These days, there are a lot of questions swirling around Apple and the biggest question of all is whether Apple has forgotten how to innovate.

Of course, this question is not new.

CAPTION: February 1996

The company once notorious for its ability to upend convention and revolutionize markets may no longer have what it takes, worry some technology journalists. Call it the iPad or the iPlod, but the message seems clear: Apple may have lost its mojo. ~ Jeremy A. Kaplan, FOXNews.com, 28 January 2010

I was talking recently to someone who knew Apple well, and I asked him if the people now running the company would be able to keep creating new things the way Apple had under Steve Jobs. His answer was simply ‘no.’ I already feared that would be the answer. I asked more to see how he’d qualify it. But he didn’t qualify it at all. No, there will be no more great new stuff beyond whatever’s currently in the pipeline. So if Apple’s not going to make the next iPad, who is? ~ Paul Graham, March 2012

Two years ago I wrote that without its charismatic founder, Apple would move from being a great company with high growth and high innovation to being a good company with moderate growth and attenuated innovation. After this week’s set of announcements, I stand by that analysis. ~ George Colony, Bloomberg, “Apple Follows” September 2, 2014

Key take aways: Innovation at Apple is over… Just incremental improvements, nothing ground breaking. The best is over for Apple. iPad mini is playing catch up to Google Android, probably will have a mediocre customer adoption. ~ Trip Chowdhry, Global Equities, 23 October 2012

Remember when the iPhone was truly innovative? Think hard, because you’d have to go back to 2007, and the release of the first iPhone. But since then, Apple has been tossing out retread after retread, and this year’s iPhone 5C and iPhone 5S represent a curious creative nadir for the firm. A new Windows Phone video shows how hard Apple must have worked to come up with these turds. Hint: Not that hard. ~ Paul Thurrott, Supersite for Windows, 13 September 2013

Apple’s innovation problem is real. And it’s unlikely to silence the critics if it simply unveils multi-colored iPhones on Tuesday. Rivals have caught up to Apple in the markets it once dominated, and the tech giant’s rumored future products appear to be more evolutionary than revolutionary. ~ Julianne Pepitone and Adrian Covert, CNNMoneyTech, 8 September 2013

They only have 60 days left to either come up with [an iWatch] or they will disappear. –Trip Chowdhry >[Written in April, 2014, one year before the Apple Watch became available.]

Apple lacks innovation, it copies. ~ Denise Garcia, CNBC, Thursday, 24 Mar 2016

While the more affordable products are seen as buying Apple time until its more blockbuster hardware event in September, Apple’s bigger problem is innovation. The company continues to be criticized for failing to innovate in the same way it did when Steve Jobs ran the company.

It has released just one new product category, the Apple Watch, since Tim Cook took the reins in 2011…. ~ Jennifer Booton, Apple sacrifices innovation for mistier market, Mar 23, 2016

The deeper question is whether Apple can keep its place as the North Star of the tech firmament. Can the company build the next great platform in computing, as it did the last one? Are its best days ahead of it, as Timothy D. Cook, the chief executive, insists — or is the new campus the capstone of an era of Apple dominance that we will never see again? ~ Farhad Manjoo, Apple, Set to Move to Its Spaceship, Should Try More Moonshots, May 4, 2016

Apple has always been renowned for being innovative and setting the rules for others to follow. … Ever since the Jobs’ death, Apple has repeatedly failed to truly innovate and offer something in the market, something that the users have never experienced before. ~ Ken Bock, Has Apple Inc. Lost Its Mojo After The Death Of Steve Jobs?, May 24, 2016

Stated simply, I don’t see any present innovation or prospective creativity at Apple. … Innovation is slowing and competitive threats are mounting. … Indeed, Facebook (FB) and Amazon (AMZN) are already challenging Apple’s position as the world’s most popular company.  For many like myself, Apple is already a distant third. ~ Doug’s Daily Diary, Apple in Wonderland (April 27, 2016)

So, are the critics right? Has Apple forgotten how to innovate?

Or, is it we who have forgotten how Apple innovates?

SERIES OUTLINE

This is part 1 of 7 in a series of articles that explores Innovation at Apple.

1. Who is Apple innovating for?
2. Where should Apple’s innovation be focused?
3. How does Apple innovate?
4. When Should Apple Introduce Its Innovations?
5. What does innovation inside of Apple look like to someone outside of Apple?
6. Why does Apple do what it does?
7. Why not be Apple?

Who

Who is Apple Innovating For?

 

Critics seem to think Apple needs to create the next breakthrough product in order to satisfy their desires and the demands of stockholders. Let me be frank: If Apple brings out a product or service because the critics or the stockholders say they have to…then Apple is screwed.

If shareholders imagine companies exist for their benefit, they’re delirious. ~ Horace Dediu (@asymco)

It’s important to remember that the opinions of tech writers… are of no consequence to these companies. ~ @natebarham

(N)either Wall Street nor the tech press have any bearing on what matters. ~ Horace Dediu on Twitter May 16, 2016

THE CUSTOMER

Apple doesn’t do what it does for the critics or the shareholders. Apple is customer-centric. They put the customer, not the company — and certainly not the critics or the stockholders — at the center of their decision-making process. Apple bases everything on understanding their customers’ problems and what their customers might want or need in order to solve those problems.

Our DNA is as a consumer company, for that individual customer who’s voting thumbs up or thumbs down. That’s who we think about. ~ Steve Jobs

(T)he most important thing is that customers love our products and they are using them and the satisfaction has never been higher and the loyalty rates have never been higher. And that is what is really important for us. That’s the most important thing for the long term of Apple. ~ Tim Cook

As James Allworth argues in his HBR article, Steve Jobs Solved the Innovator’s Dilemma, the most profound contribution Steve Jobs made was in demonstrating a radically new way of a running a company: the goal of the firm shifts from making money for the shareholders to delighting the customer.

