Think.Tank – Page 48 – Tech.pinions

Facebook in 2015

This is the last in my series of posts on big technology companies in 2015. From next week on, I’ll be moving on to new topics.

Core user growth

Facebook should see continued growth in its key user metric, monthly active users, in 2015. Growth has slowed a little, as the chart below shows, but it continues to add over 150 million monthly active users year on year and, importantly, a greater and greater percentage of those monthly users are also daily users, which is a key engagement metric for Facebook. Facebook does face some headwinds, since it continues to struggle to win new users and increase engagement, in Asia in particular, and it already has a very high penetration in much of Europe and North America. Core growth, though, will continue at a decent clip in 2015.

Advertising revenue growth

The biggest question facing Facebook’s core revenue in 2015 is the degree to which app-install ads are driving mobile advertising revenue and the extent to which that growth is sustainable. Facebook’s mobile advertising revenue has been growing enormously since it launched but a variety of sources have suggested the bulk of that revenue comes from in-app installs. I’ve written elsewhere about the risk this entails if it’s true. There’s only so much revenue available from app developers, since the app revenue opportunity itself is only so big. Facebook’s response to all this is twofold: first, app-install ads aren’t “the vast majority” of its mobile ad revenue; secondly, app install revenue doesn’t just come from pure app developers but also from big brands like McDonalds who have other reasons for wanting to promote their apps. With this broader addressable market in mind, the ceiling for growth is significantly higher than it would appear, or so Facebook would argue. The question now becomes to what extent we buy these two counterpoints from Facebook and I suspect it will end up having to put more flesh on these bones in 2015 to reassure investors the current rate of mobile advertising growth is sustainable. Of course, it also faces increasing competition from Yahoo, Twitter, Google and others in the app-install ad space, which may hamper growth even if the overall market continues to grow.

Regardless of the exact source of mobile ad revenue growth, it’s likely the past trends of rapid mobile ad growth and flat desktop ad revenues will continue in 2015. Meaning that mobile revenues will be an ever increasing proportion of the total and will come to dominate Facebook’s revenue by the end of the year. That’s not a bad thing in and of itself, since that’s where the growth is, but it also means Facebook will be increasingly targeting users in emerging markets who have both lower disposable income and attract far less advertising revenue than their counterparts in mature markets. This problem isn’t unique to Facebook – I mentioned it in the context of my Google in 2015 piece too – but it’s something Facebook will increasingly battle going forward. Even as it drives continued user growth, it will struggle to maintain growth in average revenue per user over the long term.

Messaging – Facebook Messenger and WhatsApp

Given these impending threats to Facebook’s core revenue growth, it becomes all the more important it seek out new revenue opportunities elsewhere. Its efforts in messaging are a key part of this picture. However, its two key messaging activities – Facebook Messenger and Whatsapp – will generate very little revenue in 2015 and this is a significant challenge for Facebook in the short to medium term. Though it’s building a variety of new products that will generate significant revenue eventually, most of them are in an investment rather than payoff phase at the present time. Mark Zuckerberg has publicly stated these new businesses won’t generate meaningful revenue anytime soon. However, both products will continue to grow very rapidly in 2015 in terms of users, with WhatsApp filling some of the gaps in regions where Facebook Messenger hasn’t been successful on its own. There are several possible routes to monetization over time, including digital goods, advertising, business accounts and others, and we should start to see signs which way Facebook plans to go in 2015.

Instagram

Another new product which is slightly further ahead on this roadmap is Instagram, which the company has at least begun to monetize with advertising. But it’s doing so very carefully, with very few ads, carefully curated. The current model sees Kevin Systrom personally overseeing each ad before it goes out, but in 2015 the company will need to start to create a more scalable model. Facebook has begun feeding information about Instagram users’ interests and preferences into the ad targeting system for Instagram, and this is critical for the platform’s future success. But Instagram faces some natural limits in terms of how many ads it can show before users begin to revolt. Already, users have complained about the ads they do see and Instagram will have to manage the tension here carefully.

Oculus

Of course, Facebook’s other big acquisition, aside from WhatsApp, is Oculus VR. In some ways, this will take the longest to pay off. It’s likely we’ll finally see a commercial product in 2015, though pricing and exact availability are still unknown at this point. The Gear VR from Samsung which leverages some of the technology is, of course, already in market, but the core experience, which is tied to PCs rather than smartphones, is the fully-fledged product and will be limited to serious gamers. But the longer term future of Oculus – and Facebook’s plans for it – depend on creating experiences beyond just gaming. Again, in 2015, we’ll hopefully start to see more about what else Oculus can do.

More big acquisitions are still possible

Facebook has made a couple of big acquisitions in the past year and I think it’s still possible they’ll make more. Zuckerberg has shown he’s not afraid to spend Facebook’s stock in this way to secure what he sees as a stake in the future and I don’t doubt he’ll be willing to do it again if the right acquisition comes along. But this is all about securing that future, rather than buying into revenue opportunities for the near term. That’s the key for Facebook in 2015: it’s all about cranking the handle on the core revenue model, particularly mobile advertising, while building the platforms and products that will drive growth three to five years from now. To that extent, Facebook is somewhat similar to Google, which is also investing heavily in projects that won’t pay off for some time. But I think Facebook actually faces fewer short term challenges to its growth than Google does and the next generation of products could begin to be monetized at any time, in contrast to Google’s moonshots.

DISH Steps Up the Fight with Cable TV

If I were looking for people to break down the force of TV show producers (including sports), broadcasters, and cable carriers, I’d keep a close eye on Charlie Ergen, founder and chairman of DISH Network.

Just before the start of CES on Jan. 5, DISH unveiled content for Sling TV, a service announced last summer, to deliver programming to internet devices including Roku and Xbox One as well as PCs. The services that really count are HBO and live sports on ESPN. The limited service of ESPN, currently available only to cable subscribers, is a serious blow to the future of cable. It will especially be true if DISH, which has developed some good program display systems for its cable boxes, can improve the list for internet-based programming.

$20 bargain. The $20 a month charge makes the service very attractive. Throw in $30 a month or so to Netflix, get Amazon Video with the subscription to Amazon Prime, some free services such as PBS, and you have quite a cable TV package for substantially less than Comcast, TWC and the others want.

There are some obvious disadvantages. Sling TV is designed to be watched on a single device at a time (of course, clever users may find a way around this). At least initially, it will not be available for Chromecast or the Apple TV. And getting local broadcast stations will require a tuner and antenna–and the quality may decline if you are either too close or too far from the transmitter site.

The initial demonstration shows that the programming will be a lot like existing internet service and that is likely to be a drawback. I have had a Roku for as long as the service has existed and the miserable program listing still continues. First, you have to select the service for the program you want and then look through the listing for the channel. Many show programs in what seems to be a random order. Searching alphabetically is an alternative to searching by view, but entering letters using the Roku controller requires going painfully through the on-screen keyboard (and weirdly, the iPhone Roku app forces you to peck your way through the letters on the screen rather than use the keyboard). I despise the display of shows on the screen from my FiOS set top box but even this is heaven compared to the Roku screen.

Questions about sports. Providing two sports stations, ESPN and ESPN2, also raises some questions. Most of the internet stations make all programs available at the same time and you get to chose what you want to watch at the time. But the sports events have to be offered live as they occur. What will the selection look like and how will it work?

There’s also the question about how good the quality of sports will be. I have watched a number of sports events from ESPN, Big Ten Network, and broadcast networks on both mobile devices and PCs. The quality has often been poor, with blackouts, freeze ups, and reduction of picture quality. Fortunately, DISH has some really good picture quality for its Sling service and maybe it is in a position to bring significant improvement.

We won’t be able to fully judge this service until it becomes available later this year. But the opportunity for significant improvement to the existing cable and internet service is needed. Let’s hope DISH brings it.

Wrist Based Advertising

There was an interesting announcement today that many will mistake as “advertising” on the upcoming Apple Watch. TapSense announced a hyper-local/contextual platform that delivers promotions to the Apple Watch. Some see this as something people will hate or not appreciate.

However, if done right, this could be extremely valuable and strategic in driving the smartwatch into the mass market.

Deals not Advertising
Consumer don’t want ads — they want deals. That is, in essence, what TapSense is offering. When you observe what drives behavior for many consumers today, you’d see it has everything to do with deals. Generally, deals come via email or even postal mail. Retailers have know for decades consumers who opt-in to their programs respond extremely well when offered a deal. This example of a Starbucks deal from TapSense shows the potential.

Where mail and email fail is they are neither timely or contextual. If I am walking by a Starbucks, wouldn’t it be nice to get a deal from them? Or better yet, what if my smartwatch was smart enough to know I was walking, or going to be walking or driving by a Starbucks (since it knows my route thanks to the Maps app), looks at my calendar and sees I have a 30 minute window before my next meeting, it’s 20 degrees outside and I may appreciate a warm beverage? A lot of very smart things have to take place for this to happen but you can see how this is a scenario which is possible and inevitable. One example of many I’ve thought about that make this interesting.

When mobile — meaning not stationary and looking at my phone, tablet, or computer — I’m not staring at my smartphone screen at all times. It is likely in my pocket or bag. The smartwatch is the piece of smart glass I have visible practically at all times. Because of that, while mobile, it is this display which makes the most sense to receive contextual and hyper-local deals.

Lastly, an observation about marketing/advertising. Magazines have always been one of the best examples of great marketing. This has everything to do with magazines generally being fairly niche and interest specific. Personally, I have three special interest magazines I subscribe to — Food, tennis, and farming. I find the advertisements in these magazines extremely useful because I am very interested in these subjects. Therefore, I’m being marketed to because I’m a captive/willing audience for products or services related to my interests. This is the element that has been very hard to replicate in the digital world. Facebook, Google, and others are too broad of platforms and do a terrible job showing me only ads/marketing related to my interests and passions.

I believe the smartwatch will have some role to play here — deal offering rather than generic advertising. Deals personalized to my interests that can impact my shopping/purchasing decisions have great potential. The ability to receive these types of push offerings becomes even more interesting the more personalized the product and the more the platform, in this case iOS, knows (or I allow it) to know about me. And that is key – if Apple allows this functionality, it will undoubtedly be entirely opt-in by the user.

These types of push offers are one of the areas that make me think there is more to this smartwatch category than people realize.

I’ll have more of my thoughts in a report on the smartwatch opportunity later this week.

Changing Predictions And Predicting Changes

At the start of a New Year, it’s traditional to try to predict the future. I’m not going to do that.

Prediction is very difficult, especially about the future. ~ Niels Bohr

I find it hard enough to understand the present, more less predict the future. It seems to me that the present has a way of sneaking up on us while we’re still living in the past.

In fact, predicting the future can often become counter-productive:

… beliefs about the future are so rarely correct that they usually aren’t worth the extra rigidity they impose, and that the best strategy is simply to be aggressively open-minded. Instead of trying to point yourself in the right direction, admit you have no idea what the right direction is, and try instead to be super sensitive to the winds of change. ~ Paul Grahm

So rather than attempt — and fail — to predict the future, I’ll simply share with you a few of the guideposts I use in my quixotic quest to remain open minded about the future:

Certainty

Whoever undertakes to set himself up as a judge of Truth and Knowledge is shipwrecked by the laughter of the Gods. ~ Albert Einstein

Rationalizing, Not Rational

The human mind is a delusion generator, not a window to truth. ~ Scott Adams

Unlearnng

Nothing is more damaging to a new truth than an old error. ~ Johann Wolfgang von Goethe, Proverbs in Prose

The most useful piece of learning for the uses of life is to unlearn what is untrue. ~ Antisthenes

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so. ~ Attributed to Mark Twain and probably inspired by Josh Billings

Experts

When experts are wrong, it’s often because they’re experts on an earlier version of the world. ~ Paul Grahm

Evidence

You must accept the truth from whatever source it comes. ~ Moses Ben Maimon Maimonides

You’re entitled to your own opinion but not your own facts.

