Unpacked: The Tablet is more Social Than Personal

The tablet category remains a central part of our analysis amidst the personal computing hardware landscape. I’ve been bullish on this form factor, despite the market issues, and still believe it represents the most approachable and easy to use larger screen computer on the market. We have been digging into consumer behavior around the tablet category for several years and the one trend that always stood out to me was how the tablet was more of a social device than a personal one for a good chunk of the market. I charted specific devices and what percent of consumers indicate if the product is shared or not.

Screen Shot 2016-05-05 at 9.31.27 PM

I’ve intentionally grouped these devices in their order. From upper left to lower right, the ranking of shared vs. personal is displayed. The smartphone is the least shared and most personal device consumers own. The PC is not far behind. When we look at the tablet, we see it is closer to less personal and less individually owned consumer electronics. I picked both game consoles and TVs as a comparison as they are both much more communal devices in the home.

I sense this observation has a role to play in how consumers view their tablets and their ownership of it and is one of a few reasons I believe most consumers have yet to replace their tablet as frequently as their phone and have not considered replacing their PC/Mac with a tablet. It all comes down to how the device is used and viewed by its owner. If the product is not used that much individually, but perhaps more so socially, then the burden to have the latest and greatest is not high. The main point here is devices which are viewed as more personal, and arguably more essential, will be viewed differently than ones considered less essential.

Perhaps nowhere is that more clear than when we asked consumers to rank their most personal device. In several different phrasings of the question, in every result, the tablet ranked the lowest in device importance and most personal device. That, I believe, is very telling about how it is viewed by the mainstream and a key reason why the market is struggling as it is.

Note how big the tablet market could have been if no one shared it and it was more like the smartphone as a primarily personal device. This sharing dynamic has certainly made it so not everyone in the household needs one, even if they all want one. Perhaps down the road this is a good thing and may help spur more individual ownership. Time will tell.

Lastly, it should come as no surprise that tablet sharing ranked highest among parents and age groups between 24-44. Tablet sharing was the lowest among the 55+ demographic. A group which also ranked tablets much higher as the most personal and important computer they own.

Similarly, countries which have much larger households filled with many families living together and a strong cross-generational mix also ranked quite high with tablet sharing. Notably, the Latin America region and Asia Pacific.

There is a clear pattern here with regard to tablets but the narrative is likely to start to change over the next few years. At least, the story needs to if companies with a vested interested in this category hope to inject some needed life into it.

Are We About to Enter The Era of Mobile Televisions?

One of the companies we have great respect for is NPD. In fact, some of our best industry friends are from this company. They recently sent me a press release with their updated research forecast for devices connected to TVs. Here is the news they sent out and a chart showing that 231 million devices are expected to be connected to the Internet by 2018.

“By the end of 2018, 231 million installed devices are expected to be connected to the Internet and able to deliver apps to TVs, representing 82 percent growth from 2014 to 2018, according to the Connected Home Entertainment Forecast report from global information company The NPD Group.

“The two largest drivers of growth will be the increased acceptance of connected televisions in the homes of U.S. consumers, as well as the continued adoption of streaming media players such as those offered by Google, Apple, Roku, and Amazon,” said John Buffone, Executive Director, Industry Analyst, Connected Intelligence, The NPD Group.

Forecasted # Installed & Internet-Connected Devices* Attached to TV
11E6DE63-B17D-4A3E-96D7-1EA77202A14E

Base: U.S. Internet households

*Devices include connected TVs, streaming media players, video game consoles, and Blu-ray Disc Players

Source: The NPD Group/Connected Intelligence, Connected Home Forecast

I have to admit, this projection is impressive and my first reaction is this forecast is conservative. Many people have 2, 3 and even 4 TVs in the house and, with Chromecast costing $39 and other options (except Apple’s new Apple TV) being well under $80, one would think, at the very least, they would have two or three of theses devices by 2018.

I happened to be with my friend Stephen Baker of NPD this week and, as we rode to the airport together, I asked him about this research. He says there are around 105 million homes in the US and this research projects about 80% of those homes will have at least two of these devices (with some having a bit more). That’s how they came up with the 281 million sold annually by 2018.

But he also stated that, in the future, demand for TVs will decline. Today, while people buy TVs for many rooms in a house, NPD thinks in the end most will have just two large screen TVs and will use tablets for viewing in other rooms in the house. Indeed, with pretty much all of the major networks creating online versions of their content or expanded shows on Netflix, Hulu, and other streaming services, using a tablet for TV viewing makes sense.

One of the companies that is hedging their bets on this is Samsung. They recently introduced an 18-inch tablet that, on the surface, seems to be huge for a tablet. But they actually see this more as a mobile TV and, while not positioning this specifically as such, they are hoping many buy it and use it for that purpose. On a personal level, I have a 13-inch Samsung Galaxy tablet on my bedside table and have it connected it to my Slingbox and the other streaming services I subscribe to and use only as a TV. It works perfectly and kept me from getting a TV for the bedroom.

Although the iPad Pro will never be positioned as a TV, it too is connected to my Slingbox and streaming services and I have caught myself using it on the patio and other rooms in the house many times since I started testing it. Actually, I started doing this with the original iPad when it came out and love the idea that a tablet could deliver a mobile TV experience.

I believe Samsung is really on to something with this 18″ tablet/TV concept. When Dell brought out their 18″ all-in-one, we also used it for that purpose. It was a mobile TV. Of course Dell did not design it for this use but many used it that way anyway. And to be fair, some of the larger tablets and smaller all-in-ones that have come out have probably been used as a mobile TV too.

Last year I spent some time with Intel’s chairman Andy Bryant and he told me that his kids discovered that the Dell 18 inch all-in-one was great for streaming media and games. Once he saw that how his kids used the Dell product he was hooked on the idea of larger tablets and smaller all-in-ones being used for these purposes.

But with Samsung being a major TV vendor and partially positioning this new 18” tablet as a mobile TV, if it is even mildly successful it could launch a whole new purpose for larger tablets. In the past, a mobile TV had to have a TV tuner inside for it to even be classified as a portable television. With video streaming and products like the Slingbox and direct delivery of TV content from the networks and specialty sources like HBO, Showtime, all one needs to have is a good WiFi connection to turn any tablet into a TV and a movie playback device.

The only drawback at the moment is the lack of access to live local content but that sacred cow will soon fall as more and more people become switchers and force the local stations to stream their services in the near future. Actually, in my case and using my Slingbox connection to the TV in my study, I get all the local content I want, making any tablet and especially my 13″ Samsung tablet a full blown mobile TV.

This is an idea whose time has come. People are very mobile these days and are watching streamed TV shows and movies even on small smartphone screens and small to medium-large tablets like the iPad Air. However, while watching video on smaller screens is OK, once these devices get to the 13-18 inches size, their potential to deliver an actual TV-like experience will become much more desirable and the concept of a mobile TV could really take off.

Getting Harder to Beat the Tablet Bears

I’ve been defending the tablet market for some time. I still believe the form factor offers a much more inviting and natural computing environment than a traditional PC. I’ve long argued tablets are great first computers for kids, the elderly, and many in emerging markets looking to do more than their smartphone offers, but who aren’t PC literate. However, these segments alone may not be big enough in annual shipments to sustain many players in the category. At this point, and things can always change, there are a few dynamics we have to fully understand relating to tablets.

First, a great deal of tablets’ global growth and rapid adoption since 2010 has been driven by small tablets in the 7-8″ range, and very low-cost ones. Note this chart of sales and the vast majority, ~80% on average, of tablets in the “other” category are sub $150.

Screen Shot 2015-08-12 at 11.52.20 AM

Unquestionably, replacement rate extension is an issue for iPads in particularly. A behaviour we have noted with lower-cost tablets is they are treated as disposable. In markets like India and China, where low-cost tablets saw large volume sales, it was not uncommon for these to be replaced annually. This could have played a role in the surge in volume sales from these products and is also one of the reasons I think we are seeing a decline. It is these customers, who bought tablets for sub $100 in the 2012-2013 growth stage, who are now not purchasing them anymore as larger screen phones are filling their needs. I’ve shown this chart before, now updated for Q2 2015, and we have debated it, but the signals seem be clear that large screen phones are impacting volumes of low-cost small screen tablets.

Screen Shot 2015-08-12 at 8.44.42 AM

It is unclear if larger screen phablets are impacting iPad sales, or if it is purely because the iPad refresh cycle is extremely long, but I’m certain large screen phones have dramatically impacted low-cost, small screen tablet sales on a worldwide level.

However, some recent data from DeviceAtlas may provide the best signal of the shift taking place. From their latest Q2 report, DeviceAtlas shows that internet traffic from tablets is declining across the metrics their technology tracks.

Screen Shot 2015-08-11 at 2.13.03 PM

Several of the markets tracked here, such as the US, UK, Australia, and Japan, are markets where the iPad installed base is quite high (over 50% in some cases). Which means the decline in internet usage from tablets is not just coming from low-cost, small screen Android tablets. The other point to make is the iPad has traditionally, and still does, lead in nearly every country as the dominant tablet for internet usage. So, to see tablet traffic decline, knowing how much of it globally comes from iPads, enforces again that some of this decline is coming from people using their iPads less to browse the internet. How much less? I’m not sure, but we can’t argue it is not happening.

So where does that leave us? Here are a few ways to think about where the market can go.

Tablets Become SUVs: The analogy that PCs are trucks is apt and holds water. Trucks are not mass market but are specific purpose utilities. The positioning that the tablet is more like the compact car than the truck, meaning it is more mass market than a truck, was commonly used. But perhaps the tablet needs to become more capable, functional, and powerful than a compact car but not quite a truck. Maybe it needs to become an SUV.

This is perhaps why, within iPad sales, we are seeing the mix shift away from the mini to the larger screen iPad. This may also be why there is excitement around a larger iPad, the so-called iPad Pro, which will still be more portable than a traditional PC and nearly as capable.

If this happens, these classes of tablets could compete for the 500m, or more, consumer notebooks in use that are 4-5 years old, when these devices come up for replacement.

