Apple in 2015

I’ve been getting calls from reporters working on end-of-year pieces looking towards 2015. While I always enjoy these conversations, one problem is only a fraction of what we discuss ever makes it into an article. So I thought I’d do a series of posts for Tech.pinions Insiders on what I see in store for some of the major tech companies in 2015. I’m starting with Apple this week, but I envisage doing similar pieces on Microsoft, Google, Samsung and others in the weeks to come (some may spill into January). In this piece, I’ll focus first on Apple’s newer products and services and then cover some of the more established product and service lines.

Apple Watch – fleshing out details, selling tens of millions

2015 will be the year of the Apple Watch. Announced in September 2014, it will go on sale in “early 2015”. Detailed pricing, market positioning, channels for retail sales and many other details remain unknown and the subject of considerable speculation. These details will emerge in the first few months of 2015 and the rest of the year will be about execution. Specifically, Apple still needs to provide key selling points for the Apple Watch, which the original announcement was short on. I think that’s fine – the keynote represents a sort of teaser trailer along the lines of the Star Wars one which debuted recently. The actual announcement and the ads are the key to positioning the device in the market. But retail channels, which may well include quite a few Apple hasn’t used before in non-tech sectors, will be equally important and interesting. I’d expect tens of millions of sales in 2015, but until we know more details about many of these issues I’m not willing to stick my neck out any more than that for now.

Apple Pay – expanding geographic, retailer and bank reach

I’ve written a fair bit here before about Apple Pay and the best summary of my view is Apple Pay will be a slow burn success, as its limited retailer, bank, device and geographic reach will make it an occasional use service for the time being. 2015 will be about expanding the reach of Apple Pay in those four areas. Late in the year, we’ll get more devices that will support it, but earlier in 2015 the key priorities must be increasing retailer, financial institution and geographic reach. The payment card industry in the US is somewhat unique (and backward), and one of the critical questions is whether card issuers in Europe and elsewhere are as eager to get onboard as some US ones have, given lower levels of fraud and fees. It’s possible Apple Pay will remain a mostly US service, which will be somewhat unusual for Apple, but it will be most transformative if it finds success overseas as well.

Beats – building iTunes 2.0

Apple’s Beats acquisition has long since closed, but it likely won’t be until 2015 we see what the company plans to do with the assets it acquired. It’s fairly clear to me the Beats music service technology will eventually be repackaged and rebranded and form part of what I think of as Apple’s iTunes 2.0 relaunch for music. From various public statements by musicians, it appears Apple is creating a new kind of music service; more artist friendly and beyond the music itself. The Beats acquisition was clearly part of making that happen. The timing is uncertain, but I’d guess it’ll be in the first quarter of 2015 we’ll start to see what Apple has in store in music. The other side of all this, of course, is what Apple does with the Beats headphone brand. We’ve already seen the first Apple-owned Beats headphones, but there were no signals regarding a new direction. The most interesting things to me are what Apple does beyond the current Beats brand and segment, if anything, and how Apple builds value with iPhone-specific functionality, such as using the Lightning port rather than the headphone jack as a connector.

HomeKit – 2015 is the year, after a very quiet 2014

Though HomeKit got some good stage time at WWDC, Apple has been quiet about it since. It didn’t get any coverage at all at the iPhone launch event in September and, aside from a couple of forward-looking announcements from hardware vendors, there’s been little activity from third parties either. The main reason was Apple didn’t provide the necessary components in terms of chips until November 2014, so 2015 will also be the year when smart home devices supporting HomeKit and Siri integration begin to show up in large numbers (we might see one or two launch before the end of 2014). I’m very curious to see whether Apple starts to make more of HomeKit as this happens, too – it’s been oddly quiet until now. The other interesting question is will Apple makes its own HomeKit hardware and whether it will be a hub or other function-specific devices for the home. The Apple TV might be a trojan horse for the hub functionality, but there have been signs Apple might be working on its own separate hardware, too. As it stands, HomeKit is mostly about adding value to the Apple ecosystem, but a direct push into hardware would have the potential to drive significant revenue too.

iPhone – massive growth, but hard to follow?

The iPhone should see massive growth in 2015. All the indications from Q3 reported results and early signals from third parties suggest it will have a huge end of year and this should easily spill over into 2015, especially given the supply constraints around the iPhone 6 Plus in particular. 2015 will easily be the iPhone’s biggest year ever and will likely drive a significant increase in share at the premium end of the market, at the expense of Android as a platform and Samsung as an OEM. The biggest question for me is what competitive levers Apple has still to pull in 2015 when it launches the successors to the iPhone 6 and 6 Plus. Can it possibly deliver as big a bump in 2015-2016 as it did in 2014-2015? That’s a nice problem to have, of course!

iPad – the year we discover its future

The iPad’s stagnating sales have been a topic of endless discussion with multiple pieces from me and others here on Tech.pinions and elsewhere. To my mind, 2015 will be the year we find out whether my thesis about upgrade cycles is true or not – it’s the five year anniversary of the product, and the four year anniversary of the big ramp in sales that happened with the iPad 2. If my thesis is correct, we should see a ramp in sales in 2015, as upgrade rates increase and new sales continue to be strong. If that happens, I foresee a good long term picture for the iPad as a growth driver for Apple. If it doesn’t, it’s hard to see how the iPad will grow significantly beyond its current size as a business for Apple. It’s an enviable business, to be sure. One interesting wrinkle is the possibility of a larger-screened iPad, perhaps at 12 inches, potentially with some sort of split-screen multitasking. I don’t see it enormously increasing the addressable market, but it might be a way to get sales growing again even if upgrade rates remain relatively low.

Mac – after a surprisingly good 2014, what next?

The Mac surprised many observers in 2014, especially in Q3, with its strong growth and sales performance. Apple’s share of the PC market continues to grow and it’s one of only two major suppliers (along with Lenovo) whose fortunes seem to be consistently improving. As others exit the PC market, Apple is bucking the trend with high ASPs and growing sales. All the drivers of the Mac’s successful 2014 are still in place, and I’d expect it to continue to grow its share of the PC market in 2015, which should put it on solid footing going forward. But it’s a stagnating and likely declining market as a whole, and it’s unclear to me how long the Mac can keep growing in that overall environment.

iPod – RIP, 2001-2015?

Sales of the iPod continue to drop rapidly, though Apple continues to sell several million every quarter. As the iPad becomes the device of choice for many (especially kids) who would have once asked Santa for an iPod touch, and as hand-me-down iPhones meet the needs of many others, it’s unclear how long the iPod line will go on. With no significant upgrade in quite some time, and with the iPod Classic finally killed off in 2014, how much longer will the iPod stick around as a product? I think it’s quite possible it will finally be dead in 2015.

iTunes and the App Store in transition

I’ve already talked about the potential for new music services from Apple using the Beats technology. But of course, iTunes is far more than that, especially if you include the App Store in the conversation. Music sales have been declining for some time now and I suspect video sales haven’t been growing as rapidly either, as subscription and streaming content become the preferred methods of consumption for many users across both music and video. The App Store is the shining light here, driving overall growth and offsetting the decline in traditional content revenues. That growth will likely continue, driven by both the ever-expanding base of Apple customers and by growth in in-app purchases, which appear to be driving up revenue per app download after several years of declines. I think so many of us want for Apple to disrupt TV in the way it has other industries, but I’m increasingly skeptical it has the skill set and will to do so. But unless it moves to some kind of subscription video service, I would expect its video sales and rentals to start to stagnate soon too, if they haven’t already. I’m also still hugely skeptical that Apple will ever make a TV set.

2015: Tim Cook’s year

In summary, I think 2015 is best seen as the first year when products overseen by Tim Cook will really drive Apple’s revenues and growth. It’ll be a great test of his leadership and his ability to continue Steve Jobs’ legacy of creating great products which not only delight customers but drive significant growth and profits for Apple as a company. And of course, Tim Cook has hinted there are products in the works which people aren’t even speculating about, so there could still be some significant surprises coming in 2015!

Why Chromebooks Have No Consumer Market Future

The question of whether Chromebooks will have a future in pure consumer markets is an intriguing one. There’s no question Chromebooks are well positioned for education markets where they are selling in volume. But I don’t see Chromebooks being successful in pure consumer markets.

At a fundamental level, we have to understand consumers do very little “heavy lifting” with their current PCs. While it is true consumer do quite a bit of basic web browsing on their PCs and this is a primary point for Chromebooks in consumer households, that activity has largely shifted to their smartphones or tablets, which now have over a 53% household penetration in the US. Other devices currently serve consumers with the same value proposition of Chromebooks and offer even more. As larger phones increase penetration, it hurts the Chromebook consumer proposition even more.

The other challenge is the form factor. A Chromebook is a clamshell which means where and how it is used is limited. Things like phones and tablets are more easily carried and used in more convenient ways around the house to browse the web and more. It is the clamshell form factor I also believe is not attractive to general consumers.

Lastly, there is the issue of software. If we step back and look where ALL the software innovation for consumers is happening, it is on smartphones and, to a degree, tablets (meaning the iPad). There is simply no software value proposition on Chromebooks that consumers can’t get on their existing PCs or even their smartphones and tablets.

Even with a fundamental leap in consumer-facing cloud software/apps, I believe the pure consumer market has largely moved past the PC. All the innovation happening in native apps for mobile is accelerating this shift not just in time but priority, with value being placed on mobile computing devices and not “fixed” ones like notebooks and desktops.

Some things I think could be very interesting from Google’s ChromeOS are tablets and smartphones. I think media consumption as a large percent of time spent with mobile devices plays into a future where thin-client and heavy back end server computing can come together nicely. I still feel ChromeOS may be the future of Android but that is just speculation. Where I have a strong opinion is that ChromeOS has little to no future in pure consumer markets in the shape of a clamshell PC.

How Apple can get to a Trillion Dollar Valuation

For the first time in Apple’s history, its market cap reached approx $750 billion dollars recently. Articles have come out stating Apple could become the first trillion dollar business on the planet. It is hard to believe a company so close to bankruptcy in 1997 has come back to become one of the largest companies in the world with a brand recognized everywhere and a market cap of over $750 billion. Thanks to the brilliance of Steve Jobs and his iPod, iMac, iPhone and iPad, Apple has reinvented itself from the computer company it was in its early existence to the powerhouse consumer electronics company it is today.

However, I wonder if they can achieve another $250 billion of market cap with just the products they have on the market today. iPods are slowing dying as iPhones have literally taken their place as the go to music player. The good news is the market for smartphones is still growing and will continue to be a growth market for at least another three years, if not longer. Also, Apple seems to have won the higher end of the smartphone market which carries very good margins, thus allowing the product to drive the core of profits for some time. iPads, while still an important product, have seen some market decline given the strong competition for tablets all over the world. The good news is Apple is still selling a lot of iPads with good margins and, even if it is not a growing business, it is a relatively stable one. Another bright spot is the Mac line of computers. iMacs are still selling very well and demand for Apple’s MacBook Pro and MacBook Air are at all time highs. In fact, during the last quarter, Apple sold five million Macs compared to only four million in the same quarter in 2013. These too have great margins and add to Apple’s bottom line.

