How to Turn Around Samsung

In my continual analysis of Samsung for many in the industry, I have frequently pointed out the fundamental issues that have led to their current struggles. I had a friend remind me that, over two years ago, I gave a presentation to his VC firm where I pointed out Samsung would face struggles. He reminded me that, at the time, it sounded crazy but in the end I was right. Through our discussion, the topic came up on how to turn Samsung around. I decided I would write up my thoughts.

The Heart of the Matter

Ultimately, Samsung’s fall was fully predictable. In modular ecosystems (ones where you ship a core part of your product or experience which belongs to someone else) will always be susceptible to text book disruption. Samsung wanted to compete with Apple, and they did for a brief time, but ultimately Apple was never really their competition. Other players in the Android ecosystem were, and unfortunately for them, other vendors created good enough hardware that is continuing to eat into their market share.

I highlight this reality in my post on the regionalization of the smartphone market. If you recall that post and the charts that accompany it, you recall in every market but their own in South Korea, Samsung is losing share to the local player who has home field advantage. In China, it is Xiaomi and a host of other Chinese vendors. In India, it is Micromax, XOLO, Lava, and a few others. In the US, they have never led in quarterly sales.

The culprit is the Shenzen ecosystem. This is a radically efficient and rapidly scaling ecosystem of groups of manufacturers who can take a product from nothing to time to market in less than a month. A leading SoC provider from China told me they can get a new customer up and running and in the market with new smartphones and tablets in less than two weeks. Any company can enter this ecosystem, and build “good enough” products to be extremely disruptive.

As an aside, I had a colleague mention, as we spoke about the Shenzen ecosystem, that all this ecosystem needed was a good idea. Now they have Kickstarter for ideas. The key point is product coming out of this region is getting really good.

The Shenzen ecosystem is enabling local manufacturers to build high quality, good enough products and challenge the foreign brands. We are hearing about new smartphone companies coming out of China, Brazil, Vietnam, Europe and more. Local vendors’ home field advantage fueled by a Shenzen ecosystem is starting to rival Samsung with scale and is the thorn in their side.

So what can Samsung do? The obvious answer is chase the low end. However, I think a more interesting alternative may exist.

Procter and Gamble

Why am I bringing up Procter and Gamble in a tech article about Samsung? It is because, as we connect the planet with consumer electronics at extremely affordable prices, I believe we will see similar dynamics to consumer packaged goods come to the consumer electronics industry.

What makes Procter and Gamble successful in global markets is how they regionalize their products and brands. P&G spends a great deal of time researching local markets, understanding consumers needs in those markets, and then creating solutions that meet the unique needs of a region. Often, they use a brand unique to those regions and they market these products differently everywhere. Consumer packaged goods is both commodity but also a continual fight for differentiation. As smartphones reach $10, and as tablets reach $25 it seems inevitable nearly all the dynamics of regionally focused brands, products, and solutions found in consumer packaged goods will come to the tech landscape.

For Samsung, it is essential they get scale. They are oriented in a way many of their core business components depends on the product groups to move significant volume. For the last decade or so, Samsung has achieved their scale by employing a fast follower strategy and executing that strategy at scale. I’m not sure any tech company on the planet is capable of doing this the way Samsung can. This is why they are the most interesting to follow a model like Procter and Gamble’s.

Samsung can ultimately combat the regional brands, who are eating their lunch, by creating regionally focused brands, product, services, and marketing of their own. This would require some significantly different ways of thinking within Samsung to actually do what I suggest. Yet other than just chasing the low end, I’m not sure how else they can recover their former scale. Following Apple is no longer a viable option for growth.

Ultimately, it can be argued the best thing that could happen to Samsung is for Apple to do something truly innovative. The problem is, by being modular, anything they do will be copied and at much more aggressive prices. Apple’s monopoly on iOS allows them to sustain a premium strategy. Samsung doesn’t have such a luxury.

Mobile Payments: On the Cusp of A New Era

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I hope everyone downloaded and enjoyed my tablet report. More to come on the matter as we believe the tablet category will begin to heat up from an innovation standpoint over the next few years.

There is a lot of relevant news in the days leading up to Apple’s fall iPhone event. Our Insiders will be happy to know four of our writers have received their Apple invites and will be at the Apple event — digging into and analyzing all we see and hear. Myself, Tim Bajarin, Bob O’Donnell and Jan Dawson will all be in attendance. We will have a healthy range of Insider content and will also do some video analysis after the event with hopefully all four of us. Doing analyst roundtables in video form with the authors mentioned above is a feature we want to start including for Insiders as well.

Enjoy your Labor Day weekend, and get ready to hold on to your seats for all the interesting developments we expect over the next few months.

— Ben Bajarin

Understanding Mobile Payments

With the latest news from Re/code that Apple is looking to partner with American Express, along with the latest rumors the iPhone 6 will support Near Field Communication (NFC), it seems as though the mobile payment era is upon us. As I pointed out in this insider article on mobile digital identity, Apple is in a unique position to provide the hardware, trusted ecosystem, and other necessary components to take a leadership position in mobile payments.

Regardless of how you feel about Apple, they move the market. Apple typically leads and the market follows. With the significant number of premium customers they own, it is arguable that it is necessary for Apple to lead in mobile payments to truly develop the market, particularly in the US.

In many parts of Europe, mobile payments are becoming more ubiquitous every month. However, in the US, the infrastructure for mobile payments is lacking. We have an interesting example about the willingness for US consumers to spend money via a mobile device if only the right infrastructure existed. Starbucks CEO gives us insight from late in 2013 about the type of volume Starbucks does with their mobile payment solution.

Today with 11% of our U.S. and Canada in-store transitions being paid for with a mobile device, Starbucks is far away the clear leader in mobile payment. We are encouraged by how our customers have fully embraced our mobile apps as the most convenient way to pay, reload and keep track of their loyalty rewards. With the current average of over 4 million mobile transactions per week and more than 8 million customers using our mobile app, Starbucks mobile platforms are fast growing customer touch points. Through them we are communicating with and delivering innovation to our customers in a way that no other retailer can and on the horizon, our enhancement to our mobile apps that include mobile ordering and digital tipping are on its way.

We continually hear from retailers in the US they are ready to embrace mobile payments and are actively looking to invest in the necessary infrastructure over the next few years. Globally, we hear the same in many regions as well. It does appear the market is ready to begin to embark on a paradigm shift to mobile payments.

Mobile payments can take many forms, but as you can see in this forecast from Forrester, proximity based mobile payments are poised for rapid growth over the next few years.

Screen Shot 2014-08-31 at 1.42.36 PMHaving recently been at an analyst event with many of the Forrester, IDC, and Gartner analysts, we discussed mobile payments and there was a consensus we are on the cusp of the market developing and developing rapidly.

Ultimately, this shift will likely lead to a revolution in retail. As highlighted by the Starbucks CEO along with the leadership at Target, Wal-Mart, and many other large retailers, the ability to target and promote to a captive shopper, in their stores, in real time, presents opportunities that have never existed before.

The foundation appears to be in the process and the market appears ready. Apple will undoubtedly take a leadership position, and it will be interesting to see how this plays out in competing ecosystems.

iPhone and iOS Usage in China

Every few months, I update some unique data I have access to that allows me to monitor the usage of device models actively being used in China. I have this for Android but will focus on iOS for now and do Android later. For the first time, the iPhone 5s is now the most used iPhone in China for apps, the web, etc. This data comes from a proprietary dashboard from Alibaba and their recent acquisition Umeng. It is a combination of network usage data and app usage data.

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This is a monumental moment for Apple in the region. As you see when you look at the chart, the iPhone 4 and 4S have been the dominant iPhones in China. The vast majority of these devices came in through the grey market or the secondhand market. A key takeaway is that many of them were not purchased brand new. The iPhone 5s, on the other hand, likely was. The iPhone being available now on most major network providers in China is a help. The 5s running on the China Mobile 4G network, which they are pushing pretty hard, plus the fact the iPhone 5s is the most recent device, is a help. Combined, we can easily conclude the bulk of these iPhone 5s are new and not used. This is significant and it is underscoring the upside for Apple that was not there prior to the moves they have been making to be available in the region.

I remain entirely convinced, from my research and study of the Chinese market. that Apple is in full control of their destiny in the region.

All iOS Devices

If you are wondering why the market share does not add up to 100%, it is because I did not include all the iPad models in the data. Mainly because there is a number of models being tracked and color coding all the data points so they can be specifically recognized is a pain. But I did it anyway since I knew this question would come up. So below is the chart of active use in China by each device.

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Deeper Dive on Android vs iOS Web Usage

I gave a brief overview of my thoughts on global web usage in the Tech.pinions Insider weekly newsletter that goes out each weekend. But I wanted to dive into a few more points I think are interesting.

When it comes to the business model of so many companies in the smartphone, tablet, and PC market, usage is an essential metric. For online companies like Google, Facebook, Amazon, app vendors, and more, web usage or the extent to which one gets on and uses the Internet is even more essential. What we are seeing is the early signs of the problems connecting the next billion customers for many companies. For a long time, iOS dominated Android as a whole in terms of web usage. Interestingly, an online metrics service I track points out this specifically in their FAQ on their site.

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Android ships in larger quantities, but iOS dominates usage. Point number two is perhaps the most insightful. Not only are iPhones typically supplied with generous data plans but they are purchased by people who can afford to liberally use the web. Someone who can afford a $500 or higher phone in non-subsidesd markets can also afford a premium tier data plan. I’ve started using the term “data budget” to describe this. iPhone users have a higher data budget than the average Android user. Another point is broadband is not equal in many parts of the world. Many emerging markets have spotty and slow broadband. It makes the web challenging at times due to the lack of speed. These are part of the complexities I feel led to Android taking so long to pass iOS in terms of web usage, despite having more than double the usage base for quite a while.

While I recognize the disparity in methodologies of StatCounter and NetMarket Share,  I still find them both useful. StatCounter, measures total usage of a user and will count the same user as a page view every time that person views a website they track. That is why StatCounter has Android ahead of iOS in web usage and says it has been for some time.

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StatCounter’s data will favor the heavier of web users, thus their data will give us a broader picture of how active on the web each platform may be. But it is also skewed toward the top percentage of users who more liberally use the web. It leads us to the conclusion that the Android data collected by StatCounter is likely heavily influenced by those Android users who are more like iPhone users in terms of disposable income, data budget, quality of connectivity, etc. That point is well understood when we look at the device vendor breakdown of StatCounters data. We see Samsung users have been driving the bulk of Android’s global web browsing in their network of sites. Samsung’s premium and mid-tier devices would have similar users where usage would be impacted.

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NetMarketShare presents a different picture and for different reasons. NetMarketShare only counts each user once per day on their network of sites, so we get a bit more holistic view of platform usage which is not skewed by the power users of either platform.

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One thing to point out on this chart is it is measuring absolute share. iOS’ line is not going down because iOS is being used less, only because Android is growing as a percentage of overall web traffic on their network.

It was inevitable Android would pass iOS in terms of overall usage. What this brings up though is the striking point that usage is not equal between the two platforms per users. Meaning the average iOS consumer will still use dramatically more Internet services than your average Android user. Given the many points I’ve made before that Google’s Android already has the heaviest web users and the most profitable customers to their ecosystem as they are ever going to get, the longer term trend is problematic to their growth if it remains solely tied to usage of Internet services. The same is true of Facebook. In both cases the next billion will have a lower data budget, less reliable and likely slower connectivity and will have to prioritize that data budget accordingly. In short, this next billion will prioritize survival over entertainment. They will likely use a messaging service like WhatsApp because that is how their commerce or trade gets done. That is a worthwhile spend of data budget. Those needs will trump entertainment for the foreseeable future.