Only the iPad and Windows Tablets Remain: Another scenario to consider is Android tablets simply fade away and the only tablet makers left are Apple and those shipping Windows tablets, largely to commercial customers. Since most Android tablets sold are being displaced by large screen Android phones, this scenario could be quite likely. I’d still argue, in this scenario, the tablets becoming SUVs is still the play.

Only Upside is Commercial: Another scenario is the consumer market for tablets becomes heavily seasonal, or only large in certain years, where the regularly quarterly and consistent annual upside is in commercial sales. I use this chart often in my presentations to show the opportunity for tablets to take computers into environments the desk or lap-based PC could never go.

Screen Shot 2015-08-12 at 9.19.02 PM

We believe workers who spend most of the day on their feet and use paper-based processes in places like factories, construction sites, retail, etc, could represent an opportunity of more than 400 million jobs where a tablet is a viable solution.

The Market is Simply Not That Big:Lastly, we may have to conclude the tablet market is just not as big as we originally thought. Many believed it could be larger than the PC market, meaning north of 300m units per year. Currently, the tablet market is on pace to barely break 200m units this year, a decline of about 25 million from 2014. Of course, this could change, but I’m not as confident as I once was, even if Apple brings out a larger one.

If we do continue to see small tablets shrink and potentially become extinct, it will be time to officially start lumping tablet sales into PC sales and stop separating them. I have a model that adds all iPad Air sales into PC sales since I consider them PCs. But I separate smaller tablets into the tablet category.

Perhaps the tablet category simply goes away as the tablet evolves and matures. Maybe it is even easier to just get rid of the labels and say we have small screen computing devices and large screen computing devices.

Analyzing Microsoft’s and Apple’s Approach to Tablets

With Windows 10 on the horizon and Apple’s latest iOS 9 which will bring the iPad into much closer competition with PCs, it is worth looking at how the two platform companies are approaching tablets. As outlined in this report, my thesis for tablets has always been it is the true mass market computer. The traditional PC in its desktop and notebook form factor drove the initial wave of computing. I maintain tablets and smartphones will drive the next wave.

In terms of hard numbers, a clamshell desktop or notebook is used by 1.1-1.2 billion people actively but quite a bit less daily. Microsoft claims Office has around 1 billion active users and has frequently stated Windows is used by 1.5 billion people. This is a generous number in my opinion but, even if we accept it as true, there are a large number of people on the planet not using a fully capable PC.

I’d also argue consumers are tending to use their PCs less in favor of devices like smartphones and the iPad. We have data suggesting a direct correlation to a decline in overall PC usage by the mainstream consumer market with a rise in iPad sales globally. I make a distinction here by saying iPad, not tablets because, while Android tablets ship in higher volume, they do so in markets where PC penetration is low. We see a direct correlation in PC usage decline in markets where iPad shipments are higher than Android such as in the US and parts of Europe.

What this signals to me about the market is consumers still want and need their PC for certain tasks, but are ONLY using their PC for those specific tasks they deem it necessary. For everything else, they are shifting usage to smartphones and tablets.

Which brings us to the difference in approach between Microsoft and Apple with tablets. Federico Viticci writing for MacStories makes a key point:

iOS 9 is going to be a watershed moment for iPad users. For many, the iPad is about to graduate from utility to computer. Apple is envisioning a future where users can do more with iPad apps without the inherent complexities of OS X – and they’re largely relying on developers to help build this future.

Federico is articulating in the same vein I did in Tuesday’s analysis of WWDC, that the iPad is evolving to be more PC-like than smartphone-like. The iPad’s initial drive of adoption was based on it being similar to the iPhone in simplicity. Desktop operating systems like OS X and Windows are more sophisticated, have a steeper learning curve, and are necessary for power users. I’ve long argued PCs and operating systems like OS X and Windows vastly over-serve the needs of the mass market consumer. I hold this conviction still.

Federico rightly points out that, with iOS 9 for the iPad, powerful and sophisticated computing tasks are coming but not bringing the complexities associated with a desktop operating system. This is the polar opposite of what Microsoft is doing — bringing a desktop operating system, and the ecosystem that accompanies it, to tablets. Where Apple is bringing a mobile operating system and the ecosystem to the iPad. It is the simplicity of a mobile OS vs. the complexity of a desktop OS converging on the tablet form factor.

Maintaining the depth of a desktop OS is necessary to satisfy the market that still needs everything a power user needs, including being optimized for desktop or notebook form factors and mouse/keyboard efficient inputs. However, the number of people who need and can get the most out of such a product is much smaller than the masses whose needs are different. It is this area I still believe tablets have the most potential. I fear Microsoft’s approach to tablets leaves their Windows 10 tablet offerings appealing to the hardcore PC crowd, not the mass market. iPad’s emphasis on “sophisticated simplicity”, I believe, can appeal to a wider base of potential consumers.

All of this matters because an event is going to happen which will tell us how consumers vote with their dollars. The active base of PCs 5 years or older is in the range of 500-600 million with more than half being the consumer PC installed base. One has to believe at some point these consumers will need a new PC. I tend to believe these consumers will lean more toward a tablet form factor which means it will come down to the Windows tablet PC offerings and the iPad in its current or perhaps even larger form.

My gut sense is Apple’s evolving the iPad to be more capable of traditional PC tasks is well positioned. The iPad as a computer appeals to those who are mobile literate but have a desire to do more. I’d love to see Microsoft crack the simplified computer for the masses, but my sense is the offerings they currently have are still targeting those who are PC literate.

Research/Data: Phablet Impact Continues to Grow

The device market continues to evolve and grow, following paths that aren’t always as obvious as one might presume.

PCs were dead, and now they’re not. Tablets were taking over, and now they’re not. Phablets were only going to be for a small minority, and now they’re not.

Despite the challenges, one of my roles as an analyst is to create market forecasts and try to bring some sense of order to what often seems like chaos. In the process of creating my firm’s latest predictions for smart connected devices (a term I coined while I was an analyst at IDC to describe the combination of PCs, tablets and smartphones), it became obvious to me that one over-riding factor is now driving a dramatic shift in the device landscape. In a word, “phablets,” which I define as large smartphones with screens that are 5” and greater.

The phablet phenomenon has only had a modest impact so far in the US, but in many other parts of the world—particularly the fast-growing Asian markets—large smartphones are quickly become the common choice of most smartphone buyers. For some of those buyers, in fact, a large smartphone is their first true computing device and serves as their entré to the wonders of the Internet.

While in the US, phablets represented just 13.1% of Q4 2014 shipments, worldwide they already captured 27% of smartphone shipments. In fact, with shipments at just over 100 million units last quarter, more phablets shipped than all PCs or all tablets for the same time period

Plus, the momentum for the category is really only just starting. Here in the US and certain other markets, the 5.5” iPhone 6 Plus finally “legitimized” the phablet market and the momentum behind it is now enormous.

Not surprisingly, I’m predicting very strong growth for large smartphones and believe they will surpass 1 billion shipments in 2019. In fact, they’re the sole reason the smartphone market is continuing to grow because I believe small smartphones (those with screens under 5”) peaked in 2014, and will continue to decline through the end of the decade.

Phablets are doing more than just driving smartphone market growth, however. Large smartphones have also had a negative impact on tablets. Worldwide tablet shipments barely eked out any growth last year and US tablet shipments fell between 2013 and 2014. The small tablet market (defined as those with screens from 7”-7.9”, like the iPad Mini), in particular, is already taking a beating from larger smartphones and the situation is expected to get worse over the next few years. Many people are finding that large smartphones can easily take the place of smaller tablets for most of their activities. Plus, large smartphones have the added benefit of an always-on data connection through the cellular network. As a result, I’m forecasting that worldwide tablet shipments peaked last year and will continue to decline over the next 5+ years.

Interestingly, because of this decline, I believe phablets are also impacting the PC market. When people were predicting that tablets would take over for PCs (the Post-PC Era anyone?), the PC market suffered. Now that it’s clear that wholesale PC replacement is not going to happen, we’re seeing stabilization worldwide and even modest growth in the US PC market. Many people are discovering that PCs and large smartphones make for great companions and meet all the computing and mobility demands that most people have.

The chart below summarizes my new TECHnalysis Research forecast for all the major smart connected device categories through 2020. As you can see, the phablet phenomenon is not only real, it’s reshaping the entire device landscape.

Feb.-2015-SCD-Forecast

You can find out more about the TECHnalysis Research forecast by reading the press release here and downloading a summary presentation of the results here.

The iPad’s Role in Taking Education to the Next Level

My oldest daughter is about to go to Junior High. One of the schools we are looking into sending her is a one-iPad-per-child school. Each student uses an iPad in every class. The curriculum, content, organizer, notes, and more is all on the iPad. I spent some time talking with the school’s headmaster, students, IT department, and teachers to better understand how the iPad is being used as an educational tool. I concluded without a doubt, there is no tablet or other device on the market better in this context than iPad.

I asked the headmaster of the school something I knew the answer to but wanted to hear his response. I asked if the school still had any typing or “PC literacy” classes. He said they used to have typing and computer classes but no longer once they went all iPad. The headmaster, the students, the principal, all often remarked at how amazingly adaptive and fluent the kids were with the iPad. I observed firsthand a shocking number of students who could type on the glass iPad keyboard as fast, if not faster, than I can on my PC keyboard and I type about 75 wpm. These kids use iPads every day, all day, both while at school and with homework. Their proficiency with the tool to do things I personally would feel more comfortable doing on a PC was amazing. I asked many of the students if they still even use or touch a notebook or desktop PC and the vast majority said no. The common response from those who did were boys, because they played online PC games not available on the iPad. For most of them, the iPad and smartphones are their primary computers.

Utilizing iPad

The school my daughter is in now is a great school and a science and technology magnet in our area. They use Chromebooks for certain tasks. The argument in many schools is Chromebooks are “good enough” and iPads are overkill. Nothing could be further from the truth. The Chromebook sufficed for certain tasks. Their school uses Chromebooks for research, taking tests (math, reading, writing), and they also play approved educational games as well. For this basic stuff, a Chromebook suffices. However, I saw the iPad being used in ways the Chromebook simply can not be.

