placed accurately in the ‘real world’. Additionally, Facebook is working on technology that allows the conversion 2D stills mages into 3D representations that can be modified with AR. The object recognition that will be introduced to the app means that the camera can ‘recognise’ the size, depth and location of the objct so the object can be manipulated within the AR space.”

The commonality of both Facebook and Apple is the development of an AR platform, an SDK, and the role software developers will play in creating innovative AR apps is what is important to understand. Although voice as a platform will continue to grow and be important, it is my sense AR is really the next major platform we will see the most innovation from in the near future.

Why TV Networks are Going Direct to Consumer

Lately, it seems we’ve seen one report after another of various TV network owners taking their content direct to consumers through over-the-top streaming services. Indeed, my column last week talked about who might begin to re-aggregate some of these offerings on behalf of consumers tiring of the fragmentation. But today, I wanted to step back a bit and focus instead on some numbers that help explain why that direct-to-consumer push is happening in the first place.

Cord Cutting Continues to Accelerate

One of the single biggest reasons why cable networks in particular are going direct to consumer is ongoing cord cutting. Though the US pay-TV market saw sustained growth over decades, that growth began to slow in 2014 and turned negative in 2015. Now, two years later, the rate of cord cutting is clearly accelerating, especially if you focus exclusively on the traditional pay-TV offerings and exclude streaming alternatives like Sling TV. I track the 17 largest public pay-TV providers in the US (making up over 95% of total pay-TV subscribers) and the trend has become very clear, as shown in the chart below:

The red part of the chart represents the Sling TV subscribers which are reported in DISH’s results but who aren’t traditional pay-TV subscribers. If you include those as reported by DISH, the losses of pay-TV subscribers amounts to a million a year now, up from half a million a year earlier and growth a year before that. But if you exclude them, as we should, the decline has reached over 1.5 million per year. In and of itself, that’s a substantial decline, especially in the context of a growing US population and number of households. The penetration rate of households is actually declining even more quickly, dropping from around 84% at its peak in 2014 to around 79% at the end of 2016.

Cord Shaving another Major Factor

However, cord cutting by itself doesn’t entirely explain the decline we’re seeing in the total number of cable network subscribers. Nielsen tracks these numbers and publishes its estimates for the penetration of individual cable networks and those numbers are falling more rapidly than cord cutting alone would suggest.

Back in July 2011, the cable network that reached the most households was TBS, with 101.2 million, followed closely by CNN, with 101.1 million. 15 networks having a reach of over 100 million. However, just five and a half years later, in February 2017, the network with the broadest reach (The Food Network) had 93.1 million subscribers, with only 18 networks having over 90 million. In just the last two years, the top 30 networks have lost an average of four million subscribers, or two million per year, well above the level accounted for by cord cutting alone. Some networks have dropped even more quickly, with the two major ESPN networks both losing over 6.5 million over two years and the Weather Channel losing over 12.5 million.

The reason for this decline? An increase in so-called skinny bundles, which provide smaller packages of channels for those users tired of paying $100 per month for dozens of channels they don’t watch. Verizon in particular was sued for creating packages which didn’t include all the ESPN channels it was obligated to under its contract with Disney but has managed to keep selling these packages, which have been its most popular during that period. The streaming services – Sling TV, Playstation Vue, DirecTV Now, and now YouTube TV – also offer a subset of the traditional big channel bundle, reducing the reach of these networks further.

Cable Networks Lose Control

The reality is it’s getting harder and harder for the cable network owners to control where their channels end up, as pay-TV providers create skinny bundles against their wishes and, in some cases, drop channels from their lineups entirely. The drop at the Weather Channel was precipitated by several pay-TV providers deciding they simply didn’t want to carry it anymore. As a result, it has dropped from 101 million subscribers in July 2011 to just 84 million in March 2017. More channels are facing the same fate, as some pay-TV providers decide not to renew contracts with Viacom for some or all of its channels, for example. We’ll see more of the secondary channels owned by the conglomerates squeezed out entirely or pushed into premium packages.

There’s a long way still to go: though we’ve seen this cord shaving activity for several years now, the top 45 channels all reach 90% or more of the households the top channel reaches. In other words, there’s still a ton of bundling of these channels into monolithic packages. That’s served the cable network owners well, as their rights agreements have forced this kind of packaging, but as soon as those packages begin to crumble, we’ll see a rapid decline in the distribution of at least some of them.

Direct to Consumer Reaches a Tipping Point

The channels in the best position to manage this change are those which have the strongest brands and the longest history of charging for their content. As such, it’s the premium channels like HBO, Starz, and Showtime which have been among the pioneers of direct to consumer offerings. Cannibalization of the old model matters little as long as they get adequately compensated for their new models. In many cases, they’ll get far more direct control over their relationships with end users and often more data too.

Conversely, the channels in the weakest position are those which have never created strong brands around their content and whose shows are watched on DVRs and through services like Hulu which provide little direct branding of the channel or its owner. Comcast is said to be planning a service which would bundle up content from NBC and the NBCU cable networks but, without a strong tie between those properties, it’s hard to see why consumers would pay up, especially with much of the content already available through Hulu or VoD services.

We are, though, starting to see a tipping point where even broadcasters like NBC and CBS see the need to start planning a future separate from the big pay-TV providers. That means these efforts are only going to accelerate, increasing the fragmentation in the market but, also importantly, highlighting the winners and losers among the existing channels. The strongest brands and content libraries will do OK and may even thrive in this transition as customers vote with their wallets. The weakest will get thinned out pretty quickly and their owners will struggle.

Nearing Peak Snapchat?

I never like to count companies out entirely but data is data, and it tells interesting stories. Earlier in the year, it certainly felt as though there was a hype cycle around Snapchat. All of a sudden, it was in the media more and, anecdotally, people started seeing more and more friends and family who have tried it out. The data in the chart below shows the spike but also answers the question as to whether Snapchat’s hype and new user acquisition was sustainable. It would seem as though it was not. Not only has the growth in new user acquisition slowed to a halt but we also see signs of decline.

While I don’t have a firm conviction on this point, I currently believe Snapchat is more like Twitter than Facebook. Meaning, their potential market, given current strategy and focus, is simply not that large. Unfortunately, like Twitter, they are likely to IPO ex-user growth. Perhaps that is why reports like this show up which state they are focusing more on maximizing revenue per user. As this from the article points out:

Convincing investors of the value of its engaged users will be critically important. As management told the analysts, Snap is still an early stage business where short-term performance may be “lumpy” as it grows.

Engagement matters because Snap intends to focus on more technologically mature markets where it will look for ways to increase its average revenue per user, the people said. That’s a departure from social-media competitors.

As the chart highlights, at a global level, user growth has slowed and even dipped slightly in Q4. The chart above is from consumers who answered a survey on applications they use monthly. We have similar data which asked the question of which social media accounts you have an active account with and the data was in line with the chart above.

As Snapchat nears IPO, maximizing ARPU is the best angle. However, the concern here is it will be hard to take share as ad dollars shift from offline/TV to online if you are not a Google or Facebook company. This is where Snapchat’s biggest challenges lie. They don’t have the scale to truly take share with the advertising shift, but they do have a lock on Western millennials. That’s worth something, but we just aren’t sure exactly how much at this point.

From what we hear with advertisers, the ROI on their ad spend with Snapchat isn’t what they expected either. This was the same thing we heard about Facebook in its early days and one of the primary issues they had during their stock’s plummet and low value after their IPO. It took a while for advertisers to understand how to make the most of their ad spend on Facebook. That can certainly happen with Snapchat as well as they experiment on the service. The big challenge will be to scale beyond just Western millennials. I see no path beyond that at this point.

So, if they are happy with maximizing ARPU of around 150m, mostly millennial age consumers, then that is not a bad business. It just won’t be a big business overall until they figure out how to penetrate more of the mass market with their service.

With Facebook, we had every indication that it was a mass market, mainstream product. In nearly every country, and especially in emerging ones, Facebook was a dominant driver of getting online. In emerging markets, it was common for carriers to bundle Facebook into the data plans because it was such a driver to get people to purchase smartphones. The analogy I always used is for the emerging world; Facebook was like AOL for the developed world during the first Internet book. It was the thing that got people online and connected. Snapchat is not that thing and is very different in the type of customers it is capturing. There is also the real threat of Instagram, which I think is more threatening than many are admitting to Snapchat.

Like I said, I never like to count companies out, but right now my conviction is they are more like Twitter than Facebook which means the IPO could be very rocky, if not ugly.

Global Device Ownership at 2016 Year’s End

In all my years of studying the technology industry, I’ve always found it more helpful to know installed bases of devices, platforms, apps, etc., vs looking at what is selling in terms of market share in any given quarter. Just focusing on sales share of hardware products per quarter is a deceiving statistic when looked at in isolation. We orient our research and data gathering around understanding how many people own what and what exactly they are doing with the technology they own. For this reason, I’d like to end 2016 by giving you a big picture view of the technology landscape in terms of ownership. Below is a chart of global consumers, broken out by age, and what percentage each tech category is owned.

ownership

The above chart is comprised of a global representative sample size of just over 30,000 consumers. It highlights some of the nuances within demographics but PC and smartphone ownership remains the largest piece of the pie. Once we understand the global picture of device ownership, we can more easily understand the behavioral patterns we see with software and services.

An important point is none of these categories are seeing stellar growth. We are, for the most part, hitting a peak in these categories and many are moving to replacement cycle market. Undoubtedly, a key debate will remain of the products on the far right of the chart with smart watches and fitness bands. My opinion, having sifted through the piles of data we have on those categories, is the market is simply not that large. This opinion will remain so long as their main value proposition is tied to fitness, as is the case today. If over the course of the next 4-5 years the value proposition evolves, then we can adjust our market sizing approach accordingly.