While looking at iOS vs Android web usage is helpful, it is really still only part of the story. I track a range of developer toolsets that show web usage by particular devices as well. Often many of these include app usage as well since most of these analytics services are for app developers. Here are a few select countries of interest because they are big but also because they qualify as those I consider with a stringent data budget.

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All this does is emphasize in countries where the iPhone has a presence, even if only small, those users dominate the usage the landscape and often by a healthy margin.

Take Aways

What is becoming increasingly clear to me is at a platform level, the opportunity within iOS and Android for app developers, providers of web services or services in general, are simply different on each platform. You could make the argument the opportunity within iOS is very different than the opportunity within the Android ecosystem. Thus, each ecosystem may have an entirely different set of developers, services providers, and more.

For a more detailed view of this angle, listen to the latest podcast with myself and Andreessen Horowitz partner and analyst Benedict Evans on our latest mobile focused Tech.pinions Podcast.

Smartphone Computing Platform Market Shares

Unlike the PC computing era where the industry was made up of “market share” of only one company, the “Post PC Era” is poised to be made up of market shares. That means many platforms competing in different segments, each with a share of each market. As we dive into several of the charts I’ve created, this point will stand out. It will also highlight this isn’t simply a case of iOS vs Android vs Microsoft in every segment. More to the point, it is wrong to look at the industry as purely a platform battle. The right big picture view to have of the industry is to think about what each platform means to each segment and, more importantly, what opportunities exist within each platform independently. I will cover the platform market shares in a three part series. I’ll start with smartphones, then tablets, then PCs.

Smartphones

Yes, Android ships the majority of smartphones each quarter. But what most analysts estimates don’t do is break out the sales between AOSP (Android Open Source Project) and Google’s version of Android. We essentially have three viable mobile platforms. We have iOS, we have Google’s version of Android tied to Google services and Google’s app store, and we have the AOSP version which is what is on over 95% of smartphones sold in China. The best way to understand AOSP is as China’s proprietary smartphone platform. With that context, let’s look at the percentage each platform has of smartphones in active use.

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In my smartphone model, I estimate the total active smartphone installed base to be 2.04 billion devices. As you can see from the chart, the smartphone market is not so black and white as to be just iOS vs. Android. What is absolutely essential in this model is to understand what the customer makeup is within each market share.

  1. iOS: We know iOS owns the majority of the most profitable customers. And while iOS currently has 17% of the smartphone installed base, it is likely Apple could raise that to 20% within in the next 12 months. iOS customers are higher value customers and therefore Apple’s share of the market presents certain opportunities. Things like subscription services, hardware add-ons, a-la-carte media purchasing, e-commerce, and more are viable opportunities for iPhone customers.
  2. AOSP: AOSP is not a forked version of Android (like Kindle Fire OS), it is simply a stock version of Android installed without Google’s core services like search, maps, app store, etc. China has all their own local services and they use vanilla AOSP and vendors pre-load local services and app stores on their devices for that region. AOSP must be understood within the China context. Companies like Xiaomi have uniquely benefited from using AOSP to their advantage in China. Other hardware opportunities may emerge as the door is wide open in China for many companies to leverage AOSP and use inexpensive hardware as a giveaway in order to capture monthly revenue from a service or subscription. It remains unclear how much of an opportunity there is for AOSP Android outside of China. If there is not, this piece of the pie will shrink over time.
  3. Google’s Android: Google’s version of Android will remain the dominant market share, especially as big regions like India, Brazil, and South East Asia start to ramp. Yet, Google is still faced with a problem. As Android begins to saturate in markets where hardware is very low cost, the overall value of an Android customer on average will decline. Google’s advertising business model works well now but how much will advertisers be willing to spend on customers who do not have much monthly disposable income? Android will have the largest market share but it will also consist of a large variety of consumers at different economic stages. Ultimately, I believe this will be a challenge for the platform and the ecosystem.
  4. Windows Phone: This is still a minority platform. Its fate seems yet to be sealed. Microsoft has been slow to gain partners other than Nokia and even those who have embraced Windows Phone in markets like India or SE Asia have experienced very slow sales. It is yet to be seen whether Microsoft can advance the platform by chasing the low end of the smartphone market. Given the extremely low installed base of Windows Phone, and the slow sales, it remains hard to be optimistic on the platform.

Apple has a monopoly on iOS. Market share is up for grabs should they be creative with pricing and services offered. Android OEMs will battle it out quarter after quarter and we will see if loyalty to a brand can be established in Android the way it is with iOS. What is clear is different strategies and opportunities are emerging in different regions. What is working in the US is not working in China but rather something different entirely is a success in China. The same is true of India, and early evidence suggest regionally focused strategies are going to also work in Brazil and Indonesia.

It is fascinating to watch a market in real time where there is so much at stake, yet so little is actually settled.

Next article on Tablet computing platform market shares.

Peak Samsung

Samsung’s Q2 earnings and smartphone shipment volume miss should come as no surprise to our readers. I highlighted the fundamentals of what I saw happening to Samsung in this insider article from last September. Samsung has made very little progress competing with Apple in the high end premium segment of the smartphone market and they are being attacked at the low-mid range by a variety of new entrants. Samsung rightly points out in their earnings release that one of the many culprits to their poor earnings and device shipments is increased competition. That is highlighted by this chart:

Smartphone sales by vendor

Yet the best visualization of what is happening to Samsung is in this chart:

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As you can see, Q2 2014 marks the first quarter since their global rise in smartphones that their line is trending downwards rather than up. This chart highlights Samsung has reached its peak. Samsung is trying to play this off as a short term issue and one they see being resolved with 4G. There is some merit to their logic, however, if they see any rebound it will be short lived.

It is important to note that outside of China, by my estimates, Samsung has around 60% share. Including China, Samsung has 36% share and an approximate installed base of a little over 500m smartphones in active use, again my estimates. I have mentioned this before but there is little to no brand loyalty in the Android ecosystem. Samsung has attempted to make its brand aspirational across the board and as chart number two shows, they succeeded at this for a short period. Keeping this momentum is the uphill battle they are up against.

4G is one area where they can see some rebounding in device sales. LTE is being adopted more rapidly than many initially anticipated. Samsung does have a short term lead in affordable LTE devices in their portfolio. However, that lead will diminish quickly since the markets where LTE is being adopted the fastest, Western Europe, US, and China, are all areas Samsung faces the most competition in all segments.

Differentiating outside of cost will be the battle hardware companies in the Android ecosystem face over the next few years. As I have pointed out many times before, there is little to no loyalty to hardware OEMs in the Android ecosystem. However, with the types of customers who will make up the next billion new smartphone users, I believe even loyalty to Google and their services will be challenged.

All of this brings up an interesting question. What is the “product” in the Android ecosystem? Specifically where are the revenue generating opportunities? As the answer inevitably becomes “not hardware”, the product offered must evolve. This is where the basis of competition will shift in the Android ecosystem. This shift will disrupt incumbents and open the doors to new entrants.

Why Apple Should Buy Broadcom’s Baseband/Modem Business

As I reviewed Broadcom’s updated SoC and modem business/strategy a few months ago, I became increasingly optimistic with their opportunity in this space. I understood the challenges of growing this business and the internal commitment it would require but still felt there was reason for optimism. Due to the upside I felt Broadcom had, it was a bit surprising they announced their intention to sell it. Broadcom must have come to the conclusion the resources and commitment neeed to grow this segment was more risk than they were willling to take at the moment. Resources poured into this are resources taken away from their other businesses. Broadcom is focusing on their core and this should be viewed as wise, but also conservative, on the part of their management.

What will happen with Broadcom’s baseband assets? I believe Apple is the perfect acquirer. One of my key takeaways from my meeting with Broadcom was they had some IP around their standalone thin modem which would be attractive to Apple as an alternative to Qualcomm. Doing so gives them technical flexibility and the ability to cut costs as well. The point remains for Apple, integrating a modem onto their SoC is the logical next step for the A-series. Getting modem IP, and the patents to globally certify that modem, is not something Apple can grow in-house. Which means at some point in time it will be necessary for them to get this IP from somewhere. Not many companies have these assets let alone are willing to sell them. Apple could license the IP to do this but knowing Apple like I do, they would much rather own this technology than license it. However, the IP alone may not be the driving reason for Apple to buy this group from Broadcom. It may very well be the engineering talent Apple wants and needs.

Broadcom acquired the team and IP from Renessas who acquired the team and the IP from Nokia. Most of the engineering team from Nokia remains intact and is regarded as one of the best communication engineering groups around. This is extremely significant for Apple. I view Apple’s potential to acquire Broadcom’s baseband group similar to the acquisition of PA Semi — more about the talent of the architects than the IP portfolio itself.

As Apple drives down the road of Moore’s law, they will increasingly have more transistor budget at their disposal. I strongly believe Apple’s architecual prowess of their A-series SoCs is one of the most underlooked areas of competitive advantage Apple has. They are in the unique position to spend their transitor budget in ways specific to the Apple experience. They can uniquely tune the SoC to the hardware, to the software, and potentially to the cloud services in the future.

Like all SoC companies going forward, the onus is on the architects not the architecture. In this light, it makes sense for Apple to have outstanding engineers when it comes to the communication bits as they look to inevitably integrate those bits onto their SoC.

Global Smartphone Vendor Market Share and OS Installed Base Statistics

I’ve updated our global smartphone statistics and installed base estimates up to Q1 2014. There are several important observations to call out in the following graphs.

First, let’s take a look at the market share of each smartphone vendor going back to Q4 2009.

Screen Shot 2014-06-08 at 6.28.19 PM

The first major observation is what has happened to Nokia. As you look at the graph, you notice the shift in share from Nokia to Samsung. As we all know, Samsung “fast followed” Nokia and the graph tells the rest of the story. The second major observation is how Apple has maintained their share of the market and is holding steady each quarter going between 15-20%.

Another important observation is what happened when Chinese consumers started joining the smartphone conversation. As you can see the ramp in China happened around the end of 2011. At that point you see the local Chinese vendors like ZTE, Huawei, Coolpad, and eventually Xiaomi (Mi) helped make our chart (and the world) more colorful/competitive.

Let’s see how this looks from the volume shipments of the same vendors over time.

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What this chart does a good job of showing is the overall growth of the smartphone market in terms of volume.

If you recall from the first graph we saw most of Nokia’s market share go to Samsung. What this graph points out is the size of the scale Samsung reached. While their share of the market basically swapped, Samsung’s volumes were significantly larger than Nokia’s ever were. This graph shows Samsung’s steady and persistent growth when it comes to volume. Where Apple and others see pretty seasonal Q4 spikes, Samsung has stayed relatively steady.

Another important point about this slide is to look what happens when the China smartphone market began to ramp. As we see China coming online, we observe the rise of local Chinese manufacturers who begin moving enough volume to get them out of the “other” category and to be tracked as a vendor. Most notable should be Xiaomi. Xiaomi started selling phones in the third quarter of 2011 and by the end of 2012 were moving enough quarterly volume to get on our radar. Now after the first quarter of 2014 they are nipping on the heels of every other local Chinese OEM. In fact, if Xiaomi’s quarter-on-quarter growth rate continues, they may pass Huawei. That would put them at number three in the ranks of vendor quarter volume after Samsung and Apple.

Installed Base

While calculating the exact active installed base of smart devices is an imperfect science, based on historical sales data of devices factored along with active statistics of operating systems on major carrier networks and regionally dominant web services, we can get an approximate that is defendable. The following charts break down the install base of smartphone operating systems over time and where each stands today as a percentage of the active install base.