There are four other products in the wings I believe will need to be successful if they are to ever top that trillion dollar market cap. The first is a product that used to be a hobby but is now quite a serious business. Apple has sold over 2 million Apple TVs and Steve Jobs made clear to his biographer Apple still has major plans for TV in the future. While I don’t think Apple will do an actual television, I do think they are going to drive a lot more innovation with the Apple TV external box and link it with a newer, immersive, and interactive UI and content deals that could reinvent the TV experience. If they get this right, it could add a significant new revenue stream in the future.

They also have the Apple Watch, ready for market in early 2015. While it is too early to tell if this will be a big hit, I have watched Apple enter new markets and make big waves and I have a sneaking suspicion this product may be another one that captures the imagination of a lot of people, especially those committed to the Apple ecosystem. We will all have a better handle on this when they finally ship in 2015 but I do expect it to be another financial success for the company that could add a significant amount of revenue and get them closer to this trillion dollar valuation.

There is one other area slightly related to the Apple Watch. I believe this will be Apple’s foray into the health care mediation system. When using their health app and the Apple Watch, Apple will, with a user’s permission, collect health related data that will be useful for the user and other health monitoring devices that dump data into Apple’s health app. That data could also be useful to a person’s health provider. I believe, eventually, Apple will become a broker of that health data between a patient and their health providers. Of course, they will need the permission of the users to give data to their doctor but if it helps the doctor monitor health conditions and can be used to keep them on track, I think a lot of people would be willing to let Apple send their health data to health care providers. That data will become very important to these providers and they will be willing to pay for it as part of an Apple driven mediation system. If this works as I think, it could eventually become one of Apple’s biggest cash cows.

There is one other initiative that could really be a big winner. Earlier in the year, Apple did a deal with IBM to serve as a partner in enterprise programs that includes dedicated IBM software ported to Macs and IOS and taps into IBM’s direct sales force and service organization. This is a big deal and has serious potential for helping Apple extend their presence in corporate markets. While we have not seen the fruits of their labor yet, we should get a glimpse of how this relationship and strategy will work shortly. Do not underestimate the potential impact of this deal to bring additional profits that would contribute to a trillion dollar valuation.

Combine these other products and their long term potential and it is at least conceivable Apple could, at some point in the next 5 years, become the first trillion dollar company in the world.

Apple’s Huge and Profitable Niche

After reflecting on discussions I had regarding my article on disruption of last week, another train of thought began. I captured the fundamental concept in this Tech.pinions subscriber article called “profitable niches.” As pointed out in the comments on my article, in every market, even heavily commoditized ones, a premium player(s) can always exist. The difference between the premium and the commodity player is one of scale. In examples I used — automotive, food, fashion — the premium player’s total market and overall volume are not that large. Which is why we call them niche players. The word carries with it an assumption they are not a large or majority player. However, thanks to mobile, Apple has blown this assumption apart.

Apple is playing as a niche player. Meaning, they are not the market leader in smartphones and they likely won’t be. However, their niche is gigantic. And if we add up their endpoints in terms of potential market sizes of Macs, iPads, and perhaps even Apple TV (I don’t include Apple Watch yet until it becomes a standalone product that does not depend on the iPhone) then Apple’s user base gets even larger. The sheer scale of personal computing means Apple is a niche player in one of the largest niche markets we have ever seen. More importantly, their position is one of influence, even though they are not the market share leader, they are the market leader.

But there are still interesting dynamics of this reality to tease out. Not only does Apple have a large, profitable niche, they also have very loyal customers.

Marc Andreessen tweeted:

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He followed up a few tweets later, saying he knows many don’t agree with this point but it is his belief. The tweet caused me to reflect on something Ben Thompson wrote earlier today about Apple’s focus on being the best. While I don’t necessarily agree entirely with Marc’s tweet, I do believe there is a percentage, no idea how large, of Apple’s existing base for which that may be true. Apple has a huge loyal fan base. How big, I’m not certain, but it’s likely there are some on the fringe when it comes to the technology adoption curve for whom Apple still must compete for them each product cycle, a small percent who could be swayed by good enough. In the US, carrier subsidies help level the playing field when it comes to the cost of a device. But in other markets people pay upwards of $600 for Apple’s products because they feel they truly are the best.

What is interesting about Marc’s tweet is that, even if it were universally true, I would not be worried about Apple. Primarily because I believe Apple sees themselves or last year’s Apple as this year’s primary competitor. Last year’s product is the bar to beat. Apple’s culture, people, process, and priorities all validate their commitment to being the best in the areas they can choose. That means Apple’s commitment to being the best would be unchanged whether their user base was 1 million or 1 billion. Apple’s customers know Apple is moving forward and not backwards. That next year’s product will be better than this year’s product. That even if they aren’t perfect in areas, like the cloud, they will make progress.

Apple’s niche is huge. It sounds silly and contradictory but that is the fascinating point. Looking at niche players across the board, you realize they are hard to disrupt. Usually because their values and priorities reflect that of a user base with similar values and priorities. What’s unique is how big this niche is for Apple and, more importantly, how profitable and influential.

For reference, and because it is a good read, here is the full tweet storm by Marc Andreessen @pmarca
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Intel’s PC Dilemma

PC installed base is 1.8 billion and 600M+ are 4+ years old according to @intel….that’s part of the reason why they’re positive on growth. ~ Bob O’Donnell (@bobodtech) 11/20/14

Here is the chart Intel provided in support of the above:

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Intel is suggesting 600 million PCs over 4 years of age is reason to be optimistic because these PCs are going to someday soon have to be replaced. The key question is: When these PCs are replaced, what will they be replaced with? Intel is suggesting these 600 million four year old PCs are going to be replaced by desktops, notebooks, 2-in1’s and Intel tablets. I think the facts and common sense tell you it is much more likely the vast majority of these 600 million four year and older PCs are going to be replaced by phones, ARM tablets or nothing at all.

What We Know

We know mobile devices are eclipsing PCs. Intel believes that there are 1.8 billion PCs in existence. On the other hand, there will be some 1.3 billion mobile phones sold in 2014 alone.

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We know the PC segment is not growing ((Intel pointing out the PC industry has stabilized. This is true but it is also not growing. ~ Ben Bajarin (@BenBajarin) 11/20/14)) and may, in fact, be in decline. Even Intel is predicting flat unit shipments for PC CPUs in 2015. ((Intel predicting flat unit shipments for PC CPUs in 2015 with a modest decline in enterprise and modest bump in consumer…makes sense to me. ~ Bob O’Donnell (@bobodtech) 11/20/14))

We know the current PC replacement cycle is around five to six years and there is no evidence to suggest it is going to get any shorter.

We can reasonably suppose those who have PCs that are four and more years old are not sophisticated power users who need cutting edge technology to serve their computing needs. On the contrary, they are almost certainly marginal computer users, such as senior citizens or single purpose computer users such as businesses that use their PCs as cash registers and the like. It seems extremely unlikely these low end PC users will want to purchase high end PCs or 2-in-1’s and much more likely they will be able to satisfy their computing needs with phones and ARM tablets.

A Closer Look

Let’s take a closer look at Intel tablets, 2-in-1’s and other tablets.

Intel Tablets

Intel’s efforts in tablets have proven to be a disaster. Intel has spent 7 billion dollars subsidizing x86 Atom Android tablets, yet those tablets have no appreciable market share.

Two-In-Ones

The release of 2-in-1 tablet/laptop hybrid devices, which run on Microsoft’s Windows 8 platform, have not helped Intel sales. Those devices are thought to account for just 4 percent of the market, leaving manufacturers to try other strategies for growth.

The numbers look even worse when you take into account the fact Microsoft has lost 1.7 billion dollars trying to make the Surface a hit.

Intel says 2-in-1 buyers are buying new PCs a year earlier than those purchasing a clamshell–clearly appealing to a more sophisticated user. ~ Bob O’Donnell (@bobodtech) 11/20/14

That is good news for Microsoft in its efforts to make 2-in-1’s a viable category but it is bad news for Intel. It seems extremely unlikely that any of those 600 million PCs that are four and more years old will ever be converted to high end 2-in-1’s.

Tablets

Tablet sales are probably affected much more by the PC replacement cycle than by the tablet replacement cycle ~ Benedict Evans (@BenedictEvans) 11/11/14

This is an intriguing thought. Tablet sales grew like gangbusters in their first three years of existence and then suddenly flattened. It’s almost certainly true that larger phones have eaten into tablet sales but it’s just as certain that tablet sales have eaten into notebook sales too.

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Conclusion

As older PCs come to end of life, are they more likely to be replaced by PCs or by alternative devices? The simple answer is that it depends upon the job that they are being asked to do. I doubt if the answer to that question is going to lead to the re-aquisition of PCs in any numbers close to the one’s that Intel of is hoping for.

Takeaways From IBM’s Black Friday E-Commerce Report

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

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

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

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

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

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

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

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

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

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

Mobile Is Eating The Car

I attended last week’s Los Angeles Auto Show, as I do every year. While the norm among native Californians seems to be to fly from San Francisco to Los Angeles, I always drive. I make my way over to I-5, confirm there are no patrol cars nearby, then torch the accelerator. Soon I’m in LA, checking out all the new models and the many concept cars.

This year was different.

This year it was incontrovertibly clear just how much mobile is eating the car. We still need cars, of course. Some of us still desire cars. But their value is being eaten away by our smartphones.

While it may not seem the tiny smartphone would impact the car industry, car design, or our massive, decades-long commitment to car infrastructure, the fact is smartphones are disrupting this giant 20th century ecosystem just as they are so many others.

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1. Jobs To Be Done

A primary reason for the car’s existence is to get us to work. In the mobile age, work is everywhere we are.

Mobile devices enable us to work anytime, from anywhere. They are even changing the meaning of work, its urgency, how we collaborate, how we respond, and what data is available.

Plug in from the coffee shop. Have a video conference while walking the dog. Check sales reports, site data and support emails from the couch. In this new world, cars are less important, less valuable.

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2. Location Location Location

We need to know where we’re going and want to know the best route. Smartphones are already better at this than cars:

  • We are more familiar with smartphone mapping tools.
  • They offer real time traffic data, including data from the crowd.
  • They know our history, previous locations and preferences better than our (dumb) cars.
  • They know our schedule and contacts better than our cars.

All of this means smartphones, not cars, can better predict where we need to be, where we should be, which path is best, and which mode is superior — car, public transit, ride service, walk or staying put. Yes, we still need the car to physically get us from Point A to Point B, but the value of the location data — more prevalent in our smartphones — is ascending.

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3. Entertainment

We are human. We need to be entertained. The more (and better) our smartphones entertain us — while we are in a car — the less important the car itself. The car’s value is diminished. Don’t believe me? Try this: commute in a $20,000 Honda Civic for one month, with your smartphone. Next, commute in a $90,000 Cadillac Escalade, fully tricked out, also for a month — but without connectivity. No streaming, no Siri, little to keep your and your passengers entertained.

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4. Interface

We deserve simple, instant access to our music, our contacts, our friends, our status updates. I have examined multiple cars at multiple price points and every smartphone I’ve ever used offers a superior interface to mapping, entertainment and other data — despite a 120 year head start for the car industry.

Apple’s CarPlay and Google’s AndroidAuto will deliver simpler, more responsive interfaces, better data, richer options. Expect these to become the norm, not the car maker’s lesser, more confusing dashboard configurations.