Exceptional claims demand exceptional evidence. ~ Christopher Hitchens

Questions

It is not the writer’s task to answer questions but to question answers. ~ Edward Abbey

Conclusion

Take your work seriously, but never yourself. ~ Dame Margot Fonteyn

Wishing you and yours the very best New Year.

Misunderstanding Apple

A number of prominent personalities on Twitter yesterday retweeted some “expert” opinions of the iPhone from 2007. I particularly liked this paragraph:

The big competitors in the mobile-phone industry such as Nokia Oyj and Motorola Inc. won’t be whispering nervously into their clamshells over a new threat to their business.

The iPhone is nothing more than a luxury bauble that will appeal to a few gadget freaks. In terms of its impact on the industry, the iPhone is less relevant.

This image of a Street Smart article also contained a notably negative view on Apple’s chances with the iPhone as well.

This view of Apple from many “smart” people seems rooted in what I call the common misunderstanding of Apple. Most investors, either VCs or Wall St., like to put nice, clean definitions they can understand on the companies they cover. They like to use a template for other similar companies. Often, trying to fit Apple into their templates is like trying to fit the proverbial square peg in a round hole. And when their predictions about Apple or their products don’t pan out, they have little explanation. This type of investor has templates for hardware companies, software companies, and services companies. They more often than not use a hardware template model to analyze Apple because Apple generates nearly all of its revenue from hardware products. However, that would not be possible if they did not also own their software and services. A tricky combination for most.

But I’ve always found it helpful to think to what a company actually sells. And while I’m generalizing this viewpoint, I’ve always felt Apple is an experience company and, at the center, that is what they sell. It is the experience of their products consumers gravitate towards. It starts with the design and flows to the simplicity and delight that comes from the software. Tight services integration will be the next step Apple brings their famous experience to.

Some define what I call “the Apple experience” as the Apple ecosystem. They are certainly related but I believe the Apple ecosystem was born out of the Apple experience first and foremost. Ecosystems and experiences are harder to understand and companies who sell an “experience” of any kind are bound to confound many.

I was thinking about this point when I was giving a talk about Sleep Number at an executive summit for a Fortune 500 company. I explained how Sleep Number is using technology to better the sleep experience. I told them that ultimately, Sleep Number is not selling a mattress or a bed, they are selling better sleep. That is essentially their mission and technology is now an enabler to them selling better sleep.

While we can debate the ecosystem, or even the lifestyle elements of Apple the company, it is ultimately the experiential part that will continue to cause misunderstanding. Experience is nuanced and it may mean something different to many. For some, Apple is a way of life, for others it is the technological product that causes the least frustration. For many others, it simply gets out of the way and empowers them to compute in ways other products make too complicated.

When companies or products don’t fit the standard templates of experts, they can make bold claims that end up hurting their credibility, especially with those who do know better and who are usually the ones the experts hope to have credibility with. Lots of folks love to write off Apple and history proves writing them off is a bad idea. On this point, a quote from Chris Dixon seems apt:

No company is perfect, and no company can be held to the standard of making perfect products. But as Colin points out, Apple does a good job making products people want and love. Failing to recognize this point continues to be a central error.

The common misunderstanding of Apple will continue as they advance into new categories. A general misunderstanding of the goal and definition of what success looks like for the Apple Watch will be THE misunderstanding of Apple in 2015.

While it was hard to really understand the true impact of the iPhone at the time, for a contrast to the doom and gloom of the Bloomberg article above, take a look back at Tim Bajarin’s PC Magazine column from July 2007 on his first impressions of the iPhone after the launch. I particularly liked this statement at the end of the article:

“The iPhone will become the gold standard in smartphones, and likely give Apple at least a two-year edge over the competition.”

Why I Am Passing on CES

A few months ago, as I was slowly recovering from illness, I assumed I would be unable to go to CES. The recovery came, but I found it hard to change my mind. My official excuse was CES would be exhausting, and it would. But it is looking like there will be a distinct shortage of news in Las Vegas next week. While CES still has reason for others, from meeting with manufacturers and vendors to seeing hundreds of obscure Chinese products, I’m still looking for news.

It’s not yet clear whether this is simply a weak year–though the second weak year in a row–or the beginning of a permanent decline in the show. There clearly has been a basic change in how major manufacturers approach it.

Another Apple move. Like so many other things, the change starts with Apple. When the rest of the industry crammed into Comdex and CES, Apple dominated the Macworld Expo–at its peak in San Francisco in the winter and Boston or New York in the summer. Starting in 2009, Apple decided it no longer needed IDG/Macworld and from 2010 onwards, it announced new products only at its own exclusive company events.

In 2013, Microsoft, which had a huge display and dominated CES with an opening keynote by Bill Gates and later Steve Ballmer, pulled out. It too found it could do better launching new items, such as the Surface, at its private events. Lenovo will likely be the only important PC maker on the show floor. Hewlett-Packard and Dell have disappeared.

The shift of the product interest from PCs to phones also hurt CES. The show that matters for phones is the Mobile World Congress in Barcelona in February and there is no desire to scoop MWC in January. (The success of MWC has also clobbered the U.S. CTIA show)

TV Is Back in Charge. The absence of computer companies has turned much of CES back to the traditional focus on consumer electronics, particularly televisions. The problem is there is painfully little to talk about. The last two TV breakthroughs were 3D displays and curved screens. Both got extensive coverage, especially 3D, but neither won much support from customers.

This year, the TV news is 4K displays. Two problems. There is essentially no 4K content, similar to one of the problems of the 3D market. The industry is making 4K movies for theaters, but the staggering strain on the network make it very hard to stream content to homes, even if there were a demand. Second, the full advantage of a 4K display requires a very big screen, one few homes have space or budget for.

There will be a flood of reports from Las Vegas. CES will be filled with hundreds of journalists, especially from the hungry online services. But I fear we are not going to see a lot of announcements that readers, or customers, really care about. I’ll be displeased if I miss big news at CES, but it doesn’t seem likely I will.

Tech Devices Owned in 2014

>As we enter 2015, I wanted to give our readers a look at some of my survey data highlighting the percentage of ownership by specific tech products as of the end of Q4 2014 from our research panel. Since we do research panels quarterly on a range of topics, I’m setting the stage so we can look back throughout 2015 and beyond to see how the data changes with time.

First, a note on methodology. While respondents to the survey could take the survey from their smartphone, tablet, and even featurephone, the vast majority of respondents took the survey from their desktop or notebook PC. This panel went out to over over 40,000 people with larger volumes of respondents in Western countries. I have data for over 30 countries but I’m focusing on certain markets for this post. For each market, I’ll share the chart and make a few observations. But overall they are self explanatory.

Question: What devices do you personally own?
*Smart TV was defined as a TV that could access the Internet
*Smart Watch was defined by using examples like Pebble, Samsung Galaxy Gear, Sony Smartwatch
*Smart wristband was defined by using examples like Nike Fuelband, Fitbit, Jawbone UP
*Tablet was defined by using examples like Apple iPad, Samsung Galaxy Tab
*Smartphone was defined by a phone with access to an app store, browser, maps, email, etc.

US/UK

This panel was to over 27,000 respondents in the US and UK. In both these markets the PC, smartphone, and tablet percentages closely align with actual penetration of each device. I have a high degree of confidence the other categories represent the general penetration as well of the US/UK market based on retail and sales data I have.

I expect moderate growth of both the smartwatch and the smart fitness band products by this time next year in the US and UK market. The PC will likely remain flat and may actually decline and I do expect the tablet percentage to increase.

China

China requires some context for this data. This panel had 4,700 respondents. The percentages do not line up with the penetration of core computing devices. So we have to take that into account. PC penetration is about 35% in China and smartphone penetration is nearing 50%. What we take away from this panel is the mix of device ownership by the online population, a group that can generally afford a range of gadgets and a group where PC penetration is quite high. This is why, within this group, the smartwatch percentage is quite high. In fact, of every country surveyed, China had the second highest number of respondents who said they personally owned a smartwatch.

While an important segment to understand, this data represents a picture of tech device ownership of the top 30-35% of the China market. This picture would look different if we just researched the lower tiers where a smartphone is likely the only smart tech device they own.

India

The India panel had 3,100 respondents. Much of the same context of the China market applies to the India market. Only here, we are looking at the top 20% of the market. PC penetration in India is around 10% and smartphone penetration about 9%. Smartphone penetration is growing rapidly in India and, in Q4 of 2015, smartphone penetration will likely double and be near 20% or higher. It was interesting among these respondents that smartwatch ownership came back so high. Granted, we are polling the higher tiers of the market so their disposable income and ability to afford multiple tech products is higher than the overall Indian market.

Japan

I’m including Japan because I’ve always found it a particularly interesting market. This panel covered just over 2,000 respondents but again has similar penetration rates of PCs, smartphones, and tablets. The tablet never took off in Japan the way it has in other markets, and the smartphone amazingly didn’t take off as fast as I thought either. This in the context of how fast Japan has been in the adoption of other leading tech categories. I’m very curious to see how the Apple Watch does in Japan. We know the Japanese have an affinity for Apple products and tech/gadgetry in general. While Japan is not on any lists I have seen as a big market for the Apple Watch, I think it may be a sleeper market.

I gather data points on these markets and many more and use them to round out my analysis on each region. But, as a starting point for our readers, I wanted to start with some of the specific device ownership data and keep updating models throughout 2015 as key observations come to light. Obviously, the smartwatch is a key category I’m observing and will continue get data on from each key region.

Why Apple will have Another Banner Year in 2015

When Apple releases their earnings for the 2014 holiday season in mid-January 2015, I expect them to have record sales of iPhones and Macs. The street predicts Apple will sell between 63-65 million iPhones but I think it could be higher given the strong interest in the 5c in China and older iPhones still in the pipeline. I suspect even their tablet business was robust over the holiday.

In 2015, I believe demand for the iPhone 6 will continue to be strong and have record numbers as each quarter, especially in the US, people will be coming out of current carrier contracts and upgrading their phones throughout the year. By next fall, Apple will have new models that will help keep that cycle moving forward.

Last quarter, Apple sold one million more Macs then they did in the previous year’s quarter. New iMacs and a new Macbook Air (out in 2015 — thinner, lighter and sport Intel’s newest chip) will continue to drive strong Mac sales. We also believe Apple will introduce a 12.9“ tablet aimed at business and this too could help enhance their tablet sales in 2015. BTW, this could be a game changer for the Apple crowd. While Apple will not back the 2 in 1 concept a la Microsoft Surface, a larger screen iPad with a 3rd party keyboard could make it a productivity workhorse while also finding its way into the home as a great portable TV and movie player.

Then there is the Apple Watch. I and many others are still skeptical about whether a market for smartwatches even exists. If there is one, Apple will be the company to make it happen. Apple has an important edge over possible competitors. They own the hardware and design, software SDK, application store and a powerful distribution network with their stores. While I don’t know what the killer app for a smartwatch is, Apple has empowered the software community to create apps for their new watch platform and I never underestimate the genius and innovation that could come from that community. I predict Apple will have at least 5,000 apps for the Apple Watch when it launches and we should see many killer apps that appeal to a very broad audience.