At the moment, I’m not sure if smart headphones (like the AirPods) will make their way into the tracking category of wearables, although you could make a case they should. The wearable category will undoubtedly expand into many things beyond just fitness bands and smart watches. However, those are the only two things selling in any kind of volume right now. One thing to watch in early 2017 will be the retail category growth. In the 2015 holiday season, the wearable category was up over 100% growth annually and the only real category of growth at retail. I’m not going to make any predictions but there is a good chance that category is low single digits to negative growth this holiday season. The data we will get will not include Apple retail, which would unquestionably change the number.

To look at another source, note this chart from Deloitte, specifically on the US market:

screen-shot-2016-12-22-at-7-37-54-am

PCs are not shown here but, if they were, they would be mostly flat. Interestingly, tablet access increased, as did both smart watches and fitness bands. I’m using the word access here because their question was not purely ownership but also access. Which is relevant for categories like the tablet and VR, for example, which could be shared. I’d be comfortable saying the smart watch and fitness bands are “ownership” points since they are personal and not shared products. A noteworthy point though is, just because they say they have access, it doesn’t mean it is used daily. So I’m not sure I’d bet that active daily usage of things like tablets or fitness bands is entirely reflected here. We know fitness bands do still have some abandonment issues but it is not nearly as bad as it once was.

This study was taken at the end of August and we are running a device ownership study in January. We will see what the holiday season brings to the mix of ownership. I’d bet VR goes up but probably not significantly. So will Bluetooth/wireless headphones, which trended very well in our intent to buy study for this holiday season.

Knowing what technology people own and use is a key part of knowing the market. As we look at multi-deivce homes, specifically ones where smartphones, tablets, and PCs are owned, we see some dramatic differences in usage behavior. The key part of this analysis is to build a broader thesis on how likely these scenarios are to become more common. If so, then we can expect some fairly dramatic behavioral changes in the market which will lead to opportunities that are less obvious today. More on that to come in 2017.

Apple and Miniaturization

I’d like to pick up where I left off in my AirPods article about Apple’s efforts in miniaturization. This is an important point no one is picking up on. If you remember, in the early days of cell phones and PCs, many companies looked to show off their engineering prowess by concentrating on miniaturization. The focus was on getting things smaller and packing as much sophisticated technology into the smallest shape. That trend led to a joke in the movie Zoolander about his too tiny cell phone.

tiny-cell-phone

The race to miniaturization was key in driving component technology and increasing innovation around cell phones for quite some time. Much of that work led to the innovation we saw in smartphones many years later from things like battery technology, displays, and semiconductors.

Other examples were the Toshiba Libretto.

images

One of my personal favorites was the OQO, a handheld Windows PC. It was a horribly named “UMPC” (Ultra-Mobile Portable Computer) which my firm played a role in helping to categorize.

oqo_model02_thumbs_menu

From an engineering perspective, exercises in miniaturization were important to discover holes in the landscape and highlight the hard areas where time needed to be spent solving key problems and where technology didn’t yet exist. However, too often in those days, miniaturization was done purely for the sake of the process and products which were truly unusable ended up on the market and selling in small quantities. Technology for technology sake is often better done in the lab than in public.

However, when efforts of miniaturizing computers can be done to bring about new types of experiences, as is the case with Apple Watch and AirPods then it seems worthwhile to bring those products to market in order to address another key learning which is manufacturing the miniaturization process at scale. Both the Apple Watch and AirPods are products within Apple’s current portfolio which pushed the limits of miniaturization. You could argue the iPod went down this road packing more and more technology into a smaller form and those learnings led to many of the great technologies we saw in the iPhone.

Apple’s exercising, designing, and pushing the limits of miniaturization in the wearable space is critically important for the future. I’d imagine from both their Apple Watch and AirPods efforts, they have accumulated a long list of things that still need to be created or designed to get to where they want to go in the future. This could be around new chips they need to design (which are on a 2-3 year out roadmap), companies they may need to partner with or buy, and even new manufacturing processes which need to be invested in or even invented. All of these things are key learnings which would not happen had you not tried to build the thing in the first place.

The scale in manufacturing is essential but also predicated on the product being useful. Regardless of what you believe about the size of the Apple Watch market if, in ten years, we look back at whatever Apple’s next big thing is and can see how the efforts in building and shipping the Apple Watch at scale benefited their next wave, then it would all be worth the effort. Similarly, the same is true with AirPods and anything else they have in the labs.

Learning by shipping hardware is an incredibe and underestimated skill set. So much of the “software eats the world” analysis discount the role hardware will always play, in some fashion, in the future of computing. We can not let slide from our viewpoint that there is only one company mass manufacturing some of the most complex computers in the world. This includes investing in every bit of the stack from proprietary manufacturing processes, custom silicon, sensors, and more.

Apple is learning how to solve very hard and nontrivial problems by pushing the limits of miniaturization. Without a doubt, each year, keeping an eye on the advancements in technical sophistication of Apple Watch and AirPod line will be fascinating.

Unpacked for Friday, December 16th, 2016

Uber Launches Self-Driving Cars in San Francisco – by Jan Dawson

Uber announced a trial of self-driving cars in San Francisco, one of its most important markets and its second trial after a debut in Pittsburgh in September. The first day of the trial saw both footage of one of the cars running a red light and a rebuke from the California Department of Motor Vehicles — Uber had failed to obtain permission to run the trial.

Uber’s San Francisco launch is an important one. It’s one of the most influential markets among those who track companies like Uber and write about them for the general public. It will likely be the first time many would-be early adopters of self-driving technology have a chance to experience it firsthand, in a real-world driving situation, and could expose more people to the technology and its current state of readiness than would otherwise be the case.

But there’s the problem. Uber has a well-earned reputation for a cavalier attitude towards regulations. But the regulations it’s flaunted in the past have been largely those dealing with running taxi services. Uber has been able to successfully argue it brings significant benefits and, arguably, a safer taxi service than existing ones given the whole transaction is tracked electronically, with both riders and drivers registered with the service. As such, it’s been able to get actual and potential users on board as advocates and put significant pressure on local authorities to allow it to operate, despite whatever restrictions might otherwise be in place.

What Uber is doing in San Francisco risks both playing up to its reputation and damaging it in a very serious way. Whereas Uber has been able to argue its previous disregard for regulation was either safety-neutral or even positive for safety, autonomous driving brings real safety risks in the early stages relative to driver-controlled cars. The fact one of its cars was captured on video running a red light should be – ahem – a red flag. It appears this particular car was driven by a human driver at the time and Uber has been spectacularly bold in suggesting this incident should be evidence of the need for autonomous cars.

The problem is Uber isn’t currently allowing the authorities access to all the data it captures on how these self-driving cars perform. Yes, this car was allegedly piloted by a human being as it broke the law but we have to take Uber’s word for that. It won’t be sharing any information with the DMV or the citizens of San Francisco about the accidents its cars are involved in. It’s not as if the DMV would have prevented Uber from running the trial if it sought permission. It’s this reluctance to share data with the government of California that seems to be at the root of Uber’s reticence but it shouldn’t be allowed to flaunt regulations in this way and the DMV is rightly coming down hard.

The downside here could affect not just Uber but the citizens of San Francisco – passengers, pedestrians, and fellow drivers – and other companies pursuing self-driving car technology. If Uber takes too many risks, not only could it endanger human life, but it could affect the reputation of autonomous car technology overall, which could set back what should ultimately be a technology that makes hundreds of millions of people safer over the coming years. I’ve generally been somewhat ambivalent about Uber’s regulatory strategy but this seems a clear-cut case of going too far.

Wynn in Vegas to Put Amazon Echo’s in Every Room – by Ben Bajarin

Earlier this week, the Amazon Echo got an interesting boost from the Wynn Hotel in Las Vegas. My experience with a number of high-end hotels in Vegas has shown me they are very aggressive with using new technology. Vegas was the first place I experienced concierge bots, where you can interact via text messaging with a bot that will make reservations, order food, help you find things to do, etc., all automated and personalized. So it isn’t surprising they are also going to push the limits of room automation. In this case, by adopting voice-first computing experiences in rooms and eventually throughout their hotel. In fact, I’d wager Las Vegas will increasingly become a place where you can go and experience the future.

According to the Wynn statement:

Alexa at Wynn Las Vegas will be able to do things like control lights, temperature, drapes, and the television, as well as access more than 6,000 skills in the Amazon skills marketplace. More features may be added in the future, including a Wynn Las Vegas personal assistant.

It seems as though these devices will be pre-configured. While not irrelevant, the Echo won’t be personalized for me and I’d find it unlikely they would ask me to set up Alexa to my account when I get to the room. Also, not everyone has a Prime account. Perhaps the Wynn has a master account or a deal with Amazon so, when a person enters the room, Alexa can play music and use the services tied to a master account. This is a really interesting move, both for the Wynn but also for Amazon to get people, especially wealthy people who are the profile that stays at the Wynn, to get used to a voice-automated experience.

My view on this has to do with consumer adoption. This is a great play for Amazon to get people to buy into the direction they want to go with Echo and the Alexa assistant. Consumers adopt solutions to pain points quickly and new experiences SLOWLY. The only way to get a new experience adopted is to actually experience it. Examples like this are great ways to get people to experience the value proposition of the Echo for all it can and, increasingly, will be able to do.

I can see more examples like this coming, not just from Vegas but from many consumer retail experiences where these sorts of implementations increase the customer experience dramatically. While Amazon can continue to play here, so can Google and Microsoft and I would expect all of those companies to be aggressive in going after these more commercial accounts.

One area to watch, however, is how they deal with privacy. Reports have come out saying the Echo and Google Home are recording your voice and storing it. This is likely due to both companies are trying to build user profiles to sell ads or services against. This is less useful in public environments but I still think there will need to be clear privacy boundaries in situations where a voice/listening device is in your hotel room. Especially a hotel room in Vegas where, you know, “What Happens in Vegas Stays in Vegas”?