For example, as a regular part of projects, the kids create iMovies on the iPad. Sometimes this is art, or science, or social studies, and they create movies as a deliverable for a project. They use Keynote and present via Apple TV to the class for presentation deliverables. In Music, they use GarageBand and collaborate on music projects. They take notes on Notability using their fingers (I asked about a stylus and no kids said they used them even though they knew what they were. They said their finger was easier and faster). They input all their assignments directly into their calendar and the most common way to capture homework assignments written on the board were to take a picture of the whiteboard. While a Chromebook can do a few of these things, it was the mobility of the iPad, coupled with the key software being used such as iMovie, Keynote, and a host of applications made specifically for the school, along with its overall simple yet sophisticated user experience, which sets it apart.

As I observed all of this and thought about many of the critiques of iPad in education, it seems those deployments did not integrate with the iPad and use all of its capabilities. If all a school wants to do is have kids use the web, take tests, and a few other things, then yes, a Chromebook will do. However, if a school wants to go above and beyond and take learning to the next level, then an iPad is the answer.

Obviously, iPad’s are expensive and many schools, especially public ones, can’t afford to deploy iPads universally. But the benefits of doing so in terms of return on educational investment are worth it in my opinion. The last point I’ll make on iPad vs. Chromebooks/PCs is of the skill sets we are giving our kids for the future. If we are moving to a truly mobile world, then immersing them in the tools of the future make more sense than having them use the tools of the past. We can say they need to learn how to use a PC, but from watching those kids use an iPad, and arguably more than all of us as a primary computer, I observed them do all I can do on a notebook/desktop and more.

Intel and Qualcomm’s Challenges

It is interesting to see some of the challenges facing once dominant semiconductor companies as the evolution of computing continues. Intel is and has been challenged to maintain the relevance of their architecture as personal computing shifted from desktops and notebooks to mobile devices. Similarly, Qualcomm is facing challenges in the next phase of mobile. Both Qualcomm and Intel have many similarities. Both focus on innovation to drive next generation chipset growth. Beyond advancing the capabilities of computing devices, the goal is to use this focus on innovation to keep the ASPs of their chipsets from falling. However, as hardware is commoditizing, maintaining ASPs is becoming more difficult.

With Intel, the writing on the wall happened with the commoditization and dropping ASPs of PCs. On top of this trend, the PC industry is not growing. Hence, most of Intel’s revenue strength has come from servers, not necessarily client PCs. Intel hit their mark of 40m tablet shipments in 2014, largely driven by the white box Chinese tablet market. But, outside of servers, Intel is facing headwinds with declining ASPs.

For Intel, growth markets like smart phones seem essential for the company to grow share. However, even that isn’t as black and white as it seems. While the smart phone market is huge, with our estimates above 1.5 billion smart phones sold in 2015, the market is seeing ASP declines faster than any segment. Intel has some insulation in the PC market but would have no protection from being forced to compete in commodity hardware in the smart phone sector.

Commodity smart phone hardware is what Qualcomm is facing as well right now. With a range of factors, from China regulatory and licensee disputes, to the potential loss of Samsung as a customer for Snapdragon, are all causing Qualcomm to issue lower guidance for next quarter.

Qualcomm is facing the reality that the era of smart phone growth where they could get a premium for their chipsets is about to end. Companies like MediaTek are able to compete more on price with Qualcomm at the low end of the smart phone market — which is where nearly all the device growth is going to come from in the next few years.

Both Intel and Qualcomm have to become competitive in the lower-price tiers, going against the grain of how these companies are oriented, if they want to capitalize on the upside volume. There is certainly a case to be made they can continue to serve the premium segment of the market with next generation innovations. However, the problem with that reasoning is it is becoming clear Apple is the only major player able to sustain in premium. Apple only needs a discreet modem from Qualcomm and does not use a Snapdragon processor. Similarly, should Intel have a shot at winning Apple it would only be with the discreet modem and not the entire SoC. Both companies get more money for the whole SoC over the just the discreet modem.

Looking at Qualcomm’s financials it is clear Apple’s impact on Samsung is having an effect on them as well. In fact, Apple’s role in this situation is hard to ignore. Their clear domination of the premium segment is locking out potential customers in the space where both Intel and Qualcomm could hope to sell more premium parts. This makes a strategy that Intel and Qualcomm are using to maintain ASPs or sell premium innovations, thus monetizing their RND spending, a little more difficult. If all you are left with are customers who want to sell cheap things, then this model is challenged.

What is interesting about this from a Qualcomm and, to a degree, an Intel viewpoint going forward is how ARM inherently created this situation. Since ARM is a licensable technology, from an architectural standpoint, the ARM ecosystem enables a wide range of competitors to compete in the ecosystem. Essentially, Qualcomm’s latest processor one year is the baseline ARM offering the next. I’m generalizing, but this is essentially the case.

This is what has enabled MediaTek, and really any other new upstart, to compete with a premium ARM licensee. And more to the point, when the market wants low cost chips, the competition in the ARM ecosystem gets incredibly intense. This headwind is what Qualcomm and Intel are up against in this next phase of mobile.

Mobile Security: The Key to a Successful BYOD Implementation

A great deal has been said and written about BYOD (Bring Your Own Device) programs and their real-world impact on today’s businesses, employees and IT departments. Regardless of your feelings on that matter, there’s no doubt that BYOD has and will continue to influence the conversation around how IT departments need to adapt to the changing world around them.

For most companies, BYOD is seen as a positive move forward. But it does have challenges. Last year, my firm, TECHnalysis Research, fielded a survey with over 300 US-based IT professionals split evenly across small, medium and large businesses. One particularly interesting data point from this BYOD report is that 20% of overall respondents and nearly 30% of mid-sized companies said that, while they dove into BYOD headfirst early on, they’ve started to pull back a bit recently. A key driver for those pullbacks, in many situations, is bound to be security-related issues.

BYOD-Involvement-for-Mobility-Blog-#4

©2014, TECHnalysis Research

Virtually every week we hear and read stories about critical corporate data being compromised because an individual employee’s device was lost or stolen. Given these security concerns, it’s probably not surprising to hear that, according to that same survey, 43% of all companies with BYOD programs have a policy to wipe corporate data from a lost or stolen device. But what is surprising is that a larger 46% of that group wipe out all data on the impacted device—both corporate and personal. Given the increasingly important role that personal mobile devices play in people’s lives—they’ve become the primary camera and digital photo storage device among many other things—completely wiping all that data is clearly an unacceptable solution. Plus, only 26% of employees thought their company wiped all data on a lost device, demonstrating a huge (and potentially litigiously dangerous) gap in understanding between the two groups.[pullquote]Nearly 30% of mid-sized companies said that, while they dove into BYOD headfirst early on, they’ve started to pull back a bit recently.”[/pullquote]

In order to address these concerns, IT clearly needs to develop policies that honor the company’s right to safeguard its own data, while at the same time respecting the individual employee’s desire to not lose their precious data. (Plus, if we’ve learned anything from BYOD, it’s that IT needs to develop win/win solutions for both themselves and employees, otherwise employees will find ways around whatever perceived restrictions IT puts into place.)

One key answer to these challenges is the use of containers, which can separate personal data from work data. Solutions that enable containers allow IT to continue managing access to corporate data and applications, while leaving personal data intact. Not all container solutions are created equally, however.

IT managers need to consider all aspects of a container solution as they do evaluations. How does it work with user authentication and identity? What mobile and desktop platforms does it support? Is it a complete solution or only a partial one that needs to be cobbled together with several other products from several other vendors?

By deploying a robust container solution, IT can feel free to impose very strict, very secure policies around corporate data, while still giving employees access to their own data. In doing so, they can enable all the potential benefits of BYOD, without falling prey to its potential pitfalls.

Does Google Care About Android Tablets? Should They?

One of the nice features of Android is the operating system has built-in functions that allow smartphone apps to scale well to many different screen sizes. As Google can’t control the screen sizes their Android hardware partners create, they needed to make apps extensible to many different sizes. With tablets, however, this has been more of a curse than a blessing.

Android developers have not felt the need to create new versions of their applications for the larger screen tablet form factor. This has been a fundamental failing of the Android tablet ecosystem. Apple’s developers have been finding success creating new/different version of their apps optimized for smaller screen iPhones and bigger screen iPads. The same has not translated to the Android developer ecosystem yet. The real question is, why not?

Is it Google’s Business Model?

One has to ask if Google is to blame for this. One thing that always sticks in my mind about Google is their business model. Google makes the bulk of their revenue from search queries that happen through a web browser on a smartphone, tablet, or PC. What are people doing when they are in an app — playing a game, watching a video, messaging friends, etc? I can tell you what they aren’t doing — searching the web. Native software via applications is, to a degree, counter to Google’s business model. More to the point, the vast majority of apps in Google’s app store are free. Which means revenue from Google’s app store, while healthy, is still nowhere near their core business in search. In the back of my mind, I wonder if Google is not pushing tablet apps because of the fear it impacts their search revenue. The point gets even more interesting when we observe how tablets are used in the same way as PCs in terms of web browsing. Google’s desktop search is still a healthy percentage of their revenue and, if tablets took away from that, it would make an impact.

Ultimately, developers are in the driver’s seat. They have to know they can make money on their apps and that optimizing their apps for the tablet form factor is a worthwhile investment. For whatever the reason, it appears this is not an investment developers feel is worth making. Yet this point is fascinating given there are more Android tablets in the world than iPads. However, developers are succeeding more with tablet optimized apps for iPad than they are with Android. If Google is serious about the tablet platform with regard to apps, then this is the first issue they need to solve.

Consumer vs. Enterprise

While the absence of dedicated tablet apps is an issue in the consumer marketplace, it is less of an issue in the commercial sector because, for the most part, enterprises are deploying their own custom applications. In this case, the enterprise is the developer and can create apps optimized for whatever screen size they choose. However, even with that reality, the iPad is still king in the enterprise. Samsung is hoping to add more software optimization to give their tablet products more appeal but, at the end of the day, the dearth in optimized applications will play a role in how consumers think about one tablet over another.