On a related note, I have the privilege of moderating a CES Supersession on smartwatches on Wednesday, January 7th at the Venetian Hotel, Level 1, Casanova 605. If you are at CES and interested in smartwatches, I encourage you to come by. I have execs from Samsung, Motorola, Intel’s Basis division and Yahoo on this panel to discuss if there is a market for smartwatches. The actual title of the session is “The Market for Smart Watches”. Super Sessions are open to anyone who attends the show.

Then there is Apple TV. I believe 2015 will be the year Apple lays their cards out on their new Apple TV strategy. I personally don’t think they will do an actual TV but they could dramatically redesign their current Apple TV hardware as well as give us a new type of UI and way to access and interact with TV and streaming media. This too should be a game changer given what Steve Jobs told his biographer.

There is also a possible wild card in the works. Tim Cook has stated publicly they are working on things nobody has even talked about in the media. Maybe 2015 will be the year we see something in a completely new category that could also impact their bottom line.

While Apple had a great 2014, I will not be surprised if they have an equal or even better 2015.

Amazon in 2015

After a break for Christmas, I’m continuing my series on major tech companies in 2015. You can read the previous ones here: Apple, Microsoft, and Google. Today, I’m tackling Amazon. I’m going to keep the series going for at least another week or two – I’ve had some input from readers on which companies should be next, but feel free to chime in through the comments if you have a suggestion. I’m going to start with Amazon’s e-commerce business, and then move on to the other aspects of its business.

E-Commerce – Amazon’s unprofitable core

I’ve written before about the importance for successful consumer technology companies to have a highly profitable core and Amazon continues to be the exception to this rule among the big companies. Amazon’s core – e-commerce – makes up over 85% of its revenue and yet it’s not just moderately profitable but actually unprofitable. The challenge for Amazon is retail is an inherently low margin business and Amazon is dealing with the task of rapidly growing that business — which means making huge investments. The year 2014 saw increased investments across various areas and, as a result, Amazon dipped even further into the red than usual. I don’t see any change in this pattern in 2015. Amazon’s heavy investments in building additional capacity in more large markets such as the US and building basic infrastructure in some of its new markets will continue to drag down profitability. The big test will be whether investors continue to believe this scenario can change some day – there were certainly signs in 2014 some had lost patience. I continue to be skeptical that the point will ever come when Amazon can slow this investment and turn significant profits in e-commerce.

E-commerce in emerging markets – an uphill battle

Some of Amazon’s biggest investments are going into new markets such as China. However, in those markets, it faces formidable domestic competitors such as Alibaba in China and the much smaller Flipkart in India. It also faces very different models for online retail, with Alibaba and China in general favoring third party rather than first party fulfillment. It’s a model Amazon understands, but certainly not the main model Amazon has used elsewhere. Amazon has dominated e-commerce in certain Western countries, but it’s unlikely to be able to replicate that dominance in these new markets. Therefore, it’s questionable whether they can derive the same scale and scope of benefits it does in the US and other established markets. Meanwhile, building an equivalent infrastructure in a massive country like China, especially with the expectations its citizens have for timely delivery, will be almost impossible without the scale to justify that investment. In the US and other markets, Amazon pioneered a new model but, in these markets, it’s playing catch up.

Mobile e-commerce – Amazon’s Achilles heel

Another major weakness, in China in particular but also in many of these other emerging markets, is Amazon’s relative shortcomings in mobile e-commerce. The vast majority of Amazon’s transactions are completed on PCs rather than mobile devices and it has failed to build equivalent dominance in mobile e-commerce. Conversely, the mobile share of Alibaba’s revenue has risen from under 10% two years ago to over 30% today and continues to rise rapidly. Alibaba has successfully made this transition. Amazon has not. That’s partly a reflection of overall preferences among the users Amazon serves in its existing markets, but as user behavior there shifts to mobile devices, Amazon still needs to find a way to better meet those needs. The Fire Phone (more below) was clearly an attempt, in part, to change this but was a disaster for the company. 2015 is a key year for Amazon to figure out how to build a successful mobile e-commerce platform.

New domestic competition from Google and others

Amazon’s other problem is focused competitors have started to pick off some of the low hanging fruit and they’re doing it with a rather different business model. Whereas Amazon’s dominance and differentiation have been predicated on its massive investment in infrastructure, new competitors in the US market have leveraged existing third party warehousing and retail facilities while focusing on delivery. Whether it’s Google Express, Instacart, Zookal or Postmates (and potentially Uber), a variety of companies are focusing on areas Amazon doesn’t currently serve well and are doing so very effectively. Amazon is responding in kind with its own initiatives, including its own grocery delivery service and same day and Sunday deliveries in certain markets, but it’s always tough for a competitor that thrives on scale to compete on a focused, local basis. Meanwhile, many of these competitors are targeting what are likely Amazon’s most lucrative markets. In 2015, Amazon will have to demonstrate it won’t suffer the death of a thousand cuts as these competitors increasingly take share in key categories.

First-party hardware: a failing strategy

Amazon has had one massively successful first party hardware line — then there’s all the rest. Its successful line, of course, is the Kindle, which benefits from three key characteristics: it’s exclusive, it’s cheap, and it’s tied directly to purchasing Amazon’s content, and only Amazon’s content. Though Amazon has tried to replicate its success in e-readers in other device categories, it’s largely failed. Tablets were a temporary success early on when Amazon was able to undercut the competition on price (there’s that cheap characteristic again) but, as other Android-based tablets got better and cheaper, its brief advantage was eliminated. Meanwhile, tablets were open devices, allowing customers to download whatever content they wanted rather than just content from Amazon, which prevented Amazon from using the razors-and-razor-blades model it used with the Kindle. The Fire Phone, of course, was a complete flop, and the Fire TV has sold in small numbers too (though, once again, the Fire TV Stick, a cheap device, seems to have done better).

In 2015, Amazon has some major decisions to make about its first party hardware strategy. It’s becoming increasingly clear the Kindle was something of a one-off as successful first party hardware for Amazon, and the three characteristics that made it both appealing to customers and for Amazon simply don’t apply to the other categories it’s entered. Amazon neither makes lots of money from this hardware directly nor does the hardware drive sales of other products Amazon sells. So what’s the point? I expect Amazon will continue to produce both Fire tablets and Fire Phones in 2015, but it shouldn’t. There’s no good strategic reason for Amazon to continue to produce its own hardware when it doesn’t compensate for the problems that hardware causes for the company. The one exception may be the TV space, where Amazon has at least done something different by attacking both the video and gaming. I also think some of its other devices, like the Dash and the Echo, are at least innovative, and may have a role going forward.

Fire OS and the App Store: Amazon’s consumer platform

Closely tied to first party hardware, of course, are two other Amazon initiatives: Fire OS and the Amazon App Store. Both are necessary to Amazon’s current first party hardware strategy, but neither has great strategic value independently. Amazon has recently attempted to make the App Store more readily available on Android devices directly, but Google appears to be pushing back on this effort. Third party app stores have done well in certain countries on Android, but typically not those where Amazon has historically been successful. With few exclusives, many missing apps, and only the occasional promotional price to recommend it to mainstream Android users, it’s not clear the Amazon App Store has much of a future outside of Amazon devices. The one exception is BlackBerry devices where the Amazon App Store has now become the default store for consumer purchases. That further ties Amazon’s hands should it choose to abandon first party hardware but again I doubt it will be that bold, at least in 2015. And the number of devices BlackBerry will bring to the table isn’t big enough to make much of a difference in developer appeal.

AWS: potential to become Amazon’s highly-profitable core

AWS has been one of Amazon’s big success stories over the last several years, generating higher margins than e-commerce and growing extremely fast. But growth faltered a little in 2014, as competition, from Google and Microsoft in particular, intensified. The basic storage and infrastructure services are becoming rapidly commoditized, with plummeting prices and little real differentiation. As such, both margins and differentiation will move to what these companies build on the basic services; hence Amazon’s launch of Zocalo and other enterprise tools that sit on top of AWS. But here it is going up against Microsoft’s traditional stronghold and Google’s increasingly capable offerings. End user software hasn’t been Amazon’s strong suit, but it’s Microsoft and Google’s bread and butter. I remain skeptical of Amazon’s ability to successfully compete in this area. Meanwhile, others not in the cloud storage business are also building their own competing platforms at this higher layer, including Box, Salesforce and others. If AWS is to become the highly profitable core Amazon has always lacked, it needs to successfully compete at this layer as well as the basic services it has provided historically. It’s not clear to me Amazon will be any more successful at this in 2015 than it was in 2014.

TV and video: more exclusives, but to what end?

One of the most interesting things about Amazon’s TV and video strategy is the extent to which it’s fighting a totally different battle from almost everyone else in the business. Essentially, all other players derive direct revenue from their TV customers — whether through subscriptions, one off downloads or advertising (or some combination of those). Amazon on the other hand, doesn’t sell a TV subscription per se: instead, its TV subscription is merely a perk of the Prime membership. And Prime itself is essentially a money loser, costing more money in shipping than it brings in, at least directly. Amazon makes up the difference in more purchases of physical goods and services. This has always been a strategic tension for Amazon as it builds up a larger and larger library of content and more and more exclusive shows, but without a way to monetize them directly. It’s already had to raise the price of Prime once to paper over this problem, but it’s not going to get any better as Netflix and others continue to raise spending on content while monetizing usage directly. Amazon’s penchant for indirect business models across hardware and content makes it unique, but it also creates unique challenges. In 2015, we’ll see spending on original content continue to rise, but I’m not convinced Amazon will see equivalent benefits elsewhere.

2015: a year of testing and transition

Amazon ought to see 2015 as a year of testing and potentially one of transition. Its core model, and its heavy investment in growth, are increasingly being questioned by investors, and it needs to determine whether it can continue to create shareholder value by going down this path. Its first party hardware strategy is failing with only a couple of exceptions and it should look to exit several categories in 2015. AWS needs to transition from basic services to more differentiated and higher margin products, but it’s not clear Amazon has what it takes to succeed in these new areas. Overall, Amazon faces many tests in 2015 — I’m not persuaded it will pass many of them. In the meantime, its heavy investments in both growth and first party hardware are likely to drag down margins and their future growth opportunities seem less and less certain.

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.

Tablets, Notebooks and Desktops Are The New “Other”

I have been following personal computing since the 1970s (yes, I am ancient). I was introduced to computing categories in the following order:

— First, there was the Desktop. The original Desktops were text input only. Then monitors were added. Then mouse input was added, which allowed Desktop computers to be user by a whole new class of users.

— Next there was the Notebook, which broke from the Desktop only in form factor. The Notebook made the Desktop transportable.

— Then there was the modern Smartphone, which broke from the Desktop and the Notebook both in form factor and in user input. While the form factor of the Notebook made it transportable, the form factor of the modern Smartphone made it mobile, pocketable and, with cellular and wifi connectivity, always connected to the internet. While input via a mouse was the preferred input metaphor for the Desktop and the Notebook, touch became the preferred input metaphor of the Smartphone.

— Then Steve Jobs introduced the modern Tablet and asked if there was room for a third category of personal computing device between the Notebook and the Phone. Note he did not identify the Desktop and the Notebook as different categories, which was probably correct. The Desktop and the Notebook are very similar to one another, while the gap then existing between the Notebook and the Smartphone was, and is, great. Steve Jobs was asking whether there was room in that gap for yet another category (the Tablet) and some are still asking that question today.

— Now, we see wearables as a potentially new computing category.

Input

In addition to dividing personal computers by category — Desktop, Notebook, Tablet, Smartphone and Wearable — I have also always been careful to divide personal computers by user input.

While the Desktop and the Notebook use a mouse and a touchpad to manipulate a cursor, the Smartphone and the Tablet use the finger as the input device. Touch input is so different from cursor input, it required a radical re-writing of the computing operating system. Some, to this day, still do not recognize how very different — and how very incompatible — the mouse metaphor and the finger metaphor user inputs are.