As the more personal, interactive interface of the smartphone evolves — from inside the car — the more the car itself becomes merely a vehicle for transportation. Again, this will diminish the car’s value.

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5. Ownership

Uber and similar services, all thriving due to the smartphone, are further undermining the value of a car. Consider that if you live in an “exurb” and commute to the big city for work every day, and your commute totals a whopping 20 hours per week, you are still only using your expensive car for no more than 20% of the day.

That’s a wasted asset. Why pay tens of thousands for a car that will rarely be used when someone else can take you to wherever you need to be?

Yes, the convenience of owning still trumps “ride sharing.” Owning a car means it’s always right outside your door, available at a moment’s notice.

This will change. Smartphones will soon enough be able to proactively tell any available car to be waiting and ready for us, wherever we are. Knowing our calendar, preferences, history and habits, our present location, our to do list, and knowing who we are with — and who we may need to impress — will become more valuable than having the same owned, under-used car always nearby, eating up our limited wealth.

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6. Freedom

Cars are freedom. Every teenager knows this.

Or, once did.

The open road may beckon some but with constant connectivity to friends and family, with our favorite musical groups via social media, with our favorite TV stars via Twitter, with our favorite books on Kindle, it’s time to accept a new truth: we now have more freedom inside our smartphone than is available anywhere our car may take us. No wonder fewer teens are interested in getting a driver’s license.

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7. Under The Hood

For decades, car owners loved to get under the hood, tinker with the engine, make modifications and personalize their cars. Look at today’s engines, especially those that are hybrid or electric, and know that one of the glories of car ownership is rapidly being stripped away. Only trained experts using the right tools can safely modify your purchased vehicle.

Mostly, it’s the same with smartphones. Still, after-market accessories and efforts such as Google’s “Project Ara,” which lets users customize their own mobile device, may foster a generation of smartphone tinkerers who previously might have liberated their mechanical creativity on the internal combustion engine.

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We are rapidly approaching a world where a $250 smartphone is more important than a $25,000 car. The world will never be the same.

Apple Sits Atop The Stack

On November 26th, I wrote an INSIDER article entitled: “Is Apple Pay The New iTunes?” (Subscription required.)

A foundational premise of that article was that iTunes did not, and now Apple Pay does not, directly challenge the existing incumbents in their respective categories but, instead, seemingly worked with the existing industry participants. In business theory terms, Apple sat atop the existing “stack”. However, in doing so, iTunes, and perhaps Apple Pay too, ended up disintermediating several incumbents and marginalizing others. Benedict Evans seems to think that this is not just a one-time thing but is, rather, Apple’s modus operandi:

Apple tends to disrupt non-tech markets by adding a new layer to the value chain – a new end point. Not by competing with existing layers. Hence, no Apple MVNO, record label, payment network… TV service? ~ Benedict Evans (@BenedictEvans) 9/24/14

Let’s explore that idea.

With the iPod/iTunes combo, Apple did not compete directly with the existing participants in the music stack. They built stores, but they did not build music stores. They did not create physical media. They did not create albums but they did break albums into their constituent parts (songs). The did create MP3 players which competed with the then existing CD players. Yet, for the most part, they did not create speaker based music playing devices.

In the end, however, the result of the iPod/iTunes revolution was to cause music stores and physical media to disappear and the album and music players to all but disappear. Apple was able to compete against their competitors but their competitors were unable to compete back. To use a military analogy, Apple took the high ground where they were able to shell their enemies without their enemies being able to return fire.

The most interesting disruption comes from attacking an industry from what looks like an irrelevant angle. ~ Benedict Evans (@BenedictEvans) 9/13/14

Benedict Evans provides us with other examples of where Apple DID NOT compete directly against the entrenched incumbents:

(Apple) didn’t buy or build a record label and it didn’t hire A&R guys. It didn’t buy a mobile operator or create an MVNO. It never bought movie or TV rights, and it hasn’t created a new payment platform. It is partnering with Chase and Visa, not competing with them. ~ Benedict Evans

There are at least two reasons why Apple doesn’t compete directly against incumbents. First, the incumbents compete back. In military terms, competing against the incumbents is like attacking a well-defended enemy fortification. You’re attacking them where they are strongest.

A second reason why it is generally unwise to compete against incumbents is because while they are good at what they do, you, as the newcomer, are not very good at what they do. It is better to compete where you are strong and the incumbent is weak — or even better, nonexistent.

Apple is not in the business of disrupting everything. They’re in the business of disrupting what their DNA allows them to and their DNA is not about being bank, it’s not about being a mobile operator. ~ Horace Dediu

Instead of competing directly against the “stack”, Apple sits atop the stack and inserts a layer between the incumbents and the customer. This is no mean feat because the incumbents are already trying — and failing — to close any gap between what they provide and what the customer actually wants and uses.

For example, Apple Pay is built upon NFC which is not new technology at all. The only thing new about Apple Pay — from the customer’s point of view — is that it takes a four step process and reduces it single step. Yet this makes all the difference. It is often the last, seemingly small, incremental step, that adds massive value to the already existing product or service.

Moving from three or four steps to one wave of the phone is only the last 10% of the problem, but of course it’s the 10% that takes 90% of the effort and makes all the difference in consumer adoption…. ~ Benedict Evans

I think one of the reasons why Apple is misunderstood and under appreciated by some its critics is because those critics do not recognize the value added by this last, little step. To them, a one-step process is only minimally better than a four-step process. To the consumer, however, it’s the difference between jumping a gorge and comfortably and securely walking across a bridge over that gorge. And to the average consumer, that’s all the difference in the world.

Waterfall in Oregon

What Apple seems adept at doing in creating a highly integrated product that takes that one last step that massively multiplies the usefulness of the existing product to the masses.

Is Apple Pay The New iTunes?

Everyone is talking about whether or not Apple Pay will or will not succeed. I know I’m jumping the gun on this, but I think Apple Pay has already passed the tipping point. Although it will take some time yet, I feel confident Apple Pay is going to be a viable payment solution. ((If you’re not as confident as I am, you can read some excellent discussions of the pros and cons, the ups and downs, of Apple Pay, in the following articles:

Why Apple Pay could be the mobile-payment system you’ll actually use

Why Apple Pay Can Succeed Where Google Wallet Failed

Apple Pay’s Competition Is About To Learn That Walmart Isn’t Starbucks

How Apple Creates Leverage, And The Future Of Apple Pay

In my opinion, one of the best sources for analysis of Apple Pay is the rambling discussion between James … and Ben Thompson that took place on the Exponent Podcast, Episode 023: Apple Pay. Long, but vey much worth the time.))

4cards

Since I’m already comfortable with the idea that Apple Pay will succeed, I now turn my attention to the implications of that success. In the long run, how will Apple Pay affect the payment category? I think we may be able to use the recent past to help shed some light upon that murky future.

The further back I look, the further forward I can see. ~ Anonymous

The Year 2000

Rewind
Rewind the clock to the year 2000 — before the iPod and iTunes had made their entrance upon the tech stage — and let’s follow the typical CUSTOMER as they make a typical purchase of music.

Customer
The CUSTOMER decides they want to buy some music. They drive or walk to…

Music Store
…the local MUSIC STORE. They walk up and down the aisles perusing the rows of…

Physical Media
…Records, Cassette Tapes or CDs, looking through the various…

Albums
…ALBUMS. They select one or more albums, buy it, take it home and play it on their…

Music Player
…Record player, tape deck or CD player.

The Year 2010

Wind It Forward
Wind the clock forward to the year 2010. How did the typical CUSTOMER buy music then?

Convenience
In the year 2010, the CUSTOMER picks up their smartphone, selects a song — not an ALBUM — buys it, downloads it, and plays it almost instantaneously on a single, mobile device.

The CUSTOMER has benefited because they buy less unwanted music in the form of ALBUMS, buy it without having to travel, buy it without being inconvenienced, and listen to it without having to purchase or co-ordinate their purchase with a separate MUSIC PLAYING device.

Disintermediation

My online dictionary defines disintermediation as:

In economics, disintermediation is the removal of intermediaries in a supply chain, or “cutting out the middlemen.”

Business theory often refers to the participants in a supply chain as being part of a “stack.” In our music buying story, there were numerous participants in the “stack” who were necessary in 2000 but were unnecessary in 2010. The MUSIC STORE is gone. PHYSICAL MEDIA is gone. ALBUMS are all but gone. Stand alone MUSIC PLAYERS are niche. They were all disintermediated — removed from the stack — by the introduction of the iPod/iTunes combo.

The Year 2013

We’re finally ready to return to the subject at hand — Apple Pay. It’s the year 2013, before Apple Pay has made its entrance upon the tech stage. Let’s follow the typical CUSTOMER as they make a typical retail purchase.

Customer
The CUSTOMER decides they want to buy something. They drive or walk to…

Retailer
…the local RETAILER. They walk up and down the aisles perusing the rows of merchandise. They go to the…

Cashier
…CASHIER in order to pay. They pull out their…

Credit Card
…magnetic striped CREDIT CARD which, in the United States, they got from…

Credit Card Provider
…a CREDIT CARD PROVIDER like Visa, MasterCard or American Express. Those credit cards are directly hooked to their…

Bank
…BANK. The CUSTOMER then swipes that card in a….

READER
…credit card READER and walk out of the retailer with their purchase.

The Year 2023

APPic

Wind It Forward

Wind the clock forward to the year 2023. How will the typical CUSTOMER make a retail purchase then?

Convenience

In the year 2023, the CUSTOMER travels to their RETAIL STORE, selects one or more items to purchase, proceeds to the checkout, waves their wrist wearable device before a READER, confirms the purchase and goes on their merry way. They may even make their purchases item by item as they select them and then stroll out of the store at their convenience without even having to stop at a register.

The CUSTOMER benefits because they make their purchases faster, with less waiting in lines; because they no longer carry physical CREDIT CARDS that can be stolen; because they no longer expose their CREDIT CARD numbers to the employees of the retailers, and because they no longer share their personal information with the Retailer, the BANKS or the CREDIT CARD PROVIDERS.

Disintermediation

In 2023, the CREDIT CARD is gone, the READERS have all been replaced, and there are far fewer CASHIERS with far more self-help checkout kiosks.

Marginalization

Another interesting thing has happened too. In music, some parts of the “stack” — such as the MUSIC LABELS — survived the iPod/iTunes revolution, but they were no longer the face of music. In payments, Apple Pay and other competing payment systems will stand between CUSTOMERS and the CREDIT CARD PROVIDERS and the BANKS. When people buy, they will think APPLE PAY, not Visa, MasterCard, etc. and they especially won’t think of their BANKS.

The MUSIC LABELS did not disappear after the introduction of iPod and the CREDIT CARD PROVIDERS the BANKS will not disappear after the introduction of APPLE PAY either. However, they will have been marginalized and that may have severe consequences.

Banks

It is the role of BANKS that most interests me. Many people have a relationship with their BANK because they go into a physical building and interact with a teller. More and more, the need to actually visit one’s BANK is disappearing. Payment systems, such as Apple Pay, sit atop the BANK and further obscure the BANK from the CUSTOMER’s view.