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As you can see, Android and iOS have been the biggest growth driver of the smartphone install base. Symbian was the biggest loser with most of its user base moving to Android. Blackberry held relatively steady in install base even though their quarterly shipment declines have been steep. What Blackberry’s numbers highlight was while their install base peaked in 2011, they have not participated in any growth and while maintaining a relatively small portion of the install base even at their peak, the next year will likely show steep declines in their install base.

The pie chart shows each smartphone operating systems as they currently stand as a percentage of the install base. Some of my numbers around Apple’s iOS smartphone share and Android’s seem counter to the narratives we hear that Android has 80% or iOS has 15-18%. This is because when most analysts use those numbers they are sharing the percentage of quarterly or annual sales by OS — not as installed base.

There are many fascinating evolving narratives that will continue to be fascinating to watch over the next year. The primary being as the India smartphone ramp starts to show up. India is where China was two years ago and is ramping fast. Karbonn, Lava, and Micromax to name a few may start showing up in our charts soon enough. I’ll continue to update these numbers each quarter and tease out the key observations over the year.

The Next Mobile Era: Digital Identity

We are still deeply rooted in the first mobile era. However, As I am always looking for trends, I think it is interesting to form some ideas of what the next mobile era might look like.

While I think the very far off future will include the decentralization of the modern smartphone experience into other devices on or around our person, that is too far off to speculate. I think the mobile era will go through several phases. The first is the one we are currently in. This era is simply about driving adoption of smartphones for the mass market. This means making prices lower, while bringing capable computing to the masses. Very powerful and very inexpensive smartphones for the consumer. Only 26% of people on the planet have a smartphone. Bringing this to saturation at say 70-80% is the driving goal of this first era.

However, over the next few years, I think we will see more mature markets like China and the West start to enter the cusp of the next mobile era, which will be around identity.

I’m seeing the groundwork being laid, particularly by Apple, to center our digital identity as well as our analog identity, around the mobile personal computer we call a smartphone. Opening up the Touch ID APIs is the beginning of this shift. Right now 5s customers can use their fingerprint to log into their device and make purchases on iTunes. Very soon we will be able to use Touch ID to authenticate access to our houses through our smart-lock, or to do mobile banking payments, or even to manage every password of our life. Biometric authentication will be the first step in the transition to the mobile identity era.

Yet as we continue to advance into this era, it will be predicated upon the gathering of more personal digital data than today. Our analog self and our digital self will start to converge as the Internet of Things becomes mainstream. Take for example health and fitness wearables. As this technology evolves and becomes more capable of capturing very personal health, fitness, and location data along with our eating habits, home habits, shopping habits, working habits, and everything else we can dream up, we will begin to develop an in-depth digital profile of our analog lives. The sensors, we wear, put in or around our homes, and exist out in the world will be collecting quite a bit of data on us. But the one common point for this to be enabled will be our mobile device. These sensors will have a connection to the mobile computer. Via a protocol like Bluetooth LE, and in Apple’s case iBeacon, the mobile device will be the center point enabling the creation of our digital profile. But the key to this next era is where this data is stored, and how it is accessed in order to add value to our lives.

For example, in a sensor based world, my bed will be connected and collecting data about me when I sleep. My heart rate, breathing patterns, resting temperature, and more. Then as I get up and go about my day, other sensors will track my activity, diet, exercise, and anything else I’ve enabled to collect data. Once I have all this, from a health perspective, I may want to share key learnings with my doctor, or with friends and family. However, I will also be wary of having all that data simply go to the cloud in an insecure way. In fact, the security element of this will be the primary roadblock for the evolution to the mobile identity era. However, there is a solution to this problem. Hardware encryption.

Apple does this with Touch ID, where the fingerprint is stored in the Secure Enclave and encrypted and decrypted in real time. This is one of the primary reasons Apple moved to 64-bit in the A7 architecture. Encryption sees triple digit speed performance gains on 64-bit. In fact, I am confident the Touch ID experience would not be possible on a 32-bit architecture. But the overall point is the biometric data is hardware secured to my device. When I go to log in to my house through a smart door lock, my fingerprint is never exposed. All the door lock gets is a yes/no confirmation from the iPhone through the fingerprint verification process.

This is the simplest example of this today, but it will get more expansive over time. Hardware vendors can address this through hardware encryption so my intimate and personal health data, and all my other digital identity profiles, get locked down and encrypted at a security layer. This way, my digital identity as a whole is never fully revealed. I’m only authenticating certain parties to access the bits I want them to see — not the whole identity. In my health example above, I may want to share certain data with my Dr. but not my insurance company. I can authenticate my Dr. to see certain parts of my health data they need to access but my entire digital identity is never exposed. I’m convinced encrypting this data at the hardware level is the key to mobile identity era and it will be driven by 64-bit architectures as well as the advancement of more capable microprocessors in these devices.

Answering the 64-bit Question

This means that Android, and every other platform company and the hardware companies in their ecosystem, must address not only the 64-bit question but also solve the biometric solutions that will enable this process. The concern for Android is this era would somehow come into conflict with their business model. All of this data on our digital identity is valuable to Google, but given the intimate level of this data it is hard to believe people will trust Google with their digital identity. Microsoft may be in a better position given their business model is not entirely in conflict. Microsoft simply needs to address the ecosystem in order to develop this strategy out.

As microprocessor architectures advance, we will enable incredible amounts of computing power in these mobile devices over the next few years. If Apple’s A7 has a billion transistors today, it could have four billion transistors in 4-5 years. That is the kind of computing necessary to pull this off. Intel, Qualcomm, and others will need to enable this ecosystem. They are the architects for Apple’s competition.

As we shift to the mobile identity era, I believe it presents a very clear challenge to some of the dominant incumbents of the current mobile era and will open up opportunities for some of even the less obvious challengers for the next era.

Has iPhone Lost The Best Value Crown?

Smartphones have gotten so good, so fast, and become so vital and accessible in such a short time, it’s difficult to accurately predict the direction of this market over just the next year, and nearly impossible over say, the next five years.

One aspect of the smartphone market that has remained steady throughout, however, is the iPhone always offered the best value.

No more.

A new crop of Android devices and remarkably low priced Windows Phones appear to have usurped iPhone along the value vector. This should put Apple on notice — and will almost certainly impact their branding, possibly even their pricing going forward.

No one ever got fired for buying the iPhone

The iPhone began as a revolution, turning the industry upside down. Since launch, Apple has worked diligently to improve the iPhone, expand its capabilities, and integrate it with other Apple devices and services. iPhone quickly became not just the best smartphone but the best smartphone for the buck.

There have always been solid reasons for not choosing iPhone, obviously, but value was not one of them.

Perhaps you couldn’t afford iPhone. You did not want a device with a locked-down ecosystem. The iPhone form factor(s) was not to your liking. All valid reasons for choosing ‘Other’. Now however, there may be another reason to consider a non-iPhone device: value. If so, this is a remarkable shift in the market and a new inflection point in the battle for market share and lock-in.

It’s hard to put a specific number on ‘value,’ especially as it can vary so greatly from person to person. It’s not just about design or usability. For example, iPhone’s value includes, at minimum:

  • device quality
  • integration with iPad and Mac
  • AirPlay
  • iCloud synch
  • free iWork
  • the most available apps
  • regular, free OTA updates
  • the most available digital content
  • minimal crapware
  • easy returns and superior support (for those near an Apple Store)
  • the largest range of accessories

The list is long.

Add to this list, the iPhone’s disproportionately high resale value. Dollar-for-dollar it’s hard to beat the iPhone — regardless of any personal preference for iOS.

Nonetheless, it appears new devices may now trump the iPhone, dollar-for-dollar.

For the Price of one iPhone 5s, you get 4 Moto E phones

It will cost you $650 for a 16gb iPhone 5s. For the same price, you can…

…Buy 4 Moto E smartphones.

No, the Moto E is not as good as iPhone 5s, not even close. It works only on 3G (not 4G). The screen is not nearly as nice. The camera is only 5MP — and there is no front facing camera. It also has only 4GB of memory, although this is easily expandable.

But, Moto E runs on Android KitKat, a very solid OS. It runs nearly every app, plays nearly every game you can have on your iPhone. Calls and messaging, social media and search, mapping and web browsing are all there.

On a per-dollar basis, it’s hard to think any smartphone offers a better value than Moto E.

Except, the Lumia 630, a mere $159 in the US, may offer a better value still.

Nokia-Lumia-630-hero-jpg

Lika all Nokia devices, the Lumia 630 is beautiful, colorful and built to last. It runs on Windows Phone, which I prefer to Android although admittedly the platform continues to suffer from a lack of quality apps. It includes Cortana, Microsoft’s Siri competitor.

In my experience, Cortana offers fewer functions but has superior voice recognition.

The 630 has a 4.5 inch display, a remarkable 1.2GHz Snapdragon processor and 8GB of storage. I have not tested this, but reviews suggest the battery bests the iPhone’s. There is a 5MP camera but no front facing camera. In my experience, the embedded HERE Maps and turn-by-turn navigation Nokia offers is superior to Apple Maps. The 630 also has a swipe keyboard, which many users prefer.

Ready to buy? Ready to get one for you, your spouse and your two children — all for the price of a single iPhone 5s?

No? I completely understand. Apple has long made the very best, most desired smartphone. That’s the device most of us covet. If you can afford it, there’s little reason to not choose the iPhone. Nonetheless, the price, quality and functionality of the Lumia 630 and similar devices has to put Apple on notice.

Apple’s Loss is Our Gain

Apple devices, be they smartphones, tablets or laptops, have long been among the most expensive on the market. But, they have also consistently offered the best value, year after year after year.

Can we say that in a world where the new OnePlus One phablet is available for $350? This Android smartphone comes with 64GB of memory and has received gushing reviews. It is also obviously beautiful.

oneplusone

If the iPhone no longer offers the best smartphone value, dollar-for-dollar, then Apple will need to re-tool its marketing strategy as well as its product plans.

Tough for Apple, but a win for the rest of us.

The Android Paradox and Computing Inequality

Benedict Evans wrote a great article on android fragmentation. He and I have covered this theme a variety of ways but I wanted to add a few more elements for you to think about. I also tweeted over the weekend on this theme and faced fire from the twittersphere.

 

Furthermore, Benedict makes a point in his post key to understanding the Android paradox:

Again, this is a paradox: Android is the platform best for early adopters and iOS the one best for late adopters who just want something that works, but the market adoption is the other way around.

There is no question Android is a unique beast. I’ve long heard Android compared to Windows. However, I have never been comfortable with this comparison. There are certainly some fundamental similarities but there are also a great deal of fundamental differences. They are similar in that they are both software platforms available for third parties. OEMs can take the software platform and create their own hardware. While those are basic similarities, Android has a fragmentation problem Microsoft never really had.

In the PC era, Microsoft maintained very strict hardware constraints for products running Windows. Intel, and AMD to a degree, also assisted with this a great deal to make sure OEMs had a certain bar that was maintained in terms of computing experience. This came crashing down with Windows Vista. This was an example of Microsoft having too computationally complex a piece of software which made machines with underpowered CPUs, and more importantly weak graphics capabilities, have many issues with Vista. I remember telling the OEMs around the time if everyone just shipped a discreet GPU on all their Vista machines it would be fine. But that would have driven costs up at a time they were all trying to drive costs down. For the most part, we have not had the same fragmentation issues with Windows we have with Android. Curiously, we saw the beginnings of the issue with Netbooks. For the first few years, these devices ran underpowered CPUs which consumers then attempted to use to do things they would do with more powerful computers. This is why early Netbooks didn’t play flash video well, or games, or other CPU intensive tasks. It brings us down an interesting thought trail of where we are today with computing power in lower cost devices. Which leads us to the Android paradox.

Where Windows seemingly was always designed to run computationally capable silicon, Android is and must be designed for the lowest common denominator. Android must run on an extremely low end CPU and an extremely high end CPU. This problem is outlined well in this video and in this post by Game Oven.