Furthermore, the demographic I mentioned is a typical Wynn customer who has money and skews older and is the exact profile that also tends to be much more concerned about security and privacy than your Regular Joe. All the more reason why the privacy elements of this need to be absolutely clear or it will go nowhere.

A Plethora of Micro Markets

I love this bit from the movie “Three Amigos!“:

screen-shot-2016-12-14-at-4-42-35-pm

Jefe: I have put many beautiful pinatas in the storeroom, each of them filled with little suprises.
El Guapo: Many pinatas?
Jefe: Oh yes, many!
El Guapo: Would you say I have a plethora of pinatas?
Jefe: A what?
El Guapo: A *plethora*.
Jefe: Oh yes, you have a plethora.
El Guapo: Jefe, what is a plethora?
Jefe: Why, El Guapo?
El Guapo: Well, you told me I have a plethora. And I just would like to know if you know what a plethora is. I would not like to think that a person would tell someone he has a plethora, and then find out that that person has *no idea* what it means to have a plethora.

When discussing market segmentation and the dramatic changes we see with the rich segmentation happening as we speak, I often feel like companies we talk to say they understand what market segmentation looks like only to realize they really have no strong grasp of their customer or how deeply customer needs, desires, and wants have evolved. We believe we are seeing the rise of micro markets and many of them. You may say, a plethora of micro markets is emerging.

Understanding market segmentation, at a basic 101 level, is a fairly routine idea. However, most modern thinking around segmentation is flawed. It makes assumptions about profiles and attempts to capture diverse nuances but often just ends up grouping as many people as possible together in order to bring about the appearance of a larger market opportunity. I believe markets are splintering off, and richly segmenting, at a much deeper and wider level than many others believe.

I came across a trend research report where the CEO used the term, “the audience era.” Below are a few paragraphs capturing what this means:

Today we live in what I call the ‘Audience Era’ – an age where everyone and everything has an audience.

The origins of this are not news for anyone in marketing; mass-market social media combined with 24/7 mobile access has radically reshaped our communications environment. Publishing to an audience today has been simplified to a single button press, so it is no surprise that our data quantifies that an incredible 81% of internet users now publish a video, photo or review online at least once a month. In a little over a decade, we have gone from thousands of outlets to billions.

In the mass-media era, there were limited channels to engage an audience, meaning content and its distribution were dictated by the media owner. Today there is infinite choice, from the on-demand platforms of Netflix and YouTube to content aggregators like Apple News, Facebook, and Flipboard. We live in a search-centered world where we dictate what we consume. The result of this is that audiences have splintered and fragmented, but are more centered around passions and interests.

The Audiene Era is an apt phrase for what is happening. These statements emphasize one of the larger trends I’ve been watching unfold. An era where everyone can have an audience and these audiences are very wide and diverse. Think about this from the standpoint of Facebook, YouTube, Twitter, Snapchat, Instagram (Insta as the youngs call it). All of these platforms have created at scale micro-audiences. Instead of one very large audience, there are now multiples of scale of smaller ones. This makes reaching your audience potentially less expensive but also much more difficult. Instead of blanketing a marketing campaign, the opportunity can be to target it and receive maximum return on investment. The challenge is, in my opinion, that markets may end up being smaller and less financially lucrative as a result.

Look at the Dollar Shave Club, for example. As successful as this transaction was (a billion dollars is a good exit), it is far short from the crazy valuations and acquisitions we see around Silicon Valley today. Look at the WireCutter as another example. Perhaps my absolute favorite review site was purchased by the NY Times for 30 million dollars. Again, not a bad exit given the company did not have a ton of private debt but, again, not the sale figures we are accustomed to these days.

I have a sense things like this will become more the norm than the exception. If what were once large millions of user markets begin to segment into micro-markets within the larger product category, then the total business opportunity may not be as large as it was historically. Again, the benefit is a more lucrative business opportunity, since these companies won’t require as much capital to be successful yet can operate with much higher margins, but the total dollar figures may be in the millions rather than billions more often than not.

There is nothing wrong with this but it does mean we need to change our expectations. This changes how companies will go about assessing a market opportunity and consider the total costs associated to make sure it is a profitable venture. Investors may need to rethink how they capitalize, and how much capital, they pour into private companies. Smaller deals may become the norm, along with smaller acquisition expectations and smaller overall market cap IPOs.

I also wonder to what extent we will see conglomerates owning brands or sub-brands designed to target these micro-markets but are owned by the same umbrella company. Facebook is a good example of this. As the social media platform market fragments, they are likely to buy companies that fill gaps in their overall offering. A company like Snapchat may be lured to go public and try to chase scale only to realize their market is much smaller than they first anticipated and then likely pivot or sell.

I can see many examples in news and social media, entertainment, and more where this is likely to happen. It fits my thesis that the overall tech world will operate fundamentally like the consumer packaged goods segment. Several enormous companies own the different brands targeting micro-markets. CPG understands rich segmentation better than any industry out there and I have a strong feeling the exact same dynamcs will apply to the technology industry.

As we move into this new territory for tech, the age old mantra will become increasingly more important — “Know thy Customer”.

A First for Apple in China

It has been a while since I’ve written a post on what is going on with Apple and the iPhone in China. I have recently come across and updated recent data points I’ve seen from the region and want to make a few observations.

Tracking the iPhone installed base in China is notoriously difficult since a healthy base of Chinese iPhone customers existed before Apple was officially present, both in retail and with carrier deals like China Mobile. Apple had a large and vibrant installed base which was fueled entirely by the grey market (unofficial channels, or purchased outside the country and brought in). Because we can’t track the sales of these devices, it was nearly impossible to estimate the size of the base. In early 2014, I had a theory, which I developed from a series of website-based tracking tools, that the iPhone installed base in China was north of 100 million even before Apple was officially present. People thought I was crazy and I felt like I was. How in the world could a region grow to over 100m units which, at the time, was more than any other country (including the US) solely on the back of unofficial grey market, street vendors, and imports from offshore purchases? Looking at some recent data, it appears I was correct and Apple’s base was in the 100 million range as of early 2014. Someday, a dedicated analysis will need to exist on how such a large customer base could be built solely from unofficial channels and what it says about China in particular as a market. Given many of these devices were acquired unofficially, the Apple App store was not quite present, and many of these devices were “jailbroken”, it is likely even Apple had no idea how large their customer base in China was at that time.

Fast forward to today and I see this chart which shows active devices in China as tracked by app store and website visit metrics.

china_base

This chart, and the tracking service that created it, is estimating there are ~280m iPhones and iPads in China being actively used on a monthly basis. This chart indicates most of that number is iPhones but, from a range of other tracking network data I have, it has to include iPads. It would equate to around 28% of the now one billion active mobile devices (including tablets) in use in China. The iPhone installed base is likely around or just a bit north of 200 million, keeping Apple’s smartphone share alone at around 28% of all smartphones in use. This 200+ million number of iPhones in use is greater than even the most aggressive installed base estimates from the region I’ve come across. But, given my points about the grey market, I find it plausible this is the case given the recent and updated data.

Apple saw aggressive growth in China at the end of 2014 with the release of the 6 and 6 Plus. As I watched network statistics of active devices on a monthly basis in China, I found it fascinating the 6 (4.7″) iPhone was the volume seller. Given 5″ and larger phones were becoming the norm in China up to that point, I assumed the 6 Plus and its larger 5.5″ screen size would be the volume leader. However, with both the 6 and 6s cycles, the smaller 4.7″ iPhone had the larger share of the mix. That has changed with the 7 and 7 Plus cycle. As the tracking metrics by active device will show, during this cycle, the 7 and 7 Plus are nearly identical in their adoption in mainland China.

china_mix

This is the first time since the 4.7″ and 5.5″ form factors have been released in China that the Plus is tracking in line with the 4.7″ model and is actually on a faster growth pace. It could very well pass the 7 next month and lead the mix for the first time. This tells me a few key things about how Chinese consumers view the iPhone.

First, there was not enough differentiation between the Plus devices, other than screen size, to get customers to spend the additional money to have what they perceive as “the best”. Both devices were basically the same in Chinese consumers eyes and in a market where status tied to iPhone ownership is strong, you want to be viewed as having the best and most cutting edge. In consumers’ eyes, that aspiration was relatively equal among the two products. So those who scrimped and saved to buy iPhones but couldn’t necessarily afford one went with the lower cost model. That is all changing with the 7 Plus and the dual camera system as it makes the 7 Plus stand out as clearly the best, most cutting edge of the two. It was really that simple to drive a mix shift in China.

The second thing is, if Apple moves to an entirely new design and/or technology function with the iPhone 8, we are going to see a massive cycle in China. The 6S (and even this cycle with the 7) is relatively weak by comparison. It means many Chinese consumers with a 6 or later are holding onto their device longer since the one they have still performs the job they hired it for. It also includes elements of aspiration and status but also function as well. There is undoubtedly pent up demand in China as many consumers’ iPhones are beginning to age. They are not leaving the iPhone for cheaper Android brands, as some analysis assumes, but rather holding onto them longer. The price of the iPhone is a big reason and, while they will upgrade to a new one and scrimp and save to do it, they simply can’t do it every two years. So they will pick their upgrade cycles intentionally and all signs point to a big swing in China come fall of 2017.

Now that we have more than two years of solid data on Apple’s Chinese customer base, I’m getting more confident we understand their patterns and behavioral drivers. Apple dominates the top tier-2 cities of China and the new brands you are hearing like Vivo and Oppo are growing at the expense of Xiaomi and Samsung in tier 3-4 cities. Understanding the difference between the regions of China is key to understanding the market which, like many other markets, is so large it actually functions like several markets not one. While we have a good handle on Apple’s prospects and consumer cycles in tier 1-2 cities, it will be interesting to see what happens for them in tier 3-4 cities which is where the new customer growth is going to come from. Those cities are just now starting to enter the purchasing landscape and the competition for Apple is stronger in those areas with local players than it was in tier 1-2 cities during their big growth cycle. We will need another year of data on those lower tier cities before we see what true patterns emerge. It will be interesting to see if Apple’s thesis is correct with the tier 3-4 Chinese cities as it was with tier 1-2 markets.