THE JOB TO BE DONE

Perhaps you’re thinking ‘Hey, every company is customer-centric.’ Not so. It’s not always easy to discern why buyers buy what they buy. The entire field of ‘Jobs To Be Done’ was created for the precise purpose of tackling this very thorny issue. The truth is, what seller’s sell and what buyer’s buy are, far too often, two very different things.

Examples abound. Take the Microsoft Kin, or Windows RT, or Google Glass or the Nexus Q…

…please!

It’s never easy to perfectly match what the seller sells with what the buyer buys, but a customer-centered approach — like the one Apple uses — helps to align the product design with the purchaser’s desire.

TARGET MARKET

Knowing the customer comes first is a huge part of Apple’s success. However, it is not enough to know your customer comes first. You must also first know your customer.

The technology isn’t the hard part. The hard part is…[determining] who’s the customer. ~ Steve Jobs

‘Who’s the customer?’, is a question that is not asked — and therefore is not answered — nearly enough.

APPLE’S TARGET MARKET

Let’s start with who Apple does not target. Apple does not target ‘everyone, everywhere.’

I am hearing disturbing rumours that Apple is selling a [product] that’s not right for everyone’s needs. ~ Benedict Evans @BenedictEvans

‘Everyone’ is not a target — it’s the opposite of a target. Targeting everyone is targeting no one and it’s one of the surest ways for a business to fail.

I cannot give you the formula for success, but I can give you the formula for failure–which is: Try to please everybody. ~ Herbert Bayard Swope

Apple targets only a small segment of the total market.

It is not Apple or Google’s job, or skill, to fix every vaguely Internet-related UX you’re unhappy with. Mostly they stick to their knitting ~ Benedict Evans (@BenedictEvans) 10/17/14

And that’s okay.

Today’s reminder: just because Apple makes a product that doesn’t meet your personal needs, that doesn’t make it a crappy product. ~ jcieplinski on Twitter

So, if Apple doesn’t target everyone, who do they target?

Say what you will about Apple…but it knows its market. And so do you, probably. Quick, picture an iPhone user. You’re probably picturing somebody young-ish, urban. Somebody who likes a simple user experience that doesn’t change much from model to model. Somebody who admires good industrial design, and who has the money to fit a $600-$800 phone into their budget.

Now, picture a [competitor’s] user. It’s much harder [to do]. ~ C. Custer, TechInAsia

Apple targets that part of the market that buys with intent. And Apple eschews that part of the market that buys by default.

Apple targets those who value their time a little more and their money a little less; those who value raw power a little less and ease of use a little more; those who care a little more and care to pay a little more.

Has Apple been successful in attracting the customers who care?

Damn straight they have.

PCs mostly had people who cared but mobile has everyone, including lots of people who don’t care at all. Apple has most of those who do care. ~ Benedict Evans (@BenedictEvans) 11/29/14

The value of smartphone users is distributed on a curve and Apple has most of the best ones. This has been clear for years ~ Benedict Evans (@BenedictEvans)

Does Apple get every customer they target? Of course not. There are many people who actively choose competing products and those are precisely the prospective customers Apple seeks to acquire. Apple does not, however, seek to acquire the penny pincher or the passive purchaser.

The paradox is that it’s the open, geeky OS that’s given to non-techy late adopters & vice versa ~ Benedict Evans (@BenedictEvans)

[pullquote]Those who do not pay more to get more, pay less to get less[/pullquote]

That’s not really a paradox. That’s the way of the world. Some people are willing to pay to avoid the open, geeky OS. Some people are not. Those who do not pay more to get more, pay less to get less.

And just because there is a small, but vocal, minority who PREFER the geeky OS and who are willing to pay MORE for the geeky OS, does not make any of the above any less true.

Think of it this way. Apple runs a five star restaurant. The fact most people eat at McDonald’s does not make the proprietor of the five star restaurant ‘unpopular,’ ‘clueless,’ or — more to the point — profitless.

In mobile, selling a niche-high-end product turns out to make you the biggest company on earth. ~ Benedict Evans on Twitter

And the fact that many people actually PREFER the food served at McDonalds over the food served in a five star restaurant (you know who you are) does not make the patrons of the five star restaurant cultists, religious fanatics, sheep or mindless fanboys.

In [computing] as in love, we are astonished at what is chosen by others. ~ paraphrasing André Maurois

I like chez Applé, you like McAndroids. It’s all good. Eat. Enjoy.

ASPIRATIONAL

Apple’s target market is niche, yes, but it is larger than most observers realize. It is not just those who are currently interested in — and able to afford — Apple products. Apple products are aspirational. Not everyone can afford them but many desire them and will acquire them when they are able.

And we’ve found that all throughout the world, there were so many people advising us…that people weren’t going to pay for a great product there. Well, let me tell you, it’s a bunch of bull! It’s not true! People everywhere in this world want a great product. And that doesn’t mean that everyone, every single person in the world can afford one yet. But everyone wants one [emphasis added]. And so, if we do our jobs right, and keep making great products, I think there’s a pretty good business there for us. ~ Tim Cook

(T)here are a lot of people in the world who don’t have the pleasure of owning an iPhone yet. ~ Tim Cook

(I)t turns out that people in every country in the world there’s a segment of buyer that wants the best [emphasis added] product and the best experience. And that’s what we’re about providing. ~ Tim Cook

HOW APPLE MEASURES SUCCESS

The critics say Apple is off target; that they’ve missed the mark. But that’s only because the critics don’t know the mark Apple is targeting.

Once you understand WHO Apple is making their products for, you can then — and only then — begin to understand how Apple defines success and failure.