The point the folks at Game Oven highlight is the challenge of building a computationally complex piece of software and getting it to run on every Android device in the world. This is a significant problem for the future of computing and it begs a fascinating question. Architecturally speaking, is ARM or x86 better suited to address this particular issue? I do not have this answer yet, but it is a key question.

With my background in semiconductors, I look at this problem and doubt Google can solve it. Google can not maintain control of the hardware in smartphones the same way Microsoft could with Windows PCs. Mostly this has to do with the fact Android OEMs want to make a phone that can be sold for $100 dollars or less. Those devices, by sheer economics, will have to use an inexpensive and low powered CPU. That vendor will also have to make decisions on which sensors or other chipsets to include or not include in order to hit that price. Which means software developers like Game Oven simply can’t run their software on those devices. It emphasizes the point that a software developer Android addressable market is limited by hardware if they are looking to push the envelope of computing.

Going further down this rabbit hole gets even more interesting for the future of computing. With roughly 80% of the Android install base being lower end, underpowered devices, and even more so as we add another billion plus first time computer owners with a smartphone costing less that $150, we have an issue of exposing those first time owners to the full potential of handheld computing. Perhaps that isn’t necessary, since it is their first computer, but it is from the standpoint of personal computing.

However, this may only be a short term problem. When you look at silicon road maps and Moore’s Law, it seems it’s possible that, 4-5 years from now, some incredibly powerful CPUs will be able to run in devices that can be extremely low cost. That being said, as long as Moore’s law exists, software developers will hopefully exploit the new capabilities of latest generation silicon and push software to the limits. Until Moore’s law is passed, conceptually, there will always be an inequality gap with regard to computing.

Intel may have something to offer to solve this problem, as x86 brings many efficiencies to the table for complex operations. Should they get to a very low power yet high performance benchmark over the next few years and gain traction in smartphones, I will be curious to see if the fragmentation issue around what Game Oven highlights could be solved through an x85 Android environment. We will have to wait to see, but I am still skeptical fragmentation can be solved simply by all computing devices running the same application processor architecture.

Remarkably, Apple is one of the few companies who can solve computing’s inequality gap. Should they be able to bring their experience to hardware at lower costs, it could be a huge benefit to the future of computing. Until then, we remain firmly set in an environment where the capabilities of hand held computing are unequal.

Insider Intelligence Charts: Global Market Share Mobile OS

I pulled some recent data from Statcounter to get a sense of what the most active platforms were in each region. Statcounter, like NetMarketShare, tracks over a billion websites globally. Therefore, the tracking and market share numbers represent those actually using their devices to access the web in some way, shape or form. Interestingly, I have caught wind of some data that highlights a larger number of consumers than I anticipated in key markets like China who use VPNs or proxies to access blocked sites from within their country. Many of these VPNs or proxies are based in the US or Europe which means there is a high likelihood that some country numbers are skewed because of these consumers who access via proxy. I’ll deep dive on this as I gather more data.

Let’s look at platform statistics for several key regions and tease out some observations.

Global OS Market Share

global

Looking at the global breakdown of operating systems, broken out by those actively accessing the web, several key things stand out. The first is the noticeable and undeniable trend that Android continues its steady climb. This will continue as billions of consumers get into the market with their first smartphones from price tiers lower than $200 and most likely running Android.

Despite Android’s rise, iOS market share remains relatively steady. For many, this should defy their beliefs about how “open” operating systems crush more closed systems. There is a raging debate around the topic of whether the smaller ecosystem always loses. We are in uncharted territory and history is unlikely a helpful guide. Every time I look at this data, Apple’s ability to maintain share re-enforces the staying power of a premium customer base.

Series 40, while having a smaller market share, also remains steady. This demonstrates Nokia’s ability to maintain brand and solutions in markets like India, Africa, Indonesia, and Brazil to name a few. Ultimately Series 40 will be replaced by Android in those markets. It’s just a matter of time.

Globally, there are around 1.4 to 1.5 billion smartphones in use. That number will be over 4 billion by the end of 2018.

US

US

This chart remains relatively unchanged from multiple sources besides Statcounter. In the US, it truly is a two horse market and each have relatively close market share. Statcounter tracks the iPhone as having over 50% share based on their tracking methodology. This also lines up with recent data from Chitika stating that, when usage is tracked, the iPhone remains the market share leader.

If Apple does release a larger screen iPhone, it will be interesting to look back at these charts and see if Apple has indeed widened the gap against Android in the US as many, including myself, believe will happen.

The US has over 190m smartphones as an install base.

China

China

Android is the dominant OS in China. This should not come as a surprise. However, Apple’s continued growth in market share lines up with many Insider posts on Apple’s device installed base in China. This remains an under appreciated story. I remain convinced the number of iPhones in China is larger than most other analyst firms’ estimate.

Related Posts on iPhone in China
How’s the iPhone Doing in China
Data on China: Apple’s Biggest iPhone Market

While Android will remain dominant, I’m not sure the vendor landscape is as clear as others. While Xiaomi is all the rage in China, it is unclear if their model is sustainable, particularly as they run into challenges scaling to meet demand. The hardware/OEM landscape in China is nowhere near settled. This is a key storyline to follow.

China has nearly 600m smartphones in active use in the region.

India

Screen Shot 2014-05-15 at 6.46.59 PM

India as a market could not be more different than China. These are two completely different regions who mass market customers think about technology differently and value very different things. Where in China consumers place a high price tag on status, and technology identified as status symbols, India places a priority on value for the money. This is why India will remain a challenge for Apple.

India has approximately 60-70m smartphones as an install base currently. While estimating total iPhone sales in India has been tough, I believe it to be in the 6-8m range. Likely toward the lower end of that number but certainly less than 10m as a total.

Indonesia

Indonesia

Why am I showing you Indonesia? Every so often, we will look at a market that doesn’t get a lot of attention. I could, and will, continue to show charts from Brazil, and other countries in SE Asia, but I thought looking at Indonesia would be interesting. Indonesia is a huge market and an important one to watch. It is also growing quickly overall as a market for smartphones.

As you see from the chart, Nokia’s handsets have had a good run in Indonesia. But the trend is toward Android — which is no surprise. One other point worth mentioning is BlackBerry handsets have a higher percentage of the install base than indicated in this chart. The reason they don’t show up higher is because many BlackBerry devices in the region are not used to access the web through a browser or apps. Instead, these devices are used more as secure communication platforms due to a high level of distrust of the government. Some percentage of consumers have two devices. They use the Blackberry for secure communication for business or other uses and the Android or Nokia device for other smart phone features/use cases.

This is a snapshot of the overall platform trends in several key markets. In future Insider posts, we will also break down the vendor market share in these markets as well.

Some Potential Downsides for an Apple TV

Another year, another quarterly earnings announcement, a mere month before WWDC, and not a hint of an Apple Television. Don’t hold your breath. While many of us may crave the idea of an Apple Television and certainly millions of us are not pleased with our present television “experience,” there is little for Apple to gain by offering such a product. Indeed, Apple could actually be harmed by offering an Apple Television.

This is especially true for Apple’s two largest markets, America and China. In both, smartphones are commanding more of our time, more of our attention, more of our dollars. An Apple Television may do little more than shift our focus (and thus our dollars) away from the iPhone juggernaut. That would be a costly mistake for the company.

Stay On Target

The iPhone generates more than half of Apple’s revenues and profits. While some may insist this is a reason for the company to further diversify, such a sentiment is ignoring two critical facts:

  1. The total addressable market for the iPhone extends into the billions of units. Nothing else comes close. Nothing. Apple’s primary focus therefore should be on aggressively growing the iPhone user base and maximizing the iPhone ASP, and not on lesser markets such as television.
  2. The gains from an Apple Television (and any supplemental iTunes revenues) must be greater than any revenues and profits they might potentially steal from iPhone. There is no guarantee of this.

apple revenues by product

It is that second point which I think other analysts are missing. An Apple Television carries with it the very real possibility of dampening iPhone revenues. How? By diminishing iPhone engagement.

iPhone engagement — not margins, not prices, not functionality — is what so clearly separates the iPhone from Android. The rumored Apple Television carries with it the potential of reducing iPhone engagement.

Why take such a gamble?

Smartphones in general and the iPhone in particular have succeeded in doing what every other technology of the past 75 years has failed to do — capture our time and our attention at a level equivalent to or even greater than television. The “second screen” — the smartphone — is, in fact, quickly on its way to becoming our first screen. For Apple to risk shifting our focus away from the iPhone, even just a little, could precipitate a decline in iPhone engagement. Any such decline would directly impact iPhone usage, cut into iPhone sales, possibly bleed into the iPhone’s remarkable ASP.

In this light, an Apple Television seems needlessly risky, especially given iPhone growth appears to be slowing so appreciably.

iPhone growth yoy

While Apple no doubt would endeavor to build a television that fosters deep integration with the iPhone, any television worthy of the Apple brand carries with it the very real possibility of drawing our time and attention away from our beloved and far more personal second screen.

The iPhone In Prime Time

Despite television’s decades-long hold on our collective attention span, its days as our “first screen” are quickly fading. A recent survey offered a startling conclusion: time with our smartphone has now eclipsed TV time in the US.

tv vs smartphone

While other studies somewhat counter these findings, the smartphone’s rapid rise in capturing so much of our limited attention is but one aspect of the profoundly shifting “screen” landscape. Recent Nielsen research concludes the obvious; even with the television blaring, our eyes are being drawn toward the smaller, more intimate smartphone screen:

Not only is smartphone penetration growing, with over two-thirds (67%) of mobile subscribers in the U.S. owning smartphones in Q4 2013, but consumer usage of phones is rapidly shifting toward increased screen time with entertainment and social media.

Americans simply can’t bear to turn away from their smartphones even while their favorite television programs are playing. Already, over 40% of us are regularly tapping, talking and staring at our smartphones — “multiscreening” — as the TV fades into the background.

For that multiscreening audience, 70 percent are looking and “unrelated content” (called “stacking”). 

Screen-Shot-2014-03-20-at-8.16.04-AM

The other 30 percent are exploring related content or taking some action tied to the content or advertising on TV (“meshing”). 

Screen-Shot-2014-03-20-at-8.14.26-AM

Television is becoming just one more feed inside our smartphone.

The data above is for the US market. The situation facing the original “first screen” is even more dire in China, where the smartphone extracts far more total time than the television.

Chinese smartphone owners spend nearly eight hours looking at electronic screens each day, the third longest in the world, with smartphones and laptops dominating their “screen time,”

Smartphones (170 minutes per day) and laptops (161 minutes per day) dominate their “screen time,” while TV holds their attention for only 89 minutes per day.

Death To The First Screen

Why enter a market that is becoming less relevant in our lives? Why risk detracting from iPhone usage? 

A Kleiner Perkins Caufield and Byers study last year found the average user checks their smartphone 150 times a day. This number is higher still for the average iPhone user, as various metrics consistently show iPhone users spend more time on their device, more time on the mobile web, more time with apps.

Of course, it’s not just about how much time we all look at our smartphone screens but how we use them.

smartphone usage

For a growing number of us in the US, China and every where else, the smartphone is simply more entertaining, more engaging, more attention-grabbing than anything and everything available to us on TV.  Seen in this light, why would Tim Cook and Apple even consider such a product?

The derisively labeled “second screen” has become our first screen, and as with banks, that’s where the money is. Even the most aggressive analysis of the Apple Television’s potential suggest limited upside to the company’s value.

Perhaps Apple is working on a complete re-construction of the very idea of “television,” in which case my analysis is wrong. Or perhaps once Apple has sold as many iPhones as possible, then it might make sense to tackle the television market. If I were Tim Cook, I would take a pass, at least for now. What are your thoughts?