Distinguishing between user inputs caused me to draw a bright line between Desktops/Notebooks that use cursor input and Tablets/Smartphone that use finger input.

Mea Culpa

Please pardon me for being late to the party, but I think I’ve been looking at personal computing all wrong. Because I divided personal computing by categories and because I divided personal computing by user input, I failed to see that what is really happening here is personal computing has divided into two camps: Smartphones…and everything else.

Smartphones Are The New PC

I’ve known for a while the Smartphone was a Super Computer in our Pocket and it is outselling other personal computing devices by more than 2 to 1.

However, I’ve never really given the Smartphone its due. I’ve always seen the Smartphone as being at the bottom of the personal computing pyramid, with Desktops at the top. Ben Bajarin says this is because we, who have grown up with personal computing, have a PC bias, and he is right. For most of those who did not grow up with desktops and notebooks, those devices are totally irrelevant. Old-timers like me find ourselves debating silly questions, like whether the tablet might be capable of replacing the Notebook when, in fact, the phone is more than capable of replacing the Notebook for many.

The Smartphone Is A Supercomputer In Our Pocket

For those in the West, the Smartphone combines many devices into one and for those who have never previously had access to computers, it gives them access to a plethora of devices and services they never had access to before.

The Smartphone puts previously unimaginable computing power at the service of the masses. While the richest nations benefit from the Smartphone, those who inhabit the poorest nations benefit most. Smartphones act as the great equalizer.

Some even postulate that “Mobile at work is the next Industrial Revolution“.

Running The Numbers

The are 6 billion people on Earth and it is estimated 5 billion of them will own Smartphones. Of that 5 billion, perhaps 2.5 billion will decide to own an additional Tablet, Notebook or Desktop.

You have a small screen in your pocket. You may also have a big one at home. It may be a laptop, desktop, or tablet, or some combination. ~ Benedict Evans (@BenedictEvans) 12/9/14

What this means is, in the very near future, everyone who has a computing device will have a Smartphone and only a subset of those Smartphone owners will have an additional computing device. And for many, the Smartphone will turn over every 2.5 years while the “additional” computing device may not turn over for 4 or 5 years.

Tablets, Notebooks and Desktops Competing Against One Another

While I have always thought of Tablets, Notebooks and Desktops as being separate categories, they really need to be lumped together as “Other”, i.e. other than Smartphones. Tablets, Notebooks and Desktops compete against one another for the coveted role of being our second computing device. Smartphones aren’t in competition with the “other” category. Computer owners may argue over whether to get a Tablet or Notebook or a Desktop but almost no one will think of getting a Tablet or a Notebook or a Desktop in lieu of a phone.

Tablets, Notebooks and Desktops Acting Like One Another

In addition, as different as Tablets and Notebooks and Desktops are, one from the other, they are also very alike in most of their use cases.

Looking at IBM US commerce data. Pretty clear it’s wrong to think of ‘mobile’ as smartphones + tablet. ~ Benedict Evans on Twitter

The Tablet form factor and input are completely different from the Notebook and the Desktop, but the Tablet’s use cases are far closer to the Notebook and the Desktop than they are to the phone.

The more I look at tablets the more I think of them as a continuation of the desktop to laptop transition, rather than part of ‘mobile’. Benedict Evans (@BenedictEvans) 12/9/14

Perhaps you came to a similar conclusion long ago. For me — and I suspect for many others — this is a whole new way of looking at Tablets, and at personal computers as a whole.

A New Definition Of Mobile

I think we need to redefine what we mean by “mobile”. For me at least, for a device to be categorized as “mobile”, it must be on one’s person or readily accessible at virtually all times and it must be connected to a cellular or WiFi network at virtually all times. Tablets should be removed from the mobile category and thought of, instead, as one of the three flavors of secondary computers available to those who can afford more than one computing device.

I, like many others, care about some computing categories because of what they were rather than because of what they are. Computing has re-aligned itself. It’s past time for my way of thinking about personal computing to do the same.

With Windows Phone It’s Not The What, It’s The Why

On December 4, 2014, Techpinions’ own Jan Dawson wrote a 33 page report on Windows Phone. While it sounds long, for those interested in the topic, it is easy reading and I highly recommend it to you.

Jan’s report answered the “What” questions — What’s gone wrong with Windows Phone and What should Microsoft do about it. His answers are compelling. But I am far more interested in the “Why” than the “What.” Why is Microsoft doing phones at all?

Why?

Why Windows Phone? Does it help sell more Window’s licenses? No it does not. ((Microsoft launched Office for iPad in March and says it’s seen 40 million downloads of the three apps since then. But the full functionality of the apps has only been available to Office 365 subscribers, and it’s added less than three million Home and Personal subscribers since then, at roughly the same pace as it added subscribers earlier. People have been very interested in the apps, but most haven’t been willing to pay for the full functionality (or already had access to it through existing Home or Business subscriptions ~ Jan Dawson)) Microsoft is now giving away Windows on any device smaller than 9 inches. Microsoft Windows phone is not necessary to pursue that strategy.

Why Windows Phone? Does it help sell more Office licenses? No it does not. Microsoft is now giving away Office on all mobile devices under 9 inches. Microsoft Windows phone is not necessary to pursue that strategy.

Why Windows Phone? Does it help entice more people to upgrade to Windows 365? There is no evidence that it does.

Why Windows Phone. Does it make money from the sale of hardware. Not it does not. Windows phone is a money loser.

Estimated share of Q3 handset industry profits: Microsoft: -4%, Motorola: -2%, HTC, BB: 0%, LG: 2%, Samsung: 18%, Apple: 86%. ~ Kontra (@counternotions) 11/4/14

Further, if is far more likely that Microsoft is making far more money from licensing its patents to Android manufacturers than it is from selling its own phone hardware.

Strategy Tax/Conflict Of Interest

Why Windows Phone? Does it complement Microsoft’s licensing model? No it does not. If fact, it does just the opposite.

Microsoft’s Windows Phone directly competes with its own manufacturing partners. ((With the Lumia line, now manufactured by Microsoft Mobile following its acquisition from Nokia, Microsoft is now playing Windows Phone from both sides, as the only licensor and by far the largest licensee. It’s competing with its other licensees in the most direct and dominant fashion, even as it seeks to increase the number of OEMs using Windows Phone. ~ Jan Dawson)) And if you think those manufacturers haven’t noticed, then you haven’t been watching as they one-by-one flee the market.

In what is yet another blow to Microsoft’s mobile efforts, Huawei — a top-5 smartphone maker in 2014 — confirmed to The Seattle Times that for the time being, it is done with Windows Phone. What’s more, the company’s head of international media affairs said that Huawei has not made any money with Windows Phone… and neither have any other Microsoft partners. ~ Zach Epstein, BGR

Where Is Microsoft Headed?

Microsoft is doing a great job of moving towards services. Its Windows, Office and on-premise Server businesses are throwing off cash, while Office 365 and Azure are rapidly growing.

Windows hardware is not only doing poorly, it is antithetical to Microsoft’s services business model. Consider the following four quotes from Satya Nadella:

— (Microsoft’s core question is) How do we harmonize the interests across end users, developers, and IT?

— Microsoft wants to be a player everywhere.

— I definitely don’t want to compete with our OEMs.

— We are a software company at the end of the day. ~ Satya Nadella

You cannot harmonize those quotes with the sale of Windows Phone. And, in fact, I don’t think that Nadella actually wants to be in the hardware business. It was forced on him by his predecessor and he is slowly backing away from it.

I’ll make a bold prediction. Microsoft will eventually drop Windows Phone. Unfortunately, based upon what we’ve seen of Satya Nadella’s cautious style, I think it will be later rather than sooner.

Conclusion

Windows Phone is probably a lost cause…

When a lot of remedies are suggested for a disease, that means it can’t be cured. ~ Anton Chekhov

…but so what? That’s not the problem. The problem is that Windows Phone doesn’t advance Microsoft’s strategic interests. Yet Microsoft is pursuing it anyway. That’s bad strategy…

Endurance is frequently a form of indecision. ~ Elizabeth Bibesco

…and it needs to stop.

It is better to run back than run the wrong way. ~ Proverbs

Microsoft needs to stop doing what others are doing just because others are doing it.

Once a problem is solved, you compete by rethinking the problem, not making a slightly better version of the current solution. ~ Benedict Evans (@BenedictEvans)

Instead, Microsoft needs to focus its efforts on those areas where it has a competitive advantage.

It’s not about doing what you can, it’s about doing what others can’t. ~ C. Michel ((Excerpt From: C. Michel. “Life Quotes.” C. Michel, 2012. iBooks. https://itun.es/us/AyIDI.l))

I fully understand that this is easy for me to say and hard for Microsoft to do…but that doesn’t make my advice any less valid. What I’m suggesting is the hard path but its also the smart path and the courageous path.

The right thing and the easy thing are never the same. ~ Kami Garcia

Microsoft’s future is in services and that future can be great. But that future does not need hardware and, in fact, hardware is impeding Microsoft’s progress. And I’m not the only one to say so:

Abandon devices. The devices business is only worthwhile if you are able to sell at a high margin; while this does not offer the margin percentage of software licensing, the absolute monetary value of a high margin device is significant ($300+ for an iPhone, for example). However, Lumia’s are simply not competitive at the high end; all volume to date is that the very low end (<$150), and is being sold at a loss. Moreover, Lumia volume is too low to be supply chain competitive, at least once the former Nokia feature phone business is spun off. ~ Ben Thompson

Microsoft should embrace their future and let go of everything that ties them to their unsuccessful past. And that especially includes Windows Phone.

Post Script
Jean-Louis Gassée has a very different, yet very compatible, take on Microsoft’s hardware future. Highly recommended.

How Apple could Drive 3D Printing in the Future

I have been fascinated by 3D printers since HP showed me a prototype about 8 years ago. At that time, they were expensive and pretty primitive but it gave me a real glimpse into the concept and allowed me to dream of what they could do in the future.

Today, you can buy a basic 3D printer for $1000-$1500. The low end printers are great for makers and hobbyists and are even being eyed for use in small businesses that help prototype products for small companies that eventually can be manufactured for broader use by all types of customers.

The folks at the Daily Mail uncovered an Apple patent I think is quite fascinating and needs to be watched closely. It is a new way Apple could integrate lasers into their mobile products to map images.

According to the story:

“Apple’s patent suggests the lasers could be mounted behind existing openings like the camera or have its own dedicated opening in the side of the phone that would then be pointed at walls or objects. The laser would be mounted inside the iPhone and used together with the inbuilt motion sensors to generate a map of any surface it is pointed at. An iPhone-mounted sensor would detect any light bounced back to the device and provide information about the surfaces of objects around it. This would allow the iPhone to be used to measure distance and create 3D maps of rooms and even buildings – something that currently requires bulky equipment.”

I imagine it also could be focused on an object and bring it into an app that allows it to be fine tuned and printed on a 3D desktop printer.

Keep in mind Apple introduced desktop printing to the market, a concept that put the Mac on the map. This patent suggests Apple has 3D imaging capture in mind for future products.

Given Apple’s past, I believe Apple will go big on 3D image capture innovation and take advantage of the trends in 3D printers that are poised to go beyond the world of hobbyists as early as the next holiday season. I would not be surprised if they sell a branded 3D printer as part of their commitment to 3D imaging and printing. Depending on how they go after this market, it could actually become a new profit center that would help contribute to an eventual trillion dollar valuation, something that could happen within the next three years.