We are winning with our products in all the ways that are most important to us, in customer satisfaction, in product usage and in customer loyalty. ~ Tim Cook

Customers love our products and that is the only thing that really matters. ~ Tim Cook

If you measure success by whether Apple annually ships a new product as profitable as the iPhone — and many critics do — then Apple is one of the least successful companies — if not THE least successful company — in the world.

If, however, you measure success by customer satisfaction, product usage and customer loyalty — and Apple does — then Apple is one of the most successful companies — if not THE most successful company — in the world.

ARTICLE OUTLINE

Tomorrow, part 2 of 7.

1. Who is Apple innovating for?
2. Where should Apple’s innovation be focused?
3. How does Apple innovate?
4. When should Apple introduce its innovations?
5. What does innovation inside of Apple look like to someone outside of Apple?
6. Why does Apple do what it does?
7. Why not be Apple?

Given how focused four of the other major consumer technology players are at the moment on Virtual Reality and Augmented Reality, many people are reaching the conclusion Apple must act fast or be left behind. It’s certainly true virtual reality is having its moment and appears to have reached a tipping point of sorts between its long history of over-promising and under-delivering and something that’s actually compelling. However, that doesn’t mean Apple has to introduce VR hardware in the very near future in order to keep up. In fact, following Apple’s long-established patterns of product introductions suggest a different approach.

The Apple Watch as a pattern

In a previous column, I talked about Apple’s slow, subtle build to new products and the way in which eventual product introductions often build on earlier moves which act as enablers, even though the meaning of those earlier moves isn’t always transparent. I used the Watch as an example and cited nine earlier innovations Apple had made as key enablers of the Watch, when its time arrived. There’s definitely a pattern here Apple could follow with an eventual VR hardware product. It means introducing software and, to a lesser extent, hardware features today that would enable such an accessory in the future.

In the case of the Watch, one of the key enabling technologies was Bluetooth LE and the Bluetooth notification extensions Apple introduced in 2012. This enabled third-party hardware manufacturers to create wearable devices which could pair with an iPhone and receive notifications from in a way that was far more efficient than was possible previously. This, in turn, helped enable a market for smartwatches such as the Pebble which tapped into this functionality, several years before Apple introduced its own hardware into the market. In the process, Apple allowed third-party hardware vendors to do a lot of the experimentation, to drive awareness and interest in the category, and to iron out kinks in the model. When it was ready with its own hardware, Apple was able to quickly dominate the smartwatch category and build on things that had and hadn’t worked well with earlier third-party hardware. And importantly, the Apple Watch didn’t require everyone who wanted one to go out and buy a new iPhone, because the companion functionality had been built into several generations of iPhones by that point.

Apple’s first step in VR might not be hardware

If we apply this pattern to Apple’s possible VR strategy, we might well see something other than a VR headset as the first step. In fact, it’s more likely we would see a series of subtle advances in other areas over the next couple of years before Apple finally launches a VR accessory or device. What might some of those steps be? Here are some possibilities:

• New sensors – iPhones already have a pretty robust set of sensors including accelerometers, gyroscopes, and so on, which can be used by third-party manufacturers for VR experiences. But these aren’t optimized for VR specifically. Tweaking and augmenting these sensors is an obvious thing for Apple to do as an enabler of both its own and third-party VR devices. It might or might not explicitly say this when they’re introduced – such sensors could potentially improve iPhone gaming experiences too, so they could be introduced under that cover rather than as explicit VR enablers.
• Smart Connector – Apple introduced the Smart Connector into the iPad Pro line last year, but there’s no reason why similar technology shouldn’t come to future iPhones too (early rumors have been inconsistent on this point as regards this fall’s new iPhones). The Smart Connector passes both information and power between the iPad (or iPhone) and an accessory, and would make a great enabler for VR headsets, which could either draw power from the iPhone in this way or provide it with power. Again, it’s likely Apple would have a different announced purpose for the Smart Connector but it could certainly be repurposed for both Apple and third-party VR headsets (just as the iPad Pro Smart Connector is already open to third parties for additional functions).
• Displays and processors – Apple continues to enhance its displays and its proprietary A-series chips in new versions of the iPhone. The new iPad Pro introduces new color technology which will likely make its way into future iPhones as well, for example. But VR has specific requirements in terms of processing power and displays which will need to be enabled in iPhones that are to be used for optimized VR experiences in future. Again, these enhancements might well be made in the normal course of the iPhone upgrade cycle, but would be critical enablers for better VR experiences in future too.
• APIs – although some third party VR accessories for the iPhone already exist, truly optimized experiences are likely to require more specialized APIs designed specifically for VR devices. This would be harder for Apple to enable without giving the game away, and perhaps the APIs come later than some of these other advancements as a result. But I wouldn’t be surprised if we saw VR-specific APIs announced at next year’s WWDC.

Apple will be nowhere in VR – until suddenly it is

The point of all this is to say it looks like Apple is nowhere in VR and that’s technically true from the outside. It has no announced hardware, no software that’s specifically designed to support VR, and the best indicator we have Apple is even aware of the technology is some vague comments from Tim Cook that the category is interesting. And yet, what we could see in a few weeks at this year’s WWDC, and in a few months with the new iPhone launch, is a series of subtle indicators Apple is indeed taking VR seriously and laying the groundwork for a future product in this space. Some of those indicators may be fairly transparent, while others will be harder to discern ahead of time. But, if you’re looking, I bet you’ll start to see them over the next year. This activity will slowly ramp until suddenly Apple reveals a product — and then the strategy will become obvious in hindsight.