Insider Analysis: Android Silver, Good for Google Bad for the Industry

Google is trying to reign in Android with a new program called Android Silver according to recent reports. There are pros and cons to this strategy, however. I believe Google is trying to control something that inherently can not and does not want to be controlled — Android.

There is a paradox about stock Android that is fascinating. It is the purest and best manifestation of Android. My favorite Android devices always tended to be Nexus devices. However, the Nexus program was really a developer program not a consumer one. The goal of the program was never to sell in masses to mainstream consumers. It was for developers to experience the best of Android and to use a model to get them thinking about how to take advantage of the platform with their apps.

What Google fails to realize is one of the primary reasons for Android’s early attraction from OEMs was because they desperately wanted an alternative to Microsoft. Google came in with a solution and provided this one. Which was why early OEMs like HTC adopted it even though it was still very early. The other thing that struck a nerve with OEMs was the opportunity to differentiate with Android. Microsoft offers virtually no customization of their software which means vendors who ship Microsoft software can differentiate through hardware only. All the software looks the same. Imagine how boring it would be to walk into a retail store and see lots of rectangles all running the exact same software look and feel? There would be little differentiation.

drive-in

OEMs were attracted to Android early on because they allowed enough customization for their products to stand out. Forcing OEMs or creating a new class of device where the software looks the same across all vendor hardware is a step backward not a step forward.

Mature markets value differentiation. This is why a parking lot in 2014 looks very different than a parking lot from 1955. Differentiation is one of the most sustainable strategies a company can invest in. If Google is successful at creating a new premium class of device, yet those premium Android devices all have the exact same looking software on them, we will have the sea of sameness all over again just like we had, and still have to a degree, with the Windows PC market.

This environment favors the ones who stand out. Google would be better off working with their vendors to create sustainable strategies for differentiation. The challenge for Google is that one of the ways every partner wants to differentiate is through services, which is Google’s cash cow. Remarkably, Google’s success with Android was strategic for them but has also put them at odds with the inevitable way this market plays out for their partners — shifting from hardware margins and profits to services margins and profits. History teaches us the value chain always shifts from hardware then to software then to services in horizontal/modular ecosystems. This happened with Microsoft PC ecosystem and it will happen with Android in smartphones.

Which leaves you in an uncomfortable position if you are an Android vendor — deeply tied to Google and their services for your future success. Your partner is actually your primary competitor.

Insider Analysis: Amazon’s Chances of Shaking up the Smartphone Market

As a primer for this analysis of Amazon, I recommending reading the Insider report on Smart Devices and E-Commerce. Amazon’s imminent smartphone entry is a puzzle. It feels as though the mobile landscape in places like the US, UK, and other regions where Amazon has a play are mostly settled. Apple and Samsung are the dominant brands, with the dominant ecosystems. So how can anyone break through? This is the puzzle and the question is, does Amazon have a piece that fits into the broader mobile landscape?

It would be easier to speculate, and be optimistic, about Amazon’s plans if most the markets (the US primarily) where Amazon has a foothold were not subsidy markets for mobile devices. The cost of a premium device to end consumers is relatively low, making price less of an issue. Speculating price to be a perceived advantage for an Amazon smartphone entry may not be the right angle, however. What are the possible value propositions then?

Sponsored Data

Part of the picture became more clear as news broke that a key feature may be called “Prime Data.” Amazon is making a push for Prime lately, running commercials promoting the service and even looking to invest in more exclusive content deals like adding HBO Go. The concept around sponsored data is that the cost of the data tiers goes down in exchange for consumer seeing sponsored or advertising content. While this seems like it would not be the greatest consumer experience, the bottom line is if a consumer can get an all you can eat plan for voice, text, and data, at a very low cost or even free, this could be an interesting value proposition.

Another thing to watch with regards to the Amazon phone, or any smartphone coming soon, is Broadcast LTE. No one has been more skeptical of the idea of getting broadcast TV signals on a mobile device than we are. It really only works for things like news or sports. However, Broadcast LTE can use the existing infrastructure. This was an issue with things like Digital Video Broadcast and other live mobile broadcast technologies. Those took not only new technology in many cell towers but also dedicated chips in the handsets. Broadcast LTE is different and when you think about it being free thanks to sponsored data, things could get pretty interesting from a services standpoint. While I still have some big questions about Broadcast LTE, it is something to keep an eye on.

What has become clear to me over the past few months is many carriers in Amazon’s battleground countries are complicating their plans to the point consumers are getting extremely confused. This smells like an opportunity for someone to simplify  plans and give consumers value in a way they can understand. While I don’t expect Amazon to become their own mobile operator, I would look for them to do something creative with a carrier like T-Mobile or possibly AT&T.

Mobile Commerce

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One of the other points to speculate on is the degree Amazon’s play has anything to do with mobile commerce. At the end of 2013, Amazon stated they had 237 accounts. While it pales in comparison to Apple’s 800, Amazon’s are active where Apple’s are just registered. I would estimate Apple’s active iTunes account base to be in the high 600m range, with a decent degree of confidence from our data. With that in mind, the speculation around Amazon’s mobile play is around the concept of “showrooming.” The idea behind this is consumers go to retail stores, look at the products, make a decision, and then go home and buy it online. Recent data we have highlights that 68% of mobile users surveyed said they have “showroomed” in the past month. During the Q4 2013 time frame 27% indicated they purchased the product they showroomed via their mobile device. The same research we have said the top categories for “showrooming” are: clothes (33%), shoes (26%), books (23%) and gifts (22%).

Not surprisingly in the regions where Amazon has a presence, they were the preferred retailer for someone who was showrooming. Whether from a PC, tablet, or smartphone, 48% indicated they purchased the product they showroomed through Amazon. The corresponding figure for eBay is 38%. Perhaps Amazon knows this and believes their smartphone can help drive more sales from showroomers through their portal.

Amazon is well positioned when it comes to show rooming; however this can be done through their app on any smartphone. It is hard to see how Amazon can make it any better or easier on their platform versus someone else’s.

Fighting Against Webrooming

One interesting trend where we are specifically getting data now is around “webrooming.” This is where a consumer researches online and then goes and buys the product at retail. In the above category of showrooming where 68% have done so, 74% who say they have used the internet to search for a product or service to buy offline. Clearly both are happening, with one slightly more frequently than the other, but the majority of the online population is participating in both showrooming and webrooming. However, webrooming does not benefit Amazon. They would prefer to drive the sale back through their portal. We can speculate any entry from Amazon may be designed to bring the masses, and more frequent shoppers, to do more showrooming than webrooming.

What is left to be stated is, in developed markets, the PC is the dominant e-commerce device by a healthy margin. Over 90% of online shopper indicate they shop through the PC regularly with just under 50% indicating they do so frequently from mobile, and 19% indicating they do so frequently through a tablet. Knowing this calls into question the degree Amazon’s value proposition in a smartphone hinges on the point of mobile commerce.

Beacons Play a Role

In general, beacons like iBeacon and other devices based on Bluetooth LE, will play a significant role in mobile commerce. A transformative role one might even say. For an excellent read on the promise of beacons check out this excellent piece by Steve Cheney, who works for one of the leading beacon companies.

These beacons in retail have the potential to give deeper context to a shopper through their mobile device. What’s fascinating is, beacons don’t necessarily have to drive e-commerce to dramatically change the retail experience. Instead, a shopper can walk down the cereal aisle, trigger a beacon, and be presented with coupons or promotional offerings on cereal. Beacon’s will bring proximity to retail and it stands to change the game entirely. More importantly, it will give retailers a chance to compete more fully against the Amazons of the world.

Challenges for Amazon’s Smartphone

In mobile, no company shipping a forked version of Android has attempted to succeed in mature markets. This is because Google and Apple have all the apps, the map services, and a host of other things considered essential for a mobile device. Amazon has a much weaker app ecosystem in mobile on their Android fork. They have no mapping solution, and will need to use someone else’s most likely. They will need to use a search engine like Bing as they do on the Kindle Fire tablets. Knowing what their options are, it is extremely difficult to have optimistic projections for their smartphone entry against the likes of Apple and other Android vendors like Samsung.

That being said, Amazon seems to be playing a very different game than others. So perhaps we need to shape our expectations of what success looks like for Amazon different than others in the smartphone market. Whatever the case, it will be nice to see some new competition enter mobile. And if Amazon can prove that a fork can compete against the incumbents, it could open the flood gates of others driving hardware as a service in multiple segments related to PCs, tablets, and smartphones.

Amazon’s hardware play, in any category, is their attempt to acquire valuable data and integrate their experience. These are two things they will have trouble accomplishing if they are simply a software stack on someone else’s platform. But whether they can pull it off, or whether their platform is even the right one, remains to be seen. In terms of mobile eyeballs, payment opportunity, and overall share of mobile engagement time, I again leave this slide as food for thought.

Screen Shot 2014-04-25 at 5.02.46 PM

Analyzing Apple’s Emerging Growth, iTunes, and Explaining iPad Woes

Apple surprised with iPhones and “disappointed” with iPads. While many in the media will overreact and question Apple’s growth prospects, I find myself as optimistic as ever about Apple and its future. The foundations for a long term, healthy ecosystem are starting to shape up. It starts with the iPhone.

iPhone

Our biggest takeaway from the earnings data around the iPhone should be the success we are seeing in emerging markets and especially China. Key points:

  1. iPhone took 55% of the smartphone market in Japan according to Kantar Worldpanel
  2. Double digit growth in Taiwan, Indonesia, and Brazil
  3. Sales in India and Vietnam doubled
  4. 85% of iPhone 4S buyers in China are new to iPhone
  5. 69% of iPhone 5c buyers in China are also new
  6. Many of those are switching from Android

The story for the iPhone has to be its growth in these new markets. While readers of my analysis should not be surprised at the China stats, since I have long been saying the China opportunity is underestimated, the growth in these other markets is worth noting. While it is true Apple has a small base in these countries and the percentages look good because we are talking about small numbers, growth remains growth. In particular, Apple is seeing growth, even though modest, in regions which are viewed as “low end.” Most other analysts I speak with completely discount Apple in these markets and say they have no chance to succeed. Modest growth is still growth. Keep in mind this comes with Apple not necessarily changing their pricing strategy much. They keep their newest products at a premium and use their older generation products as entry level. This is the investment they have made in quality components, design, and build quality paying off. Products several years old can succeed as entry level products years later for markets who generally can’t afford the latest and greatest.

Another chart to ponder. Here is a look at the countries where Android is most dominant. We will keep an eye on these numbers.

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iTunes

While it is a point Apple’s iTunes revenue has stayed relatively flat, we can’t ignore the now massive size of the iTunes active user base. Apple highlighted they have 800m iTunes accounts now and nearly all of them with a credit card on file. To put it into perspective, let’s look at the user numbers of other large user base companies.

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Thinking about the opportunity for an active base with nearly 800m credit cards on file is an extreme source of optimism. Tim Cook made a point on the earnings call to point out their loyal customer base begins with a product that gets new customers into their ecosystem. This is why the statistic of first time customers coming into the Apple ecosystem is key. Once into Apple’s ecosystem, customers are loyal and begin to invest. The relatively flat growth of the iTunes ecosystem is likely due to these first time Apple customers coming in at lower price points and therefore representative of an audience with monetary sensitivity. As I pointed out for Tech.pinions insiders yesterday, many consumers in these markets use payment mechanisms other than credit cards. If Apple can embrace these consumers, meet them where they are and cater to their purchasing habits beyond credit cards, I fully expect iTunes revenue from these customer to increase rapidly.