Mobile App Development Challenges

Despite all the hype around enterprise mobility, there are still significant challenges many organizations are facing. The simple truth is many organizations are finding the move to mobile applications more challenging than it might appear. Obviously, there’s going to be a great deal of pressure for IT organizations to start creating mobile apps—from their end users, corporate management, partners and others—but despite that pressure, the path to mobility can be long and arduous.

First, there’s often a resource constraint. It’s not that corporations don’t have access to in-house programming talent—they usually do. However, most of that talent is going to have experience on the Windows side, not necessarily on popular mobile platforms like Android and iOS. Of course, as discussed in a previous post, Windows can and should be a part of any mobile platform discussions.

Even if these organizations focus on adding Android and iOS programming talent, they also have to deal with recruitment challenges. Let’s be honest. If you’re a hotshot 27 year old mobile programmer, are you going to look for work on a corporation’s in-house app development team? Or are you going to try and join one of the seemingly never-ending supply of mobile startups that offer the promise of making millions with the latest hot app?[pullquote]If you’re a hotshot 27 year old mobile programmer, are you going to look for work on a corporation’s in-house app development team or join a startup?”[/pullquote]

Not only are there resource and experience issues in creating mobile apps within many companies, there are also organizational challenges. As mentioned in another post, some of the most compelling ROI stories for mobile apps can be made for line of business (LOB) workers, particularly those who are regularly out on the front lines or in the field. The problem is in many companies, LOB are not comfortable going to IT for custom solutions. In fact, the links between corporate IT and LOB in many organizations are relatively weak, making it difficult to organize meetings between the two groups to even start the process of defining a mobile application. On top of that, there are often serious questions about who manages, who funds, and who owns a mobile app created for a specific line of business group.

Another challenge for many organizations falls around metrics—or the lack thereof—for mobile applications. While most companies have clearly defined standards for measuring the success of desktop-based custom applications, many have yet to create solid standards for mobile apps. In some organizations for example, mobile end user performance does not matter to IT, because wireless network issues often fall under the auspices of a separate telecom group.

The desire and need for custom mobile application development is real, but many organizations are finding the reality of creating those apps is challenging on many fronts. The key issue is, in many IT shops, mobility is still more of an afterthought than a core guiding principle. In order to overcome this, companies are going to need to not only do some soul-searching regarding their development priorities, they’re also going to need to find resources and partners they can work with in order to help make mobile app development a key part of their strategy moving forward. It’s what the world is demanding of IT and it’s what IT needs to do.

Where Can Intel Find Growth?

Jean-Louis Gassée, a veteran executive, investor, and observer of the tech industry, wrote an accurate and depressing account on the position of once high-flying Intel. Like Microsoft, Intel was unable to to keep up with a rapidly changing world where the kings of PCs were being overrun by small, lightweight, mobile equipment.

The question is, how did Intel get into this mess and how does it get out? One thing to remember is Intel, again like Microsoft, has lots of problems but is not in dire straits. Its revenue and profits have both fallen slightly over the past three years but nothing in danger of putting it out of business. The server market, for which it owns the processor business, is strong and, while PC sales are weak, that business isn’t going away. But this can’t change the fact the market for Intel’s processors is far, far behind the demand for ARM designs in mobile devices.

Intel, of course, could be on top of the world of processors for everything from PCs to phones. In 1997, Intel agreed to acquire Digital Equipment’s StrongARM, a top-of-the-line ARM chip, to settle a legal dispute with DEC. The problem was that the x86 had all the real power within Intel. The x86 teams wanted to build smaller and cheaper chips of their own (of course, mobiles phones in those day did nothing but make phone calls).

Intel renamed the StrongARM XScale and it became a real contender as much more sophisticated mobile data devices, such as Palm, migrated into phones. But it never really counted as a central Intel product.

The classic test came along when Apple, which had already switched to Intel’s x86 for the Mac, expressed interest in XScale for the iPhone. But Apple drove a hard bargain. In an interview with The Atlantic, retiring Intel CEO Paul Otellini said:

At the end of the day, there was a chip that they were interested in that they wanted to pay a certain price for and not a nickel more and that price was below our forecasted cost. I couldn’t see it. It wasn’t one of these things you can make up on volume. And in hindsight, the forecasted cost was wrong and the volume was 100x what anyone thought.

Intel decided to leave the ARM business instead and sold the division to Marvell. Since then, it has been focusing exclusively on miniature x86 system-on-a-chip (SoC) for mobile devices but has failed to make a dent in a field dominated by the ARM products of Samsung, Apple, Qualcomm, Nvidia, and others.

Intel has been pushing its x86 Atom SoC for a while. It’s found a market for its Medfied, Merrified, and Moorfield systems on Windows and Android tablets and a variety of industrial products, but not very many phones. It has been able the shrink the SoCs ever smaller, but ARM has continued to stay ahead. Today Apple’s A7 processor, a Samsung-made SoC, is still substantially smaller at a die size of 102 square mm, compared to the 196 square mm Moorefield.

Intel is going to need a way to get into a phone device, and it seems unlikely to be x86. But Intel, unlike most of its competitors, is in the business of manufacturing its own chips and the drop in demand for PCs has left it with a significant amount of fabrication capacity.

It could get into the business of manufacturing chips for ARM designers. But while Apple would like to take its business away from Samsung, making iPhone chips would be a bitter move for Intel. Taking on the iPhone at its launch would have made Intel a successful partner for the decade’s most important product. But Apple has learned so much about chip design that Apple would be the leader and Intel just a hired fab operator.

To get back into real competition, Intel will probably have to find away to reverse the mistake of the XScale sale and get back into the ARM business. It would be a painful and expensive move, especially since there are no readily available ARM manufacturers on the market. But it may be Intel’s only way to find a growth market.

The Evolution of Search

One of the data services I subscribe to highlighted a specific trend their survey research uncovered. They called this trend “the slow death of search”. To illustrate, they graphed the following data.

While the Y-axis is capped at 95% rather than 100%, and the bottom at 85% but the point remains. Search is happening less on DT/NBs. Given the global trend away from PCs to mobile devices, I assume that this time next year that chart will show the bottom to keep trending downward. The question was regarding websites visited on a PC. The specific question listed a range of websites — one of them was a search engine. Thus, the resulting graphed data is how many respondents (30,000+ globally) answered that they visit a search engine at least once per month from a PC/laptop. The question asked dated back over many years so the graph shows the answer’s evolution over time. What we see is a clear trend away from desktop search as a frequent monthly task.

Clearly, search is still important. No one will say they never search the web but the interaction model for search has changed and is still changing. The idea of pulling up Google and doing a search is the fundamental engagement model in question. The graphed data likely highlights a shift from desktop/laptop search to devices like mobile and tablets. I have access to similar data sets that highlight a similar question regarding mobile search and more than 65% of respondents said they perform a search of some kind from their mobile device every week. This point shouldn’t be surprising.

Ultimately, when we understand the constructs of search, it is helpful to view it in the lens of decision making. Helping me make a decision looked like a blank text box in the past but in the future, and thanks to mobile devices enabling device and contextual awareness and intelligence, the paradigm is poised to change.

What sits at the crux of this conversation comes back to a shift in interaction models. This could be something like Google Now, or elements of Siri, which create more predictive analytics to bring things to my attention that are relevant before I have to search for them. Smarter beacons, integrated with smarter local hardware, could be another dynamic that helps shift the search interaction model. However it manifests itself, it is clear the search interaction model is changing and evolving and will likely look very different than a blank text box in five years.

As we look out at who is in a good position to capitalize on these it is those both at the platform level, but also those who are gaining data to build a comprehensive anticipation engine. Ultimately I feel it is companies like Apple, Microsoft, Google, Baidu, Tencent, even perhaps Amazon and Yahoo.

A Deeper Dive on Android and iPhone in China

I’ve received a number of questions from readers about why I don’t talk as much about the US market for smartphones. It’s primarily because the US doesn’t offer any new interesting questions or problems. It’s about a 50/50 split between Android and iOS and Apple controls over 60% (and growing) of the premium smartphone space. iOS is on track to gain share into Android’s each quarter of 2014 and it will likely be more of the same in the US in 2015. However, other markets like India and China pose much more interesting questions and problems to be solved. I’ll do a few deep dives on the US market with some of our updated data sets, but what we find will likely not contain major surprises. Now, onto the iPhone and China.

First, Android Context

A fascinating data point came from Baidu yesterday. Baidu, the largest browser in use with an over 80% share in China, reported to Tech In Asia that they count 386 million active, individual Android customers. This is Android AOSP, not Google-approved Android, and a few things are unclear about the numbers. First, it is uncertain if these are smartphone-only owners. The report simply states active Android devices. Given China runs both AOSP on smartphones and tablets sold there, either device connecting to the Internet and accessing Baidu’s search engine would be counted. Through my supply chain checks, I learned that, on average, about 20m low cost Android tablets are sold in China each year. As I have discussed before, most of those are used simply as portable media players and large percentages likely do not connect to the internet. Which means, while some of the 386m active Android devices are tablets, the majority are smartphones. ((Even if the report said they were all smartphones, I would still believe a small percentage were tablets since my research there found that even 7-inch tablets in China use smartphone components; therefore they show up in analytics as smartphones.))

Baidu similarly reported last year a total of 270m active Android users. So there is impressive growth for AOSP. For some time now, I have been building a model of AOSP’s growth in China and was pleased to see Baidu’s data for Q3 2014 matched very closely to my own model.

You’ll note growth is slowing, as is the China smartphone market in general. There is certainly more growth to be had as more of rural China gets online, but these will mostly be with very low cost smartphones. Where things start to get interesting is when we look at the nearly 400m Android AOSP customers in light of the total smartphone user base. A number of Chinese research firms like iResearch China and analytics engines like Baidu/Umeng came out and said over 550m smartphones were in use in China by the end of June of 2014. My model would estimate that number to be around 575m as of today. Now we turn to the iPhone.

All local app analytics sources I have access to in China, and major network statistics I see, show Android and iOS as the two dominant smartphone platforms. So, if ~386m of them are on Android, then the iPhone fills most of the gap between 386m and ~575m. Based on my model, I had estimated iPhones were likely in the 130-150m range and I have believed for some time there were more iPhones in use in China than the US. It seems Baidu’s data is confirming much of what I thought my model was suggesting was true.

However, the bulk of that iPhone active installed base is on much later generation hardware sold through the grey market. This chart is the most updated data — now containing a a month and a half of iPhone 6/6 Plus availability. Keep in mind iPhone 6s starting showing up in September in this data because of grey market imports.

As Apple offers more models for sale in China, we are seeing the continued rise of primary market sales of iPhones. There remains a large installed base of later generation phones but, as you can see, it is actually more of a mix than domination by a few models. This data comes from Baidu’s app distribution network so it does not cover the entire market but it does cover over 100m devices. I can’t imagine the picture is much different on other app distribution platforms.

What I’m left thinking about is what will happen with the large percentage of current iPhone owners who are using later generation iPhones they bought from the secondary market for prices around $300-$400. It is hard to believe every one of those owners can afford a $700 phone but will they stay in the Apple camp and get another later generation phone like the 5s? Or will they stay in their price range and go with Xiaomi? These will be interesting questions for most of 2015. However, once the current iPhone 6/6 Plus gets discounted in China when the iPhone 7 comes out, I think Apple’s offering in China will be very competitive.