Last week at Google I/O, we saw the introduction of Google Home and Google assistant. Like Amazon before it, Google made a distinction between the object Home, an Echo-like smart speaker, and Google assistant. Unlike Amazon, who called the brains inside Echo Alexa, Google did not give its agent a name and just referred to it as “assistant”. This detail did not go unnoticed as tech enthusiasts and commentators took to Twitter to have their say.

Incredibly odd how Google refuses to name its AI system. Apple has Siri. Amazon has Alexa. Microsoft has Cortana. Google … nada. #io16

— Stefan Constantine (@WhatTheBit) May 18, 2016

Google’s take on the matter was that people are already used to interacting with Google.

“People talk to Google for many different reasons…are already looking to Google to help get things done.” #io16 https://t.co/IxPHLFNMZp

— Google (@google) May 18, 2016

This is certainly true, not so much for “OK Google” which some still find a little unnatural, but for how Google has become a verb we now use to mean “internet search”. So many times questions that start with “Do you know…” are answered with “Google it!”

Aside from Alexa, we have Microsoft’s Cortana, Apple’s Siri, IBM’s Watson, Facebook M and a new kid on the block, Viv. Most vendors seem to opt for personification when it comes to an assistant.

Who is the user supposed to build a relationship with?

Ultimately I think this is the question vendors are trying to answer when deciding whether or not to give their assistant a name. Many, myself included, argue giving a digital assistant a name deepens the relationship with the user by making it more personal.

Amazon lets you wake up your Echo with Alexa, Echo or Amazon. Yet, most of the people I know with an Echo use Alexa. Personifying the assistant might also make it easier for some people to understand what exactly the role is it has in their life. The hope for all the companies experimenting with digital assistants is for their assistant to become your primary agent, if not your one and only. Giving it a name allows for it to change shape and form like a genie in a bottle — one moment being in your home speaker, the next in your phone, the next in your car helping you with different tasks throughout the day. If the digital assistant is very successful, you might even forget who is powering it. Alexa might indeed become bigger than Amazon.

It seems to me Google’s approach wants to make sure that, whatever I do, whatever I use, and whoever I use as a medium, especially on a non-Google product or service, I am very clear Google is the one making it possible. Soon after introducing Google Home, a new messaging app called Allo was presented and Google assistant was embedded into that as well. This approach is perfectly fine. At the end of the day, if the Google Home video played at Google i/o becomes reality, who would not want Google to run their life?

Yet, while I entrust my life to Google, I am still very aware it is a corporation I am dealing with. Building an emotional connection would be much harder. After the initial Echo set up, my eight-year-old daughter asked Alexa to play a song and, as soon as the song started, she said excitedly, “Oh mom! She is awesome! Can we keep her, please?” I very much doubt Amazon would get that level of bonding. Humanizing our assistant however, creates expectations on how naturally we can interact with it. Expectations that, at this stage of the technology, are probably going to be unmet more often than not.

Going with linking the assistant to the company name, like Google or Amazon, increases the risk of having any negativity around the company impact the relationship between user and agent. Think about the Google antitrust investigation as an example. I would also argue that, while Google consumers are accustomed to relying on it for questions in the form of search, other vendors do not have such an advantage. For most consumers, Amazon is mostly associated with the brown box that shows up at my front door with what I ordered; Apple is about hardware and Microsoft is mostly relegated to my PC and work life.

Are most digital assistants female because of sexism or user preference?

Once the decision of humanizing your digital assistant has been made, there comes the even more difficult task of deciding on which sex said assistant should have. Thus far, it is clear that most lean to making their assistant female. Even in cases where the name is not explicitly female and the default voice is different in different markets, like in the case of Siri, (male is the default voice in the UK), general consensus tends to refer to it as female.

Why is that?

Some women link this to the fact assistants in the real world are predominantly female. Others link it to the fact that tech is still a very male-dominated industry and most women have supporting roles at best.

30 mins in to the #GoogleIO2016 keynote and no women yet. Not even The Assistant is a woman (thank God). hahahaha

— Shara Tibken (@sharatibken) May 18, 2016

Some argue it is easier to find a female voice than a male voice most people will like. Maybe I am naïve or just a wishful thinker but looking more broadly at old GPS devices to automated call prompts, I found that those voices tend to be more female than male helping back up this theory.

Ultimately, I am convinced that diversity will come to digital agents in the same way it came to emojis. Well, hopefully it will come faster. Nothing will deepen that bond with our personal agent than a voice with an accent, a vocabulary, and a gender I can personally relate to.

A few weeks back, I attended the Collision Conference in New Orleans. This is my favorite “food city” so, when I found out Collision would be held in the Crescent City, I booked a flight and made a point to attend this year’s event. Collision has become one of the best shows for up and coming startups with a conference program that caters to them and a broader industry audience wanting to keep up with what’s new in tech.

I like to go to this show just to talk to these young entrepreneurs from all over the world who come to pitch their startups and get noticed. I saw over 100 new companies showing everything from new travel apps to new vertical social networks and a host of others dealing with health, education, regional solutions, and finance.

They all got to spend about seven minutes pitching their startups on a “Pitch” stage and they had a small kiosk in the demo area where everyone could come by and check out what they were doing. This to me has become a really worthwhile show to attend and one that keeps my perspective on the startup world fresh each year.

As you can imagine, VR was a hot topic at the show and there were multiple sessions on this subject during the conference. But there was one session that really stuck out to me. Its focus was on VR being a new platform for storytelling. The panel included two executives from Samsung, David Eun of Samsung’s Global Innovation Center and Marc Mathieu from Samsung Electronics America. Also on the panel was Jacques Methe of Cirque Du Soleil Media.