The Tablet is not a Smartphone

The key point about tablets and their upside is they are not smartphones. In my opinion, to be limited to running smartphone applications on your tablet is the same as being limited to running smartphone applications on your PC. One would not tolerate smartphone apps on their PC and one should not tolerate smartphone apps on their tablet. The tablet platform is loaded with potential and the large screen should be taken advantage of. Hopefully, Google recognizes they have an issue on their hands. If they want Android to become the tablet computing platform it can be then they must bring the Android ecosystem on board and envision a bigger picture for Android tablets and its role in personal computing.

This is a fascinating dynamic in the Google tablet story. There is mounting evidence of the severe bifurcation of the tablet market. Apple owns the high end with the iPad and many no-name vendors seem to be selling the majority share in the low end. But these low cost tablets are not being used in ways that benefit Google — rather, they are functioning as disposable pieces of glass and are taking shape as more of a utility than a computing device. Ultimately, I am not sure Google cares and, at this point, any attempt to try to create a robust development environment for dedicated tablet apps would be a fruitless endeavor.

Takeaways From IBM’s Black Friday E-Commerce Report

Recently, IBM released their post Black Friday analytics report. As always, it includes some interesting takeaways around devices and platforms used for Black Friday e-commerce. Before digging into the report, I thought this tweet from Benedict Evans was insightful in context.

Screen Shot 2014-12-01 at 9.14.00 AM

Tablets functioning more like PCs in the home rather than mobile devices should be obvious for those who use them. However, this observation has some interesting implications. In particular, it further validates that tablets are more like PCs than smartphones in many aspects of usage. This chart is one I’d like to dig into a little more.

Screen Shot 2014-12-01 at 8.41.12 AM

Note that tablets represent a fairly small percentage of website traffic compared to smartphones. Yet, they have higher conversion rates and much higher average order values. Furthermore, more consumers made a purchase on a tablet than a smartphone. As a percentage of sales tablets made up 16% of purchases where smartphones made up 11.8%. Both the conversation rate and the average order value of tablets are more in line with PCs than with smartphones. The picture this data paints is how that many users do quite a bit of browsing/research on their smartphones but then move to their preferred purchasing platform — either the tablet or the PC — to complete the transaction. The low percentage of traffic from tablets is perhaps representative of the smaller installed base vs smartphones and PCs in the US. It also could suggest that, after consumers decided what they wanted, they moved to the tablet to complete the purchase.

While the picture painted from Black Friday of tablets and smartphones is interesting, I’m not sure this dynamic continues forever. By next year, I believe Touch ID-equipped smartphones will have a larger impact on the Black Friday device e-commerce landscape. Apple is working to eliminate payment friction in both the physical and the digital world and, by next year, my sense is the large US installed base of Touch ID-equipped iPhones may shift this picture quite a bit.

For now, the IBM report paints a non-surprising picture of iOS vs. Android users when it comes to online purchasing.

Screen Shot 2014-12-01 at 10.01.32 AM

It’s worth noting the above chart is not a breakdown of iPhone vs. Android smartphone users but the platform as a whole. Which means iPad is playing into these statistics as well. Some key stats from the report:

  1. Average Order Value: iOS users averaged $121.86 per order compared to $98.07 for Android users, a difference of 24.3%.
  2. Online Traffic: iOS traffic accounted for 34.2% of total online traffic, more than double that of Android, which drove 15% of all online traffic.
  3. Online Sales: iOS sales accounted for 21.9% of total online sales, nearly quadruple that of Android, which drove 5.8% of all online sales.

One other stat that stood out was that average page views on Android devices were higher than on iOS devices. This is interesting because the installed base in the US of iPhones and iPads is quite a bit higher than Android phones and tablets. While on a monthly average basis iOS leads Android in US in web browsing, it didn’t on Black Friday. Some have suggested this means Android users are more “window shoppers” than iOS users. While that could be true, it could also mean more iOS users were out shopping at physical retail stores, thus spending less time browsing. The disparity between Android purchases and the high average page views could also suggest Android customers are a bit more calculated, possibly even frugal, than their iOS counterparts. Meaning, they are more selective in what they purchase, even though they do roughly the same amount of research.

The picture painted here of iOS vs. Android users is not surprising and likely the gap in spending between iOS and Android users will increase over the next year and should be evident in the data this time next year.

Lastly, the dominance of the PC for e-commerce still shines. It led in every category for online purchasing. This shows the trust and comfort level many in the US have in making purchases on the PC. While this isn’t terribly surprising, what struck me is how different this picture is with regard to the PC and e-commerce in the US vs. other regions I study, particularly markets like India and China. E-commerce from mobile devices is dramatically higher in those markets than the US and I believe it has everything to do with, for now, the high PC penetration and comfort level with PCs in the US. Which, as I will flesh out more at a later time, is potentially a roadblock keeping the US from progressing to the mobile reality the rest of the world is living in. Perhaps this is just a matter of time, but the centrality of the PC in the US may be a negative compared to innovative things happening in markets where the mobile is the center of consumer’s universe.

What Foxconn Making a Nokia Tablet Tells Us About the Future

Something interesting happened today. Many people missed what is perhaps a significant development when Nokia announced the N1 Android tablet. Lots of folks saw the announcement and proclaimed Nokia back in the hardware business, making and selling tablets. A deeper look reveals what the real story is.

The release states:

The N1 will be brought to market in Q1 2015 through a brand-licensing agreement with an original equipment manufacturer (OEM) partner responsible for manufacturing, distribution and sales.

So a “brand licensing agreement” between Nokia and an OEM has been established. We have since found out this OEM is Foxconn, which is technically an ODM (original device manufacturer). That is where this really gets interesting.

The release goes on to point out:

In addition to the Nokia brand, Nokia is licensing the industrial design, Z Launcher software layer and IP on a running royalty basis to the OEM partner. The OEM partner is responsible for full business execution, from engineering and sales to customer care, including liabilities and warranty costs, inbound IP and software licensing and contractual agreements with 3rd parties.

So what is going on here? Several very important observations need to be made.

Nokia has developed a tablet design. A pretty decent one at that. They have also licensed the Nokia name as well as their own design to Foxconn who will make the tablets, handle sales, engineering, customer care, etc. Basically, Nokia has handed Foxconn a cookie cutter product to be sold and marketed under a global household name. So why does this matter?

If you read much of what I write, I am fascinated with the hardware business model in the mid-to-low end segment of the smartphone and tablet market. There are virtually no margins to be made in the commoditized tablet and smartphone world we are quickly moving toward. How hardware vendors sustain themselves has always been a key question for me. Yet, I’ve concluded long ago other companies using business models other than just monetizing hardware under their brand are well positioned to succeed in this future. Foxconn’s business is manufacturing and, as long as they make things, times are good. I’ve heard for some time that Foxconn has been thinking about ways to use or develop its own brand to go to market with products. In areas like India and Brazil, there are import fees that make it very hard for external parties to succeed. Foxconn has a plant in Brazil and is well positioned to make handsets in the region, without an import tax, and do very well. Foxconn has a business model going for them and all they needed was a brand. Now it appears they have it.

It is true they cannot make phones yet due to the Nokia brand name licensing deal with Microsoft. I fully expect Foxconn to start making Nokia smartphones in 2016 when the smartphones brand agreement between Nokia and Microsoft is complete. Foxconn can make these devices and sell them at dirt cheap –commoditized–prices and it fits their business model.

Foxconn also has a similar deal with Blackberry. But they have yet to do much with it and for good reason. The Nokia brand gives them more credibility in the markets where I think they seek to enter. Sure, there will be challenges. How does an ODM do sales, marketing, and support? We will have to wait to see to get answers. But what Foxconn is doing addresses a business model problem I think businesses have in selling commoditized hardware to the next billion plus consumers.

For Nokia, this is an interesting move. They have done the design and maintain some quality control in order to protect their brand. What they are doing sounds very similar to what Polaroid tried to do. This is an intriguing move by Nokia and one that, if successful, could be quite sustainable.

Regardless if this scenario works or not, how big companies navigate the business model challenges of connecting the low income majority of the planet will be fascinating to watch.

Research: Who’s Buying What Tech around the Globe This Holiday Season

We have some research that gives us insight into what tech products are on the interest horizon for purchase over the next six months. While intent to purchase surveys don’t always lead to purchases, it does give us an indication of what products are top of mind and more importantly how that may differ from each region across the globe. This research comes from surveys across 32 different regions and over 30,000 people in total. With as much data as I have, I struggled with the best way to display it. Since percentages did not equal 100% and were also based on sample size from each region making the percentages vary, I decided to weight the values numerically by priority. 12 is the highest priority / interest to purchase over the next 6 months and one is the lowest.

Here is the chart from a global standpoint with all 32 regions included.

Screen Shot 2014-11-03 at 8.31.48 AM

As you can see, globally tablets, smartphones, and a PC (laptop) have the highest interest level/priority to purchase over the next six months. While mobile phone numbers shouldn’t be surprising, it is interesting that, in all regions, the tablet still remains the highest priority with the PC (laptop) third. As I look at what we see happening in the market, my gut tells me there is still a large number of global consumers struggling with whether to get a laptop or a tablet. I’ve been saying for some time that, when the consumer market moves and finally upgrades their PC, we will see how the tablet and PC conundrum plays out. Still, looking at the data, one has to believe companies like Microsoft and Intel look at this and believe the 2-1 value proposition is strong if a buyer is struggling between both products.

To look at the data more granularly, I’ve broken it out by some of the larger regions by population. The sample sizes were also quite a bit larger in these regions giving us better detail of who intends to buy what.

Screen Shot 2014-11-03 at 8.43.14 AM

As you see, most regions are prioritizing the tablet from a purchase intention standpoint. A few markets like China and the US are prioritizing mobile, thanks to these two regions being extremely seasonal with mobile purchases. When it comes to the PC, it still ranks high, but only Brazil consumers have it as their top priority over the next six months. What is interesting to me is other categories on this list which can also be served by a tablet should the consumer desire. Take the e-reader for example. While lower on the priority list, a tablet can also be an e-reader. Perhaps, as a consumer gets savvy to this, it sways their decision more toward a tablet or a 2-1 rather than a desktop or clamshell? The tablet or 2-1 could also conceivably fill the role of a game console or even a DVD player where access to digital movies exists. What this highlights is my point about the tablet as a much more diverse device due to its form factor than previous heavy computing devices like notebooks and desktops. The tablet form factor can simply “morph” into so many things thanks to the software and services. As consumers become more knowledgeable, I believe the value of the tablet increases.