Amazon Go: One Store to Rule Them All

Amazon is very clever. With the announcement of Amazon Go, an entirely new type of store and shopping experience, they have just given us a blueprint of how they intend to dominate the future of retail.

If you haven’t seen the video, I suggest you take a minute to view it. There are a few key things to notice. First, Amazon starts with the pain point–lines. Perhaps one of the worst experiences at retail is standing in a check-out line, going through the transaction process. Amazon’s video starts with the value proposition that hits that nerve and builds from there.

Here is a parallel observation. I have been thinking about why the Uber experience is vastly better than taking a taxi. There is the app and the “not having to hunt down a taxi” part but, more often than not, even if a cab is sitting in front of me, I’ll still request an Uber. I believe it is for the single reason of not having to pay/tip at the end of the ride. One of the most compelling parts of the Uber experience is to simply get out and get on with your business. Not having to worry about paying or tipping eliminates the “friction” at the end of a cab ride. I’m sure there is a deeper psychological point here about humanity and how, after we hunt or gather, we are simply ready to be done. Checking/paying at the end of that journey is something annoying standing in the way of completing our task. It is this view that makes Amazon Go interesting. At least, that is the simplistic part the consumer will understand. Go in, shop, walk out.

Under the hood and behind the scenes, there is a lot more complicated tactics and strategy at play. As you watch the video, reflect on what Amazon is doing with the Go experience. They state they use three core technologies — computer vision, deep learning algorithms, and sensor fusion — to bring about the “just walk out” technology. With that bit of detail, it is likely they are using computer vision with a combination of proximity sensors to know what you picked up. Perhaps there are cameras/sensors near all the items so the computer can see what items you pick up and pair that with your profile/identity/account when you pick it up. Alternately, this could all happen as you walk out as well as sensors and computer vision + RFID or some other local proximity sensors could sense everything you have in your cart and pair it with your account to charge you. Whatever the combination is, there is a lot of technology behind it and that is probably the key point in all of this.

I believe Amazon just took all of retail hostage. I’ve long argued that Amazon is not a retailer. They are, fundamentally, a technology company who happens to be in retail. That is abundantly clear with many things they do but very clear here with Amazon Go. I’ve also long argued that retailers have not implemented technology well enough to compete with Amazon. Largely because they are retailers, not technology companies. My gut feeling has always been that retailers (at least most of them) will not figure this out and will fail at the technology bits and fall by the wayside.

If the direction I feel Amazon is going with the Echo and other first party hardware lines is any indication of their larger strategy, then Amazon is using these Go stores as a showcase for their backend technology — AWS plus a host of hardware that can go into a store and revolutionize and modernize the physical retail experience. Amazon has no intention of building thousands of stores. Those thousands of retail locations competing with Amazon know their physical space is their biggest asset. Amazon just showed them how it’s done, with the caveat of saying, “you can do this also, but you are going to have to use all of our technology to do it.” Brilliant,

Just as they did with the Echo, where they offered an entire platform to third parties to build their own solutions as a part of an AWS service that includes natural language processing, “Lex” the framework for the Alexa assistant, and deeper entrench customers into the AWS framework, they can now similarly offer a framework to retailers to use all the technology behind Go and rake in the margins and the cut of sales. Amazon’s online storefront grew as third parties offered their products through Amazon’s online marketplace and Amazon took a cut. You have to wonder if a similar play is possible with this solution where they can subsidize some of the hardware/sensors costs to big box retailers with the costs of an AWS solution and then take a cut of the transaction.

With any angle you analyze this, it leaves us with the reality that Amazon just showed retailers a solution they can not implement and will likely show them a path to be Amazon customers. Amazon, very likely, just conquered physical retail.

Unpacking This Weeks News – Friday, Dec 2, 2016

Netflix Adds the Ability to Download Select Videos – by Jan Dawson

Netflix announced this week that users would now be able to download some of the videos available through the service on to their phones or tablets. Amazon already has a similar feature (with similar limitations), while YouTube’s Red subscription services offers a download option, though the free version of YouTube does not.

While I’ve seen several headlines suggesting that Netflix’s download feature applies mostly to the company’s original content, this doesn’t seem to be the case from what I’ve seen while browsing through the app. Big name movies such as Kung Fu Panda 3, Good Will Hunting, Cinderella Man and others are all there, as are many popular TV series. That’s not to say all content will be available but this definitely goes further than just Netflix Originals.

This feature now extends the scenarios in which Netflix can be reasonably used into several new ones, including flights and subway rides, and reduces the bandwidth required for watching when on the go, even when cellular signals might be available. One of the biggest limitations of Netflix until now has been it is effectively useless when there’s no connectivity available, or when the connectivity is restricted, as with airplane WiFi. This now removes those limitations for at least some content and makes the service even more attractive.

While much of the focus at Netflix has been on geographic expansion and investment in original content, this kind of investment in features and functionality is important too. The company is already at the forefront of investment in 4K content and this offline viewing will be another useful feature. These incremental improvements in the value of the service will be particularly important in its most mature markets, especially in the US, where it risks reaching a saturation point unless it is able to make the service appealing to new customers.

All of this also further erodes the value of traditional electronic sell-through (EST) and rental services such as iTunes, one of whose main differentiators in the age of subscription content has been the ability to download content before a trip for viewing in the air or while roaming. This isn’t a dramatic change in that dynamic, which was already moving very obviously in the direction of subscriptions, but it should increase pressure on Apple to consider what its role will be in this subscription-centric future for video. That future now needs to combine streaming and downloading content and the competition is intensifying.

Apple May Use Drones to Improve Maps – by Ben Bajarin

I think this signals how important the maps experience is for Apple and Apple customers. They are looking for ways to make the Maps app better and this drone strategy seems to be a way they believe they can get better mapping and better visuals both indoors and outdoors. The other interesting element here is what this data could mean for any future AR/VR play. Google earth in VR is a pretty compelling experience. Similarly, some early value propositions for travel or real estate has been the ability to be immersed in the hotel or condo or city you are interested in to get a first-hand visual experience. Maps or high-resolution images or video of real world objects is a key part of AR/VR so, thinking long term, this could be a play for that future as well.

Google’s advantage, in my opinion, has more to do with accuracy as well as their mapping to have a degree of premonition of your route. There are simply more details of the driving experience in Google Maps and their feature to predict traffic into the future. All of this is because or the massive data they get from having so many people use Google Maps. Obviously, the more people Apple has using Maps, the better every element of the experience can be for current and future experiences.

Whether the exact implementation of using drones is true, there does seem to be enough smoke out there around Apple’s initiatives to improve Maps and make the experience of location visualization much better for their users. We know from a range of estimates that the vast majority of Apple users in markets like the US and Europe use Apple Maps as their primary maps app. It is important to keep making the experience better and build upon that foundation which could turn out to be quite valuable in an AR/VR world.

Nokia is Back! – By Carolina Milanesi

Not really but the brand is back in the phone market under the licensing agreement that HMD Global closed back in May with Nokia and Microsoft. On December 1st, during Slush, the European startup event, HMD announced that, starting in early 2017, they will start to ship Android-based Nokia smartphones.

There is a lot of skepticism around the news, especially in North America, mainly because this market has never experienced the strength of the Nokia brand in the smartphone market. However, brand loyalty and purchase intention in markets such as India, South East Asia, Africa, and Latin America is still very strong for Nokia. These markets have not yet capped when it comes to smartphone growth and the price points needed to capture that growth are, more often than not, lower than where tier one vendors want to go. Local players addressing the space might not be able to leverage economies of scale that comes from being available across markets which is something that HMD will be able to take advantage of.

For many successful Chinese whitebox players, taking their products across borders is not necessarily an option as IP costs will drive their overall prices up, removing their advantage. Aside from licensing the brand, HMD has retained many key channel relationships Nokia held in these markets — a great advantage.

The opportunity in these markets is very much the same as it was for Nokia in mature markets with Windows Phone: first-time smartphone owners. In mature markets, this did not work. Not because of the quality of the Nokia phones but because of the operating system they were running. Nokia’s last attempt to go after these markets with an Android-based device was well received but short-lived due to the conflict of interest which arose from the Microsoft acquisition. In these markets, aside from first-time buyers, the opportunity also extends to consumers who want to upgrade from second-hand phones or unknown whitebox vendors.

We’ll have to see what the final products look like but the opportunity is certainly there for HMD to drive sales. While I do not expect the Nokia name to return to the top of the leaderboard, I see them capturing share from others. What will be key for the longevity of the effort will be to see what the upgrade path HMD will be able to build for its Nokia buyers.

Amazon’s Offensive For the AI Platform of the Future

At Amazon’s Developer Event in Las Vegas, the company came out swinging, looking to be the sole platform for machine learning and artificial intelligence of the future. Their announcements are important in a couple of key contexts.

Thinking about the Echo and Alexa platform, we are at the stage in the game where the early entrant may be the winner or a majority winner. We are in a race for the voice-first platform and the players are Apple, Google, Microsoft, and Amazon. While I’m not going to discount the potential of all four, I believe I can create the strongest arguments that Apple and Amazon are the best positioned to be the dominant players in markets where they compete. Apple, for reasons I outlined here, where they can likely be the default, and Amazon because of the reasons I will lay out. First, I need to make a grounding point.

With voice, we are talking about the opportunity to develop a relationship we are comfortable with. Having used all the main voice first UIs, I still think Amazon is the best because you can address it by name. I know this sounds like something small but it is a big point in how we interact. Saying, “Hey, Siri”, “Hey, Cortana” or “OK Google” are natural ways to speak but saying, “Alexa” is a more organic way to kick off a “conversation”. Yes, the other three can fix this but, right now, we are at a stage where the consumer experience with a voice-first UI matters. The key for all of these companies is to get regular consumers using their voice-first UI and to use it for more than just saying, “play a song” or “set the alarm.” Apple, Google, Microsoft, and Amazon need people to train their AI agents. That will only come as they use them often and for more advanced things necessary for making these agents smarter.