Screen Shot 2014-04-23 at 8.02.53 PM

iPad

There is a dynamic about the iPad I don’t hear many talking about. It is something we have become aware of due to recent research. Take a look at this statistic from a GWI report of 30,000 global consumers.

This shows the percentage of people who share specific devices with one or more people. What we have learned is 50% of tablet owners share their tablet with one or more people. This is a key observation. We have long debated whether the tablet was communal or personal. There is surely a case for both but what the research is showing us is for a large percentage of the tablet install base, just shy of 500m customers, the device is for the most part communal. Which means one or two per household suffices for the time being and the necessity for one per person does not exist. This dynamic completely changes how we think about tablets, their use cases, and their refresh cycles.

That being said, I am still extremely bullish on the tablet segment. We view this device as the true mass market computer. While it has tremendous benefits for enterprises and education markets, the pure consumer market is still ripe for tablet growth. In emerging markets we are already seeing tablet owners leapfrog the PC and go straight to the tablet computing form factor. All of these points are why we are confident this market is bigger than the PC market.

The iPad is in uncharted territory. We are still in an era where we are figuring out all the things it can be and do as well as how it fits between the PC and the smartphone. In 1978 Visicalc came out and immediately people understood how the PC was going to transform everything. The tablet has not had its modern day 1978. It will and hopefully sooner than later.

The Changing Shape of the Smartphone Market and What it Means for Samsung and Apple

When I study data and trends in every major smartphone market in the world several points stand out. The first is the dramatic rise of regional smartphone players. Most of these players are coming from Asian markets due to regional manufacturing infrastructure. This article includes a list of the top 15 Asian handset makers who are, for the most part, focusing only on certain regions of Asia. This is a major trend and is one of the most fascinating to watch. It is also perhaps the biggest challenge for companies like Samsung and Apple who are the brands dominating the global smartphone market today.

The second major trend is related to the price bands where all the growth will come from in smartphones the next few years. Since we have, for the most part, saturated the total addressable market for smartphones in developed economies, the vast majority of the growth (over 80%) of the smartphone market will come from devices costing less than $150. When you combine the two trends I just described, you can see why these lower cost regional players are rising fast and worth paying attention to.

To Be Global, Think Regional

Be global, think regional. This will become the mantra for every global tech company selling products to consumers worldwide. I am becoming increasingly convinced a global brand strategy will work but a global product strategy won’t. Global companies like Apple and Samsung will have to be sensitive to the unique market dynamics of each region and, in many cases, offer products and services unique to those regions. As I study larger regions like China, India, Indonesia, Brazil, and even Africa, it becomes clear there are specific things that are popular and working in those regions not available elsewhere. More often than not these are regional services like micro-payments, search, and local commerce (transit, leisure, etc.). This is not to say these things don’t happen in developed markets, but the infrastructure is highly localized in many cases. For example, in developed markets credit cards are a common method to handle transactions but in many of these emerging markets, credit cards are not common. The key takeaway for companies looking to compete in this region is the necessity to support and integrate the vast diversity of highly localized services dominating these regions.

These local players are succeeding, and in some cases dangerous to the likes of Samsung and Apple, because they are focusing so heavily on localized services. This is a key point due to the economics of these regions. We are seeing business model innovation in handsets due to the extremely low cost of these devices. The OEMs know the money is not in the hardware but in the services upside. This is why, for example, it is not out of the realm of reality (and would not surprise me one bit) if companies like Tencent or Alibaba got into the hardware business with a smartphone or tablet in China.

The massive growth coming from the low end is driving companies to focus more on localized services. This is an attractive proposition since these markets thrive on local services. Companies willing to go out of their way to cater to these customers and their localized needs are the ones positioned to succeed.

Samsung and Apple

Although often compared, Samsung and Apple are in very different positions when it comes to these markets. Samsung has risen on the basis of their low end smartphone business. The premium category line of Galaxy smartphones is relatively new and not where the bulk of their mobile hardware revenue comes from. Nor is the Galaxy lineup where they see the bulk of their mobile device shipments. Samsung’s mobile group thrives from the low end in markets like China and India. Coincidentally, the exact same markets where these regional players are squeezing them out of that low end. I remain convinced Samsung can not and may not even want to compete in the low end any longer with these upstarts. It is a battle they can’t win, especially when they don’t have a services business model to get incremental revenue beyond the hardware.

On the other hand, they are shifting to become more of a premium player. This is why they are willing to spend billions of dollars on global marketing for the Galaxy brand. With just over 200m ((Creative Strategies estimates)) Galaxy smartphones sold to date, it is a slow but steady crawl. Samsung’s only hope is to develop into a premium hardware player. Whether they can create a services revenue model on top of that hardware is yet to be seen. Samsung is in the more precarious position of any company in my opinion.

Apple, on the other hand, has no intention of competing in the low end with the companies I mentioned. This is the right decision. So what is Apple’s play, if any, in these markets? The first is their continued investment to support local services. Apple has shown, with regard to China, they are investing in features in iOS and Mac OS X to integrate local and regional services. There is still more to be done but this is a good start. While Apple has stayed away from carrier billing, it happens to be the norm in many of these markets. Whether it is embracing carrier billing, or integrating better with a local payment services, it is in Apple’s interest to integrate with the transaction models that are the norm for the regions where credit cards are not standard. Apple can not just be a hardware company in these regions but must be in a position to monetize software and services within their ecosystem. Going beyond credit cards is the key in these markets.

While it is reasonable for Apple to not go toe to toe with these low end companies, the risk is in the business model innovation happening around them. Xiaomi is a good case study to continue to keep an eye on. They have managed their brand well. They sell affordable premium devices at cost but monetize services as a part of the platform. They have global ambitions as well. Today, they renamed their company to Mi in an effort to expand globally with a name much easier to brand than Xiaomi. Very smart on their behalf. This business model may very well represent the future of OEMs. Premium hardware at cost but tied to services is a model to watch in every region.

Bl0IGRgCEAASD46.jpg-large

I don’t think Apple is in nearly the precarious position Samsung is but I will wait and see how they adapt to the global trends at all levels of their business, hardware, software, and services. Global brand, regional strategies are the key.

Does Samsung need Adult Supervision in the US?

Not long after Eric Schmidt became CEO of Google, people around Google started saying with Schmidt in charge, Google now had adult supervision. At the time, the two Google founders, Larry Page and Sergey Brin, were barely out of college and, while great engineers, they did not have the business background to really take Google to the next level. Schmidt had come from Sun Microsystems and at that time had just left the role as CEO of Novell. Eric Schmidt’s track record at Google speaks for itself. Google is the biggest search company on the planet, continues to rake in record profits and is clearly one of the most powerful companies in the world.

Over the last 9 months I have actually become quite a fan of Samsung products. During the last two years, their designs have become more innovative and to my surprise their software prowess has increased exponentially. While many have criticized their Gear smartwatch, I personally really like it and use it daily. I did not think I would be a fan of any phablet but my use of the Galaxy Note Pro has changed my mind on this type of smartphone. It sits in my back pocket and while not my main smartphone, it is the one I use for surfing the Web, connecting to my Gear watch and, because of its large screen, is the book reader I use the most when mobile. I must admit as I age my eyes have trouble reading on a smaller screen, which is partly why a phablet sized screen appeals to me.

But I have become increasingly concerned with Samsung’s lack of understanding of the American market/culture and how to market within the US. If you were at the launch of the Galaxy S4 smartphone and Gear Smart Watch or saw it on video, you know how cringeworthy that event was. Using a Broadway-like show to introduce tech products and, even worse, creating scenes that were controversial for their demeaning women in the office and you had a disaster most of us will not forget. While the final decisions on producing this production and including these controversial stereotypes rested solely in S. Korea, how in the world did their US executives not question it and allow it to go forward as it was scripted?

A side note to this is I have been covering the PC and CE business for 35 years and can tell you horror stories of when tech companies tried to be cute and added theatrical twists when introducing new technology or new devices. Radio Shack’s use of a motorcycle and cop on stage to show off CB radios turned out poorly or when Sony brings Hollywood stars into their keynotes that have nothing to do with what is being introduced are just a few examples. Who can forget Intel’s use of the Blue Man Group in a CES Keynote? Their CEO at the time, Paul Otellini’s, interaction with them was lame. My recommendation to those doing tech introductions of products is to show off what the product can do and let the product speak for itself. Just keep everything in a tech presentation focused on the product and ditch the entertainment.

Although Samsung has had other cultural challenges in our market, the recent one in which Boston Red Sox player David Ortiz took a selfie with the President when the team was at the White House, then Samsung using the selfie to promote the new Samsung smartphone Ortiz was using was completely out of line. Again, how in the world did no one in Samsung’s US executive ranks question the idea of doing a promotion using the image of the president without his permission? It showed a complete lack of understanding of the fact the president does not endorse any product by nature of his job, which implies he has to be neutral when it comes to any product, company or service.

Perhaps they need a PUSCO or Professional US Cultural Officer that all US events, ads and communications go through to keep them from making these types of errors that ultimately reflect poorly on the company and its overall leadership. If you caught the banter from the media over the Broadway launch of the Galaxy S4 you know how this one event has really colored how many in the media and even some consumers view Samsung today. With all the publicity Samsung received over the Ortiz presidential selfie, this too did not help the image of Samsung — a great company with great products.

Let’s just hope they’ve learned an important lesson from these two major missteps and some adult leadership focused on these types of issues comes soon. I would hate to see Samsung get any more black eyes in the US and would rather see their US marketing become smarter and more US savvy.

Peering Inside The Apple Rumors Prism

Steve Jobs fully understood the value in surprise, the wonder of magic, and the awe a beautiful, functional, highly personal computing device can evoke when unwrapped for the very first time. Rumors, particularly a stream of unceasing rumors of all kinds, tend to sully this ideal.

Not much can be done about it, unfortunately. Not only because Jobs is now gone but because Apple is far, far bigger than it has ever been. The company now comprises ten of thousands of employees, a massive retail chain, strategic partnerships with nearly every big name in media, relationships with automakers and contractors by the score. The Apple ecosystems spans nearly half a billion active users, a global supply chain that touches 4 million workers, hundreds of suppliers, and 18 worldwide final assembly plants. Leaks and rumors are inevitable.

Apple suppliers

In addition to leaks, there may be story plants, trial balloons, media spin, hurt feelings from those let go, false leads from those gunning for a promotion, snapshots from an anonymous line worker in China, misdirections from a savvy executive and slip ups by trusted employees. Given the scope of today’s Apple, shutting down the rumor-media industrial complex is simply not possible.

The end result of all of this?

We don’t know what we don’t know and we aren’t always sure what we do know. To be sure, all the rumors and all the talk may help whet our appetite for the next great Apple product. It can also lead to far too many brain cells preoccupied with even the most ridiculous Apple tales.

For example…iRing. Yes, leading Apple sites have written about and thoroughly dissected the very real possibility of a computerized ring, forged by Apple, which could be, it is presumed, a means to support digital payments, possibly serve as a remote control for the wearer’s music collection, and all manner of other nonsensical functions.

This will not happen. There will be no iRing. None. If for no other reason than should Apple even dare release such a product, every sneer, every cutting remark made by any and every Apple hater everywhere since the beginning of time would instantly be made whole. I can barely write the word ‘iRing’ without laughing.

I am certain, however, that talk of an iRing will persist.

The Apple Rumor Prism

Like it or not, expect no end to the Apple rumors and tall tales that emerge from the amorphous flotsam the media periodically feasts upon. This is all exacerbated by the fact Apple PR, whom I have been in contact with on many occasions, nearly always refuses to comment on any rumor. Realistically, they have little other choice.

Which begs the question: Is there a way to pre-determine the veracity of a Apple rumor?

(Wait for it…)

No.