One point that stands out and is worth highlighting is India’s intent to buy a mobile phone. Look at the data point and you would think buying a mobile is simply not a high priority for Indian consumers. When in reality it is the highest priority among the masses from a tech purchase standpoint. Keep in mind, to take this survey, you have to be online already in some capacity with a smartphone, PC, or tablet. The online population in India is still very small in contrast to India’s population (somewhere over 200m people are actively online). So people who are answering these questions from every region are already online in some way, shape or form. Google’s head of India estimated 5 million new Indian consumers are coming online every month. Most of those are coming from mobile devices. For the unconnected, the mobile phone is the highest purchase priority since it is most people’s first computer. Looking at the data, we are focusing a bit more on what the purchase intent of the already connected is for the next few months.

Where that reality stands out is when we look at what tech was purchased over the past six months. This is a question I like because it brings a bit more clarity to the picture since consumers are stating what they have actually purchased rather than what they intend to purchase. Similar to the above chart, I weighted the percentages numerically. The most purchased product over the past six months is a 12 while the least purchased product is a one.

Screen Shot 2014-11-03 at 8.59.54 AM

Here we see the clarity of the mobile priority. As expected the mobile phone has dominated purchases over the past six months. We also see the strength of the notebook and desktop rebound we are seeing as it shows up in this data. The desktop in particular was a frequently purchased product globally over the past six months. We had a hunch early last year the PC would do well this year and we were right. Partly based on similar intent to purchase data we got this time last year. In fact, the above chart showing who purchased what was very similar to the same intent to purchase data from a Q3 2013 survey.

We know about the centrality of mobile, but what intrigues me about this data is the continued interplay between tablets and PCs. As a part of my overall industry analysis of both categories, this remains a story line and one that does not have as crystal clear of an ending as other categories. I get this data every few quarters so we will check back early in 2015 and see how the story is playing out. My guess is that Mobile is still high, but where PCs and tablets fall is the key question.

First Half 2014 Tablet Report

The tablet market is easily the most fascinatingly diverse consumer electronics category I have ever studied. If you have read my commentary on tablets, it is the unique form and function of the product that allows it to be so nuanced. Both the smartphone and the tablet are relatively small pieces of glass. Both are brought to life by their software. However ,with smartphones, we see more clear consistency in application. We don’t see the rich segmentation in smartphones we are seeing in tablets. The tablet is a blank piece of glass that can take on many general computing use cases and unlike the smartphone which has a focus, the tablet can be many things to many people. This, at a root level, is why I believe so many people misunderstand the tablet category.

Without question, the tablet saw explosive initial growth. This was driven primarily by Apple and benefited from a latent PC refresh cycle. Looking back, there are certain market dynamics which contributed to the tablet category allowing it to be rapidly adopted. I would argue those dynamics have changed and, if the tablet was released for the first time in 2014, the product would not have the same initial ramp up. That in no way means the tablet category is dead or, more importantly, not a viable category. It simply highlights the tablet market is still not fully mature.

Coming Back Down to Earth

Many of the charts I’ll be showing are a part of a much larger and in depth PC/Tablet Report I’m publishing through my industry analyst firm Creative Strategies. I’ve broken a few of these charts out to give a high level view of the tablet market.

As you can see, YoY growth of tablets has come back down to earth. For nearly a year, the tablet was experiencing anywhere from 120%-220% growth YoY in certain markets. YoY growth prior to Q1 2013 remained high — 70% up to 135% depending on the quarter. But after Q1 2013, the growth normalized and as you can see, the tablet category is now performing similar to desktops and notebooks.

Screen Shot 2014-10-06 at 10.14.47 AM

I’ve included in this chart my estimates for the next few quarters and into 2015. These of course are still subject to revision should we see any major trends which cause us to revise. But as of now, we believe the tablet will still remain in slightly positive, but low, growth territory, where notebooks and desktops remain slightly off going forward. The one caveat to the tablet line could be the effect of large phones on tablet growth. This is the one factor that could cause the tablet line to move closer to the notebook and desktop line.

Another interesting way to slice the same chart is to add Apple’s YoY growth of iPads. I’ve done that in this chart and you can see the impact iPad sales have on the tablet market as a whole.

Screen Shot 2014-10-06 at 12.30.12 PM

Tablets vs. Notebooks

A key discussion point for those of us who analyze both the tablet and PC market is what impact tablets are having on PCs? There is little evidence to suggest tablets are replacing PCs but that they are more of an extension to them. Perhaps a good way to understand the tablet vs. the notebook is to think in terms of computer literacy. To use a notebook one has to be PC literate. Users need to know their way around a desktop OS, mouse, and keyboard. Not every person on the planet is computer literate. However, thanks to smartphones, many are touch computing and touch OS literate. This is why the tablet running a mobile OS provides greater upside in our view.

The notebook form factor has taken the mobile PC as far as it can go. At this point, if you need a notebook for your day job, student life, or any other use case, you know it. Therefore, we believe the notebook addressable market is tapped out. However, the tablet represents a form and function of a device that can bring a “computer” to those who did not use one before either in their life or work place. For example, corporate field workers are being given tablets to replace walking around with clip boards on the job site. Tablets, as a work opportunity, bring computing to field workers who did not use a computer in their day job. For these workers, the notebook was simply not mobile enough. Tablets are filling those holes.

We also believe the tablet represents an opportunity for first time PC owners. Those who are not computer literate but looking for more capabilities than their smartphone offers. It is within this view we continue to watch tablets as a category.

The last point to make on this topic is not all tablets are created equal. If we count tablets that are not branded and being sold sub-$80 in many emerging markets, we can probably argue the tablet market may be larger than the PC market. But when we only look at branded tablets from PC or mobile companies, we see the tablet market may be shaped more like the notebook market than the entire PC category.

Here I charted only branded tablets from companies like Apple, Samsung, Lenovo, Asus, etc. You can see the tablet category is comparable to the notebook category when we attempt, as best we can, to compare apples to apples.

Screen Shot 2014-10-06 at 12.15.59 PM

Seasonality

While I try to point out there is some comparison to be made to the notebook and branded tablet market, there is one area the tablet category is quite different than the PC market. Tablets, including branded tablets by the vendors I mentioned above, are more seasonal purchases. Part of this has to do with the more consumer focused play of tablets for now, but also their pricing. PCs maintained a fairly high ASP for most of their life. Even now the ASP of PCs is still over $600 while the ASP of the tablet category is just over $300.

As you can see from this chart, the seasonality of tablets is more dramatic than any other class of PC.

Screen Shot 2014-10-06 at 1.01.37 PM

Note, the chart looking forward includes my estimates subject to revision depending on the trends we see.

Tablets, in essence, operate similarly to both the notebook and the smartphone. The smartphone category also experiences dramatic seasonality purchases in the calendar Q4, although we are seeing smartphone seasonality slow down as the global audience comes online.

The seasonality of tablets is also visualized when we look at QoQ growth since Q1 2013. While YoY growth, charted earlier, smoothes the tablet line, QoQ growth highlights the seasonality of that growth.

Screen Shot 2014-10-06 at 1.10.51 PM

From a marketing standpoint, this chart tells us tablet marketing is best spent in calendar Q4. Bottom line, I don’t see the seasonality of the tablet category going away any time soon.

ASP

I talk a lot about the the white box tablet market. These are non-branded tablets coming from the China tech manufacturing ecosystem and selling for less than $80 on average. Knowing that, when we plot the ASP YoY growth of tablets, it shows how dramatic both the low cost Android push and the white box tablet market have had on tablet ASPs.

Screen Shot 2014-10-06 at 1.15.45 PM

As you can see, the tablet market as a whole has been a troublesome one to really make money at for nearly all but Apple. Vendors like Samsung would move many as a promotion through the carrier channel with the purchase of another Samsung smartphone. Other than those two, no one really sells tablets in any meaningful volume.

As we look at ASPs going forward, the line is still trending down. One caveat on tablets would be if we see fewer branded tablets on the market as certain companies get out of the market due to lack of volume or monetization. In which case, the tablet market would be driven by Apple and white-box as far as volume goes.

Conclusion

As many of my charts highlight, much of the key growth in tablets appears to have slowed and, in some cases, disappeared entirely. Revisiting the question of whether or not the tablet category is as large as the PC category seems like a re-kindled debate. From what I see right now the answer is both yes and no. If we combine all tablet sales, including those low cost white box tablets from the China tech manufacturers, then I can see how we sell more tablets than PCs worldwide annually (not necessarily quarterly). However, since not all tablets are created equal, this may not be a metric worth spending more time on.

Comparing branded tablets like the iPad for example, and tracking them against notebook sales does seem like a valid metric worth tracking. But, as a few of my charts point out, it is questionable whether the branded tablet category is bigger than that of PCs. Rather, it seems it is more similar in terms of volume to notebooks than the entire PC category. Given its form factor and use case, this makes sense.

As we track tablet sales and try to articulate the bigger picture of how they fit into computing as well as the broader consumer electronics picture, we strive to look at ways the tablet is extending computing in meaningful ways to those who were not true “computer users” before. We know nearly everyone on the planet will have a smartphone. We have reasonable assumptions the smartphone is not the only computing product they will own. We have strong doubts, based on the point of computer literacy, that the notebook or desktop will be the first computer of choice for current smartphone-only customer. We believe, for this market, the tablet represents the most interesting opportunity as the first large screen computer of choice.

What cannot be overstated in this discussion is the meaningful impact of bringing computers to the masses. It should not matter the shape or manner, only that we deliver on that promise. Each form factor — the desktop, notebook, tablet, and smartphone — will play a role in bringing computing and the internet to the masses. Some form factors will be more affordable than others. Some more capable. Some more portable. No matter their size, shape, or capabilities, we are seeing computing advance in ways we never could have before thanks to the many shapes a personal computer can take in the 21st century.