All three focused on the fact VR is set to become one of the most important tools for telling stories, whether by professionals or regular consumers. In fact, Mr Methe of Cirque du Soleil said VR, “Is inventing a new way to tell a story.” He referenced Cirque Du Soleil’s 360-degree VR app in the Oculus Store called KURIO. He said they “put the 360-degree camera in the center of the performance and people come up and say hi, putting you in the center of the action.” I have played with this app and it was one of the first VR videos I saw that made me realize how VR will someday revolutionize all forms of entertainment. If you have a Samsung Galaxy VR headset and a Samsung smartphone 5, 6 or 7, I encourage you to download the Cirque Du Soleil KURIO VR app to see for yourself how this could change story telling within the entertainment industry.

Mr Mathieu of Samsung said that, when cavemen came back from a hunt, they told the story of the hunt in pictures in a cave on the walls. Eventually, storytelling was moved to a frame in paintings and pictures where it has stayed for the centuries. Even today, our HD video is shown within a frame whether it is on a TV, PC, tablet, or a smartphone. According to Mr. Matheiu, 360-degree VR breaks us out of that frame and delivers the scene as if one was at the event and viewing it from the center of the action. He went on to say, “This may be the closest to teleportation we will ever have in our lifetime”. I agree with that view. The really good VR apps puts you in the center of the story and tells it all around you in 360-degree views.

David Eun agreed that professional storytelling like the content from Cirque Du Soliel would be big, but he added he felt normal consumers may actually create the greatest amount of content over time for themselves and their friends. He said to imagine capturing your child’s first steps with a 360-degree video camera and, using the proper goggles, go back and relive this any time you wished. VR puts you back into the experience so that it is always there to view in the future. One could imagine putting a 360-degree VR camera on the table at a child’s birthday party and being able to share that experience with the other parents who were not there. Or using a 360-video camera at a wedding and placing it at the center of the ceremony so friends and relatives who did not attend could view the ceremony as if they had.

To that end last February. Samsung introduced their 360-degree camera and expects it to be a key content creation tool for consumers and semi-professionals to use to tell their VR stories for use especially with the Gear VR in the near future.

Our research at Creative Strategies on VR shows that user-created content will be an important catalyst to getting consumers to back VR in the future. But what is not clear from our research to date is what type of VR headsets or platforms consumers will adopt to drive VR into a broader consumer mass market. The prices are too high on the Oculus Rift and HTC’s Vive to see any serious interest from consumers beyond the high-end gaming market. But the Samsung Gear VR headset and the low-end Google Cardboard headsets are too low quality to really drive broad adoption, although Mr. Eun of Samsung said they have sold over 1 million Samsung Great headsets to date.

The good news is the industry is moving fast to try and create new VR headsets at better prices. In my column next week, I will report on what I found while on a trip to China a few weeks ago to check with suppliers on what the Chinese are doing create top of the line headsets at cheaper prices.

But, after listening to the folks on this VR panel at Collision and especially hearing Mr. Jacques Methe of Cirque Du Soleil talk so excitedly about how his organization is embracing VR as the next big thing in storytelling, I am convinced storytelling could be at least one of the killer apps that will drive VR adoption in the future.

Yesterday, Google announced its answer to Amazon’s Echo home speaker product, which will be known simply as Home. But it also announced what it called “the Google assistant”, which will operate both on the Home device and in a variety of other products. These announcements, and some recent news from Amazon, highlight the fact that these devices, while important, are merely examples of the endpoints that will be part of a broader picture and not the endgame in and of themselves. That understanding is important for seeing these announcements in the proper context and figuring out where this technology goes from here.

Home is a new endpoint for old services

The key thing to understand about both Home and the Google assistant is that they’re new instantiations of old tricks to a great extent. One of the big challenges of Google’s efforts in this area to date is that they’ve been disjointed and hard to refer to in a holistic fashion. Apple has Siri, Microsoft has Cortana, Amazon has Alexa, but Google has only had Google Now, Google voice search, and the “OK Google” function on certain devices along with plain old Google search on the web or inside of apps or widgets.

One of these things, to put it simply, was not like the others. What’s good about the Google assistant branding (though not necessarily the strange use of a lowercase “a”) is it starts to put a name to this collection of functionalities. That, in turn, should allow users to begin to grasp that these things are part of a coherent whole and not just islands of functions floating in a Google sea.

What Home does is give this new assistant a physical embodiment. That should allow users to more easily grasp the concept of what the assistant does and what functionality lives within it. What’s strange, then, is it appears the assistant will take its first bow as part of the Allo messaging app, also announced at I/O, and not within the Home device. Chances are that’s simply a matter of timing driven by the relative development cycles of hardware and software. But it means the assistant will be somewhat buried at first and, quite possibly, in a software product few people will use (but that’s a topic for another post).

The key thing is the assistant is separate from the Home device and that’s actually a good thing. Though Home will perhaps be its best example, what makes the assistant powerful is precisely that it doesn’t live in any single device but exists in the cloud and becomes available to users through a variety of devices. That’s important because we won’t be carrying our Google Home devices with us everywhere we go. Rather, we’ll use our smartphones, tablets, smartwatches, computers, and other devices throughout the day and the Google assistant will be most useful as it follows us around, building a profile on us from interacting with it many times during the course of the day.

Amazon’s vision for Alexa is also expansive

In this context, it’s worth thinking about what’s been happening recently with Alexa, too. It started out as functionality within a single product, the Echo, but it’s clear Amazon’s vision for it is more expansive than that. Not only has Amazon recently introduced two other dedicated hardware products that provide Echo-like functionality in the form of the Dot and Tap, but it’s started putting the core smarts into existing devices as well. The Fire TV box and Stick have been getting Alexa features recently and there are rumors a forthcoming Fire tablet might also feature Alexa prominently. In this way, Amazon is ultimately pursuing the same vision as Google — that of a virtual assistant that’s truly virtual, inhabiting all the different devices we interact with throughout the day.