The best we have so far are a few very well connected Apple writers, such as Jim Dalrymple, who can deliver a yay or nay but only at certain times and only for certain rumors. With Apple, rumors are like weeds, and no one person can stomp down all of them.

For example, thanks to the ongoing court battles with Samsung, we recently learned Apple has been rather concerned over the sales growth of large display smartphones, which it does not yet offer.

iphone-4-5-inch-displays-1

Surprise! Days later, we are treated to pictures of new iPhone molds suggesting a larger iPhone! Is this a plant from Apple? A false lead? Or some kid in Taiwan not very good with Photoshop? We don’t know. Worse, we tend to latch onto any data point, such as it is, that confirms our biases or affirms our hopes.

What then, is the best means of determining if a rumor is even merely likely when Apple refuses to say and the best Apple sources can’t (yet) verify? I focus on what I do know with a high degree of certainty and run the latest rumor through that prism. This may lead to some dead ends or errors, but it typically keeps me on the right trail.

I know with a high degree of certainty that…

  • Tim Cook is firmly in charge of Apple
  • Jony Ive is firmly in charge of the look and feel of Apple products — all of it, inside and out
  • Tim Cook has essentially removed Jony Ive from the bowels of the Apple design labs and made him a quite respectable SVP, which almost certainly means Ive won’t be as intimately involved with each and every product, manufacturing process and innovative material going forward
  • Cook’s big name hires have been in retail and branding, though he’s also hired veterans from the fitness and medical devices industry
  • Apple works on products and prototypes for years before it believes everything is just right for launch
  • iPhone margins are massive and counter to the direction of the marketplace
  • Apple cannot go down market 1
  • Apple is comfortable with offering seemingly confusing choices for consumers (e.g. iPad Mini RD vs iPad 2 vs iPad 3, I think)
  • Core Apple products such as the iPhone, iPad and the Mac are typically replaced by users every 1-5 years, and many of these are not junked but rather re-sold by the original customer or a third party
  • Apple possesses a near religious fealty to the notion of continuous product improvement
  • Optimizing and innovating all hardware in pursuit of product improvement — and product margins — is hardwired into the company’s DNA
  • Apple’s relationships with IT decision makers and procurement personnel in government, the enterprise and businesses with more than 20 employees is woefully lacking
  • Apple is worth more than $450 billion and is sitting on approximately $160 billion in cash and equivalents

These guide me whenever I dare pick apart an Apple rumor or chase down the latest crazy Apple tale.

Caution: these ‘knowns’ are not equal!

The majority of Apple’s revenues come from the iPhone. The addressable market for the iPhone is radically larger than the market for any other extant Apple product. Each fact from above, even if entirely true in isolation, is not inviolable should it ever even potentially bring harm to iPhone sales and iPhone margins.

iphone revenues

The Apple Rumor Mill

Running rumors though this iPhone prism serves as my handy guide in understanding if a rumor has legitimacy or not.

For example:

An iWatch should almost certainly integrate with (and be made most useful by) the iPhone. An iWatch will likely demand a keen sense of style, luxury branding and retail sales savvy. Given what I know, iWatch rumors are absolutely within the bounds of certainty.

An Apple television would not be appreciably enhanced by the iPhone. Televisions are kept in use far longer than five years. There’s little to justify this rumor, no matter its persistence.

A line of wearables or ‘smart’ accessories that all tie back to the iPhone? Absolutely. These enhance the iPhone’s value and should extend iPhone sales.

That Apple has to do anything this month, this quarter, this fiscal year to ensure its success? Complete nonsense.

A revolutionary new product that just might “disrupt” the iPhone? No. Repeat after me: No. For Apple to even consider disrupting its golden iPhone goose would not only be foolish but darn close to a dereliction of duty. Buttressing this is another fact: there is nothing on the horizon, nothing at all, even remotely ready to replace the iPhone (or any high end smartphone). Nothing. Not Google Glass. Not Oculus Rift. Nothing. We are in the early days of the smartphone market. Do not make me repeat myself. 

Within a week of reading this, probably sooner, you will hear yet another rumor about Apple. Before considering it, pro or con, first make sure you run it through your list of knowns. Most of the time, you will immediately recognize the rumor as utter nonsense. On rare occasions however and no matter the source, you will stumble upon a rumor more true than not.

Such is life for those that follow Apple Inc and the hundreds of millions who love its products. The true story of Apple does not begin or end at product launch. Those are merely two data points in an ongoing and very rewarding chase.

1. [Feel free to counter my claim Apple cannot go down market. Remember, however, even the ‘cheap’ iPhone, the iPhone 5c, is one of the most expensive on the market, and note also the major Apple retail hires come from luxury brand companies.]

Microsoft’s Two Big Announcements and Their Future Impact

Microsoft made a number of announcements at their Build conference this morning. While many were related to Windows 8.1 and Windows Phone 8.1, most feature announcements were simply playing catch up. But they did announce a few things I think are interesting.

Let me preface this by saying Microsoft is in a deep deep hole. Nothing they announced or will announce any time soon will immediately get them out of it. What I am looking for are things I can point to that signal they are building a step, or a ladder, to get out of this hole.

The first and most important announcement is they are not charging any OEM making a tablet or smartphone less than 9 inches a fee for Windows Phone or Windows 8.1. The big one here is Windows Phone is now free to OEMs. Again, this announcement will not immediately get them out of this hole but several observations need to be made about it.

First, this move is geared at hoping to win over OEMs who are making smartphones for the low end of the market. This is the part of the market where the vast majority of growth will be over the next 2-3 years. My numbers tell the story that, over the course of the next 2-3 years, the market will add a billion new smartphone owners. Over 80% of these new users will purchase their first smartphone at a price point less than $150 and largely less than $100. In making Windows Phone 8.1 free, Microsoft is hoping to get a slice of the next billion smartphone owners who will be connecting to the Internet for the first time. Microsoft played a key role in connecting the first billion users via a PC, and are hoping to play a key role connecting the next billion via a smartphone.

Note this picture showing the growing ecosystem and the regions where each OEM is strong. Most of the OEMs that you may not recognize are serving the low end of the market in their respective regions.

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The second observation, which is important to the first, is most of the vendors in this screenshot are paying Microsoft a licensee fee for their Android implementation. Which means for many of these OEMs, shipping a Windows Phone will cost them less than shipping an Android phone. The problem for Microsoft is if they can not monetize a shift in the mix of Android phones sold by these OEMs, then they are losing money by not monetizing the OS. For this to work, Microsoft must have services they can make money on, to the tune of $5-12 per year per device for this to make them as much money as they make on Android per device. A key point to this observation, however, is Windows Phone requires quite a bit of processing power. An OEM likely can’t ship a phone costing less than $100 dollars, given the tech specs necessary, that runs Windows Phone. For this strategy to even be remotely possible for Microsoft, they need Windows Phone to require less resources so it can ship on a lower cost device specification wise. Windows Phone hardware, and even the software, is now truly just a shell to Microsoft services — very similar to Google in this regard. To work, Microsoft needs services these new customers value and will use.

The second announcement is a bit more nuanced but could have interesting implications. Microsoft announced their own smart voice assistant on Windows Phone called Cortana. This is the name of the cloud computer based personal assistant for the Master Chief character in Microsoft’s popular Halo gaming franchise. While most of the things this solution enables are just catching up to Siri and Google Now, this service is fully powered by Bing. When I look at many of the services Microsoft is offering, Bing is the one I believe they have the best chance at monetizing with these new low end customers — assuming they win their allegiance.

I do believe the next big evolution of the smartphone is to transition the device from what it is today and move toward a true personal assistant to its owner. Artificial intelligence will play a key role in this. While this is not necessarily something a first time owner needs or wants, it is an important foundation for Microsoft to build upon.

As I stated earlier, none of this immediately gets Microsoft out of this hole. While neither announcement is a guarantee they are building toward a ladder, these are at least a couple of the things I think make the case they are moving in that direction.

The Genius Of Steve Jobs Or Why Google And Facebook Must Make Big Bets

The ghost of Steve Jobs haunts Google and Facebook. Unlike Apple, which has always aligned its interests with its users, both Google and Facebook must serve two masters: users and customers. They are not the same. Indeed, the divergent demands of these two groups has placed both web giants at a long term competitive disadvantage against Apple — one that will cost them billions to correct and will likely never be fully resolved.

Steve Jobs repeatedly veered from conventional Silicon Valley wisdom. His successes were legion. Given Apple’s current size and dominance, it’s easy to forget how so many of the big strategic gambles Jobs made were almost laughable at the time.

  • Vertical integration
  • Make both hardware and software
  • Keep design in-house
  • Create a global retail chain
  • Lock down your ecosystem
  • Make money on the hardware
  • Focus on fashion
  • Touchscreens are superior to physical keyboards

Google is, despite occasional shout outs to “openness”, absolutely following the Apple playbook which Jobs crafted decades ago. Facebook will follow as best it can, I suspect.

It’s not going to be enough.

Jobs made an even more profound strategic decision, one neither Google nor Facebook can ever match. It was a decision stunningly obvious in its simplicity, yet even today, despite Apple’s success, is still rejected throughout the Valley. That primal Jobsian strategy?

Your users are your customers and your customers are your users.

Sounds so simple, so obvious, yet think of nearly every start-up success in Silicon Valley this millennium, every hot new business model trend. Is the actual end user the actual paying customer?

In nearly every case, the answer is no.

In this disconnect, there is much weakness.

By linking Apple’s fortunes with the happiness of its actual users, Steve Jobs unleashed a slow-motion revolution that haunts Google and Facebook even now. Others, too. Even once dominant Microsoft, which remains radically dependent upon corporate buyers — not the actual users of their product — is hurting.

Obvious is not always easy.

The High Cost of Serving Two Masters

The divergent interests of users and customers is why Google and Facebook have been on such a massive buying spree recently. I do not expect a slowdown.

Big tech acquisitions

The latest acquisitions are not, as so many confounded analysts suggest, a sign Google and Facebook lack Apple’s “focus”. Rather, the fault lines in the Google and Facebook business models demand these acquisitions. That is, to make users happy and to make advertisers happy and to ensure an uneasy peace across both consumes enormous resources. Google and Facebook will always need to keep the checkbook handy. It’s not a lack of focus which explains their acquisitions. Just the opposite, in fact. Their focus is on a two-headed beast.

Before I go any further analyzing Google and Facebook acquisitions, I must acknowledge there are other, less critical factors at play:

  1. Real Control
  2. Fake Money

Google’s and Facebook’s founders have radically disproportionate voting control relative to their total ownership share. They can buy, even on a whim, and almost without explanation. Steve Jobs had no such control, nor does Tim Cook. Essentially, Larry Page and Mark Zuckerberg can buy whatever they wish without a single voice being raised.

In addition, the respective CEO-owners of Google and Facebook are fortunate enough to have inexplicably high PE values. $GOOG is at 31, $FB is 92 — that’s not a misprint. $AAPL on the other hand, trades at a stunningly reasonable 13. Whether you think the market is appropriately valuing these three companies is a separate issue. For now, the market is throwing money at Google and Facebook and money is of no use if it’s not being spent. I suspect if the market pushed Apple’s share price to a PE of 31, that Cook would likewise go on a shopping spree.

These two fortunate, albeit anomalous realities notwithstanding, the primary motivator behind the massive Google and Facebook spending sprees is, in fact, their respective CEO’s keen understanding of what their businesses require to succeed.

Think of a gushing well that nonetheless requires continuous priming. 

Encourage. Capture. Present.

To continue earning billions, both Google and Facebook must:

  1. Encourage use — to the point where they pay whatever is necessary to get billions more people online.
  2. Capture our personal data — including where we are, who we are with, what we are doing, even how we are feeling.
  3. Offer screens, tools, services and platforms so their paying customers — advertisers — can effectively present their message.