Profitable Niches

As of late, I have been speaking with management of many different companies. Oftentimes I’m asked for my recommendations in these engagements and I have noticed a certain theme that remains constant in my answer. That theme is to focus on profitable niches.

Way too many companies, in their internal strategic planning, make the mistake of doing zero sum game analysis. Having done a review of these analysis for Fortune 500 companies, it becomes clear that many bring an old world view to the competitive landscape. What I mean by “old world” is the thinking that, for someone to win, others have to lose. This may have been true at a time when the industry was small and the total addressable market of computing products was less than 500 million. It was in this environment Microsoft ruled computing and Apple was nearly bankrupt. Not long after that narrative, another emerged, also including Microsoft, with Internet Explorer vs Netscape. The online population was also only in the hundred millions and the narrative was only one of these browsers could win. Eventually, Internet Explorer did. The same was true when Palm entered the scene. Against Microsoft’s Pocket PC platform, most analysis looked at this as a zero sum game in a winner-take-all market. That world is gone and has been for some time. In a world being drive by computing’s S-Curve (pictured below), there is market share to go around.

Screen Shot 2014-09-29 at 3.00.32 PM

Market Share vs. Market Shares

“Enough market share to go around” seems to be lost on many companies. Which is why I hammer home the theme of profitable niches as a sustainable business in such a large market. Perhaps the best modern day example is Nvidia. A company thriving by continuing to advance high end gaming graphics cards with incredible margins. They sell these to an enthusiast market which, while small, spends a tremendous amount of money. Gamers are a profitable niche. In fact, you could probably argue any enthusiast market is a profitable niche. Every market has these. In the automobile world, there are cars designed specifically for car enthusiasts. In the consumer packaged goods space, health enthusiasts enable premium prices for more quality food and goods. Fashion, jewelry, and more all have their commodity products but these markets also have profitable niches.

In essence, this is what Blackberry is hoping to accomplish with their Passport. They hope there is a business “enthusiast” who values the hardware, software, and services they create and are willing to pay more for them. If successful, Blackberry will have found a profitable niche.

While it is hard to predict which niches will be profitable, I do believe the computing markets globally will continue to splinter. As the broader commodity smartphone, tablet, and PC categories grow, there will be some splintering off to these profitable niches. Nvidia again has a great example with their Shield gaming tablet. Nvidia knows the makeup of core PC gamers and built them a tablet to compliment and extent their PC gaming experience. Kids’ tablets are another great example. Nabi is moving millions of these products at decent margins by focusing on parents but delivering a kid-friendly tablet solution. Ruggedized PCs, tablets, and smartphones are profitable niches. GoPro is another great example of a profitable niche. There are already many examples and more will come.

The key is to be looking out for them or being an innovator and creating them. As computing grows, so will a large base of those underserved by commodity computing products and looking for things more reflective of their unique needs, wants, and desires. This will be true of everything around hardware, software, and services. Some profitable niches will be bigger than others in terms of their slice of the pie. However, these profitable niches are in essence zero sum games. These are the areas where first mover advantage is real and apparent. So the key to is see them early or create them.

Know your customers, and look to fill an underserved need in the market and the profitable niche will emerge.

The Future of Retail

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

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

Payments

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

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

Contextual Shopping

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

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

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

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

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

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

Tablet Report: The Next Frontier of Personal Computing

I’m about to make some updates to a tablet report I publish through my firm Creative Strategies. Usually, this type of report is reserved for our clients only, or to purchase a-la-carte for $499. I decided to give Tech.pinions Insiders a promo code to download and read it for free. The code expires at the end of the month, August 31st, so make sure to download it before then.

We have, of course, been observing some interesting trend shifts in the tablet market. This report still represents the basic foundation of my thinking for how the tablet will evolve, and the future role it will play, particularly in emerging markets as you will see. The updated report, which will we will offer a brief version for free, will highlight some of the usage trend changes we are observing, and include a more clear outlook of the tablet’s future.

To download the report go to: http://creativestrategies.com/downloads/tablets-next-frontier-personal-computing/

Use the code at checkout: TPinsiders08

Below is an overview of topics covered, and screen shots of the entire .PDF.

Topics covered:
– Global Statistics of Internet Penetration
– Infographic “If the World was a Village” – global technology statistics
– From Click to Touch
– The State of the Tablet Market
– Growth in Emerging Markets
– Tablet Usage Trends
– The Touch Generation
– Food for Thought
– Key Takeaways

Screen-Shot-2014-04-28-at-6.42.27-PM

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.

Screen Shot 2014-08-13 at 8.45.59 AM

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.

Screen Shot 2014-08-10 at 1.00.03 PM

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.

Screen Shot 2014-08-13 at 10.27.27 AM

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.

Screen Shot 2014-08-10 at 12.58.55 PM

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.

Screen Shot 2014-08-13 at 10.45.33 AM

Screen Shot 2014-08-13 at 10.43.17 AM

Screen Shot 2014-08-13 at 10.45.11 AM

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.

Tablet Computing Platform Market Shares

The tablet market share story is quite different. While the market appears to be slowing, it is, in fact, still growing. Our data shows year-on-year increases in user numbers have dropped from around +200% at the start of the decade to less than +15% in 2014. This product may be even more subject to seasonality than many other consumer tech products. Therefore, before anyone starts selling the tablet segment short, we need to wait to see what happens in the holiday season. The tablet story is still one of market shares, but with the usage of these products more like PCs than smartphones, the device represents a distinct opportunity. Here is the breakdown of platform market shares as a percentage of the current active tablet installed base.

Screen Shot 2014-08-04 at 6.04.29 PM

In my tablet model, I estimate the total active installed base of tablets to be 501m devices. As I said, annual shipments of tablets are slowing but still growing – albeit slowly. Thus we must conclude the TAM for tablets is still larger than the current installed base. We just don’t know how much larger. Over the next few years I have a feeling we will get a true sense of the size of the market. That being said, there are still two distinctly different tablet markets we must be aware of as we analyze the category. I will cover that below in the AOSP bullet point.

  1. iOS: Unlike in smartphones, iOS is the dominant platform as a percentage of the installed base. It was common for a while to say there wasn’t a tablet market but only an iPad market. If we just look at Google’s version of Android vs. iOS then this story may still be true. iOS captures 65% of the share of tablets without AOSP. Just like the smartphone platform, the iPad owns the bulk of the most profitable customers in the tablet ecosystem. In the consumer market, tablets remain a luxury rather than a necessity. But we may see if this changes as Apple evolves the form factor, makes it more capable in terms of computing, and the app ecosystem catches on to its full potential. Apple gaining ground in the enterprise could be a likely catalyst for the iPad ecosystem as well.
  2. AOSP: Here AOSP means the same as it did for smartphones. The only difference is AOSP is increasing significantly as a percentage of quarterly shipments. However, these devices are not being used in the same way as iPad and even Samsung tablets. These devices are largely made up of no-name white box vendors and they sell anywhere from $40 and $80. All our research indicates these devices are simply portable video or game players and not much else. There is very little web browsing, commerce, app purchasing, or other functions that would classify it as a healthy ecosystem. Where AOSP tablets start to get interesting may be as service providers like a broadcaster, content provider, or other company who can leverage an existing business model (but not a hardware model), can use the device as a giveaway in order to capture subscription upside. For example, a broadcaster or content network in China can offer the device for $50 but tie it specifically to their content portal or services for a monthly fee. AOSP will continue to open doors for unimagined and creative business models around the tablet form factor.
  3. Google Android: Oddly enough, Google’s version of Android for tablets is the odd man out in my opinion. Given what we know about the tablet market, Google’s Android tablet solution remains unfocused. Their priority is smartphones and there is nothing wrong with that. However, Google risks missing out on a significant opportunity if they are not willing to take leadership in advancing the tablet platform. Nearly all sales of Google’s Android tablet solution have come from Samsung and many of those due to promotional giveaways and extremely aggressive pricing in emerging markets.One interesting trend, however, has been the rise of carrier branded tablets like the Verizon Elipsis. This tablet is now offered for free with a two year contract from Verizon and has captured a 0.4% share after slightly more than 8 months on the market. Tablet solutions like this are ones to watch as it is possible this is the angle which challenges the iPad.
  4. Windows: Windows is in this category thanks to the 2-1 form factor pushed by Intel and Microsoft with the Surface. To be included as a Windows tablet in ours and other analyst firm’s data the device must have a detachable screen. To date sales of these devices have been very low — making up far less than 1m shipped per quarter. While Surface 3 is a positive step forward, and the best of all 2-1’s in my opinion, I still have my doubts this form factor is the future of the PC or, more importantly, that it will ever ship more than 20% of the annual PC volume and perhaps even less as a total of the tablet market.

The story on tablets is still being written. Questions such as, “Is it a one per person device or a one or two per household (like the PC)?” still remain to be seen. Ultimately, there are many specific use cases for tablets in which they add value. We will still see experimentation along with further segmentation in the segment.

Next article, PC computing market shares.

Apple Earnings: iPad Struggles and iTunes Revenue Importance

There were several interesting narratives out of Apple’s earnings report yesterday. The most glaring, and most confusing to many, was the struggles of the iPad. I’ll return to that in a moment. The Mac surprised many, but should not have surprised our readers. I wrote this in December of last year, and I explained the PCs upside in 2014. The PC will remain steady but we are still nowhere near the eventual bottom of annual cycles. We are seeing a refresh, mostly by corporations and education, and Apple, like many vendors, is positioned to capitalize on the upside. In an upcoming Insider post, I’ll layout why I think the Mac is actually a strong growth story for Apple.

But the iPad remains an important narrative. The tablet market is functioning exactly like the typical PC market. Therefore, our deep knowledge of PC cycles helps us understand the tablet market. There is one difference though and it is a significant one which has led to many to misunderstand the tablet market.

The tablet is still the fastest adopted technology in our industry history. Take a look at my install base estimates broken down by device.

Screen Shot 2014-07-23 at 8.52.00 AM

Despite what you conclude about tablets, for a category which began in 2010, garnering 22% of the estimated current installed base is impressive. What gets lost is the speed in which this category grew.