Amazon’s biggest challenge is it hasn’t provided those omnipresent devices to most of its users. Yes, it’s gained a certain amount of market share with its tablets and TV devices but its smartphone effort failed spectacularly. As such, it remains absent on the most omnipresent device of all. It’s likely that a standalone version of the Alexa app for iOS and Android will appear eventually but, just as the Google and Cortana apps for iOS are inherently second-class citizens to Siri, Amazon will likely never match its success in the home in more mobile scenarios. It’s easy to be blinded by Amazon’s success with the Echo but the reality is its broader virtual assistant strategy will remain handicapped until it solves this problem. It’s overcome that problem in part by majoring less on knowing everything about you than on playing nice with the services that already do, whether that’s third party calendars, music apps like Pandora and Spotify, or your smart home gear. But that’s still a step away from knowing you the way a true assistant does. Google has an advantage here and it’s one it would do well to play up.

Apple has the components but not the home device

Apple, of course, is coming at all this from the opposite end of the spectrum from Amazon. It does provide the omnipresent smartphone and to hundreds of millions of people at that. Its virtual assistant, Siri, is on all those devices and more in the form of iPads and it’s recently added Siri to the Apple TV, too. But as long as the Apple TV requires a screen to perform most of its functions, it can’t truly compete with an always-on device in the home. To be sure, Apple’s vision is one of personal devices and one possible solution is that everyone who needs to interact with such an assistant simply uses their own iPhone or iPad. But of course, many people don’t always have these devices within arm’s reach (or within the sound of their voice), and Apple Watches aren’t yet ubiquitous enough to make up the difference. Does Apple, too, need a home speaker device in the vein of Echo and Home to remain competitive and fill in this gap in its coverage? The evidence it does is getting stronger all the time.

User profiles and shared devices

Perhaps the toughest challenge ahead for all three companies is how to manage individual user profiles on what will inherently be shared devices. That applies to the Home and Echo, of course, but also to the Apple TV and, to some extent, to tablets. Google made a point of talking in its I/O keynote about how your Home and the Google assistant would (with your permission, of course) get to know you over time and therefore get better at their jobs. But that raises the question of who “you” is in this context. Is it the person who set the device up? Is it whoever happens to be asking it questions at any given time? Is it some aggregated profile based on all the members of the household? There are lots more questions than answers for me at this point about how Home (and other similar devices) will resolve all these issues over time.

Siri on the Apple TV deals with this by being utterly impersonal – it provides the same answers to everyone rather than attempting to personalize itself based on who’s asking the questions and deliberately knows nothing about the user. But, if Google wants to make its learning a differentiator, it needs to figure out how to tell the difference between users and share only the right information with the right members of the household. TV box and service creators have long wrestled with this issue and user profiles have usually been the answer proposed, although it rarely works all that well in practice. People hate manually switching profiles and so the solution usually has to be smart enough to tell which user it’s engaging with automatically and respond accordingly. That may require voice recognition, some sort of detection of nearby devices, or perhaps a different trigger phrase for each user. I’m not sure any of this is going to be ready by the time Home launches,o but it’s something Google needs to be thinking about. It’s also an area where Amazon falls short with the Echo – it doesn’t do well with multiple calendars, for example, which is odd for a device that’s explicitly designed to support households and not individuals.

More endpoints to come

I started this piece by saying these home devices will be endpoints but not the endgame. Let me return to that. Yes, these are the newest endpoints in this broader mission of providing intelligent assistants to respond to our needs in a variety of situations. But they won’t be the last – smartwatches obviously have a role here too, but then so do cars, future wearables, and many other devices not yet conceived of. What makes these assistants most useful is they will move through our lives with us on our different devices. That in turn will require either a greater willingness by users to commit to single-vendor device portfolios or by vendors to take their applications cross-platform. History suggests Apple will likely try the former route, while Google and Amazon will probably favor the latter. But this will only get more challenging as the variety of devices on which personal assistants live continues to proliferate.

Software upgrades are commonplace. We have them in apps, video games, computer software. Pay an additional amount and the products can seamlessly acquire new capabilities.

Now, there’s an equally seamless hardware upgrade: Tesla will upgrade the battery in an owner’s $71,000 Model S70. The owner pays an additional $3250 for the company to do an over the air upgrade to activate an additional battery that’s built into the car. Once activated, the 240 mile range electric vehicle increases it to 260 miles, turning the car into a Model S75.

No, they don’t teleport the battery over the air. It’s already built into the car. You might think Tesla shouldn’t charge extra for hardware that’s already there. But actually, it’s quite ingenious. A clever way for Tesla to sell their car at a slightly lower price, knowing they’ll recoup a profit from many of the buyers later on.

It also allows Tesla to produce fewer variations of the car, simplify the design, and eliminate the labor and inconvenience of installing an upgraded battery. But its biggest advantage might be customer satisfaction: giving the owner a way to improve his driving distance with a phone call or tap on the display.

Is this the beginning of something new? Just imagine how hardware upgrades, or “in-hardware purchases (IHP)”, might offer designers and marketers all sorts of new possibilities. A company could sell a phone or computer with built-in memory that can be expanded with an online purchase. Cameras could have features turned on for an extra charge, such as increased resolution or a wider zoom range. Tablets and computers could have built-in cellular modems in all of their models. An over-the-air purchase would turn on the cell service.

Yes, these add costs to the bill of materials, but that’s offset by simplifying the supply chain, reducing inventory and shortening the buying decisions. Additionally, the new revenue stream of after-sale purchases provides a competitive advantage and customer convenience.