Here is the key. Today BANKS are very “sticky.” People are unlikely to change BANKS because they have a relationship with their BANKS and because it is a pain in the neck to make a switch with very little to be gained. But what happens when one doesn’t have a relationship with their BANK, when every BANK looks like another, when every BANK provides virtually the same services, when it’s easy to make a switch and when the benefits of switching are made clear?

With APPLE PAY, and competing payment services, the BANK becomes just an interchangeable block in the stack. When Apple — the company you know and love — comes to you, suggests you transfer your funds from your bank to another bank, makes the changeover easy, and clearly defines the benefits of making that change…are you going to say no?

Conclusion

It is said that the present is pregnant with the future. ~ Voltaire

The iPod/iTunes combo changed the music business forever. It disintermediated several players and marginalized the roles of others. If Apple Pay succeeds, I believe the same will happen in payments. Some parts of the payment system will disappear forever and other parts will be obscured, then marginalized, then commoditized and, ultimately, subject to easy substitution and replacement.

Should Apple reinvent the iPod?

One of the most beloved tech toys I have is my prized iPod Classic with a hard drive that holds over 10,000 songs and still has 30 gigabytes of free space to use as extra storage. In fact, iPods in general have had a wonderful impact on my travel and exercise life. They have been faithful companions since the day they came out.

Apple has now “retired” the iPod Classic. They can no longer buy the parts to make them and, while flash based ultra thin iPod’s are still sold in their stores, it is no longer the cash cow is was before the iPhone came out.

Indeed, the iPhone has pretty much replaced the iPod, especially for those who have iPhones. The same goes for competing smartphones–all are now capable of playing back music and videos. You would think there would be no need for iPods anymore. Which is why Apple has done very little with the iPod in terms of new versions in the last 18 months.

Yet, I suspect there is a good number of people who still use iPods while exercising or traveling, especially if they have smartphones whose battery life is challenged.

That is one key reason I still use an iPod, especially before I got much better battery life on my iPhone 6 Plus. On long trips, I would pull out my iPod Classic, holding my entire music, audiobook and music video library and use it for well over 12 hours continually with no problem.

There is probably no reason to innovate on the current iPod design, but perhaps there is another platform in which an integrated iPod could be of interest to some people.

At the last CES, a smart headphone was introduced known as the Muzik headphones. The Muzik headphone has touch controls for high definition audio, voice command, long range wireless capabilities, motion sensors, one touch phone answering, and social sharing. All these are controlled directly from the side of the headset. It is designed to be connected wirelessly to your smartphone.

The company has created a software development kit (SDK) so developers can create apps for the platform. They say “it can send updates, applications, and new features to listeners as they are released — allowing the product to evolve over time, beyond the capabilities of traditional headphones”.

What if Apple created an iPod in a Beats headset and gave it touch and voice commands so a user could have a significant amount of their personal music content in the headset itself and not have to rely on a connection to their smartphone? As a traveler who uses wired headphones connected to my iPhone once in a while, I would love to not run the battery down on the iPhone on a long plane flight yet still have the ability to listen to hours of music. Same goes for when I do my two hour walk on the weekends. If my headset had the iPod built in, I could just touch it or give it voice commands to search for different music, change the volume, etc. This would add an interesting dimension to these particular activities.

And if the Beats headset also delivered extremely high quality audio with an integrated iPod inside it, Apple could deliver a new iPod design I think would garner a lot of interest from people who want to have their music on a local device and not have to always carry their smartphone with them too.

I have no clue if Apple is doing anything like this but it seems to me an iPod still has value. If they wanted to still innovate on the iPod platform, integrating it into a Beats headset could give them another interesting product that connects people and their music in a new way.

Apple’s Very Human Interface Guidelines

I am impressed with the speed of Apple’s foray into entirely new UIs. No, I am not talking about the re-jiggered version of iOS the company built for the Apple Watch. It merely reveals the way forward. Apple is clearly focused on transforming our bodies into the next great interface.

The devices this could enable are nearly limitless.

Starting with the launch of the Apple Watch, our voice and flesh, maybe soon our eyes, become common input methods — the mode by which we interface with data and interact with machines (or screens, clothes, wearables).

You already know about voice. The iPhone is now good enough to be reliably used for dictation, creating notes, tweets, texts, setting reminders and appointments, even searching the web. The Apple Watch incorporates this voice capability, along with touch, right from the start. The Apple Watch also incorporates physical interactions — haptics. Apple brands this as “taptics.”

My recent article in Macworld examined this new UI:

Haptic technology—haptics—uses force upon the skin to deliver real-time tactile feedback. These physical sensations are created by tiny motors called actuators. Done right, haptics can mimic the feeling of a pin prick by a wearable that tracks your blood sugar, simulate the plucking of virtual guitar strings on a tablet screen, or re-create the physical recoil of a phaser from your favorite game controller.

To date, use of haptics has been limited in part by middling accuracy — how much and where exactly the force is applied. Apple appears to have uncovered the use cases and improved the accuracy enough to make haptics a core feature of its next big thing. As the company boldly states:

Because (Apple Watch) touches your skin, we were able to add a physical dimension to alerts and notifications — you’ll feel a gentle tap when you receive an incoming message. Apple Watch also allows you to connect with your favorite people in some new, spontaneous ways not possible with any other device.

apple-watch-sensors-580-90

Physical sensations — haptics — are core to the Apple Watch UI.

It’s called the Taptic Engine, a linear actuator inside Apple Watch that produces haptic feedback. In less technical terms, it taps you on the wrist. Whenever you receive an alert or notification, or perform a function like turning the Digital Crown or pressing down on the display, you feel a tactile sensation that’s recognizably different for each kind of interaction. Combined with subtle audio cues from the specially engineered speaker driver, the Taptic Engine creates a discreet, sophisticated, and nuanced experience by engaging more of your senses. (emphasis added)

Where might this lead us?

I won’t predict any specific devices. I will say that, by leveraging human voice, touch and sensation, entirely new forms of interaction become possible — with data, objects and people. Thus, while I confess I am not terribly interested in the Apple Watch per se, I am very excited by Apple’s deliberate if somehow under the radar efforts at launching these human-centric UIs.

See Me, Feel Me, Touch Me

Sogeti Labs predicts a “personalization” revolution by 2025, a world filled with an amazing array of mobile devices, sensors, wearables, things, robots and semi-autonomous machines. In this brave new world, current input methods simply won’t work. No matter how great or how knowing the state of artificial intelligence or Big Data may be ten years from now, the world of “computing everywhere” will be severely limited if it cannot be instantly and reliably engaged by voice, touch, physical force and/or eyesight. Apple — with its pricey, jewelry-like watch — is showing us the way forward. Not with a failed beta like Google Glass but with a very real product soon available for sale around the world.

I predict the potential for human UI to be so great in fact I suspect Apple’s appropriately named Human Interface Guidelines only barely scratches the surface of what will soon be possible. These are the early days of the human-computing interface, akin to when the early PC makers touted the benefits of “storing your recipes”.

Here are some of the present ways the Apple Watch will leverage our body to interact with data (emphasis mine):

Voice

Siri. Dictate a message, ask to view your next event, find the nearest coffee shop, and more. Siri is closer than ever with the Apple Watch.

And…

Phone. Use the built-in speaker and microphone for quick chats, or seamlessly transfer calls to your iPhone for longer conversations. You can also transfer calls from the Apple Watch to your car’s speakers or your Bluetooth headset. 

Body

In addition to recognizing touch, the Apple Watch senses force, adding a new dimension to the user interface. Force Touch uses tiny electrodes around the flexible Retina display to distinguish between a light tap and a deep press, and trigger instant access to a range of contextually specific controls — such as an action menu in Messages, or a mode that allows you to select different watch faces — whenever you want. It’s the most significant new sensing capability since Multi‑Touch.

And…

Heartbeat. When you press two fingers on the screen, the built-in heart rate sensor records and sends your heartbeat. It’s a simple and intimate way to tell someone how you feel.

And…

To pay with Apple Watch, just double click the button next to the Digital Crown and hold your wrist up to the contactless reader. You’ll hear and feel a confirmation from the Apple Watch once your payment information is sent.

apple-watch-features_w_600

And…

Since the Apple Watch sits on your wrist, your alerts aren’t just immediate. They’re intimate. With a gentle tap, notifications subtly let you know when and where your next meeting starts, what current traffic conditions are like, even when to leave so you’ll arrive on time.

According to Apple, “You won’t just see and respond to messages, calls, and notifications easily and intuitively. You’ll actually feel them.”

Eyes

Confession: There are no eye-driven UI features in Apple Watch. I do wonder, however, if such a UI may be coming soon. Consider how “Looks” will work in Apple Watch 1.0:

A Short Look provides a discreet, minimal amount of information—preserving a degree of privacy. If the wearer lowers his or her wrist, the Short Look disappears. A Long Look appears when the wearer’s wrist remains raised or the user taps the short look interface. It provides more detailed information and more functionality—and it must be actively dismissed by the wearer.

I can absolutely envision an Apple Watch 2018 model, for example, which can and does change the information presented based on actual eye glances, not just movements.

The overall design of the Apple Watch, its innovative computer on a chip, the clever Digital Crown input and other features and technologies are all laudable. That said, I think the most important aspect of the Apple Watch is what it portends: entirely new ways of interacting with data, machines and people all thanks to entirely new forms of human-centric interfaces.

How Apple Forces New Technology to Improve the Future

Apple’s decisions on redesign of the technology of just about everything are an endless source of criticism, especially by those who have a right to tinker with their devices. History suggests Apple has the sense to choose the right technology for the future.

As GlennC777 said in a comment on my article on Apple Pay, “Apple Makes Old Security Business Lead to the Future,” Apple’s decisions have been both mistrusted and missjudged:

When the Mac was first introduced I was enough into computers to be a young reader of Byte magazine, and I remember the reader letters complaining that the too-simple “pointing” and “pictures” interface was a backwards step that would hobble “real” computer users. A real computer was operated by command line, and if you weren’t willing to go to the considerable trouble of learning how to use it then you probably weren’t worthy of the privilege. With binary blood running through my veins I was very much one of these people at the time, and very much wrong.

Let’s take a look at some history.

USB: The Universal Serial Bus was introduced in 1996. Intel quickly started doing everything it could to force the USB port onto the motherboard of PCs. Those ports sat there idle since most people could not figure out what to do with them. Then Steve Jobs came out with the original iMac. It did not just add USB; it eliminated all of the ports for mice, keyboards, printers, and everything else. In time, Windows PCs that came equipped with other ports were using nothing but USB.

Floppy drive: Back in the Apple ][ days, the Apple beat out some competitors PCs by replacing tapes with the floppy drive. Later, Apple replaced the 5.25 inch floppy with the 3 inch hard-covered floppy on the Macintosh and later Apple ][. But the iMac got rid of the floppy all together. The CD had already replaced the floppy for software distribution and, with relatively large (for the time) hard drives, the introduction of network storage, and USB thumb drives it eliminated the need for floppies. Eventually, Windows began to see the advantage of eliminating drives from laptops, though they lingered on desktops for a very long time.

CD/DVD: By 2011, Apple decided users didn’t need the CD/DVD drive on both the iMac and the MacBook. The network had replaced disks for software delivery, iTunes had replaced DVDs and CDs for video and music delivery, the cloud was there for storage. The desire to shrink the size of laptops led Windows devices to accept the no-drive design relatively quickly.