Screen Shot 2014-07-23 at 8.56.59 AM

It could be argued the iPad hit the perfect storm of lagging PC cycles, the mainstream’s desire for simplified computing paradigms vs complicated ones (the PC), and the Windows 8 debacle, all of which accelerated the adoption of the category. This burst led many to conclude the size of the tablet market was much larger than it actually is — potentially billions in annual unit shipments. Our forecasts were never that aggressive. While we believe the tablet market will remain a healthy segment, it will also be segmented. Segmentation will be what influences the total size of the tablet market.

With regard to iPad sales slowing, several things need to be mentioned. The first is the iPad had been experiencing solid growth in education and, to a degree, still is. However, new competition in the Chromebook has arisen for Apple in the education market. Every Chromebook manufacturer we speak with highlights to us they can not make enough to meet demand. Google announced they had sold one million Chromebooks to education in the second quarter, and the Chromebook segment is on pace to sell more than 5m units in 2014. While the iPad does more than double that number per quarter, the rising challenge of the Chromebook could be a factor in Apple’s education sector for iPads.

The enterprise is the other significant opportunity for iPad growth. I’ve spoken with a number of job market analysts and have heard numbers in the 300m-500m range for workers who don’t use a PC in their day job today but could benefit from a tablet computer. Things like construction, health, oil/gas/electic, factory workers, etc. Apple’s deal with IBM could help this, if for no other reason than it makes Apple in the enterprise more credible. Being viewed as credible to IT departments means they have more confidence to fully commit to iOS. This lack of credibility regarding Apple in the enterprise has been one of the things we hear from IT on why they hesitate to commit fully to iOS in their enterprise.

Lastly, replacement cycles are central to understand the tablet market. Fellow analyst colleague and Tech.pinions columnist Jan Dawson created a tremendous chart which we must dig into.

Jan has created a chart very similar in philosophy to ones used by all the PC vendors. It estimates the age of devices as a part of the active installed base. When I wrote earlier in the year about why I felt the PC would have a good 2014, it was based on a similar philosophy of estimates that there were around 300m PCs in active use five years or older. Knowing the replacement cycle for PCs to be in the 5-6 yr range, it was easy to conclude a large number would be upgraded soon. Using that same philosophy Jan has created this chart.

iPad-base-and-sold-by-age

What we don’t know is the refresh cycles of tablets and, specifically, the iPad. Apple is somewhat cursed by the fact their products last so long without breaking. Consumers, on the other hand, are blessed by that reality. But if we simply look at the number of iPad’s still in use that are in the three yearr old range we can estimate the number to be around 50m units that should be eligible for upgrade in the near future.

Another key point to iPads we realized is the device is often handed down as new ones are purchased. Again, the value of the long life of the product allows this to happen. The impact of this will add to the overall installed base, but also could lead to a larger and difficult to predict refresh cycle at some point in time.

Adding new customers is the key metric to watch in this analysis. Apple reports frequently that 50% of iPad’s quarterly sales are to people who are first time iPad owners. Maintaining that statistic in our model is key as we track the installed base, growth cycle, and attempt to understand refresh patterns.

All of this brings us back to an important point about Apple’s business model. As I pointed out in my article on why Apple is immune to disruption, I specifically mention Apple has not and does not need to change their business model. What they do have to do, however, is capture more value per user. This is why watching iTunes services and revenue grow is a key statistic in the overall Apple narrative.

Surface Pro 3: Future of a Laptop or Future of a Tablet?

There is a lot to read between the lines of today’s Surface event from Microsoft. Microsoft’s vision for the Surface continues to be of a device both a great tablet and a great laptop. Previous versions of the Surface were neither. From the looks of the Surface Pro 3, it may finally be a viable laptop replacement. The key question for Microsoft with this product is whether or not they believe this is the future of the notebook or the future of the tablet?

Assuming they believe it to be the future of the laptop, they are addressing a shrinking market, not a growing one. Microsoft’s sales of Surface tablets have been relatively small to date. I would confidently estimate them to be less than five million units and more likely closer to 4 million. But they may hope to get a piece of the nearly 200m notebook annual sales. Can they do this with the Surface Pro 3? Only time will tell, but given the trends around tablets and PCs I see and the many conversations I’ve had with CIOs and CTOs, I have a hard time believing the Surface Pro 3, at its current price point, will do much to dethrone the notebook. This is particularly true as Microsoft’s partners like Lenovo, Dell, and HP will remain aggressive in their designs and pricing. Microsoft may look to own the the ultra-premium price segment but there they are competing with Apple and that could be an uphill battle.

The Surface Pro 3, however, has added a new dimension I think is very important. They have added better support in portrait mode by going to a 3:2 aspect ratio. This has been, in my opinion, the limiting factor of Windows 8 in general, but particularly the Surface when used as a tablet. I’m glad Microsoft added this mode and it will make for a much more pleasant tablet experience. Even with the 3:2 aspect ratio, I still feel the Surface is designed more to be a notebook replacement and not a tablet replacement.

As I point, out in this article for Insiders, corporate installations of tablets are going specifically to people like field workers. A 3:2 aspect ratio will help this greatly. Do they still have a tablet dilemma? The issue they continue to face is so much of IT has begun to transition to iOS (phones and iPads) and they are already converting key software assets to iOS. Still, for the value of the tablet form factor and how it is used and deployed for field workers, those companies with field workers still reliant on Windows software and policies may very well like the Surface Pro 3’s approach.

Like most of Microsoft’s products these days, I see the Surface Pro 3 as having a much stronger commercial play than a consumer one. While I don’t think the pure “tablet” nature of the Surface Pro 3 is the “tablet” experience consumers are looking for, I do think there is value in the pure “tablet” experience for IT looking to deploy tablets to field workers. If there is volume upside for Microsoft then it will come from their sales teams being aggressive with IT.

In all of this, we have to remember the reason a form factor like this exists, something considered a 2-in-1 (both laptop and tablet features), is for the worker who needs to be both highly mobile but also stationary. Therefore, the tradeoffs of what a pure tablet or a good notebook offer are worth it based on this mobile workers use case. While a tablet designed to be the best tablet and a notebook designed to be the best notebook will always be better than a 2-in-1 form factor, there is a market (relatively small in the grand scale of things) who will value a device that is a good enough tablet and a good enough PC. In my opinion, the Surface Pro 3 is the first offering by Microsoft good enough at both.

The pricing is still a head scratcher. Why they don’t include the keyboard, given you can’t use all the features without one, is a puzzle. Given its positioning as a laptop replacement, the lack of bundling a keyboard is particularly questionable. Microsoft is minting a premium price point strategy which comes off as high but only if viewed from a consumer standpoint. Enterprise will likely get volume discounts and, since that is where this product will be most successful, that is where the pricing tactics really matter.

I remain confident some level of a PC refresh is coming. There are now over 300m PCs in use in the market that are very dated technologically and over four years old. A win for Microsoft would be if some percent of the coming refresh cycle appeals to Windows laptop upgrades.

At the core of Microsoft’s vision is to bring the mobile world and the PC world together. However, given current trends, it seems the two worlds do not want to come together. We will see in five or maybe even ten years if Microsoft is eventually right or entirely wrong.

The Windows Tablet Dilemma

We are at an inflection point in the tablet market. Something that grew as fast and as large as the tablet/iPad did is clearly not a fluke. There are many theories about replacement cycles, household saturation, device sharing, tablet over-serving, and the smartphones growing role in computing to name a few. However, I still believe this market is in its early stages. Consumers are still feeling out the tablet form factor and discovering how it fits into their lives. I remain confident the tablet market is a growing opportunity and consumers, along with software developers, will have an “a ha” moment and the rest will be history. While we wait for the consumer market to shake out, there is still a growth story in the enterprise. It is one Apple is winning but Microsoft must remain competitive in. However, Microsoft’s approach is actually a detriment to their success in the enterprise.

The more time I spend with IT managers and CIOs discussing their tablet deployments, the more clarity I get in how they are being deployed. There is a clear trend. Almost universally, tablets are being deployed to those workers who did not have a computer before. This is because their job was out in the field. They work for large construction companies and spend most the day in the trenches and on their feet. They are techs working for utilities companies who may have had access to a PC in their car but never out in the job site. They are public safety workers. They are delivery drivers. They roam around oil rigs or energy facilities doing routine safety checks and procedure documentation. They are people who used to go into the field with clip boards full of forms, blueprints, and other necessary documentation. These are the people getting computers in tablet form and it is empowering them in their job in ways not before possible with a clamshell PC.

Now enter Microsoft’s approach. Regardless of where you stand in the debate of why Microsoft did what they did with Windows 8, the bottom line is they misunderstood the job to be done by the tablet in the enterprise. Microsoft saw the iPad and assumed commercial workers wanted something more than a slate and no keyboard. When in actuality, the clamshell PC form factor works great for those stationary desk workers, and touch is not as much of a value proposition while stationary than it is while on your feet in operating a computer. I don’t hear from CIOs their field workers need something that is both a PC and a tablet in the same device. Their field workers need a supremely portable and easy to hold for long periods of time “pure slate”. This is Microsoft’s tablet dilemma. Their current approach with Windows 8 is not conducive to a 10 inch screen size pure slate form factor. For one reason, the entire OS is optimized for the 16:9 aspect ratio, so the hardware is quite a bit longer than it is wide. This makes the device larger, heavier, etc. While the Surface form factor, and a few from Dell, is the closest Microsoft gets to the pure slate industrial design, they are still quite heavy and, more importantly, hard to hold and use in portrait mode. Portrait mode is an easily overlooked feature for many field workers. Oftentimes when they are looking at blueprints, using a clipboard for forms, and other typical paper based parts of their job, the orientation matters. Filling out a form is better in portrait mode, for example, due to the orientation being similar to paper’s 8.5″ x 11″ dimensions. My key point is, for field workers, the ideal tablet is orientation agnostic. This point favors the iPad and is one of the reasons the iPad is being deployed more for field workers than any other tablet.