Lastly, it is worth pointing out the China smartphone market is unlike anything out there at the moment. Much of it has to do with WeChat. WeChat is undeniably functioning as an alternate or “para” operating system that runs on iOS and Android. As I look at what lock-in Android AOSP, or Xiaomi’s Android skin, or Apple’s ecosystem has, I observe the true lock-in in China is WeChat. Apple has the benefit of playing as a luxury brand; status is a huge part of their lock-in in China. But as this financial analyst correctly points out, we are hoping to see Apple continue to create more services/cloud lock-in rather than just status. Services like UnionPay integration will help with this but Apple’s services stickiness in China is a story to watch.

With Chinese consumers’ loyalty to WeChat, it means Android vendors could come and go. Xiaomi is doing a decent job building some loyalty and all on-the-ground research I get from China indicates a growing pride of Chinese consumers for local Chinese tech brands. This will continue to pose challenges to Samsung. We are watching a number of Chinese brands closely, but Vivo (charted below) is one to keep an eye on as they are positioning a number of their products to the high end.

There are many story lines to watch and analyze throughout 2015 with regard to China and I’ll keep updating my narratives on all of them.

Microsoft in 2015

This is the third in my series on what I see happening in the year ahead for major tech companies. Apple is here, and Google is here. One quick note: as an analyst, my coverage area is consumer technology, so although I will address Microsoft’s enterprise business throughout this post and especially at the end, it won’t be the main focus of the piece.

Windows 10 – symbolic of all the challenges facing Microsoft

The single biggest thing (we know of) on Microsoft’s agenda for 2015 is the public launch of Windows 10, its new, single operating system for all devices and form factors. I’ve written about Windows 10 previously here, but wanted to be a bit more specific about what I see happening with the platform in 2015. The preview is out already, but there is much we don’t know about the new OS, including the pricing and the business model. Microsoft has a consumer-centric press event scheduled for January 21, so it’s possible we’ll learn more about this then. But the biggest question in my mind is to what extent Windows 10 is offered as a free upgrade and to whom. Some possibilities include:

offering it as a free upgrade for Windows 8 users, many of whom have been unhappy about the removal of the traditional start menu and other features being restored in Windows 10. This would be mostly about pacifying those users.
offering it as a free upgrade for users of older versions of Windows, who are the important customers Microsoft needs to move to its new model of app development and purchasing. This would be mostly about getting as much of the base as possible onto a modern operating system.
offering versions for free to consumers (and possibly consumer OEMs), while still charging a fee for enterprise versions – something Microsoft has shown signals it may do with Office, with the new pricing for Office for iOS, and, of course, Windows is already free for devices under a certain size. This would be a recognition Microsoft is increasingly isolated in charging significant license fees for operating systems.

The other major possibility is a move to a different kind of pricing model for Windows. Microsoft has strongly hinted it intends to embrace a future of streaming computing, with Office 365’s subscription pricing as the model. But recent comments from Microsoft itself and commentators close to it suggest this may not be on the cards for Windows 10. Another big question is to what extent Microsoft sets a precedent for pricing future Windows upgrades with this release. It has done free upgrades in the past on a one-off basis, but can it really do a one-off giveaway (or heavy discounts) this time around without setting too much of a precedent for future upgrades? I also think it’s time Windows moves to an annual release cycle, much as Apple has with OS X and iOS – part of Microsoft’s current predicament is when it makes missteps with Windows, it takes years to fix them. More frequent updates would help with that, though it’s particularly challenging given Microsoft’s enormous and conservative enterprise base.

In some ways, Windows 10 may be seen as symbolic of all the challenges facing Microsoft — the dominance of Apple and Google and their mobile operating systems, the uphill battle Microsoft faces in continuing to charge for operating systems and productivity software in the face of free alternatives, Microsoft’s ability to differentiate itself based not just on cross-platform services but on its own platforms as well, and so on. The single greatest test may be whether Microsoft can successfully charge large amounts of money for a new operating system to consumers and still see significant uptake.

Office – the transformation continues

Two transformations are underway with regard to Office: firstly, the move from one-off purchases to a subscription model with Office 365, and secondly, the increasing availability of Office on non-Microsoft, non-PC platforms such as iOS and Android. The transition to Office 365 has been slow among consumers, with only 7.1 million subscribers at the end of Q3 2014, which suggests a certain reluctance to embrace an ongoing commitment to pay for Office rather than milk a sunk cost. In the enterprise, the transition is likely going slightly faster: SaaS models are far more established there and willingness to pay for software in any way is also greater. Microsoft has decisions to make in 2015 about how much to push the new model, especially as the new version of Office arrives for Windows. Does it abandon the old model entirely or at least strongly incentivize customers to switch to Office 365, or does it continue to allow customers to choose their own path?

The availability of Office on other platforms has also raised new questions about consumer pricing. It’s clear Microsoft intends to continue to charge for Office in the enterprise, though likely increasingly on a per-user rather than per-device basis. But it’s not yet clear whether it has given up on its ability to charge for Office in the consumer space. The recent shift of the dividing line between free and paid features in the iOS versions of Office suggest a fundamental move towards giving away more functionality for free. It will be interesting to see whether the same model is applied to consumer versions of Office on Windows. I think it’s possible Microsoft will indeed embrace this model broadly, sacrificing some revenue from consumer versions of Office in an attempt to maintain its status as the de facto standard and, with it, the scale necessary to ensure its continued success in the enterprise.

Lumia – playing both sides of Windows Phone

With the Lumia line, now manufactured by Microsoft Mobile following its acquisition from Nokia, Microsoft is now playing Windows Phone from both sides, as the only licensor and by far the largest licensee. It’s competing with its other licensees in the most direct and dominant fashion, even as it seeks to increase the number of OEMs using Windows Phone. Both the platform and Lumia’s part of it have stagnated somewhat in share and in numbers in recent quarters, and Microsoft needs to get both sides going again in 2015 if it is to have any hope of escaping its current niche status. I wrote recently about the challenges Windows Phone faces in general, so I won’t belabor the point here. But the key strategic imperatives for Microsoft around Lumia and Windows Phone in 2015 are creating a true flagship that can go head-to-head against the competition, avoiding a fate as a low-end-only operating system, and finding better ways to attract developers.

Surface – make or break in 2015

Surface enjoys somewhat the same position as Lumia, in that it represents Microsoft competing with its licensees, but on a much smaller scale. Though Surface does compete against other Windows devices, its share of the total market is very small, and it represents much less of a threat to other OEMs than does Lumia. But it also reflects the same basic strategic tension: does Microsoft want to be first and foremost a licensor of operating systems, or a manufacturer of devices? Though Lumia is critical to the survival of Windows Phone as an OS, the same can’t be said for Surface. And as long as it fails to make money for Microsoft, the whole enterprise is questionable. I strongly believe Microsoft ought to make a decision in 2015 about whether the investment it is making in Surface is worthwhile, both financially and strategically, given the drag on its overall finances and the tension it creates with OEMs. In my opinion, it should choose to discontinue the line in 2015 and focus instead on helping OEMs create more compelling devices.

Xbox – the roundest peg in Microsoft’s two square holes

Xbox continues to be the most awkward fit with Microsoft’s new focus on platforms and productivity, as it aligns with neither of those focuses. It also doesn’t make much money for Microsoft, and the company has failed to use it as a launchpad for broader ambitions within the home. Even as competition and innovation in the home shifts from gaming to TV and home automation devices, Microsoft took a step back in 2013 and 2014 with the Xbox One by focusing more explicitly on gaming. It badly needs a TV device akin to the Apple TV, Roku, Chromecast and Fire TV, and an Xbox TV device seems an obvious extension of the current brand. Strip out the power hardware and gaming focus, and Microsoft could extend its strong position in gaming into the home more broadly. As long as Xbox remains one of the two major console brands, it’s likely worth Microsoft maintaining its investment, but it needs to find ways to spread the brand beyond hardcore gamers and $400 consoles.

Consumer services – focus on free stuff sends a mixed message

Microsoft is increasingly focused on cross-platform services, but its track record there is mixed so far beyond Office. Skype remains one of Microsoft’s most powerful brands, but the service itself has stagnated of late, especially on the consumer side (its ongoing integration with Lync on the enterprise side makes perfect sense). Microsoft has begun talking about Skype as one of the biggest messaging platforms in the world, and yet that’s not how most people see it, and there’s still startlingly little integration with Microsoft’s other properties. Even Windows Phone and Windows have relatively little integration with the service which could be the default communications method on those platforms, compared with the increasing integration of Hangouts into Android and FaceTime and iMessage into iOS and OS X. Other newer services such as OneDrive have been hits, but, at least in part, for the same reason as Skype has always been popular: they’re free. Microsoft has two major jobs in consumer services: create things consumers want to use, and then monetize them. So far, it’s doing OK at the former, but there’s little sign of the latter. Perhaps this is part of a broader recognition on Microsoft’s part it won’t be able to monetize consumer services, but it feels a bit early for that.

Car and home – two domains where Microsoft doesn’t have a story

Even as Google and Apple expand their ecosystems into the connected car and smart home, Microsoft has no real story to tell in those new domains. Its one success story in the car – Ford’s SYNC – has now been displaced by BlackBerry’s QNX, and it has nothing beyond its partnership with Insteon in the smart home space. Competing across these various domains will be increasingly critical for building a sustainable ecosystem, and unless Microsoft makes a play soon it risks being left behind. To be sure, the small market share of Windows Phone is a big barrier in a world where the smartphone is increasingly the center of the ecosystem, but Microsoft still has an opportunity to make a play as the Switzerland of the tech world. The Microsoft Band – for all its flaws – was a sign of what such a strategy could look like, but Microsoft needs to both iterate that product and extend the same model to other domains.

Enterprise – where Microsoft’s growth and profits will come from

There’s certainly a version of the future in which Microsoft’s various enterprise products and services – Windows, Office, Dynamics, Azure and so on – will end up generating the vast majority of Microsoft’s revenues and revenue growth as well as its profits, even as its consumer revenues dwindle in the face of ever stronger competition. It’s a good thing that these enterprise products and services, and especially the cloud business, are growing strongly and remain very profitable. The question is whether it can ramp those revenues fast enough to offset what I’m coming to believe is the inevitable decline in consumer Windows and Office revenue. If it is, then Microsoft can effect a slow transition to a new kind of company, one that makes all its money in enterprise, but has huge mindshare in consumer through various products and services it gives away for free (or at least heavily subsidizes). Such a company would be a more formidable competitor to Apple and Google (and would mirror more closely their focus on funding many activities from a highly profitable core elsewhere).

2015 – from vision to execution

Satya Nadella’s enjoyed quite a honeymoon period, benefiting from many early moves which appeared to set him apart from his predecessor (though the wheels on many of these things were likely in motion long before he took over). But much of what he’s done so far has been about articulating a vision of what Microsoft is, and what it wants to become. Though there have been early signs of the implementation of that vision, 2015 will be much more about execution – about showing what that vision really means in practice and, importantly, about whether it’s the right one for Microsoft.

Thoughts On “Jobs To Be Done”

“Jobs To Be Done” is one of my favorite analytical tools. Tech analysis often appears to be a dark ocean without shores or lighthouse, strewn with many a wreck. ((Stolen from Kant: “Metaphysics is a dark ocean without shores or lighthouse, strewn with many a philosophic wreck.)) The Jobs To Be Done” test is a metaphorical lighthouse, shining through the darkness, guiding us to our destination.

The Jobs To Be Done test is often stated as follows:

“What job is the product or service being hired to do?” ((Harvard Business School professor Clayton Christensen and coauthors articulated the JTBD concept in a Sloan Management Review article (Spring 2007) as follows: “Most companies segment their markets by customer demographics or product characteristics and differentiate their offerings by adding features and functions. But the consumer has a different view of the marketplace. He simply has a job to be done and is seeking to ‘hire’ the best product or service to do it.”))