Wi-Fi: In the early 1990s, wireless networking was used mostly in industrial communication, but in 1998 Apple worked with Lucent (now Alcatel Lucent) to take advantage of the faster and less expensive wireless networking. It wasn’t even named Wi-Fi until 1999, but it gained popularity quickly.

Modems: Macs got internal modems in 1984 but they disappeared in 2008. The availability of the network in homes, offices, and hotels–Wi-Fi everywhere–has eliminated the need for a dial up connection. Modems hung on in many Windows computers for a long time, especially those intended for business use, but have now disappeared. A built in radio for wireless data on a phone network was never offered on the MacBook. It was widely offered as an option in commercial laptops, though it never became very popular.

Phone keyboard: The Palm Treo and the BlackBerry, the most successful early text and later internet content phones, depended on keyboards. The introduction of the screen-only iPhone in 2007 attracted a lot of criticism because of the decision to eliminate the hard button keyboard. The BlackBerry continued to dominate the market and the first Android phone featured a slide out keyboard. But it didn’t take long for the iPhone to nearly kill the BlackBerry and all but eliminate keyboard Android phones.

Interestingly, Apple’s success generally did not come on the invention of these components. Apple supported Firewire, which it designed with Texas Instruments, as an alternative to USB. But it was more complex and more expensive, and has lived on only as a super high speed connector. Even LG had brought out the touch keyboard Prada ahead of the iPhone. Wi-Fi technology was probably the only technology where Apple deserves credit for being the first and even here it is not responsible for the invention.

Apple’s actions leverage the company’s ability to see the consumers’ use of new technology before the competition and, almost as important, its willingness to get rid of technology as better becomes available. It has been a key to Apple’s success, with Apple Pay just the latest such innovation.

Data: The iPhone 6 vs. the 6 Plus in China

Internal data I have access to from Baidu in China allows me to see a picture of what is happening at ground level in terms of daily active users by device on Baidu’s network/app distribution platform. Baidu is the largest search engine in China both by use and revenue and their app distribution platform represents over 50% of the app distribution share and is growing. This data comes from analytics of devices that are accessing Baidu’s app platforms, not their search engine. They point out this data covers over 600m users.

There are a number of key takeaways from the most recent October data that relate to the iPhone 6, the 6 Plus, and the iPhone 5c.

First let’s look at the chart:

Screen Shot 2014-11-20 at 6.38.46 AM

When the iPhone went on sale in China at the end of September, it showed up on Baidu’s network at 0.9% of active use of all iOS devices. The 6 Plus didn’t show up at all. At the end of October, the iPhone 6 registered 2.6% of all active iOS devices and the 6 Plus 1%. Obviously, this suggests there are more iPhone 6s being sold in China than the 6 Plus–for now. Speaking with friends and colleagues in the region, it appears the shortage of availability of the iPhone 6 Plus is one of the major factors for this. I had several of them tell me customers were waiting more than a month, sometimes two, just to get their hands on the 6 Plus they ordered.

Knowing what I know about the region, I assume this will balance itself out and the anticipated 50/50 to 60/40 6 Plus to 6 split in China mix will play out. While I can’t quite use this data to interpret sales volume for these iPhones in October, I can use other means to estimate it in the coming months.

While these data points are interesting and I will continue updating this chart every few months, the uptick of the iPhone 5c may be the most interesting story line. As you can see from the chart, the iPhone 5c maintained a relatively steady flat line. But over the past few months the iPhone 5c has been gaining share in China. This seems to be counter to many of the assumptions of China as only a super premium market for Apple. Many were quick to point out the 5c was not targeted at China and thus expectations for it were tempered. However, things may be starting to change for the 5c and I believe there are a few reasons why.

One thing you realize when you study Chinese urban, and in particular, youth culture, is sometimes certain things/trends take a little while to make an impact in China. Many trends which start out global do not hit China and go big overnight. When I talked to some fellow researchers in China about this, a point was made that for the youth culture (who we believe is the source of the uptick in 5c sales) certain trends need to be established as culturally cool before they buy into it. It seems this is the common wisdom on the ground in China with regards to the 5c. It was not viewed as cool initially, since it was the “cheaper” iPhone but influences from metropolitan areas like Hong Kong have helped change the initial perception and it has become acceptible as an “entry level” iPhone. More succinctly, the 5c took a little while to be viewed as culturally acceptable since it is/was not the premiere iPhone.

If you read what I wrote about Xiaomi and Apple, you will recall I said Xiaomi’s phones are viewed as a cultural symbol for a young person who is upwardly mobile or moving up in society. From some dynamics I can see around the 5c, it seems it is also perceived now in a similar light as Xiaomi’s phones as a cultural status symbol. It helps the iPhone 5c is now also much closer in price to Xiaomi’s phones, especially the Mi4, with the heavy discounts coming to the later generation device. Given the iPhone 5c has a limited shelf life and no similar product was released last year, this dynamic may not last forever. However, I have a feeling once the iPhone 7 line come out and the iPhone 6 and 6 Plus are discounted in the region, we will likely see even greater penetration of iPhones in the exact same markets Xiaomi is looking to capitalize on. But, for the time being, it is interesting to see the dynamic of the 5c starting to play into the middle smartphone price tier of the Chinese market where Xiaomi has and continues to be quite strong.

There is one more important data point for the iPhone in China this report tells us. It relates to jailbroken iPhones. The number of jailbroken iPhones has been steadily decreasing. This is part of the reason why UnionPay being supported is a big deal. As I studied behavior of jailbroken iPhone users in China, the heaviest of whom were on the iPhone 4 and 4s, it became clear those who jailbroke their devices were not investing in Apple’s ecosystem. Which would have been a concern to Apple’s overall China strategy.

The Baidu data shows us since the 5s and 5c, the number of jailbroken devices is less than 10% of those devices, and less than 1% on the current iPhone 6 and 6 Plus models. Meaning, more and more iPhone consumers are not jailbreaking their devices and thus investing, to some degree, in Apple’s ecosystem. UnionPay helps this and both are very positive signs for Apple’s ecosystem story.

Mozilla, Apple and Google

The Mozilla Foundation, makers of the Firefox web browser, have announced the end of their partnership with Google to be the default search engine on the US version of the browser in favor of Yahoo. I wanted to pen a few thoughts for Tech.pinions Insiders on the significance of this deal, especially when taken together with Apple’s recent moves away from Google. I’m going to share some quick stats and some thoughts on each of them.

Browser market share – Firefox waning, Chrome gaining

First, off, let’s look at desktop browser market shares. Firefox has been in steady decline and Chrome has been steadily increasing, and it’s amazing how the two have largely traded places over the last couple of years:

Chrome and Firefox share change

Just in the last year or so, Chrome has risen from 16% to 21%, while Firefox has fallen from 18% to 14% or so, according to those same NetMarketShare stats. Arguably, Google no longer needs Firefox anywhere near as much as it once did, since it’s been slowly taking browser share from Firefox over the last few years. Interestingly, Internet Explorer’s share has barely moved over the same period and it remains dominant at around 58%. Firefox is becoming less and less relevant, and driving less and less traffic to Google as a result, which may be one reason why Google was willing to allow the agreement to lapse.

US search market share: Google constant, Microsoft and Yahoo trading places

In the US, which is where the new deal between Firefox and Yahoo applies, the positions are rather different. Here, it’s Google that’s been virtually static, at around 66-67%, while Microsoft and Yahoo have largely swapped users:

US search market share

Interestingly though, Yahoo’s share has started to stabilize in the last few months, as has Microsoft’s. The shift seems to have stalled recently, perhaps as a result of some of Yahoo’s successes in transforming its search products. The funny thing about that, of course, is both providers use the same underlying provider: Bing. Microsoft benefits both from Yahoo’s share (I estimate a large majority of Yahoo’s search revenue goes straight to Microsoft), and from its own share, so to some extent this doesn’t matter. The percentage of US searches powered by Bing hasn’t moved more than half a percentage point in the last year and a half:

Powered by Bing share of search

The key thing, therefore, is for Microsoft and Yahoo to find a way to stop taking share from each other, which is expensive but ultimately doesn’t benefit Microsoft much either way, and to start taking share from Google instead. Hence this deal.

Google’s traffic acquisition costs: climbing as a percentage of revenue

Google has long provided the vast majority of the funding for Mozilla – around 90% by most estimates. This partnership has been mutually beneficial, as Firefox has very few other sources of funding and Google has derived a great deal of traffic from Firefox. However, just as Google and Apple began as complementary partners but became competitors, so Mozilla and Google have slowly become competitors too, as Mozilla launched Firefox OS in competition with Google. What began as an alliance against the dominance of Microsoft has become a philosophical fight between erstwhile partners who now see the world differently. Mozilla has tried to out-open Google in recent years, both in its browser and in its mobile OS, and it’s possible these philosophical differences also played a part in the move away from Google and into the arms of Yahoo.

Despite Firefox’s slow decline however, traffic acquisition costs (TAC) paid to partners like Mozilla have been rising steadily as a percentage of Google’s revenue from its own sites:

Sites TAC

So, even as Google is able to drive more and more traffic to its own search engine through browsers it directly controls on both the desktop and mobile, its cost of acquiring that traffic has been rising faster than its revenues. Why is that? Well, this is where Apple comes in. An increasing amount of Google’s total search traffic comes from mobile and Apple is a very significant source of search traffic in mobile, through iOS, where Google is the default search provider. Much of the almost $1 billion in revenue Google pays out to partners each month goes to Mozilla and Apple, with the majority now likely going to Apple.

The likely impact of Google’s two biggest external referrers moving away

So we now have a situation where Google’s two largest external referrers for search are moving away from it. Mozilla explicitly, in the form of the new partnership with Yahoo, and Apple less explicitly with the insertion of Siri and Spotlight search (both powered by Bing) between users and a Google.com search results page. On the plus side, Google’s TAC should start to fall as it stops paying Mozilla for US search, and to a lesser extent as iOS and Yosemite start to drive less traffic to Google. But more significantly, Google’s search revenue growth may be dented somewhat by both moves. Neither is going to damage Google’s dominant position in search, but together these moves may finally start to move market share not just between Microsoft and Yahoo but between the Google and Bing camps. To be clear, with Google now in second place in desktop browsers and dominant in mobile browsers, it will drive an increasing amount of its own traffic from properties it owns. But more and more of the traffic it doesn’t own will now start to shift away to others by default, and apathy is a strong force in these areas – default options tend to become actual options for many users.

The biggest risk to Google remains Apple

The only thing that could cause more significant damage for Google is if Apple switched the default search provider from Google to Bing or Yahoo in Safari. So far, all its moves away from Google have been subtle and barely discernible to users, because they’ve occurred in scenarios that don’t involve a page of blue links. I think that’s in part because Apple recognizes Google really is superior to competing search engines when it comes to traditional search results. I’ve tested both Bing and DuckDuckGo as default search engines on iOS over the last few months, and found both to be noticeably inferior when it came to more obscure searches. Apple has shown before it’s willing to (temporarily) damage the user experience in order to make a strategic shift away from Google – the big question now is whether it sees that move in retrospect as a mistake or as a price worth paying.