There’s also a precedent for Tesla’s IHP. GM cars offer OnStar that, when activated, turns on a built-in cellular modem to connect and make calls. There are probably numerous other examples we’ve just not noticed.

Building in extra hardware that can be enabled after the purchase can not only be done for making a new sale but also to improve performance. The Chevy Volt is powered by a battery that typically needs to be recharged 5-7 times per week, depending on the owner’s driving habits. But, just as they do on our phones and computers, Li-Ion batteries deteriorate after successive charges. Chevy solves this issue by only using 10kWh of the Volt’s 16.5kWh battery capacity. This allows the car to maintain the same driving range on the battery, even as it degrades with use. As the battery’s capacity diminishes, more cells are turned on, maintaining the same performance for the life of the car.

Imagine if Apple or Samsung did this with their phones. Instead of a battery needing to be replaced after 2-3 years, just turn on a spare cell to maintain the original performance.

But IHP applies to more than just tech hardware. Several trends are at work that make hardware upgrades more practical. More devices are connected than ever, particularly in the IoT area, and the cost of hardware is falling, with computers-on-a-chip costing under ten dollars and large displays not much more; tablets cost as little as $25.

Companies need new sources of revenues after the initial purchase, beyond just offering an extended warranty. Appliances, such as refrigerators, washers, dryers, and HDTVs could come with a built-in computer, display, speakers, or an Echo-like device activated as an option by the customer. That provides an aftermarket sale direct to the manufacturer plus the option of recurring revenue.

The opportunities are endless and only subject to the imagination of engineers and marketers.

OK, be honest. When was the last time you really thought about desktop PCs? Especially new desktop PCs?

Probably not recently. Heck, with all the press about the death of PCs we’ve seen over the last several years, you would be excused for thinking that new desktop PC shipments had essentially stopped.

But in an ironic case of what’s old is new again, desktop PCs are not only not dead, they’re seeing a rebirth of sorts. To be clear, I’m not predicting a massive resurgence, but they’re actually holding their own and even growing in several different sub segments of the market.

Traditional consumer desktop PCs have taken a big hit, with most consumers who opt for a new PC choosing a notebook. However, there are still a lot of existing desktop PCs in use by consumers and, if they’re anything like the main desktop in my household, still doing some important tasks.

Our primary family digital photo library (now at 50,000+ photos), for example, still lives on our desktop (as well as in the cloud), as do our Quicken finances, TurboTax taxes, and other critical files. When my son comes home from college, it’s also the machine he often gravitates to for gaming.

In fact, gaming is one of the critical drivers for renewed vigor in the desktop market. With the explosive growth of eSports, Twitch and computer gaming overall, there’s very strong interest in desktop-based gaming rigs. Of course, unlike the early days of computer gaming, you no longer have to own a desktop to get high quality graphics, but for fixed installations, many people still prefer them. Throw in innovative new small form factor desktops like Intel’s Skull Canyon NUC (Next Unit of Computing) and you have people who may not have considered desktops giving them a serious second look.

In the commercial world, desktop PCs are far from dead. Believe it or not, desktops still make up more than 50% of all PCs purchased for business. That number is expected to eventually fall below half, but in many business environments, a fixed, large computing device is still very much an asset. After all, most people in businesses don’t travel and don’t need a notebook. As a result, commercial PC desktop volume is expected to increase in the latter years of the decade as businesses start completing their Windows 10 migrations and upgrading their existing PCs.[pullquote]VR headsets from the likes of Oculus and HTC have the most demanding compute and graphics requirements of any consumer-focused application, and they need the raw horsepower that you can now only get from a desktop.”[/pullquote]

The most compelling and newest demand for desktop PCs, however, is being driven by virtual reality. VR headsets from the likes of Oculus and HTC have the most demanding compute and graphics requirements of any consumer-focused application, and they need the raw horsepower that you can now only get from a desktop. If you want the latest iterations of the powerhouse graphics cards from AMD (the Fiji-based Radeon Pro Duo) and nVidia (the Pascal-based GTX1080), for example, you have to buy a desktop.

As a result, we’re seeing long-time desktop PC brands like Dell-owned Alienware, as well as Dell itself, developing complete new lines of desktop PCs specifically for VR. For now, Alienware (which is celebrating it’s 20-year anniversary in October, by the way) is offering specialized configurations of its X51 small form factor desktop, but it’s not hard to imagine them offering a whole new line of VR-optimized desktops in the future. In addition, Dell has informed me (exclusively) that they will be offering a new high-power and expandable XPS desktop this fall that’s specifically designed for VR applications.

Desktop PCs will never again reach the high-level stature that they once held, but that doesn’t mean they’re going to go away either. They still provide the best experience for a wide variety of consumer and business computing applications, and for that reason, will continue to hold an important place among technology solutions for some time to come.

I’ve been thinking about pricing for various consumer tech products and services and there are some aspects that are incongruous. For example, how is it you can host a conference call for 150 colleagues for free using FreeConference, yet the minute you leave the U.S. with your cell phone, pricing leaps to the stratosphere? So, here’s my admittedly subjective list of the biggest rip-offs and best bargains in consumer technology.

Rip-offs

1. International Cellular Roaming. This is the last bastion of 1970s era telecom pricing. Voice calls can average $1.00 per minute or more and data pricing can be 10x what it costs in the U.S. T-Mobile offers more favorable international roaming rates, especially within North America but exorbitant international roaming rates are one of the most common consumer frustrations in tech.

2. Apple Storage. There’s storage. Then there’s Apple device storage. Apple charges $100 more for an iPhone 6s with 64GB of storage compared to the 16GB model. By contrast, a 32GB microSD card for Android costs $15 or so. To really put things in perspective, $60 buys a 1TB external hard drive for a PC.