The reason the Echo is interesting to me is it forces you to a voice-first paradigm. This is on point with what Carolina outlined yesterday, where adding a screen could hinder the Echo because it allows the user to go back to an old habit or UI metaphor by using touch instead of voice. This is a similar counterpoint I offer to Apple’s positioning that the best place for Siri is in your computers. The problem with this viewpoint is it allows us to use our old behaviors of touching or typing vs. being “forced” to speak to Siri. Consumers will almost always stick with default behaviors when given the option. The beauty of the Echo is we are not allowed old behaviors but forced to create new ones. It just so happens to be the ones that are helping Amazon take the lead.

It is with this grounding I think about how certain companies are positioned for the future. If Amazon continues on this path, they are likely to have more consumers using their AI interface in ways that are truly helping them build an AI platform than other competitors in the market. This is also a part of their grand strategy in announcing that anyone can now build on top of their AWS platform — including natural language processing, machine and visual processing, and even their artificial agents using a set of tools Amazon now offers.

I think about who else is laying the groundwork for third parties to develop such comprehensive solutions in AI and machine learning and come up empty. Not to discount what Google has done but their strength is in search, not AI. Microsoft has some compelling assets around Cortana but they have yet to prove the masses will embrace these new tools. Apple is focused on a more introverted approach to AI. Amazon is looking to democratize it faster and with a holistic toolset more than the others.

While it is still early, the foundation is being laid. A big part of the analysis is to look at who is laying the right foundation and looking to plug as many holes as they can. Right now, I feel that is Amazon. They are putting the pieces together to offer a suite of tools which will enable the next generation platform of AI and machine learning that can tie together hardware, software, and services from a standard AI and ML platform. The kicker is, anyone can build these tools, not just Amazon.

Interestingly, Amazon has made it possible for all sorts of companies to create competing products to the Echo. Which begs and interesting question: Is the Echo simply a showcase for Amazon’s cloud services which power it? Is Amazon’s end goal to not necessarily make the hardware but provide the platform to enable a new generation of hardware built around their AI platform?

All of this to say, I’m getting pretty bullish on Amazon.

For the interview with Amazon’s VP of Alexa, check out this article by Steven Levy.

Apple in India and Porsche vs. Toyota

We recently conducted an Indian market study in several of the more developed cities with a range of ages and consumer types. I crafted this study with a couple of goals: a deeper understanding of some of the nuances in the smartphone market in India and a better understanding of how Apple and the iPhone are perceived in India. My hopes with the second goal was to gauge what the opportunity for India truly is for Apple. While I won’t divulge the entire study, I want to share a couple of points I found enlightening.

First, even though Apple’s installed base in India is relatively small, the iPhone is the second most owned brand behind Samsung and slightly ahead of Micromax. The massive number of smartphone brands sold in India plays into this dynamic. Second, the iPhone tends to have greater business/professional penetration than consumer penetration. More people who said they have a job in upper eschalons of business said they own an iPhone than any other cohort. Understanding that Apple has a strong brand and brand perception in India is key. Several other surveys I’ve seen on smartphone brand and purchase consideration in India have ranked the iPhone quite high. Our own internal study confirmed this. We took it one step further as we explored some deeper sentiment around Apple and the iPhone and asked consumers which brand they believed was the global smartphone leader as defined by things like brand reputation, product quality, design, etc. Overwhelmingly (61%), Indian consumers said, in their opinion, Apple and the iPhone was the leader.

Similarly, when we asked which brand Indian consumers would make their top preference to own, 66% said an iPhone. However, when faced with actually purchasing an iPhone, most India consumers choose a different brand that is a better fit for their budget. After doing some digging, I feel the best way to articulate what is happening is to use a car analogy. The iPhone is to Indian consumers what a Porsche is to me. I love Porsches and think they are iconic and amazing cars in every way. I’d love to own one. Will I buy one with my own money? No. I can appreciate the Porsche or a Ferrari or any number of luxury cars many of us agree are fantastic but they are simply out of the range I’m willing to pay for a car. This is how I believe Indian consumers view the iPhone.

This is where the contrast between Indian consumers and Chinese consumers stands out. Chinese consumers view the iPhone the same way as Indian consumers, only they are willing to go to extreme lengths saving and doing anything they can to buy the iPhone due to its high status. Indian consumers are much more pragmatic and do not strive for status as the Chinese do. Similarly in the US, with iPhones being subsidized (at least initially and now with very affordable payment plans), the US consumer does not have the same sense that the iPhone is out of reach financially as it is in India.

Apple’s bet is, over time, Indian consumers will rise in affluence as India continues to develop and rise in GDP. As their disposable income rises, the iPhone may seem less out of reach and, hopefully, their brand reputation, design, and all the other things that led Indian consumers to believe they are the leader will still hold true and more of them will choose the iPhone. Of course, we can wonder if they will be too entrenched in Google’s ecosystem by then or if it takes so long that, by the time the Indian market is truly ready for Apple, we may be on to the next thing beyond the iPhone.

The Click-Bait Business Model

One thing that has become abundantly clear as I reflect on the media landscape, post-elections here in the US, is how disastrous the click-bait business model has become. When we started Tech.pinions, it was a direct attempt to add sanity back into the public domain against the damage I was seeing done by tech publications thriving on the model. I won’t link to all of them but if you go back into the Tech.pinions archives in 2011 and 2012, you will see posts arom Tim, myself, and Steve Wildstrom (then the core team) calling out specific articles from publications and trying to shine a light on the deception they were posting.ceboo

The click-bait business model inherently encourages media outlets to be disingenuous with the truth. The danger in so many of these articles is they contain elements of truth but that truth is distorted and accompanied by a jaded opinion or bias. Sometimes, this is referred to as “Yellow Journalism”, defined as:

Yellow journalism, or the yellow press, is a type of journalism that presents little or no legitimate well-researched news and instead uses eye-catching headlines to sell more newspapers.[1] Techniques may include exaggerations of news events, scandal-mongering or sensationalism.[1] By extension, the term yellow journalism is used today as a pejorative to decry any journalism that treats news in an unprofessional or unethical fashion.[2]

journalism that is based upon sensationalism and crude exaggeration.

Examples of this type of journalism or sensationalist headlines date back many years as tactics to sell more newspapers. So there’s no surprise it came to the internet. However, it grew to an entirely different scale thanks to the web. If you can write a good headline, tell part of the truth or bend the truth, or do all of it to tell an audience what they want to hear, then you can have a good business in the click-bait era of online publishing. Since the internet enabled more free websites, which are supported by ads, the click-bait tactic became the way to get the eyeballs necessary to sustain your business. In 2009-2010, I helped run a particular tech website where, while not a total click-bait site, I still saw firsthand how profitable a website could be when it knew it had to use Google Ads smartly and drive massive pageviews to the site on a daily basis. The click-bait business model can be massively profitable but it also comes at a cost I’m not sure the owners of said sites care about.

The “free with ad-supported” business model is not bad but it led to the possibility of creating websites which are genuinely destructive. We need to preserve the opportunity for anyone to have a voice on the internet and the business opportunity to make a living but we also need to be wise about these types of sites and the underlying agendas often found in them.

This is true in all forms of verticals — sports, politics, news, tech, etc. As recent reports have discovered, the click-bait business model has led to a rise in entirely false stories and spoof websites of legitimate news websites. For example, this website, which appears to be trying to pass as an ABC news site, was continually linked to by folks on my Facebook feed. People were linking to articles about politics, the election, or false news items, and saying they came from “ABC News” so they must be legitimate. In fact, this site has no affiliation with ABC News. This is just one concerning example of how easy it is to thrive in a click-bait world and deceive the public.

For companies like Facebook and Google, this is a tricky balance. In no way do we want to limit our First Amendment right of free speech. This article from Ben Thompson yesterday on the topic of fake news was apt. The last sentence in particular:

It’s tempting to make a connection between the Miller fiasco and the current debate about Facebook’s fake news problem; the cautionary tale that “fake news is bad” writes itself. My takeaway, though, is the exact opposite: it matters less what is fake and more who decides what is news in the first place.

I am in 100% agreement it is a more dangerous precedent to allow a third party to determine what is news and what is not. It is, however, unfortunate this click-bait business model has made it more difficult for regular people to distinguish between what is true and what is not or, in this case, what are the facts of the news and what is spin, half-truth, or fabrication.

I have no idea what the solution is. I am encouraged by the trend of subscriptions growing to sites like the New York Times, the Wall St. Journal, and others which will hopefully fuel a new golden era of journalism. I know many people believe some of these news sites lean one way or the other but I’m hoping this entire election process was a wake-up call to the news industry to give the whole truth to the public — as hard as that may be for both the news outlet and their audience to hear.

I am an optimist and I like to look for silver linings. I’m hoping the big observations we can make today of the state of news and media can lead to a renaissance of fantastic journalism and writing where deep expertise and domain specific knowledge paired with fantastic writing and storytelling can again become part of the mainstream media. But we need to educate and/or somehow eliminate the click-bait business model or it may never happen.

Weekly Stat: Two Charts on Consumer PC Behavior

In the last few weeks, there has been a lot of discussion about the PC market. I have maintained the market is still contracting and consolidating. Only a handful of hardware vendors will continue to own share of this contracting market and most of the positive gains by vendors will come from stealing customers from their competition. The PC category is one I keep a close eye on and one my firm gathers a lot of research on. We believe the PC, in the shape of a notebook or a desktop, remains an important hardware product for long form workflows and productivity tasks but we recognize not every human on the planet has a use for these machines.