What Foxconn Making a Nokia Tablet Tells Us About the Future

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

The release states:

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

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

The release goes on to point out:

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

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

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

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

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

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

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

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

The New Dell vs the New HP

As I sat through various sessions at the recent Dell World event in Austin, TX, I could not help but think about the new Dell vs the new HP.

In a recent Techpinions article, I wrote about how Dell, as a private company, was making major strides in growing and becoming a profitable company again. However, in one conversation I had with a very high level executive, he pointed out that, when they were a public company, at least a quarter of his time was spent dealing with Wall Street and the legal matters and pressure brought by shareholders and that this took away from him spending as much time as possible on products and services and meeting the needs of their customers. He said while he still has to work to keep his division profitable, the majority of his time is now focused on products and their customers and pointed out this is why their overall sales grew close to 20% in the last quarter.

Dell also has the advantage of all of the various divisions working together in harmony and supporting each other. Michael Dell told me two thirds of their enterprise business comes through their PC division and he has allocated a specific amount of money towards R&D with an eye on creating innovative products. This is the new Dell.

Now contrast this with the new HP. The new HP, which includes the PC and printing division, is still part of HP and very much a public company. I asked Michael Dell what he thought of the HP split and he said this was done strictly for the shareholders. That is not news. All one has to do is look at the structure of this deal and its impact — a decrease in HP employees and the goal of splitting lower profitable businesses from the HP Enterprise company. You can see Wall Street written all over this restructuring.

But by staying a public company, they still have all of the pressures of Wall Street and, more specifically, have to lead the company on the whims of their shareholders, at what I consider the expense of their customers. Since the PC and printing division is now separate, with their own P & L, how will this group work with the enterprise group in an integrated way while still being very separate. This is an important question HP has not addressed as of this writing.

Also, the PC business and printer business are very different. I know this well. When Carly Florina was CEO at HP, she put the PC business under the printing business and made the head of the printing business, Vyomesh Joshi or VJ as he was known, head of both groups. VJ knew printers but his grasp of the PC business was challenged. I was asked to help with the PC marketing strategy for his team and at the time Ms Fiorina tried to tie the two together and create the equivalent of bundled PC/printer deals that pretty much failed. Each product has a different purpose and while they can work together in certain settings, each stands alone when it comes to focus and functionality. Bringing printers and PCs together again I believe will prove a real challenge for the leadership of this new HP division.

By the way, this will be the third time they have combined two groups under one head. In March of 2012, HP put the PC and printer group under Todd Bradley and that experiment did not go well either.

I have concerns about how successful this new HP will be, especially the PC and printing division. They have Lenovo taking aim at their market share and even Apple is eating into some of HP’s enterprise business. In fact, I am certain the Apple/IBM partnership will make competing, especially with HP, a major focus in the new year. At the low end they have new PC players that are about to come out of the Shenzen ecosystem and tie local content to competing tablets and PCs by the end of 2015, potentially eat even more into HP’s international business. Add to that the fact they have constant pressure to perform for Wall Street and the shareholders and I see an HP being challenged more than at any time in their history.

Algorithms Aren’t Always The Answer

On November 17 in his weekly Monday Note, Jean-Louis Gassée wrote: “App Store Curation: An Open Letter To Tim Cook“. He summed up his own letter best when he said:

With one million titles and no human guides, the Apple App Store has become incomprehensible for mere mortals. A simple solution exists: curation by humans instead of algorithms.

Is he right?

Where Have We Heard This Before?

When I read Monsieur Gassée’s article, I was immediately reminded of Beats. When Apple acquired Beats, Jimmy Iovine also opined on the importance of human curation, this time in regards to music.

There is a sea of music, an ocean of music and absolutely no curation for it. Your friends can’t curate for you.

(P)eople need navigation through all this music and somebody to help curate what song comes next.

Right now, somebody’s giving you 12 million songs, and you give them your credit card, and they tell you ‘good luck.’ … I’m going to offer you a guide … it’s going to be a trusted voice, and it’s going to be really good. ~ Jimmy Iovine

Algorithms Aren’t Always The Answer

What’s going on here? I thought this was the age of algorithms. Google was going to allow us to search the world’s information and give us driverless cars. Pandora was going to use the Music Genome Project to give us the music we loved. And eHarmony was going to match us with our soul mate. Yet now we’re retreating to human curation? What’s gone wrong?

Stereotypes And Subjectivity

A cowboy and a biker are on death row and are to be executed on the same day. The day comes, and they are brought to the gas chamber.
 The warden asks the cowboy if he has a last request, to which the cowboy replies:

“Ah shore do, warden. Ah’d be mighty grateful if ’n yoo’d play ‘Achy Breaky Heart’ fur me bahfore ah hafta go.”

“Sure enough, cowboy, we can do that,” says the warden. He turns to the biker, “And you, biker, what’s your last request?”

“Kill me first.”

Funny right? Only it’s a stereotype, not a reliable rule. In reality, The Biker may have liked ‘Achy Breaky Heart’ and The Cowboy may have preferred the gas chamber to having to hear that song even one more time. Machine Learning is great at learning rules. But human beings don’t use algorithms. We use common sense. And there’s nothing harder to replicate than common sense.

common sense

Machine Learning

Turns out we need to distinguish between Machine Learning and Common Sense. In his book “Everything Is Obvious,” Duncan J. Watts explains why computers use Machine Learning instead of common sense:

(Machine learning) is a statistical model of data rather than thought processes. This approach…was far less intuitive than the original cognitive approach, but it has proved to be much more productive, leading to all kinds of impressive breakthroughs, from the almost magical ability of search engines to complete queries as you type them to building autonomous robot cars, and even a computer that can play Jeopardy. ((Excerpt From: Duncan J. Watts. “Everything Is Obvious.” iBooks. https://itun.es/us/jw4lz.l))

Common Sense

Machine Learning is great. It makes search engines like Google work and it may someday give us driverless cars. But Machine Learning can’t curate App Stores, Music Stores and dating sites because it measures things differently than we do. Which reminds me of another joke:

An attorney, an accountant and a statistician went deer hunting. The attorney loosed his arrow at the deer but it landed five feet beyond the deer. The accountant loosed his arrow at the deer but it landed five feet short. The statistician then began to wildly celebrate yelling: “We hit it! We hit it!”

The point? The statistician was obviously using the wrong method to determine what constituted hitting the deer. Computer algorithms use the wrong method too — not because they’re stupid but because they’re smart and because the rules we use to guide our preferences are not subject to smart, logical constructs.

(V)irtually every everyday task is difficult for essentially the same reason—that the list of potentially relevant facts and rules is staggeringly long. Nor does it help that most of this list can be safely ignored most of the time—because it’s generally impossible to know in advance which things can be ignored and which cannot. So in practice, the researchers found that they had to wildly overprogram their creations in order to perform even the most trivial tasks.

(C)ommonsense knowledge has proven so hard to replicate in computers—because, in contrast with theoretical knowledge, it requires a relatively large number of rules to deal with even a small number of special cases.

[pullquote]For computer to understand us, you would have to teach it everything about the world.[/pullquote]

Attempts to formalize common sense knowledge have all encountered versions of this problem—that, in order to teach a robot to imitate even a limited range of human behavior, you would have to, in a sense, teach it everything about the world.

Excerpts From: Duncan J. Watts. “Everything Is Obvious.” iBooks. https://itun.es/us/jw4lz.l

Conclusion

Robert A. Heinlein once said:

Don’t explain computers to laymen. Simpler to explain sex to a virgin.

It turns out, trying to explain humans to a computer is even more difficult. And not half as much fun.

For a computer to understand my music, my dating, or even my app preferences, it would need to know almost everything there is to know about me. Even then it wouldn’t be able to apply the same mishmash of rules to the problem as I would.

Human curation seems like a step back to me. But when it comes to providing humans with what they prefer, that step back may end up being a huge leap forward.

How Worried Should Apple be about Xiaomi?

I’ve been asked this question often and feel there is a great deal of misunderstanding regarding the dynamics and strategies of the two companies. I was quick to point out during Xiaomi’s rise that they pose more of a threat to Samsung and this has proven to be true. Samsung’s issues are a combined double whammy from both Apple on the premium end and Xiaomi in the mid-to-low end. Xiaomi is on my radar first and foremost because they are building a brand. My belief is a good brand is one of the hardest things to build globally but also one of the most sustainable efforts a company can engage in, especially in the worldwide consumer market. Xiaomi is a threat for this reason. But to believe Xiaomi disrupts or threatens Apple is an incorrect assumption. Let’s look at a few data points to highlight this.

In a report from Morgan Stanley where their analysts model the iPhone 6 and 6 Plus upside, several charts from their survey data are insightful. First there is this one:

Screen Shot 2014-11-17 at 8.29.48 AM

This chart highlights repurchase intent by brand. Notice which companies decreased in “brand repurchase intent” — Samsung and Lenovo. This chart is telling of consumer sentiment more than anything else. Apple and Xiaomi remain “sticky”, while the rise of HTC and Huawei show many global consumers willing to look at new options in the Android hardware landscape.

Another chart from the survey is insightful of the dynamic between Apple and Xiaomi.

Screen Shot 2014-11-17 at 8.31.08 AM

Owners of the specific devices and brands that were interested in the new iPhones were plotted. Xiaomi was included due to the lack of intent to switch from the Xiaomi brand to the new iPhones. This is a notable data point, but it is one that does not tell the whole story.

report in the Financial Times last week had a very specific sentence that highlights an incredibly important distinction between how Chinese consumers view Apple and Xiaomi respectively.

As one Beijing-based entrepreneur puts it, “the tech grad who has worked at Baidu as an engineer for two years, that’s their target gatekeeper and prestige consumer. In China’s tier two and three cities, that is someone people look up to. People want to see what kind of phone such a guy is using.”

Creating an aspirational brand at the low end of the income scale is an accomplishment, and it is difficult to replicate. Xiaomi’s products are seen as a cross between a commodity and a luxury item, although one techie notes that while many of his peers use its phones “eventually they end up making more money and buy Apple”.

Several key takeaways from this statement back up a lot of the feedback we hear from China. Xiaomi is doing as good a job as any of creating a premium brand for the low-to-mid range of the smartphone market. Young Chinese consumers who are upwardly mobile are choosing Xiaomi as their starting point. This has an effect on the aspirational middle class at the early stages of their mobility. They are not the phone for the poor but also not the phone for the rich. The previous quote makes this clear. Xiaomi is an aspirational brand for those on their way up. Apple is their ultimate aspirational brand once they have “made it”.

External appearances and what that says about your status is central in China. A Xiaomi phone says, “I’m not at the bottom. I’m on my way up”. An iPhone says “I’ve made it.” This is a powerful and important distinction to understand at a psychological level about Chinese consumers.

Xiaomi is the Gateway for Apple

The more I study these dynamics, the more I am convinced Xiaomi is paving the way in China for Apple. I say this for a few reasons. The first is because what Xiaomi has copied from Apple is more than just hardware and software UI. They have actually copied their ecosystem. MiCloud is, in concept, just like iCloud. Store images, documents, and more in the cloud and access them from any browser. They have their own app store, messenger, TV box and interface, and more. Many of the things about Xiaomi’s ecosystem beyond hardware and software are similar to Apple’s. They are providing the Apple ecosystem but with a lower cost of entry.