1) “The Jobs To Be Done” test is concise. It’s a single, self-explanatory sentence. It does not require essays (like this one) to explain how it works. You read it, and you apply it. The end.

If it can’t do any useful job then it won’t get hired. Conversely, if it nails an unmet job, it will be blindingly successful. ~ Horace Dediu (@asymco)

2) It’s a metaphor. Many say that we think metaphorically and the “Jobs To Be Done” test does the translation for us.

A metaphor juxtaposes two different things and then skews our point of view so unexpected similarities emerge. It’s a sort of magical mental changing room — where one thing, for a moment, becomes another, and in that moment we see things in a whole new way. Metaphorical thinking half discovers and half invents the likeness it describes. ((Paraphrased from “The World In A Phrase, James Geary))

The “Jobs To Be Done” test shakes things up. We don’t normally think that we are “hiring” a task or a service, but we are, and the “Jobs To Be Done” test forces us to see things in that entirely new way.

3) The “Jobs To Be Done” test forces us to re-focus on what matters — and what matters is the user, not the product or the producer.

It is clear from any study of business that it is human nature to think of things from one’s own point of view. But the product or service works best if it is viewed from the buyer’s or user’s perspective. No amount of time, effort, money or engineering is going to matter if the product does not serve the purpose of the end user. This is a lesson that we have to continuously relearn. The “Jobs To Be Done” test forces us to re-learn the lesson; to view things from the perspective of the users.

You’ve got to start with the customer experience and work back toward the technology, not the other way around. ~ Steve Jobs

Conclusion

For more on Jobs To Be Done, check out Horace Dediu’s most recent podcast: “Chief Jobs Officer.”

The Danger of the $200 PC

There have been rumors of the return to netbook pricing in the PC market. We believe this could have an irreversible impact on overall PC prices. When we study the PC market, we see a high degree of health in the higher end segments of the market. Companies like Apple and other vendors who have legitimate premium offerings have secured their slice of the PC pie with a sustainable hardware strategy. Our concern on the Windows front is, if the price of Windows PCs drop significantly, those price points will become the “new normals” and eliminate any real chance of premium offerings by other Windows PC vendors. Currently, the ASP of notebooks is approximately $700 and desktops approximately $550. But those high ASPs are because of Apple’s Macs. The ASP of a strictly Windows PC is about $430 which is about as low as a full featured Windows PC has ever been (excluding netbooks). At that price, it is already difficult for many Windows OEMs to make much money on hardware. They are all currently looking for more software, services, and accessories revenue as a point of emphasis.

Competing with Apple is hard enough for vendors in the Windows ecosystem. A significant drop of ASP will likely eliminate any chance of premium offerings by them. There will still be an enthusiast Windows community but that community is already quite small. The build-it-yourself PC community and the hard core PC gaming category, while extremely healthy, are still too small to sustain the ASPs of the entire Windows PC market. So as of right now, this is a look forward forecast of the ASPs of certain categories.

However, given this article I posted a few days ago on low cost tablets, I’m already due to update my outlook for tablet ASPs in 2015. Should the notebook and desktop space truly become a race to the bottom, then I will have to adjust the 2015 ASPs of notebooks and possibly desktops to trend more into the negative than I think is healthy for the category.

Part of the drive to bring down the ASPs of PCs is to kick start the broader upgrade cycle in consumer markets and perhaps compete more with tablets in the entry level PC space (first time PC/tablet buyers). There is some sound logic to this. However, with “good enough” computing established in these markets, the concern would be that nearly the whole market would gravitate to these lower cost PCs and cause a sweeping shift in price points to the lower end where margins will be even further squeezed for the OEMs. Overall, our concern is the destruction of the “value and premium” segments of the market with “good enough” options being offered in the <$400 PC market.

Using my viewpoint of what happens with low cost tablets in consumer markets, I feel it would be smarter if vendors left the bottom to those tablets and focused on features and functions that will remain “valued” by end users. I can see a scenario where consumers start to gravitate to desktops in their homes instead of notebooks. They can use the tablet or their smartphone as their mobile PC and pair it with a desktop for their fixed PC usage. Due to the lengthy refresh rates, our research indicates consumers would spend more on these PCs because they intend to hold onto them because they want to them last longer than previous upgrade cycles. Those who need notebooks because they are traveling or are mobile workers will still utilize and spend on the product because of its value to them from a productivity standpoint. Bottom line, I believe there is still money to be made in PC hardware if Microsoft and the vendors can avoid letting certain players collapse the ASP of the PC category. Should the race to the bottom happen, even those who would pay more because of the intrinsic value the PC provides will no longer have to since they can get the same features as mid and even high end PCs at rock bottom prices.

Eventually, I can see the PC market going one of two ways. Either it becomes a race to the bottom and only a few current vendors are left standing or value can remain in the category. Ultimately, it is up to Microsoft and the Windows OEMs to decide which future they want.

Xaomi Barred from Selling Phones in India

News hit today that the Indian courts have barred Xiamoi from selling phones in the country due to a complaint registered by Ericsson that Xiaomi is using Ericcson technology in their phones and not paying a royalty. Xiaomi officials claim they are open to discussion with Ericsson to resolve this as India is an important market for this Chinese smartphone company.

One of the things that has concerned me about Xiaomi is their phones are basically knock offs of existing smartphones. They get away with this in China because laws there are not strong when it comes to intellectual property. There has been talk of trying to go after them outside of China but this is the first such legal challenge to their crass use of IP without compensating those who created it.

Xiaomi only has 1.5% of the Indian market so far and has sold about 500,000 phones in India last quarter. But Xiaomi believes they can grow this market and is making a significant investment in India to expand their reach and presence. Looking at the actual complaint from Ericsson it is clear that, even though they have been in talks with Ericsson over a couple of years, Xiaomi has chosen to use this technology any way and to not compensate Ericsson. I have been surprised it took Ericsson so long to challenge this in the courts but it appears they have found a friend in the Indian High Courts and Xiaomi is barred until this can be resolved.

This could be the tip of the iceberg when it comes to Xiaomi’s blatant use of IP without compensating the owners of that IP. It could also send shivers through the Shenzen ecosystem and, in a good way, force them to look closer at any IP that has royalties tied to it when making these phones for OEM’s.

It could also embolden other component makers whose parts are in Xiaomi’s phones to take similar action, at first in India but perhaps in other countries Xiaomi is selling in if their technology is used without proper compensation.

Those interested in the global smart watch market need to watch this case closely. Xiaomi taken to task in India could just be the beginning of more legal challenges for them in the near future.

Read Hugo Barra’s message to Mi fans in India about the ban.

Also, for those looking for more depth on India IP law and how it has impacted Micromax in this case and Xiaomi we recommend diving into these two articles.

– Delhi High Court grants injunction against Xiaomi
– FRAND-ly Injunctions from India: Has Ex Parte Become the “Standard”?

The Next Target for Enterprise Mobile Apps? Line of Business Field Workers

It’s a relatively well-known fact that most businesses have not built a great deal of custom mobile applications for their businesses yet. Sure, there are a number of pilots out there, but organizations of many sizes are finding that it’s relatively challenging to get high-quality apps out of development and into widespread deployments.

Not surprisingly, the few apps that are being deployed typically get built for mainstream office workers—those folks in headquarters or other main offices that are the most vocal about wanting to use their own BYOD smartphones and tablets at work. On the one hand, this makes sense. After all, they tend to be a large, influential group, and IT often feels the need to go out of their way to keep them happy.

In doing so, however, internal IT development organizations are potentially missing out on the workers in their companies who could actually get the most benefit from custom-built mobile applications: field workers and others out on the front line.

These types of workers—who are typically part of line of business (LOB) organizations—aren’t always as vocal to IT as their counterparts at HQ, and in some organizations, may represent a much smaller percentage of the overall worker population. However, you can build the most compelling custom application ROI story for exactly these types of workers. Reducing the amount of time it takes to do remote paperwork, or leveraging in-house analytics data to help drive field-based decisions regarding equipment repairs are just two of many compelling applications that can translate to real-world dollars and cents benefits to organizations of many types and sizes.[pullquote]You can build the most compelling custom application ROI story for line of business field workers.”[/pullquote]

Part of the problem is, historically, many LOB divisions have gone off to purchase or create their own point solutions, independent of IT. The argument was that they had unique needs/requirements that internal app development teams couldn’t really understand or meet (or, at least, that’s what they thought). In many situations, this has led to solutions that might work OK for a particular LOB, but don’t really integrate well into the tools and/or processes created by IT that are being used at HQ.

With the extended reach and greatly enhanced computing and connectivity that mobile devices now provide these workers, it’s time to rethink this approach and figure out ways for IT to work with LOB mobile workers. Creating mobile apps that not only fit the unique needs of these folks, but also seamlessly connect to corporate data resources is clearly what needs to happen.

In the end, building mobile apps for mobile workers who really need them is likely to generate a better return on investment than making tools for office workers who have relatively easy access to all the information they need and don’t really need customized mobile apps as much. It’s time to start thinking outside the office box.

IBM Leads Apple Into the Corporate Market

The last time Apple and IBM did serious business, the companies were fighting over the processors that powered the Macs of the day. IBM had no interest in meeting Apple’s desire for G5 chips for laptops and the end of the quarrel pushed Apple to Intel (and fabulous success for Macs).

Almost a decade later, when Apple has grown far larger than IBM, the company that now mainly sells corporate services is in another partnership with Apple. With the deal revealed in detail on Dec. 10, IBM will be selling iPhones and iPads to its industrial services customers and supplying them with secured, Apple-designed iOS business services.

For Apple, this is largely a payoff of iOS 8. A key step in the operating system was the redesign of the security operating structure. Of course, the attention has been focused on how Apple Pay is structured. But the improved security design can support a broad range of applications, including corporate security desires.

Although Apple acts as though the consumer market is the only thing it really cares about, when it comes to the iPhone and the iPad, the corporate market has looked increasingly attractive. Corporate employees have lots of Apple mobile devices, usually bought on their own (though often snuck into the T&E budget). Apple and IBM are now creating iPhone and iPad-based offerings with IBM corporate services installed.

Secure applications have been difficult to provide for Android since Google has mostly left the development of security features to manufacturers. Samsung has attempted a service called Knox but it has sold poorly and the company is rumored to be hoping Google will take over security in a future Android version. With Android struggling and corporations generally moving away from BlackBerry’s offerings, Apple has a huge advantage.

That gives the Apple-IBM partnership a big opening. The IBM service, called MobileFirst, starts with programs aimed at key industry partners. The travel and transportation offerings include Plan Flight, a fuel expense management program and Passengers+, which provides rebooking, baggage information, and special services in-flight. Advice & Grow provides small business with financial communications, while Trusted Advice allows advisors to get confidential information on customers’ investments even when they are away from their secure office machines. Other initial applications are designed for insurance, government, retail, and telecommunications. Applications for additional industries are coming.

From “frenemies” to full scale partners, the Apple-IBM history has been fascinating to watch. With this latest association, it promises to bring more to the table for both companies and make the rest of the industry take notice.

Google in 2015

This is the second in a series of posts for Insiders on what I see ahead for some of the major tech companies in 2015 – I covered Apple last week, and Microsoft and others will be coming in the next few weeks. My intention is to look ahead at the challenges and opportunities facing these companies next year and what they should be doing about them.

Core search advertising under pressure

Google’s cash cow is its search advertising business. It has provided huge growth for the company for quite a few years now. But growth in this business is strongly tied to growth in the overall Internet population, and growth in that metric is starting to slow. Beyond that, the vast majority of new Internet users are mobile-only, limiting Google’s opportunity to serve up ads. And many of them will come onboard in markets where ad spending per capita is vastly lower than in some of Google’s key markets. On top of that, in many of those markets where growth is highest, Google faces significant competition from local players, whether Yandex in Russia or Baidu in China, so its share of the available market may well be lower too. For all these reasons, I believe Google will struggle to continue its historic rate of growth and profitability in search advertising in the next few years and that may start to become evident in 2015.