All their respective acquisitions are to maximize these three building blocks: Encourage. Capture. Present.

internet.org

Thus, while couched in feel-good language, it’s shrewd business to encourage more people go online.

Last year Facebook and other tech companies launched Internet.org, a global partnership to make the internet available to the two thirds of the world’s population that doesn’t have it.

Thus, cool-sounding “AI” projects are really little more than a means of better extracting maximum value from the captured information of a billion plus users:

By teaching a computer to think, Facebook hopes to better understand how its users do too. So today the company announced that one of the world’s leading deep learning and machine learning scientists, NYU’s Professor Yann LeCun, will lead its new artificial intelligence laboratory.

Thus, a few years from now, when we spend as much time inside ‘virtual reality’ as we now do staring at our smartphones, Facebook will need to have a suitable platform for its advertisers to present their message. Enter: Oculus Rift.

SWOT

Of course, each company has its own unique strengths. As the graph below illustrates, I contend Google does a far better job of capturing user information — via Play, Wallet, Android, search, Maps, etc.

Both Google and Facebook do an equally good job of encouraging use.

Facebook offers advertisers more and better options to present their message — Facebook, Instagram, WhatsApp.

capture encourage Facebook google

We should therefore expect both companies to acquire other firms, talent and technologies that enable them to further enhance their existing strengths and to shore up their weaknesses. For example, Facebook needs to build or buy tools to more effectively capture critical personal data. Might this lead to buying Foursquare, for example, with all its user-location data?

As we increasingly look to our wearables and smart watches, expect Google to buy or build tools to ensure their advertisers can present their message onto these new screens.

There’s still another consideration for potential acquisitions. The companies currently are split in the type(s) of information they are best at encouraging, capturing and presenting.

think do express feel

Facebook’s superiority is better suited for encouraging us to share how we feel, and its platforms allow users to more fully express themselves. Google by contrast, is far better at capturing what we want and what we are doing.

Given this, I suspect while both Google and Facebook will acquire companies that help them shore up weaknesses across the feeling-doing-wanting-expressing spectrum, the really big money will be spent on ensuring their current leadership is almost impossible to surpass.

Focused Acquisitions

Was $19 billion too much for WhatsApp? Likely. As was $2 billion for Oculus and $3+ billion for Nest. Fair enough. But, these acquisitions do not reveal a lack of focus – just the opposite:

  • Driverless cars will present ads and content in a captive environment without distraction.
  • Internet drones, lasers and balloons encourage more of us onto the web and onto the many and varied Google and Facebook platforms.
  • If any of us spends any appreciable time in the “metaverse”, then Facebook’s Oculus Rift gamble will enable advertisers to present a stream of messages into our eyes and ears, without any of the real world’s messiness.
  • Google Glass can (soon) present the latest reviews of the newest restaurant as we walk past — or instantly display where we can get a better price on our favorite gear.
  • Nest will help Google capture our home information.
  • WhatsApp encourages us to share a great deal of personal information.
  • Instagram encourages us to express ourselves.

The list goes on.

Therefore, when you read financial analysts, such as Felix Salmon, who insist Facebook’s latest acquisitions aren’t related, they are missing the big picture.

Look at his big purchases — Instagram, WhatsApp, Oculus. None of them are likely to be integrated into the core Facebook product any time soon; none of them really make it better in any visible way. I’m sure he promised something similar to Snapchat, too.

Wrong. It’s not about being “integrated into the core Facebook product.” Rather, it’s about encouraging use, capturing use, and maximizing its value to advertisers — which means enabling those advertisers to present their message to every user at any time, in all places, on all screens.

And it will never end.

Apple must make its customers happy. That’s no easy task. Google and Facebook, however, must make both their customers and their users happy. That’s much harder. The checkbooks will remain at the ready.

Market Share Metaphysics

Twice before I have used Aristotle’s concept of “Essentialism” to explain why tablets are “real” computers and why OS X will not be merging with iOS. Today, I go to the well one last time ((…unless I need to go there again in my desire to quench my thirst for knowledge (or drown my stubborn opponents therein).)) in an attempt to definitively and finally put an end to the messianic myth that market share equals platform. Hopefully, we shall never speak of this again. ((Fat chance.))

Essentialism

What attributes make things what they are? Or, what attributes make things not what they aren’t? (Confused yet?)

Aristotle drew a distinction between “essential” and “nonessential” properties. ((Actually, Aristotle called “nonessential” properties “accidental” properties. That’s totally confusing so I “accidentally” changed Aristotle’s wording from “accidental” to “nonessential”. It’s my article, I can do what I want.))

Essential properties are those without which a thing wouldn’t be what it is. Nonessential properties are those that determine how a thing is, but not what it is. For example, Aristotle thought rationality was essential to being a human being and, since Socrates was a human being, Socrates’s rationality was essential to his being Socrates. Without the property of rationality, Socrates simply wouldn’t be Socrates. He wouldn’t even be a human being, so how could he be Socrates?

On the other hand, Aristotle thought Socrates’s property of being snubnosed was merely nonessential; snub-nosed was part of how Socrates was, but it wasn’t essential to what or who he was. To put it another way, take away Socrates’s rationality, and he’s no longer Socrates, but give him plastic surgery, and he’s Socrates with a nose job.

The Elephant In The Room

Baby elephantOne could describe an elephant as being big, gray and wrinkled. But are those essential or nonessential attributes?

  1. Are there elephants who aren’t big? Sure. Baby elephants are small. So were prehistoric dwarf elephants.
  2. Are there elephants who aren’t gray? Sure. There are brownish elephants. There may even be albino elephants.
  3. Are there elephants who aren’t wrinkled? Sure. Maybe. Or maybe not. Who knows.

In other words, bigness, grayness, and wrinkledness all fail Aristotle’s test of defining what an elephant essentially is. Instead, they describe how elephants are, generally and nonessentially.

The Church of Market Share

The Church of Market Share says majority market share is essential for a computing platform to thrive. But is this even close to being true?

  1. Are there successful platforms that aren’t big? Sure.
  2. Are there successful platforms that don’t have majority market share? Sure.
  3. Are there successful platforms that aren’t wrinkled? Uh, maybe. Or maybe not.

In other words, massive market share fails Aristotle’s test of defining what a successful platform is. Arguing market share size makes a platform successful is like arguing being “big” makes an animal an elephant. That’s simply a “whale” of a lie.

What Is Essential

Greek astronomerWhat is “essential” to a computing platform is an operating system which forms the foundation upon which third party developers can develop; developers who create desirable products; and consumers who desire and acquire those products. Bigness may be nice, but it ain’t “essential.”

In other words, bigness, grayness, and wrinkledness all fail Aristotle’s test of defining what an elephant essentially is. Instead they describe how elephants are, generally and non-essentially.

Likewise, bigness, majority market share and wrinkledness all fail Aristotle’s test of defining what a successful platform is. Instead, they describe how platforms are, generally and non-essentially.

This is true only up to a point. Something as small, white, and round as an aspirin cannot be an elephant, and confronted with such an object, we would not be tempted to ask, “Is that an aspirin you’re taking or an atypical elephant?”

Market share as small as Microsoft’s Windows 8 and Blackberry’s cannot be dominant platforms. Confronted with such a platform, we would not be tempted to ask, “Is that an insubstantial, unfounded stereotype you’re swallowing whole and without critical analysis…or an atypical platform?”

The point is that bigness, grayness, and wrinkledness are not precise enough terms to be the essential qualities of an elephant. Likewise, bigness, majority market share and wrinkledness are not precise enough terms to be the essential qualities of a platform.

It’s a certain size range and a certain color range that, among other qualities, determine whether or not something is an elephant. It’s a certain size range and a certain market share that, among other qualities, determine whether or not something is a successful computing platform.

Wrinkledness, on the other hand, may be a red herring, or perhaps a “whistling herring”.

The Wrong Question Will Get You The Wrong Answer

    Abe: I got a riddle for you, Sol. What’s green, hangs on the wall, and whistles?
    Sol: I give up.
    Abe: A herring.
    Sol: But a herring isn’t green.
    Abe: So you can paint it green.
    Sol: But a herring doesn’t hang on the wall.
    Abe: Put a nail through it, it hangs on the wall.
    Sol: But a herring doesn’t whistle!
    Abe: So? It doesn’t whistle.

Microsoft’s Windows platform was big, a monopoly and it whistled (or it didn’t whistle). But that doesn’t mean that it was or is the one and only way to create a successful platform. And anyone who says it is, is telling you a fish story.

Post-Moretm

Feel free to steal this argument and use it since I essentially (not accidentally) stole it, er, borrowed it from Thomas Cathcart: “Plato and a Platypus Walk Into a Bar.”

Of course, a link to this article would be nice…

…just not “essential”.

How Microsoft Could Hijack Android

Last December I wrote a piece for PC Magazine where I suggested Microsoft embrace Android in order to tap into the world of Android apps for use with Windows 8 and Windows mobile.

I argued that Microsoft would never get the long tail apps for their Windows desktop or mobile platform but there was a solid way to offer Android apps within the Windows framework that would allow Android apps to run, as is, on top of both operating systems.

I also suggested they adopt the Bluestacks player which launches the Android apps and will then run on Windows in such a way a user would not even know it is an Android or Windows app; it just works in its own right. It would give Microsoft the long tail apps they desperately need to keep Windows 8 and Windows mobile viable in the future.

At the time I wrote this I was not aware of the work Nokia was doing to create a dedicated Android Phone using the Android base AOSP (Android Open System Platform). Instead of offering Google’s dedicated apps and services, they installed Microsoft’s services and cloud apps instead. We were able to see this a month before it was introduced at last month’s Mobile World Congress. We immediately realized this was ground breaking from a soon-to-be Microsoft company and could have ramifications for Nokia and Microsoft in the near future.

While Microsoft has somewhat downplayed Nokia’s Android phones and continues to say their mobile strategies are all focused on Windows Mobile, this move by Nokia could actually become a blueprint for how Microsoft could embrace Android in a broader way and make it their own. While it would require Microsoft eating some humble pie, I see the idea of bringing Android apps into the Windows ecosystem as a powerful way to extend their OS market reach and potential while at the same time wrestle some control from Google in the process.

So, how could they do this? The simplest way would be to use the Bluestacks player as mentioned above. Instead of tying the apps and services to Google Play, they could create a dedicated Microsoft Android store and services area thereby substituting anything Google has in this space with Microsoft services. All Android apps are written under the basic AOSP architecture but are currently tied to the Google Store. It would not be difficult for Microsoft to create a Microsoft Android store and offer all Android app developers the API’s to hook into Microsoft’s Android store. It would become another outlet for Android app vendors. Android app vendors would be crazy not to do this since it expands the audience for their apps and could generate more revenue from an audience of over 150 million current Windows 8 customers and another 280-290 million Windows 8 PCs that will ship in calendar 2014.

They could do the same thing on Windows Mobile phone. In this case they would use the core Windows mobile OS, which includes all of Microsoft’s apps and services and then use the Bluestacks player to deliver the Android apps in a similar way. They would do it on their desktop or laptop platforms of Windows 8. This would mean all Windows mobile phones would now have access to the one million plus Android apps and the long tail content and apps Windows Mobile phone needs to grow.

Microsoft already makes money on Android due to license agreements with most of the Android hardware vendors. Using this strategy, they could hijack Android for their own purposes and at a dreaded competitor’s expense. While doing this would mean quite a sharp and humbling turn for Microsoft, the chance of using Android for their own purposes and wrestling it from Google is just too delicious for them to not go in this direction.

Data on China: Apple’s Biggest iPhone Market

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

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

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

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

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

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

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

Big Questions about the Big iPhone

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

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

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

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

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

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