At first I believed this would be a challenge to Apple but then realized it is good for Apple. Xiaomi is grooming customers to understand the value of an ecosystem with multiple touch points. Customers are getting content across a number of different screens and seeing the convenience of the multi-screen era. This is new in China and nonexistent in other emerging markets for now. Xiaomi is giving low end and mid-tier consumers a small taste of the Apple ecosystem but without the significant lock in.

Obviously, for many who can’t afford to move up or get Apple hardware, the Xiaomi ecosystem will suffice. But in China specifically, the transition of Xiaomi customers to the Apple ecosystem will increasingly become attractive due to the Chinese consumer psychology. Many Xiaomi customers may start in their ecosystem but many will also not stay there.

This “moving up” mentality of consumers is exactly what Apple hopes, I believe. Their strategy is to play at the premium tier and hope that, as emerging market consumers mature from their first device and begin to refine their needs, wants, and desires with technology, over time they will consider Apple’s full solution.

In China, I believe Xiaomi is unknowingly paving the way for their customers and leading more and more of them to Apple’s door. Those who believe Apple should be worried about Xiaomi miss the point that Xiaomi should be worried about Apple, at least in China. This is a story line I will maintain throughout 2015.

Apple Accepts UnionPay: A Huge Step for Their Ecosystem in China

Apple has just announced they have added UnionPay support as a payment option for customers in China for purchases in the iTunes App Store. This is a big deal. There are dynamics at play with regard to the China commerce market and particularly around e-commerce trends I will get into for our subscribers when I do a global e-commerce update before the end of the year. Several years ago, I began studying why there were so many jailbroken iPhones in China. It turns out apps were the answer. To use Apple’s app store, even to download free apps, you have to have a supported payment method like a credit card. While Apple in China accepts many global credit cards, there is a card they did not accept and it is by far the most dominant offline payment card method in China — UnionPay.

From Apple’s press release, Eddy Cue offered the following statement:

“The ability to buy apps and make purchases using UnionPay cards has been one of the most requested features from our customers in China,” said Eddy Cue, Apple’s senior vice president of Internet Software and Services. “China is already our second largest market for app downloads, and now we’re providing users with an incredibly convenient way to purchase their favorite apps with just one-tap.”

UnionPay is so dominant an offline payment method in China it is common knowledge to global retailers that, to attract Chinese consumers, accepting UnionPay is essential. This move opens the door to Apple’s ecosystem in China in ways that were a huge roadblock in the past. Even though Apple has a significant number of extremely high end users in China and who are likely have a credit card there is, thanks to the secondhand market, probably upwards of 50m or more users who are more likely to have a UnionPay debit or credit card over anything else. I strongly believe there was a significant number of iPhone users in China who were not investing in Apple’s software or services ecosystem for this very reason.

UnionPay is also a member of the EMVCo which means the foundation for ApplePay in China is currently being laid.

There is always the question of how much software the Chinese actually pay for. We know from Xiaomi’s ecosystem their revenue comes from hardware not software and, in all likelihood, their software revenue-per-user is less than $10. However, Apple has an entirely different kind of customer base than Xiaomi — one that does and can spend. For them, UnionPay opens the door for Apple to generate more revenue from apps and services in the greater China region. This is also a boon for developers who now have a viable way to monetize their apps in China as well.

The big question will still remain around AliPay. Remember that AliPay is the leader in e-commerce in China where UnionPay is the dominant offline purchase method. The three largest online payment methods are AliPay, Tenpay, and UnionPay in that order. AliPay is likely next on Apple’s list as doing so aligns nicely with Apple’s focus and execution in China.

Overall this is another key step for Apple and their ecosystem in China. Hopefully over the next few quarters we will get data to help us quantify the impact of this deal.

BlackBerry and Samsung: Will a security partnership help either company?

Yesterday, Blackberry held an event where one of their announcements was a deal with Samsung to help add a deeper layer of security to Samsung/KNOX devices. Given the criticism of KNOX’s security, questions surrounding its integrity aren’t surprising. In my view, it’s a recognition/admission that Samsung needed help in the security arena if they wanted to be viewed as a valid player in more secure enterprise accounts.

I view this deal more as a necessity for Samsung than for Blackberry. Blackberry’s BES 12 operating system already supports Android in general, along with iOS and Windows Phone. But Android at large continues to have a negative opinion held by many IT administrators and since Samsung is hands down the leading Android vendor in the enterprise, this view carries over to Samsung to a degree. This move could help Samsung fill the void in their offerings, assuming Blackberry is successful in growing their software and services accounts of BES 12 over the next year.

While BES 12 is a cross-platform enterprise mobility management product, iOS is still standing in Blackberry’s way. iOS continues to increase its dominance in many of the key accounts where Blackberry’s value adds are relevant. In fact, I have heard from many IT managers that more and more groups inside their enterprise are using or being deployed only iOS devices for their teams. For teams where heightened security is more of a need, this is happening even more frequently. If this trend continues then it raises the question of the need for cross-platform, outside of a very general solution to cover all employees which can come from many different providers.

Blackberry is at least moving in the right direction with BES 12. By bringing Samsung along for the ride, it gives them a partner they can have deeper integration with in the hopes a higher degree of cross-platform security is needed within a specific group or company function.

As both RIM and Samsung pointed out in the release, it is about choice. Ultimately, that is the angle they hope to exploit.

Takeaways from Samsung’s Developer Conference

At today’s Samsung’s Developer Conference, they circled around four key trends: digital health, Smart Home, wearables and virtual reality. From these themes, there were a few elements I thought were interesting.

1) Voice of the Body: This theme is a blend of digital health and wearables but as a focal point it is quite interesting. The overall concept is the combination of both sensor loaded wearables and big data to interpret what and how your body is speaking to you and helping you make key decisions based on what your body is saying. An example would be if your heart rate suddenly spikes, perhaps in reaction to anger or stress, you could be notified to calm down, take deep breaths, etc. Or, some day when a sensor can do blood glucose readings, if your blood sugar is getting low or trending downwards (before you even notice) it can alert you that you need to eat and perhaps even give you diet suggestions. This concept has merit because it is where wearable sensors begin to make sense and add value.

From a digital health perspective, wearables and the sensors they encompass, should help us make better decisions about our health, fitness, diet, and more. The “voice of the body” is a great narrative to understand how this vision can become reality. Interestingly, Samsung released a developer kit loaded with a sensor called Simband along with the SAMI digital health platform. It looks like a Gear S but has six sensors in it that function independently or together to do interesting things. The platform and SDK are available for developers to create software and leverage the extensive sensors on the band to come up with interesting applications and use cases. Here is a look at the sensors and you can visit this page for a more detailed look at each of them.

Screen Shot 2014-11-12 at 4.49.06 PM

2. Smart Home: Samsung bought Smart Things earlier in the year and are looking to integrate it into many other forms of smart home applications. Samsung again is making a platform play here, recognizing they can’t build all the hardware and hoping smart home companies will work with their platform for connected home applications. There is still too much fragmentation in this space and no clear winner yet for a standard. That being said, the programmability of the Smart Things platform is interesting. One of the elements of a connected home that is of value will be automation. Meaning, when something happens, a chain reaction of other automated things happens. In essence, your home becomes a computer. An example Samsung showed was an automated task one of their developers created where, as he got near his Scotch cabinet, a light came on and a symphony of angelic voices filled the room. Kind of cheesy but you get the point. The automation of a number of connected objects working in unison is a key element still missing in many mass market connected home applications.

Time will tell how this plays out for Samsung. Especially with competing ecosystems and standards being driven by other major players.

Virtual Reality: I’m quite bullish on Virtual Reality. Samsung is looking to take it as mainstream as they can. It looks like the price of their VR headset will be $199 and it only works with a Note 4 (which they will likely sell approx. 16 million of globally in the next six months). Regardless, Samsung is looking to take the lead in Virtual Reality and it is a category worth leading. They will of course not be the only player, but leadership also means development from time to time. VR has a bright future and we need as many companies as we can developing the market for it.

They released something that may help called Project Beyond. This project uses a camera custom built by Samsung which captures immersive 3D video in HD and from every angle. They intend to set these cameras up in key locations and when you use the Samsung Gear VR headset you can tap into these cameras and it will seem like you are there. The demo I tried was of a camera set up at a park in San Francisco. You put the VR on and it is like you are standing in that location and can look around to see all the vantage points. You could imagine putting these cameras up in major tourist locations. Not everyone can travel there in person but many can see what it looks like to be there.

We are just scratching the surface with VR and have a long way to go but, as I said, it needs backers to develop the market. Good for Samsung for taking a leadership position.

Ultimately, I feel Samsung should be expanding these efforts beyond their own ecosystem. I don’t believe Samsung’s is strong enough or large enough to truly drive these advancements on their own. Their VR solution, their Smart Home platform, even their wearables and digital health platform should be extended to other platforms like iOS for example. I understand why they are locking it to their hardware but, in this case, I think it is the wrong move. If Samsung believes their future is in services then they have to be cross platform and cross hardware.

The Idiocy of CVS and Rite Aid

dunceBy now you have probably heard CVS and Rite Aid have disabled their NFC radios in check out terminals in order to block Apple Pay and Google Wallet. The reason is they, along with Walmart and about 45 other merchants, are working to create a competitor called CurrentC that eliminates their paying a fee to the credit card companies and gives them the ability to track what you buy. This so they can send you ads and follow up on offers you might be interested in based on what you have bought in the past. They already have loyalty card programs that do this but many don’t use these loyalty cards and therefore the retailers have no clue what a person bought. With CurrentC, they get everyone to tell them what they purchased so they can target everyone with ads and offers. 

From what I hear, CurrentC does not work well and, while it may be good for the retailers, it most likely will anger many customers if they try to push this on them. The concept of tracking what a person buys has not worked well for Google Wallet. Google Wallet also tracks what you buy and the credit card companies are obligated to send that data back to Google so Google can then target you with contextual ads. For example, if I bought a lawn mower at Home Depot, Google wants to know so they can send me ads about lawn fertilizer, leaf blowers, etc. I spoke to a couple of credit card companies who did not want to support Google Wallet because they did not want to be the middle man sending private data back to Google so Google could target their customers.

This is one of the reasons they don’t like Apple Pay. Apple does not share what a person has bought with the retailers and only uses a token from the banks to create the transaction. Of course, the merchant can track what they bought through their terminals but they have no way to target customers with ads if they don’t have personal information in their database to target after the sale.

What irks me the most about this is, from what I know of retail, the goal is for me to buy stuff from them and for them to take my money. They should care less about how they get my dollars. Their reason to exist is to serve the customer and take my hard earned cash. Putting up barriers to taking my money is idiotic. Now, I have to admit, the root of my thinking lies in the fact so many times when I go into a store there are long lines of people waiting to check out because they don’t have enough cashiers. When this happens, I always ask myself, “Why in the world don’t they have more people taking my money and servicing me and others in a timely fashion!”

I also admit I am spoiled by Apple. I can walk into an Apple store, pick up what I want, take it to any of their services reps who then use a handheld scanner to take my credit card and I am out the door in minutes. Now, with Apple Pay, that experience will be even faster.