Steven Sinofsky (the original creator of Surface and Surface RT) observed a similar point about field workers in a post yesterday. His point is spot on — there is a transition happening for field workers where the tablet is becoming their central computing device for their job. The software transition of internal apps from PC to tablet is happening and it’s happening fast. Microsoft’s dilemma is they run the risk of being left out of these field worker deployments entirely. If this happens, enterprises will become more dependent on the iPad as they create custom software for iOS rather than Windows. Could the iPad become a trojan horse to the enterprise, which then creates the opening for more iPhones and Macs in the enterprise?

Keep in mind the original reason Windows PCs took off the way they did in consumer markets was because consumers used them at work. They were familiar with them and because of that, they bought Windows PCs. Could the reverse now happen to Microsoft as the iPad, iPhone, and other future iOS devices become the norm in enterprise environments? Windows in the enterprise was its trojan horse to the consumer market in the early PC stages. I wonder if the same may be true for the iPad.

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.

Screen Shot 2014-04-22 at 8.35.53 AM

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.

Screen Shot 2014-04-25 at 5.02.46 PM

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.

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.

BkOiXh9IQAAaYJx.jpg-large

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.

Report: Smart Devices and E-Commerce

E-commerce has been a buzzword in the industry for more than a decade. I have come across some interesting data points that paint a new picture of the e-commerce marketplace than one that has previously existed. Not surprisingly, this shift in e-commerce trends is being driven by mobile devices. The implications of mobile on e-commerce will be significant.

Take a look at the following chart depicting the past 11 years Q4 US e-commerce sales as a % of US retail.

Screen Shot 2014-03-03 at 12.52.24 PM

As the chart above illustrates, Q4 2013 saw the biggest jump in e-commerce growth of any past Q4. According to the US Department of Commerce, 2013 online sales grew 12% over 2012. During the same time period overall retail growth in the US was up a less- than-anticipated 4.1%. According to a recent report from Monetate, in 2012, only one in five online purchases were made on a mobile device (phone and tablet). This year, that number jumped to one in three, growing approximately 50% in one year. In many of the ways the mobile web is poised to become more powerful and more dominant than the desktop web, so will mobile e-commerce be more powerful and more dominant than desktop e-commerce.

However, not all mobile platforms are made equally when it comes to e-commerce. To understand the future of e-commerce and mobile e-commerce we need to understand how platforms and form factor trends signal how this market will evolve. For the sake of this report we will focus on tablets and smartphones.

Tablets

Compared to 2012, the tablet saw an increase in average order value (AOV) of 14.13%. This last holiday quarter in the US the tablet AOV was $162.80. AOVs on tablet map much more closely to that of a traditional PC. For comparison the tablets YoY increase in AOV was 15.71% with a total value of $167.31.

Similarly conversion rates of tablet purchases and PC purchases were similar as well. The tablet saw purchase conversion rates increase 17.75% YoY with a conversion rate of 3.16% in Q4 2013. The PC saw conversion rates jump 24.29% with a total of 4% of purchase converted.

Screen Shot 2014-03-03 at 1.30.54 PM

Understanding that the tablet and the PC have similar average order values and similar conversions is a key takeaway. Why we are more optimist these trends will continue and the tablet may even continue to grow as a percentage of e-commerce transitions is due to its mobility over the PCs. More and more consumers are using their tablets while in key modes of discovery. Using a table to read a digital magazine in bed or on the couch, or using a tablet while watching TV are all situations where the consumer may see something they may be interested to purchase. The mobility of the tablet makes it the perfect form factor for not just gathering data but also for completing the transaction.

A joint research project between Ipsos and Google highlighted that the tablet was the device with the highest number of purchase conversions where the discovery process of something like shopping, planning a trip, and managing finances, were most commonly started and finished on the tablet. Where in the case of the smartphone most of the same tasks were started on the smartphone and completed on a device like a PC or a tablet.

While the traditional PC will still play a key role in the future of e-commerce, the tablet is the device with the most potential in not just western markets but global ones as well. I expect the tablet to soon be the king of e-commerce in every market.

When it came to platforms, unsurprisingly, iOS dominated with the higher AOV of any tablet platform. Below is the AOV by tablet platform for the past few quarters.

Screen Shot 2014-03-03 at 2.14.36 PM

Similarly the iPad drove the highest conversion rates of any other tablet platform. In Q4 2013 the iPad saw conversion rates of 2.72%. Android was 1.82% and the Kindle Fire just a measly .82%.

Smartphones

The smartphone presents the platform with most upside but its upside may reside less with e-commerce and more with driving new in-store mobile experiences/commerce. When it came to e-commerce the phone is still a distant platform to PCs and tablet in many respect. According to Monetate’s research the smartphone actually saw a decline YoY of 2.20% in average order values. Last Q4 2012 the smartphones AOV $136.61 and in Q4 2013 it dropped to $133.60.

Conversions of purchases from smartphone increased by 26.70% YoY to 1.18% in 2013. What the data suggests is that smartphones are valid entry points to search, discovery, and to help consumers decide what to purchase. Where the tablet is becoming the device consumers use to actually buy. This research from Monetate coincides with the data from IBM’s black Friday report where the following point is made:

Smartphones Browse, Tablets Buy: Smartphones drove 24.9 percent of all online traffic on Black Friday compared to tablets at 14.2 percent, making it the browsing device of choice. Tablets drove 14.4 percent of all online sales, double that of smartphones, which accounted for 7.2 percent of all online sales. Tablet users also averaged 15 percent more per order than smartphone users, spending on average $132.75 versus $115.63 for smartphone users.

Where smartphones may see their true potential is to drive more in-store activity than perhaps traditional e-commerce. In-store beacons may serve as the foundation for this new transaction driver. Apple is aggressively moving forward with implementations of its iBeacon technology. As more of these beacons which have the ability to send targeted and specific data base on precise location are installed in retail locations, retailers will be able to dramatically alter the in store experience. This shift will open new opportunities to influence the behavior of consumers in retail locations. If a store knows where a consumer is in their store it will make it easier for them or brands to offer them information and even promotions in real time.

Image that Coca-Cola puts a rule in place at a local grocery that if a consumer is standing in the isle near Coca-Cola products for a set amount of time, like 1min or more, to offer that person a discount on select Coke products if they purchase today. A smartphone and an abundance of strategically located beacons in stores will lead to this kind of super targeted advertising and promotions.

Technologies like TouchID also stand to impact the mobile shopping experience. This level of security depth will give merchants the ability to not just know where a customer is in store but also that they are who they say they are. Naturally, TouchID is important in the value chain of mobile purchases. This single technology has the opportunity to not just decrease the amount of credit card fraud globally but to also perhaps be a catalyst for an increase in mobile purchasing at large.

Smartphones, paired with in-store beacons, and a secure mobile purchasing mechanism all combined together make for exciting opportunities for brick and mortar stores to add value and to compete against on-line retailers or even use online retail to their advantage.

Mobile Traffic

Mobile devices are invading the PCs territory in nearly every dimension. Monetate’s research pointed out that one out of every three visits to leading e-commerce websites come from either a tablet or a smartphone. Mobile e-commerce orders grew 102% YoY and accounted for 4.22% of holiday e-commerce orders.

On Black Friday, traffic from tablets jumped 89.46% compared to Q4 2012. Similarly, Cyber Monday saw tablet traffic increase to 73.09%. Similarly Christmas day tablet and smartphone traffic was up 46.9% YoY. All data points according to Monetate.

The e-commerce trends are clear. T standout from my observations of market data and research from other and our own internal data is the tablet. You can not ignore the kind of data we are seeing about how tablets are being used in many vectors of consumers digital lives.

Samsung and their Fragile Relationship with Google

For Insiders I wrote a while back about Samsung’s precarious position in the market place. Samsung finds themselves between a rock and a hard place. It is not surprising that a bit of news surfaced stating that the next version of their Galaxy Gear will run Tizen not Android. Tizen is a joint venture OS between Intel and Samsung. Several other big name firms are involved with Tizen as well but Samsung is the largest to date said to actually take it to market.

Samsung’s move to run Tizen on their smart watch platform, if it does indeed turn out to be true, would not be a surprise. As many PC OEMs will attest shipping someone else’s software can only take a hardware company so far. When the day comes where a segment of the hardware industry becomes a commodity it makes life for hardware companies difficult. Samsung is a hardware company who desperately needs to become a software and services company. If history is our guide then it favors software and services companies. Facebook’s acquisition of WhatsApp emphasizes this point.

Samsung is not in a position to control their own destiny. Samsung’s challenge is that they struggle for customer loyalty. Currently, there is little reason for a customer to choose next years Samsung phone when they upgrade. If there is a better Android device on the market that catches their eye they are equally going to consider that device as well. What Samsung, and other Google Android OEMs, do is help drive loyalty to Google and Android but not necessarily to their brand. Apple does not suffer from this problem since their loyalty is built on more than their brand but on their ecosystem of not just hardware but software and services. This is why Samsung appears to be teetering on the edge of going vertical as much as they can without fully leaving the Google Android ecosystem. Samsung needs Google. Yet they need to not need them for their mobile group to thrive.

A Tizen based Galaxy Gear could be a step in this direction. If Samsung were to release an SDK around this Tizen Galaxy Gear product and get a critical mass of developers and apps creating applications for a product unique to Samsung then it could be the foundation for a Samsung ecosystem. It is worth noting that Samsung does not run Android on their Smart TVs. These Smart TVs do have apps but a critical mass of apps or developers exist for the Samsung Smart TV platform. Mobile is inherently where Samsung needs to have a critical mass of developers. If Samsung can’t figure this out and destined to be stuck in the rut of a hardware company then very troubled times are ahead for their smartphone and tablet operations.

Samsung does not have a services business to support forking Android. Amazon does. Xiaomi does and both have been successful at taking Android and building a services platform on top of it. Similarly, Microsoft could have a strong business case to layer their services on top of an AOSP implementation of their own. I’m yet to see something similar from Samsung. Which leaves them in a position to have to “platformize” Google’s version of Android as best they can without over stepping their boundaries as a Google certified OEM.

What we must watch with regard to Samsung is how they make steps in this direction on devices for which they don’t have to go through Google’s certification process. Products like their TVs, Smart Watches, or even new product categories, that are ecosystem boosters, are where they can start to lay a foundation to grow and foster their own platform.