Several things have changed in corporate and consumer PC environments. In corporate, more choice has entered the work place. You now have significantly more options to pick from with form factors, features, and brands of PC you want to use in your work place. IT departments have started offering a more robust menu of PCs to employees, and this is a positive shift from the way IT used to deploy corporate PCs. In the consumer space, we are seeing both longer refresh cycles overall (the average consumer PC lifecycle is 6.5 years) and consumers beginning to spend more on their PCs because they know they are keeping them for a long time — they view them as long term investments. From consumers, who are also heavy users of PCs in the workplace, we are also seeing a more work/home divide where the corporate-issued PC is just used for work and the individual is choosing other devices to use for personal computing tasks.

I want to share two charts from our consumer facing study. We focused this particular study on more common consumer use cases than looking at the consumer in the enterprise, a different study altogether.

In our research at Creative Strategies, we add a lot of questions to our studies that are driven by our qualitative work to truly understand the mindset of the consumer. We do this by adding questions around sentiment, or overall phrases they agree with, to help us quantitatively see some mindset and behavior patterns. This helps us understand more why things happen in the market and yield deeper insights for our analysis. I’m sharing here one question of several designed to understand the consumer mindset for the PC category.

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While this is one picture from our overall study, it does bring out a few important things. The biggest takeaway is consumers aren’t saying they don’t see a need for a PC at all, just they don’t see a need for a new one. As you can see, only 3% said they question their need for a PC. Yet, over 50% simply don’t see a need for a new one. This is always the hardest thing any hardware company is up against with consumers because they are overwhelmingly content most often. Innovation’s goal is to shake the crust of contentment off of consumers. As hardware products reach maturity, this becomes much harder to accomplish. There are some other fascinating data points here, and I’ll let you chime in with your own interpretations.

Perhaps this next chart highlights why consumers are so content. This shows the most common tasks consumer do each day with their PC. As you can see, in many cases, none are computationally complex or taxing to a modern day PC which has been good enough at many of these tasks for years.

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Note some of these responses are from consumers who use a PC at work so the responses are from a mix of consumers who use a PC daily for work and those who do not. Regardless, it is interesting to look at most common daily usages as a barometer to understand what people do with their devices.

One other thing that bounces around in my head from this last chart is how many of these tasks can be done on something other than a PC. I think about this from the viewpoint of, if consumers wise up to other form factors which may suit their needs better, will their device behavior change? We see some of that already when we explore a consumer’s awareness of things they do more with their smartphone than their PC or main tasks the smartphone has taken from the PC. But the fact remains, the larger screen computing device is still relevant, but its role has changed.

Consumers will upgrade when their machine feels old and slow. For those of us trying to size that up, we simply have to use our models around age of PC in the market and the estimated number of devices in the market which may fit a “need to upgrade this year” profile. I wish the picture was rosier across the board, but consumers tend to be simplistic. We often forget that.

Why Google, Not Apple, Risks Losing the AI Platform Battle

I know how crazy the title of this post sounds. It’s hard to think of another company better positioned than Google and their decades-long business of machine learning to succeed when it comes to AI. However, there are some underappreciated elements of this debate I’d like to throw into the discussion.

Baseline Assumptions and Market Fundamentals

We need to clarify what the baseline assumptions are. First, the next platform will be born from the mobile computing foundation established with smartphones. There has been no larger democratization of computing than the super computer in our pockets. This single movement has brought a computer to over two billion people and will eventually connect over four billion globally. In retrospect, the PC, in its desk or lap-based form factor, was actually a barrier to bringing a computer to every person on the planet.

Second, iOS and Android are the dominant mobile operating systems and therefore both will play a key role in ushering in the next platform whatever it will be. Apple’s iOS has an active installed base of around 850-900 (iPhone + iPad) million people and Android has an active installed base of around 1.8-2 billion. But it is in this part of the discussion we have to recognize that Android running on nearly two billion devices does not equate to Google’s version of Android or a version of Android that ties to Google services like Maps, Play Store, Search, etc. If we exclude China, we eliminate somewhere between 600-700 million devices, meaning a version of Google’s loosely controlled Android OS, with some of their core services, runs on about 1.4 billion devices, mostly smartphones.

Third, we must recognize Google’s somewhat loose control of Android with their partners. They require their major partners like Samsung, HTC, LG, Huawei (outside of China), Xiaomi (outside of China), Micromax, and many others, to pass official certification and agree to specific terms in order to sell a device that includes essential items to compete in the global market — Google Play store, Maps, search, and other core Google services. However, they also allow these same partners to add some of their own custom services, some which compete with Google’s core services, in order to add an element of differentiation.

Enter Google Pixel

Without understanding my third point, it is hard to appreciate how strategic the Pixel is to Google’s future and specifically, their future where an artificially intelligent smart assistant becomes something a consumer interacts with many times throughout the day.

The Pixel is positioned specifically as the only smartphone on the market that exemplifies the best of everything Google. This statement alone is a recognition of the diverse landscape that is Android where Google’s most important partners are NOT shipping devices which represent the best of the Google ecosystem as they try to add value on top of Google services and, as a result, share the customer with Google. The Pixel is purely and simply Google’s attempt to provide a solution to the market where they do not have to share the customer with anyone else.

This is a critically important point, as it is tactically important for Google to own and not share the customer when it comes to AI if they are to truly have a role in the platform of the future. Here is where the hard numbers make my point.

Do the math on the major partners Google shares the customer with and we see the issue Google is faced with when it comes to an artificial intelligent personal assistant. These core partners are likely to add their own AI agent to their Android devices, and will leave Google’s off, so long as Google gives them the option to:

  1. Samsung
  2. Huawei
  3. Xiaomi

Those three are the ones who are already confirmed to be working on their own set of AI personal agents. It is possible a number of other growing Android OEMs like Vivo, Oppo, LeEco, etc., will also integrate their own agents but let’s just assume it’s only Samsung, Huawei, and Xiaomi. The issue for Google is those three vendors alone make up on average between 34-38% (roughly 130 million per quarter, north of 500m annually) of all quarterly Android smartphone shipments. Perhaps most importantly, they make up the most important 34-38% because those three make up the vast majority of smartphones that cost more than $300 — a more valuable customer to Google. Right there, Google’s AI assistant is likely locked out of 34-38% of the Android smartphones sold each quarter. Add Apple, since no Google AI assistant will be tightly integrated to iOS because Apple has Siri, and Google is locked out of an average 47% (nearly 200m per quarter and ~800 million annually) of smartphones sold each quarter, but greater than 90% of smartphones sold are more premium tiers — the most valuable customers. Assuming Google does let their assistant be shipped on other Android smartphones, you are talking the bottom of the barrel vendors who have no brand and sell most of their phones for under $300 to customers who will provide little to no value to Google on the AI front. This is the real issue Google has in front of them in getting their AI assistant into the hands of billions of customers Google can monetize.

The Pixel for Google is an offensive play against this dynamic to try and gain share in a critical part of the market where they can control the AI element and bring the purest version of their AI to a set of customers they don’t have to share. Of course, Google will offer their assistant to their partners but, in reality, few will take them up on the offer. The only other play, which is possible but would add a gallon of fuel to an already extremely hot fire of anxiety of Google’s partners toward them, would be to force their partners like Samsung, Huawei, Xiaomi, etc., to ship the Google Assistant on their devices as part of their certification to ship other services like Google Play store. Google, however, has to closely walk the tightrope of monopoly-like behavior in what they force on their partners when it comes to core services. My sense is they will leave Assistant as an option. Which, in turn, means they have an exceptionally narrow path to try to get their AI assistant into the hands of the masses. To put it simply, Google either delivers it to consumers themselves through their own hardware or it is unlikely to go anywhere.

Android may have the vast majority of smartphone market share but that reality will not translate into Google’s AI having the vast majority of share in the scenario I lay out above.

From a smartphone and tablet hardware standpoint, Apple has the largest installed base of customers followed by Samsung, then Huawei. Arguably, these three have the greatest potential to share the market for AI personal assistants since these three brands have the majority of consumers on the planet owning one of their smartphones.

Weekly Stat: E-commerce Purchasing Trends

One of the many things I keep an eye on is overall trends in e-commerce. If you have followed my analysis, you know I am still waiting for a true tipping point in e-commerce. As I shared here, worldwide e-commerce is still less than 10% of retail commerce. This varies by country — markets like India and China have a much higher and more balanced percentage between online and offline. Developed countries like the US, the UK, and key parts of Europe range between 20-30% of online retail as an overall percentage. Most analysis on this subject is generated on the assumption this is a “Winner Take Most” category. Meaning, Alibaba in China remains dominant but other vendors like JD.com and other more segmented and focused competitors can carve out a niche but not challenge the dominant players. Similarly, Amazon is viewed as a winner take most in the US, UK, and several other markets where they are investing heavily in logistics. This does not mean other players will not take share, only that there will be a few dominant players and a host of smaller players. It is critical to understand the winner take most thesis applies to specific markets and is not a worldwide view. So, the winners in each market will vary heavily vs a worldwide dominant player in e-commerce.

Thre are many ways you can slice who the winners and losers may be when it comes to the point of purchase but I think an interesting way to start looking at this is to understand the dominant categories that are purchased online. From our data collection practices, I’ve charted the most recent look at Q3 e-commerce categories consumers said they purchased online in the last 30 days.

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We have quarterly data for over 90 categories but I’m showing you the top 21. With the exception of a few areas, you can sum up this list by fashion and consumer packaged goods. This is one reason why most analysis and data on Amazon has them threatening department fashion stores like Walmart and Target. If consumers start to get more comfortable ordering common and frequent CPG items online, then the likes of Target and Walmart are diminished to only the things you need in a pinch and ASAP. Obviously, if Amazon can also figure out within-the-hour deliveries, that can take some of that share. But I’m not convinced Amazon can blanket their markets with that solution.

It is abundantly clear the fashion department stores are in serious trouble. Fashion and clothing shopping behavior is clearly changing in ways many department stores can not adapt to. This chart from a Morgan Stanley clothing retail study shows some of the changing behavior in purchasing trends at department stores.