The backlash against CVS and Rite Aid is pretty strong. From what I have read, CVS has conveniently not commented on this and Rite Aid’s official position is they continue to review options on the way people can pay. All Walmart has to add is CurrentC is in the best interest of the customer. Really? As a consumer, I am already bombarded by ads from Google and others and am not inclined to now have CVS, Rite Aid and even Walmart join in the fray. That is why what Apple is doing is so important and is the better business model when it comes to the consumer. They protect my privacy and keep me from being besieged by merchants who could care less about my privacy and only want to bombard me with ads.

I understand the need for ads and, in fact, there are some ads I want. I happen to be an avid traveler, foodie and am very interested in scuba diving gear. Ads related to this get my attention. However, as I was researching this column I decided to check how many ads I get in email and via unsolicited ways each day and found out that, on average, I get about 120 ads I have no interest in. If I used CurrentC I would get even more.

Rob Pegoraro over at Yahoo has written a great piece — “Why Some Stores Won’t take Apple Pay and how to Punish Them“. It is a good read and gives even more details on how CurrentC works and why these retailers want consumers to use it.

CurrentC is only in beta now and won’t actually launch until 2015. On a personal level I would never use CurrentC and if I should have to buy something from these retailers I would just use a credit card with the highest transaction fees. I also suspect a lot of people will not use CurrentC either when they realize you have to give them your social security number to even sign up. These retailers need to wake up and understand they should not dictate how people pay them. Their goal is to take my money and make it easy for a consumer to do it in any reasonable way a transaction can take place. If not, they can expect a backlash from customers and they would deserve it.

Xiaomi: Just a Hardware Company?

Whether or not Xiaomi is just a hardware company or is truly an internet company as founder Lei Jun continually emphasizes came into question with last week’s Wall St. Journal report. The statistic that surprised many was the “94% of revenue made in hardware” figure. It was generally believed Xiaomi sold their hardware at cost with little to no margin and made their profits with internet services. However, if the Wall St. Journal report is correct, then that assumption has been flawed, at least up until now.  What’s fascinating, and perhaps enlightening, about what we learned from the report is they have effectively figured out how to still get average OEM net profit margins. Xiaomi’s BOM cost of their popular Red Rice Phone is about $85 and sells for $130. Their popular Mi3 has an estimated BOM cost of $185 and sells for $270. By being able to manage the supply chain and, after other hard costs, I estimated hardware net profits of approximately $23-$26 per phone sold.

What is interesting to ponder with relation to the Wall St. Journal report is why Xiaomi’s profit only increased 85% when handset shipments increased 200% YoY. One would think, given this hardware model they are employing, profits would scale with such a dramatic increase in unit sales. Clearly Xiaomi incurred some significant costs, perhaps in CapEx, or in global expansion efforts, which offset their profit growth.

Another explanation for the discrepancy in growth was a higher mix of products like the RedMi and RedMi Note which, in a BOM cost analysis I did by looking at their suppliers, suggests this product was sold well below the average of $23-$26 estimated margin per phone and may have actually been sold at a slight loss. In fact, non-public reports I have read hint that Xiaomi initially prices their phones at or just below cost but then quickly drives costs down allowing them to begin to yield margins that weren’t there initially. Xiaomi in this case is a lot like Dell, in that they only order the phones to be made once the sales are taken in. Xiaomi manages zero inventory and only builds phones in bulk for the orders they have taken. This is one reason the order availability is capped at a certain level. By managing supply chain tightly, and driving product costs down over time while capturing those margins in real time, they have effectively been able to generate the kind of hardware revenue the Wall St. Journal report indicates. That being said, they can not simply be a hardware company. And ultimately their growth prospects are challenged with just this business model. This is why they are seeking to raise capital. A cash infusion is necessary for Xiaomi to grow and grow quickly, which they’ll need to keep capitalizing on the mind share they currently have.

Ultimately however, I believe Xiaomi is still laying the critical groundwork to be the internet services company they desire to be. Being in the hardware business alone is not a sustainable business for many global OEMs. I have spoken with several high-up execs at Xiaomi and was told that, as of late 2014, they are generating around $21 million USD in revenue from their app stores (game app store, mobile app store, and books app store). Which means it is likely 2014 profits should have quite a bit more balance between hardware and services. Xiaomi is on pace to again increase handset shipments ~200% — yet the WSJ report only estimated a 75% increase in profits this year. The curious variable of why profits are not more closely matching explosive YoY handset shipments is a concerning element of the overall Xiaomi story.

Can Xiaomi go international? That remains to be seen. Their sales in markets outside of China have been nominal to date but there is increasing brand awareness in non-Chinese markets. Scaling internationally will be a challenge and they have to be more than a hardware company to do it sustainably. Xiaomi is in the news a lot but I still have my doubts about their long term fate. If China is the only market they are relevant, this is not a bad thing. Xiaomi can have a strong and profitable regional business and still be successful.

Google’s Ads: Defense or Offense?

I recall not too long ago Google did zero advertising. “Just Google it” was spreading virally and Google was growing and had no need to spend money on marketing. Slowly but surely over the past few years, Google has stepped up its advertising efforts. Which, and some may disagree, I interpret as a sign of their slowing growth. Myself, along with others, have pointed out that Google’s long term growth prospects have been challenged. From internal discussions I have had with execs there it seems this is well known inside the organization. I have been observing two distinctly different advertising efforts and I have a few observations.

North American Advertising

Google has, all of a sudden, begun advertising Android in several prime time commercials in the US/Canada market. I see several fundamentals causing Google to get more aggressive in Android marketing.

  1. Samsung’s US dominance is declining. Samsung is currently in a very vulnerable position in the US. Many fail to realize Samsung’s aggressive marketing and sales commissions helped get them to where they are today in the US premium segment. Yet Apple still sells nearly ~2:1 more phones than Samsung in the above $500 wholesale price tier. Despite Samsung’s best efforts, and a massive internal effort to become the leading US smartphone vendor, they have yet to knock off the king of the hill. Furthermore, it is doubtful they will in the foreseeable future. It is not a secret that Google makes more money from iOS consumers globally but Samsung was helping them get the profitable US consumer more embedded to Google’s services. If Samsung’s growth slows or declines and it is not picked up by another Android vendor but instead by Apple, Google could be loosing key advantages in the US.
  2. Carriers backing iPhone 6/6 Plus more than other premium Android devices. In case you haven’t noticed, nearly every major carrier commercial running in prime time right now is for the new iPhones. This may very well be a part of the agreement between the carrier and Apple but the point remains. More promotion is going on currently for the new iPhones than any other US smartphone. Google must recognize Samsung alone can’t push the Android agenda forward in the US. Yet Motorola and LG are not equipped to embark on the same kind of marketing blitzkrieg Samsung can.

India

Google winning in India is not a slam dunk. I’m not sure many realize this. India is a completely green field when it comes to smartphones and smartphone ecosystems. In fact, Microsoft even has a chance in India. Google can not afford to be a minority player in India and they know it. Android One is Google’s push at getting Android deeply engrained into the Indian mobile ecosystem. Their challenge is things like Facebook, WhatsApp, and even other app stores/distribution methods, are more dominant than many Google services. Which is why Google is advertising on behalf of several Android One OEMs in India to help spread the word and drive the brand/ecosystem. I expect Google to be ruthless in competing for India. Which is fantastic for Indian consumers but may be quite challenging for competing ecosystems and even to a degree competing hardware vendors.

What Google has me thinking about with regards to their marketing strategy is a lot like Intel’s. When a vendor picked an Intel chipset, Intel offers marketing assistance as a part of that design win. Most PC OEMs do not shoulder the bulk of their marketing — Intel does. It is one of the main advantages they have had with OEMs over AMD. Intel’s chips may be more expensive but they will help/do the bulk of the outbound marketing for you. Similarly, Google is beginning to do the same. Understanding that their partners are not good at marketing nor can they afford big marketing budgets, it seems Google is willing to take on the marketing efforts for many of their partners.

What impact this has on their margins is a key metric to watch. Their growth is already stalling and they currently have the most profitable customers they are going to get to fuel their current business model. Spending marketing dollars to acquire customers who will they will reap less revenue from is both a necessity but also risks off-setting any gains.

Obama’s Strange Challenge to Net Neutrality

Obama banner

For months, President Obama has been under pressure from liberals, many Democrats in Congress, special issue groups such as the Electronic Frontier Foundation, and a fair chunk of the tech companies such as Google and Netflix to act to regulate internet network neutrality. Today he finally took action after waiting for a Republican election victory that could well make the action impossible.

The main effect of Obama’s statement is to move the regulation of internet communications from Title I to Title II of the Telecommunications Act. Services under Title I, designed primarily for cable TV, are lightly regulated. Title II is designed for telephone services and would require approval–and might provide for outright blockage–for such step as extra charges for the delivery of higher network speeds for things like TV content.

Personally, I believe the issue to be extremely complicated and find it difficult, perhaps impossible, to see a simple decision to support either side. Obama’s position looks like he is throwing support to liberal Democrats and law school and computer science departments. Obama led EFF to announce:

This is an important moment in the fight for the open Internet. President Obama has chosen to stand with the us: the users, the innovators, the creators who depend on an open internet. But the fight isn’t over yet: we still need to persuade the FCC to join him. Stay tuned for ways you can help.

Conservatives and regulation foes found this a simple move to oppose. Says libertarian Berin Szoka, president of TechFreedom:

Title II is a wolf in sheep’s clothing. A radical fringe has dressed up a government takeover of the Internet as ‘Net Neutrality.’ Google, Facebook, and the NAACP haven’t jumped on the Title II bandwagon, because they know better. Imposing public utility regulations on the Internet won’t create Net Neutrality, but the heavy hand of government will crush innovation and investment in broadband.

But the history of the situation makes it less likely that post-election Obama can change anything. First of all, the current position of the FCC goes back to January, when the D.C. Circuit Court of Appeal struck down an earlier FCC decision that set up network neutrality rules. The network neutrality provision was the work of Obama’s first FCC chair, Julius Genachoski. Thomas Wheeler, the second term chair, decided to try to come up with a new regulatory plan rather than appeal to the Supreme Court. Wheeler responded with some very squishy support that ended with a statement that suggests the issue be left to the big boys.:

I am grateful for the input of the President and look forward to continuing to receive input from all stakeholders, including the public, members of Congress of both parties, including the leadership of the Senate and House committees, and my fellow commissioners. Ten years have passed since the Commission started down the road towards enforceable Open Internet rules. We must take the time to get the job done correctly, once and for all, in order to successfully protect consumers and innovators online.

With two Republican FCC commissioners all but certain to oppose the Obama plan, it would take the full support of Wheeler for a 3-4 majority (and that assumes votes for by Democratic members Mingon Clyburn and Jessica Rosenworcel).

Then there’s the Court. If the Obama plan were to be approved by the FCC, the opposition of opponents such as Verizon, Comcast, and Time Warner Cable, are certain to appeal to the D.C. Circuit (which has automatic justice over FCC decisions). The Republicans, who now control the Senate, are certain to oppose Obama’s attempt to fill vacant seats, so the old conservative appeals court is as unlikely to support a new FCC net neutrality move as the old one.

Finally, should the court somehow let the FCC do it, the Republicans who control both the House and Senate would  be likely to overrule them. (Although the split on net neutrality is not naturally a partisan split, politics has now overcome the issue.) When you consider the opponents of net neutrality need only prevent new action, always the easier course, the prospects for nothing happening for the next two years are likely.