Significant risks and threats in mobile advertising specifically

Mobile advertising is booming, and Google is clearly well positioned to benefit enormously from this growth. eMarketer estimates mobile adverting will rise from 14.1% of Google’s ad revenue in 2012 to 37% in 2014 and that proportion will continue to grow. But, whereas search was clearly the place to be in desktop advertising, various forms of native advertising are far more promising in the mobile world. Whether it’s Facebook’s News Feed ads or Twitter’s sponsored tweets, these in-stream ads are a better fit for the cluttered and limited space on mobile screens, and Google doesn’t have the same sort of product to serve those as competitors do. According to eMarketer figures, while Google’s revenue from mobile ads will roughly quadruple from 2012 to 2014, Facebook’s will increase 15-fold. These competitors’ ability to take share in non-search advertising, and their increasing attempts to bolster their position in search on mobile, will make it tough for Google to replicate its desktop share on mobile. Then there’s the risk of Apple switching away from Google as the default search engine on iOS, which would eat into Google’s mobile search revenue significantly. We’re not likely to see a dramatic shift in any of these areas in 2015, but there may well be signs Google is unable to keep up with competitors, in non-search advertising in particular.

YouTube is Google’s native advertising play

I said Google largely lacked products that suited themselves well to native advertising, but YouTube is the one big exception. Pre-roll video ads have clearly worked very well for Google and YouTube is an increasingly important source of revenue for the company. With the emergence in 2014 of a subscription music service based on YouTube, it’s clear Google is also looking beyond advertising for ways to monetize YouTube’s popularity. The platform is dominant in user-generated video and is acting as a springboard for successful new media businesses such as Maker Studios and Fullscreen Media, which are generating significant valuations of their own. If there’s a risk, it’s that some of these businesses, once they become successful, will start to build their own platforms in order to capture more of the value than they’re able to on YouTube. It takes many millions of views on YouTube for a content creator to generate any significant amount of money and for many who have built up an audience, it may be easier to monetize elsewhere. As some of these businesses get acquired, and with both AOL and Yahoo making a big push around video, it may be tempting for at least some of these brands to jump ship. As long as the major musicians and others still treat YouTube as the default option, that likely won’t cause any damage in the short term, but again, we could see seeds sown in 2015 for a longer term shift.

Nest – Google’s smart-home hub in more ways than one

Nest is clearly becoming Google’s hub for the smart home in two distinct ways: first, Nest, the business, is becoming the vehicle for Google’s other acquisitions in the smart home space. Second, Nest, the product, is becoming the hub for a broader smart home strategy with the release of APIs for third party integration in 2014. So far though, there has been very little integration between any of this and the core Google platforms, in contrast to Apple. That partly reflects a desire to allay privacy concerns that arose at the time the acquisition was announced but it could change over time. Might we see the first attempts to build some sort of data link between Nest and the rest of Google in 2015? It’s also likely Nest and its subsidiaries will continue to create new products for the smart home in other categories, beyond thermostats, smoke detectors and cameras. Nest is certainly building what looks like one of the most viable smart home platforms, and one of the most interesting dynamics will be how it competes and partners with the other ecosystems, whether Apple’s HomeKit, AT&T’s Digital Life, Samsung’s SmartThings or myriad others.

Android’s growth continues but becomes more dominated by low end

Android already has a massive base of users, and it’s likely to grow by several hundred million more in 2015. But even as its scale continues to grow, there’s a risk Android’s biggest weakness becomes more entrenched next year. That weakness is its increasing use by low end users, who spend less on apps and devices. That’s important for a few reasons: one, Android’s ability to attract the best developers will be hampered by its users’ failure to spend money on apps; two, OEMs who focus on Android will find it tough to make premium margins if the major opportunity is in cheap devices; and lastly, Google itself will struggle to monetize Android if the majority of its users are in markets where both disposable incomes and ad spend are very low. Meanwhile, Microsoft is pushing Windows Phone into the lowest end of the market too, with new partners in markets such as India and reference designs intended to facilitate and speed product development. And Apple’s new devices are likely to take share from Samsung and others, at a time when Samsung is already struggling to maintain its share and shipments at the high end. All this taken together could dramatically change the profile of the average Android user, in a way that could hurt Google as well as Android OEMs and developers.

Android Auto, TV and Wear suggest a new trajectory

I’ve written about Google’s announcements at I/O earlier this year and what they signaled for Android and its various flavors going forward. Even as Samsung falters, Chinese vendors are on the rise, and many of them don’t even use Google services on their devices. Google therefore risks a switch from one major vendor which prioritized its own UI and services to a myriad of smaller vendors who do the same. It needs to reassert control over Android and it clearly sees the new flavors of Android – for the TV, for the car and for the body – as opportunities to do so. I expect we may see more control by Google over the smartphone and tablet flavors of Android too – the Material Design language seems an attempt to bring some consistency to both Google and third party apps on Android – and we may well see more of this in 2015 as well.

Meanwhile, Android Auto will see its first mass market adoption in cars in 2015, and will go up against Apple’s CarPlay in this space, along with various platform-agnostic solutions from other players. It’ll be very interesting to watch to what extent people’s smartphone platforms affect their choice of car and vice versa in 2015 and beyond. Android Wear is still struggling to catch on, with Samsung easily the largest vendor in the smartwatch space today but hedging its bets with Tizen-based devices in addition to Wear-based watches. As the Apple Watch launches, it will present further barriers to the existing offerings, but also has the potential to stimulate demand as Apple’s products in other categories have.

Google X – not much potential for monetization in 2015

Google X is the home for many of Google’s more outlandish and forward-looking initiatives, but even though some of them – notably self-driving cars – get lots of press, the reality is essentially all Google X projects are years from generating money for Google. That’s a challenge, because of the increasing headwinds I mentioned at the beginning. Google needs to start finding new revenue streams which can supplement growth from its traditional core areas, while generating significant margins, and Google X seems, in theory, to be the best source. But these projects encompass everything from extremely long range in likely commercialization to almost philanthropic in their business models, and it’s unclear as yet how they will help Google financially in anything like the near term, let alone 2015.

Privacy will continue to be a major theme

Privacy is a perennial theme when it comes to Google, and all ad-supported businesses, and will continue to be a significant theme in 2015, not least because two of Google’s major competitors – Apple and Microsoft – will continue to hammer at it as a competitive differentiator. I’d expect all three of these companies to continue to try to demonstrate their commitment to protecting user data in 2015, Apple and Microsoft proactively, Google more defensively. I don’t see a resolution to the ongoing debate on the topic of tensions between users and advertisers in 2015, but I think, by the end of the year, we’ll have a clearer sense of what extent users really care about privacy enough to let it affect their choice of ecosystems and services. How Google represents itself in this arena during 2015 is likely to have a big impact on how that plays out.

A year of transition for Google

Overall, 2015 promises to be a year of transition for Google. That transition will be much harder to spot from the outside than for many other big tech companies, if only because of the way Google reports its financials. Android, YouTube, mobile advertising in general and so many other interesting Google businesses are entirely opaque to outsiders from a financial perspective. But, underneath the high level reporting, I believe there will be significant shifts taking place in 2015 — whether slowing search advertising revenue growth, falling mobile advertising share, or increasing struggles to monetize new Android and Google users in emerging markets. Meanwhile, the fate of Android will continue to be very much tied up in its partner OEMs, with a major transition from one dominant vendor to a multitude of smaller vendors threatening Google and its ability to monetize Android in whole new ways. As it works to build an ecosystem that spans cars, TVs, wearables, smartphones and the home, Google will have to find ways to build loyalty to itself rather than its partners, a challenge arguably made harder by its ongoing susceptibility to privacy concerns.

Time For Entirely New Myths At Apple

Steve Jobs is dead.

There’s no bigger, richer company on the planet than Apple.

Apple’s CEO Tim Cook has repeatedly stated this most American of companies will soon garner more of its sales from China than anywhere else.

The company hasn’t really been a ‘pirate’ since the early days of the iPod — a decade ago.

The biggest hires at Apple these past few years have come from the world of high margin fashion.

Apple’s primary innovations the past five years, in my view, stem from technologies the company acquired, not developed: Siri and Touch ID, specifically.

One more thing: the great Woz says that whole “Apple started in a garage” myth? Yeah, not exactly true.

This is a new world. Mobile computing devastates all before it and Apple rules the landscape. The old myths, the myths of the garage, the visionary, the pirates, the small, merry ‘cult’ of users, these no longer apply.

What now?

Can you fly a pirate flag when you have more money than anyone else? And a partnership with IBM?

When you are bigger than even Google or Microsoft or Exxon, can you usher in a new order? Against the established order?

Time for new myths at Apple. Myths help support the brand. Apple’s brand is the most valued in the world.

For the second year in row, Apple has topped Google as the world’s most valuable brand. The two are the only brands to be valued at more than $100 billion, according to the annual Best Global Brands report.

Valued at $118.9 billion, Apple increased its (brand) value by 21% year-on-year, while Google’s brand value of $107.43 billion jumped 15% compared to last year.

The Insanely Great New Myths

New myths are now necessary. These must resonate on a deeply personal level, on a universal level, and must seem borderline eternal.

That is not easy to do.

I suspect this is why Apple has been spending so much lately to develop in-house advertising expertise — to craft the message no one else can legitimately mimic. Apple’s current ads reflect the company’s transition from destroyer of Big Old Order to guidepost for Universal Individual Empowerment. But they do not soar. They are not “only Apple.”

Apple’s current ads focus on thinness, a product feature, or generic personal empowerment, an emotional tug. These are fine as marketing efforts go, but are easily replicable by competitors.

What is or can be an “only Apple” myth?

Let’s consider recent Tim Cook quotes as Apple’s attempts to uncover the new myths, the new rallying cries that drive staff and customers for at least a generation.

We’re very simple people at Apple. We focus on making the world’s best products and enriching people’s lives.

A great statement, though I suspect it’s too expansive. The “best products” that “enrich” our lives could be a mobile computer, a watch — or a car, dishwasher or robot butler. Apple can’t do all such products.

Strike 1.

Companies that get confused, that think their goal is revenue or stock price or something. You have to focus on the things that lead to those.

This is an awesome sentiment, in large part because it’s believable. However, as $AAPL nears a literal $1 trillion in value, shuttling billions around from country to country, state to state, such a view opens itself up to way too much snark.

Strike 2.

Our whole role in life is to give you something you didn’t know you wanted. And then once you get it, you can’t imagine your life without it. And you can count on Apple doing that.

Stand up double.

This last sentiment of Cook’s works. It sets Apple apart, puts the pressure on Apple for achieving a level of greatness others can’t match — and suggests its products are rightly coveted.

Unboxing

Remember, it’s never only about the product. Just ask Coke or Coach.

Myths matter, even in business. From a Salon essay on the subject:

Even stripped of their original religious significance, even when we don’t know their source, myths still strike us as being filled with meaning.

In the 20th century, the psychiatrist Carl Jung formed his theory of archetypes, motifs recurring throughout most cultures. The archetypes, he believed, arise from the collective unconscious, an inherited body of symbols shared by all humanity.

Apple products, logistics, manufacturing acumen, design skill and vision enabled it to rise from near death and become the world’s richest company. These qualities remain. It’s the myths that must now change. The old Apple mythos no longer applies in our new world.