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The depth of selection and aggressive pricing strategy which made big retailers like Walmart, Target, Macy’s, JC Penny, etc., all successful are dead in the water value propositions for online commerce. E-commerce will always have more selection and better prices. The value of physical retail is being reduced to instant needs and that may not be sustainable either.

As I mentioned at the start, looking at the categories where purchasing behavior is changing is key to looking at the short and long term trends of which parts of physical retail is about to be disrupted and which may have a fighting chance.

Mobile vs. PC Commerce

One of the main stats we track is what is happening globally with m-commerce vs. PC/desktop/notebook browser-based commerce. In many developed countries, we are yet to truly see the shift from desktop-based commerce to mobile-based commerce as the majority of transactions. Perhaps even more interesting to track as a part of this analysis is how much headroom e-commerce has to grow as a part of overall purchases worldwide. Here is the current share of e-commerce as a percentage of retail transactions and the forecast from eMarketer.

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As you can see, e-commerce has tremendous upside globally. It is one of the main reasons to take the long view of companies like Amazon, Baidu, and others who are poised to dominate the share of online shopping in many parts of the world.

Our belief is the mobile device will be the catalyst that will drive e-commerce to continue to aggressively take share from physical retail. This is not to say physical retail will not participate in this trend but that the mobile device will become a central gateway to purchasing many of our most common goods from both online and physical retail outlets. Part of our thesis here is because of our conviction of things like Apple Pay and Android Pay to eliminate many barriers to friction in transactions across the board. As consumers become more comfortable with mobile wallets, we believe this will act as a catalyst to drive a hyper growth cycle of e/m-commerce.

Another part of this thesis is built from what we see in markets like China, where mobile wallets within WeChat and AliPay are driving the same kind of cycle we think mobile wallets can drive in the US. While PC penetration is nearly 60% of the online population in China, purchasing from the mobile device has overtaken PC based e-commerce thanks to mobile wallets. In India, only 10% of the online population has access to a notebook or desktop and the rest of the online population uses only a smartphone as their primary computer. This is true of markets like Indonesia, Vietnam, Philippines, etc., where mobile-only is the norm.

As of this latest quarter, here is a snapshot of a few select countries and the percentage of consumers who said they buy a product online each month via either PC or mobile device.

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As you can see, the more developed countries with a larger and more mature PC (desktop or notebook) installed base is still seeing the majority of online transactions from traditional PCs whereas, the more mobile-first or mobile-centric regions have more mobile e-commerce transactions than desktop or notebook ones. However, it is worth noting that, a year ago, both the US and the UK were in the low 20% range of mobile commerce and are now well over 30%. We think when mobile wallets are more widely accepted we will see a sharp S-curve take place in mobile commerce vs. the slow steady line we see today. It is also worth noting that the younger millennial demographic is already much more mobile-centric in their buying habits in countries like the US and the UK. Millenials are already well over 50% who say they engage in monthly buying of goods from their smartphone. Highlighting another element central to our thesis that younger generations in developed parts of the world are showing many similarities to other mobile-first consumers in other parts of the world.

Again, this is not to say that only Amazon, or Baidu, or other online market places are the only winners here. It is a recognition that even physical retail must stay on the ball or risk losing customers. WalMart, for example, is struggling to figure this out as Amazon continues to eat much of their business. Retail used to be about breadth and depth of selection and price as a basis of competition. Hence, WalMart’s advantage for the better part of the last few decades. However, every single advantage big box retail offers is destroyed by online merchants like Amazon or Baidu. Retail has to change if it is to compete.

This was a central theme from the Money 2020 conference I presented research at last week. The value of retail needed to move to more customer experience-based vs just breadth of selection and price. It’s hard to see how a WalMart, Macy’s, or Best Buy survives this transition but companies like Starbucks, which offer “order ahead” via mobile, or Home Depot, which offers order ahead or inventory searching in store for contractors, are adapting nicely. Home Depot, for example, now sees 40% of their online store transactions coming from in-store via their app. This is fascinating since last year at this time, it was only 10%. Contractors are seeing a huge need met via order ahead and in-store ordering at other locations when the current doesn’t have stock. These are two examples of how mobile adds a new dimension to physical retail and the kind of enhanced commerce experience physical retail needs to develop if they are to stay competitive.

If retailers think Amazon and others threaten them today via mostly PC-based commerce, just wait unitl they see what happens when mobile starts to play a bigger role.

Painting a Clearer Picture of the Global Smartphone Market

Oftentimes, our peers in the analyst community put out press releases on category and vendor market share numbers and the true insight of the market gets lots in a set of very generic statistics. I understand why they do this. They make them fuzzy on purpose so people inquire about their data and pay them for the broader cuts. My frustration with this approach is it almost always leads the press astray with a headline because the media rarely understands how to ask the deeper questions. So a headline like “Nobody is buying an Apple Watch” gets published when it is total nonsense. I cleared this up in this piece where I outlined why we are revising some parts of our model for wearables going forward. That was just one example (of many) that happens when market share numbers get reported. In an ever increasing effort to more thoroughly educate our readers, I’ll make this point. Statistics are not insights. The insight comes from how those statistics are interpreted and the deep truths of what is happening in the market and why are communicated. Prepare yourself for a flood of similar headlines around the smartphone market.

I’d like to make a few generic smartphone market points then focus the rest of the article on what is happening in China, since that is where I foresee most of the disingenuous data will come from.

Globally, there are only six brand names worth keeping an eye on right now. They are, in no particular order: Samsung, Apple, Huawei, Xiaomi, Oppo, and Vivo (I am leaving LeEco out for the moment until I see where they are in six months). Oppo and Vivo are subsidiaries of a larger Chinese company called BBK, who also has a financial interest in OnePlus. Only Samsung, Apple, and Huawei sell more than 100m smartphones per year and it remains to be seen if any other brand can cross the 100m annual threshold.

This chart, which I have adapted from Morgan Stanley research, paints what I think is the best look at understanding a critical point about the smartphone market — pricing.

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As you can see, the chart paints a picture of who makes money and who barely does, even if they ship large volumes of smartphones each quarter. This also tells you where their focus on the market is and thus, where their growth can come from.

Apple sells annually more than any other brand in the premium tier of the market. They have a near monopoly on the high-end and that is extremely unlikely to change anytime soon, if ever. Only Samsung should even be considered in the conversation for high-end smartphone sales. For them, that equates to around 60-70 million high-end phones each year (potentially declining) to Apple’s 180-190m high-end phones sold annually (potentially increasing). For Apple, in nearly all the big markets where they compete, they have nearly saturated the number of customers who can afford north of $500. So, their cycles are now largely replacement driven or driven by switchers. Either way, it’s a slower growth curve than when they were adding tons of new users. This is why analyzing Apple’s growth prospects now largely depends on understanding replcement cycles, payment plans, and other dynamics of replacement markets.

Interestingly, it appears global smartphone shipments may be up in 2016 which is contra to what most were forecasting early on. I attribute this to a much more predictable upgrade cycle in the developed markets than what was anticipated in early 2016. This, however, is leading many to believe 2017 may be more of a down year and most consensus data we see has people shifting the dynamics that were leading to negativity toward 2016 to 2017. Then again, look for accelerated growth overall for the category in 2018.

When it comes to a big key market like the US, we are seeing what looks like a bigger upgrade cycle this fall than originally thought. Which means it is possible next year’s cycle is not as strong. For Apple, the idea of a 2017 super cycle may be more myth than reality. Right now, China is the most interesting market to talk about as some new developments are starting to take shape.

What will get missed in a lot of the China market share forecasts is the biggest factor changing the shape of market share is tier 3-6 (the lower income tiers of China) are starting to contribute to the growth of China as a whole. When you look at brands I mentioned before like Oppo and Vivo, which look to having impressive gains, they are acquiring those gains given their strategy to attack the tier 3-6 parts of China with offline stores and nicely designed phones and specs in the $200-$300 range which is largely considered mid-range nowadays.

The rise of Oppo and Vivo are showcase examples of a major theme about how developing a strategy for the next 1-2 billion consumers who are yet to get smartphones in the least developed parts of the world is a completely different strategy than how you go after the current most profitable billion plus consumers with more mature and refined interests and greater disposable income. Only a handful of companies can do this and globally I think Huawei is building this strategy as they look to Africa and other continents with hundreds of millions of people yet to get a smartphone. This dynamic will likely boost the market share of certain vendors but it will be important to know what price point they are shipping in volume as it will be in the lower tier. Apple is clearly not going after this audience and it is unknown how Samsung will go after them. Both of these companies seem to be hunkering down to go after customers who don’t want to compromise and that self-identification only comes with time as consumers themselves learn what they want.

An interesting example of this is in India where it is clear Apple is not the favorite (due to their high prices) to see a big share gain any time soon. However, in a recent study my firm conducted in India, we asked which brand consumers felt was the market leader. Overwhelmingly, 61% of consumers in India said Apple was the clear market leader citing a range of reasons, mostly around software quality, design, etc. They acknowledge Apple is the best and said Apple is the phone they WANT to buy. Yet, they still are not going to, for a variety of reasons our research indicates Apple can solve.

This is a prime example of my thesis that, as portions of consumers in immature markets mature, they will slowly gravitate toward Apple. Even if the growth happens incrementally, I’m convinced Apple will still grow their unique consumer base, which could hit a billion users in the not too distant future.

There will always be tiers of smartphones but I maintain the strongest fuel for growth is brand. We can bet on those who have strong global brands. Companies like Xiaomi, Oppo, and Vivo are attempting to make a global brand but they will live or die on their success to become a brand consumers trust and love.

There is no question China is a very big market where we will see many companies attempt to create a global brand. Right now, Samsung, Apple, and Huawei remain the most fundamentally sustainable global brands, with a variety of different market nuances helping each independently. The main story to watch is if Vivo, Oppo, Xiaomi, and perhaps LeEco can break free from the cutthroat China market and become global brands. This is the hill they have to climb and it is going to be more costly than I believe they anticipate.

One last point on pricing. I maintain that, if you start in the low-end/low mid-range, it will become nearly impossible to ever go upstream too far. Once you sell a cheap phone, I think a “cheap” stigma will always be on the minds of consumers and will be very hard for those brands to compete in segments with Apple and Samsung. This is still a thesis but we have yet to see evidence it is not true in computing segments. I’m happy to be proven wrong and will point it out as a key case study if it happens.

I leave you with my estimates for Q4. While the line looks bad for Samsung, our research indicates it is likely they can recover from this as most of their customers will remain loyal. It could impact their growth prospects, however, which is a key dynamic to keep an eye on.

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Q3 2016 Earnings Preview

Earnings season is here again. Netflix reported its results on Monday afternoon and seemed to provide a pleasant surprise for investors, who sent the stock up 20% after hours. We’ll see all the other big names reporting results in the next two or three weeks as well, so I’m providing my usual roundup of what to expect from some of the most important consumer technology companies.

Alphabet

Following stories which suggest a certain amount of belt-tightening at Alphabet, it’ll be interesting to see if there’s evidence of that in its financial results this quarter. There has been some sign of this already in things like Alphabet’s capital expenditures and the performance of the Other Bets segment but I suspect there should be more evidence in this quarter. There will also be increasing pressure on the Google segment to start quantifying its cloud revenue, given its recent heavy emphasis on this business and the continued lack of financial transparency here relative to Amazon and Microsoft. There will also no doubt be questions on the call about pre-sales for Google’s new hardware products – Home and Pixel – though of course these started selling and shipping after the quarter was over.

Amazon

Speaking of Amazon, it will likely continue to show strong progress both in its core e-commerce business and in its AWS cloud services. Another interesting milestone to watch for is the percentage of paid units which come from third party sellers, which is due to cross the 50% mark this quarter. That’s symbolically quite important for Amazon, whose own sales have always been a majority of total sales on the site. But it’s also important financially, because Amazon’s gross margin on these third party sales is higher than on its own sales. We might well see AWS cross 10% of total revenues in Q3, though it’ll quickly drop well below that again in Q4, as e-commerce sales rise dramatically in the fourth quarter each year. Also worth watching is whether Amazon can achieve four straight quarters of profitability in its International business, which has historically struggled to drive a profit. Capital expenditures and the associated depreciation and amortization have also been falling lately as a percentage of revenue, which has helped drive the improving margins we’ve seen lately. Is that a sign Amazon has run out of ideas for things to invest money in?

Apple

With its car efforts in the news again this week, it’s inevitable Apple will be asked about Project Titan on its earnings call and at least as inevitable executives will refuse to answer questions about it. Near term, however, all the attention will be on pre-sales of the new iPhones and for indications these may provide a potential rebound in iPhone sales and, therefore, Apple’s overall revenues. I think Apple’s revenues will rebound either at the tail end of this year or early next year and we’ll have official guidance for calendar Q4 2016 from this quarter’s earnings. That guidance number will be particularly interesting as it will be issued two days before a rumored event to announce new Macs. Macs don’t have an outsized impact on overall revenues, especially in a December quarter typically dominated by iPhone sales, but I’d expect analysts to try to tease out the effects of pent-up demand for Macs given how long in the tooth the current product line is. It’s also well worth watching the iPad revenue line, which was positive in growth terms last quarter for the first time in years off the back of much higher ASPs driven by the 9.7″ iPad Pro. Will that happen again this quarter?

Facebook

Facebook continues to be one of the few companies that consistently provides impressive results quarter after quarter with little let-up. Even at its current scale, it achieved 60% year on year revenue growth last quarter and that’s even before any of its recent acquisitions make any significant contribution. Ads continue to provide over 95% of that revenue so one of the big questions this quarter has to be whether there’s any sign of that changing. Though there may be little evidence of it so far in the actual results, I’d expect analysts to ask how new initiatives like Workplace, Marketplace, and others will contribute over time to the non-ad revenue at Facebook. I’d also expect to see ongoing requests for more transparency in how Instagram performs, given many of Facebook’s ARPU metrics somewhat misleadingly include revenue but not user numbers for Instagram. I would also expect ongoing scrutiny on the question of ad load and whether Facebook is approaching peak loads yet, especially in its most mature markets.

Microsoft

Interestingly, Microsoft has already announced it will provide a couple of additional financial metrics this quarter, including both gaming revenue and gross margin for its “commercial cloud services”. The former will include revenue from hardware, software, and services, which is a business line that’s a little under $10 billion a year at present. The latter will be useful for gauging the profitability of the cloud business at Microsoft on an ongoing basis. This is another useful step toward more transparency from Microsoft in this area but, given how many things Microsoft throws onto the “cloud” pile, it’s hardly a like-for-like comparison versus Amazon’s AWS segment. Because Microsoft doesn’t break this cloud business out separately, it doesn’t currently have a reporting segment that does better than single digit growth on an annual basis and it badly needs to tell a better story of where future growth will come from, especially in the consumer market.

Samsung

Samsung has already – twice – provided preliminary numbers for Q3 and they’re obviously heavily impacted by the Note 7 issues, which will be a major area of focus when the full and final numbers are reported. The Note 7 will have a significant impact on revenues and on profits, both from forgone sales and the cost of the recall and the devices involved. But it’s worth looking beyond that too – Samsung has been growing and increasingly profitable again in recent quarters and, although it will certainly take a hit here this quarter, it’s worth looking for longer-term signs these trends will continue (or evidence to the contrary). The semiconductor business, in particular, has been unpredictable lately, and it would be good to see some more stability there going forward.

Weekly Stat: Top Brands Fueling iPhone Gains

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

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

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

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

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

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

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

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

Long Live a Free Twitter

Many of you know my love of Twitter. A major part of my role studying this industry is to gather information and stay on top of everything as close to real time as it happens. Twitter plays a significant role in my daily workflow to do that. I don’t know exactly how much time I spend daily on Twitter but it is significant. Just look at my top app in usage the last 5 days.

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Twitter’s journey has been an interesting one. In the beginning, we thought they were a social network. Now, they say they are a news service. In reality, both are true but news may make more sense to more people. What makes Twitter fascinating is the experience that everything happens first on Twitter. Whenever a major news story happens, it seems to go big on Twitter first then everyone else catches up. If I’m not on Twitter and I hear of something major, the first thing I go to is Twitter to see what is happening and, more importantly, what PEOPLE are saying. The voices on Twitter are broad and dynamic. To read a story on a news site, I get one voice whereas, on Twitter, I get many voices in near real-time — both professional journalists and regular people. It is the most unique blend of news and conversation I’ve ever encountered.

I do, however, recognize not everyone uses Twitter like I do. Their active user base is somewhere in the 300-400 million range with a potential audience size of ~700-800m logged out users )those without an account who still see content from Twitter in some fashion). From data we see every quarter, we are able to track a range of behaviors related to Twitter. Compared to other social networks or news apps, Twitter has a relatively engaged base. 21% of consumers say their average daily time spent on Twitter is 30 minutes to one hour and 19% say they average 1-2 hours per day. This ranks among the top of all social networks we track in terms of engagement. So, while Twitter’s base is not as large as Facebook’s, it is as engaged or more so than most of Facebook’s active accounts.

The top five most common actions, from the most recent Q3 2016 Twitter behavior data, in order:

– Read a news story (by far the most common activity)
– Liked a Tweet
– Watched a video (not a live stream)
– Looked at trending topics
– Clicked on a tweeted link

What you notice about these activities is none of them are actually tweeting. It confirms my early analysis that Twitter is more attractive to the mainstream as a consumption service than a broadcast service. This seems obvious now but much of the criticism of the platform several years ago were people claiming the service was useless because “who cares what I had for breakfast today.” This completely misses the point that broadcasters have reasons to broadcast. They report news, are celebrities, etc. and. for most people, Twitter is simply a near real-time medium to consume that content from broadcasters. Twitter is not actually different from a magazine, website, TV show, news program, etc., with the exception that it is more real-time and allows for the possibility for two-way communication. Again, unlike any other medium.

The other interesting behavior in the top five activities is looked at trending topics. This behavior has grown more over the past two quarters than any previous time since it started being tracked. In both Q2 and Q3 2016, it grew 60% QoQ in its rank as a core behavior. It was not in the top 10 prior to these two quarters. Which, again, suggests the mainstream is embracing Twitter as a content consumption platform.

Many people seem to think Twitter needs to be bought. In my opinion, only Facebook or Google made any sense to buy it and, if neither were interested, then let Twitter be free. Those two companies could have let it keep on doing business as usual and just slotted it into their advertising buying program and added Twitter metrics to their own to sell ads. Considering both these companies are off the table, I’m inclined to want Twitter to stay independent.

Lastly, perhaps the most interesting thing of late is Twitter starting to broadcast live content. You can watch a Thursday night NFL game via Twitter. I watched the US presidential debates last Sunday via Twitter. Recently, Bloomberg West started streaming on Twitter. The list of streaming content options on Twitter is increasing and the feedback I am seeing is extremely positive. I honestly thought it would be more of a gimmick when I first heard Twitter was lining up streaming deals but, having experienced it, I like it quite a bit more than I thought. Many others I talk to seem to agree. It seems like we active Twitter users were adding Twitter, via a second screen, to our TV watching when in reality we needed to add TV to Twitter. I really believe Twitter is on to something here and I expect their engagement metrics will only accelerate their ability to line up content.

The trick is to capture the new eyeballs they get from live content and turn them into consumers of more media on the platform and get them to use the service more. This has been the issue for Twitter for some time and my sense is, this opportunity around live is their best chance to grow their user base. And, for the moment, I am convinced their best chance to execute on that challenge is to stay independent.