3. Cable Box Rental. If you are a cable TV subscriber, you’re likely paying some $200 or more per year for the privilege of renting a set-top box. And there’s no choice in the matter. This is a bonanza for the cable companies, sort of like the $4 billion in baggage fees collected by the airlines every year. The FCC is onto this, with its recent proposals to unlock the set-top box and promote competition.

4. Most extended warranties. Much ink has been spilled (what’s the digital equivalent of that term?) advising consumers not to buy the extended warranty on most consumer electronics products. But the extended warranty is still a part of the pitch, especially when purchasing at a retail location. Usually it’s not worth the price, although Apple Care and some of the cellular ‘insurance’ programs are worth it if you’re a serial phone dropper or need a lot of tech support.

5. Printer Ink. This is the consumer tech’s best ‘razors and blades’ product. HP might well be out of business were it not for high margin ink sales over the years. There are some workarounds and the occasional bargain if you look hard enough, but nobody who buys printer ink is happy about the price.

6. Cable Unbundling. A significant percentage of cable subscribers are paying for a bundle of broadband, pay TV, and phone services. Most consumers believe they’re paying too much for that bundle. But try taking that bundle apart and the picture gets even worse. Ask for a broadband only plan from your provider and that cable part of your bill starts looking more attractive.

7. Wi-Fi Access Points. For the important role that Wi-Fi plays in our daily lives, dropping $100 for a decent Wi-Fi AP seems like a reasonable expenditure. My beef, however, is it’s very difficult for the average consumer to determine the right mix of quality and value in this product category. Many Wi-Fi APs have similar specs (generally undecipherable to the average consumer) but prices are all over the map. There are some clearly superior APs, but they come at a significant price premium.

8. Fees on Most Telecom and Cable Bills. Telcos and cable providers are great at turning that $99 plan into $140, once taxes and fees are included. My latest cable bill has 10 separate “taxes, surcharges, and fees” on it. Call to complain and they largely blame it on the government and the FCC. But I am sure there are certain fees that are not all going into that specific regulatory coffer. An example of fee creep: RCN, which offers a competitive cable and broadband service in some markets, has separate ‘surcharges’ for broadcast TV, sports, and entertainment. Sort of like a ‘movie surcharge’ if you go to a movie. Hmm…

9. International Voice Calling. It is still easy to fall into the trap of paying some exorbitant price for the occasional international call. You see it on the phone bill and say Whoaaa! For those who make a lot of international calls or who hunt around, there are tons of inexpensive options – Skype, FaceTime, some specific international calling plans offered by the telcos – but for the casual caller there’s bound to be the occasional gotcha.

Bargains

1. Music Streaming Services. Compared to the physical or digital download world, paying $10-15 per month for access to a vast library of music content is one of the best values available in the digital world. In reality, these services should cost a lot more because I’d like to see more money go to the artists.

2. Netflix and HBO. I separate these folks out because they are spending billions on creating fantastic original content. Paying $10-20 per month for access to their entire library, on demand, on any device, is great value for money.

3. Amazon Prime. Even though the price went from $79 to $99, the vast majority of Prime subscribers believe they are getting a great bargain, even if they just use it for the free shipping benefit. There are, of course, several other features of Amazon Prime that make it an even better value. This will be one for the business case history books.

4. A mid-priced Android phone. Many people believe that, even though smartphones are good products, they’re expensive. That’s certainly true of the high-end, flagship phones, such as the latest iPhone or Samsung Galaxy device. But there’s an increasingly impressive array of very good Android phones in the $300-400 range that offer nearly the same capabilities as top of the line products. This is not a huge outlay considering the range of things one can do from a smartphone today.

5. Free Conference Calls. This is one I have never been able to figure out. How do services such as Freeconference.com, which allow you to host a call for up to 100 people, for free, make money? Yes, I know – it’s a freemium model. But you have to admit to wondering, “how can this be free?”

6. Web site domain names. It’s $10 a year or so to own a domain name. That’s one of the best bargains in digital real estate. It’s a bit incongruous given the many smarty pants who bought a domain like clothing.com on the cheap and sold it for a gazillion dollars. But the domain name party has been the digital version of the 1860s Homestead Act.

7. Voice calling. Voice calling has become practically free. It’s included in most cell phone plans and cable/telco ‘triple play’ type services. Even if you’re still dependent on a ‘landline plan’, there are inexpensive VoIP plans, provided you have a decent broadband connection. So, with a few exceptions, if you’re paying more than $10 a month for domestic voice calls, you’re paying too much.

8. Tax Software. Yes, there’s a bit of baiting and switching here with the more popular services such as TurboTax. It’s free! No, wait, if it’s more than 1040 EZ, then it costs. Then there’s the State return, and so on. But even at $50-100, which is what most people spend, it’s a pretty good bargain. And these folks seem to do a pretty good job of keeping up with our increasingly complex tax code.

9. Google Maps. I have kept free, ad-supported services such as Gmail and Facebook off the ‘bargains’ list, but then I started thinking about what app or service would I be glad to pay $100 a year for and came up with Google Maps. First, it’s a valuable product, used frequently, that continues to improve and second, the advertising component of this is a lot less obvious or intrusive than many other apps or services.

I’d welcome your thoughts and ideas on this list!

Alphabet’s Nest subsidiary has been in the news recently for all the wrong reasons. Whether for unpleasant management styles, uncomfortable financial belt-tightening, or a failure to hit annual targets. All this has many people asking why Nest, which was the darling of the smart home market before its acquisition by Google, seems so stuck. I think the answer is that Nest is mostly a victim of the current state of the smart home market, which itself seems perennially stuck in the early adopter phase.

A category in search of a problem

The smart home and home automation category has always been a solution in search of a problem. For the vast majority of people, there’s no desperate yearning for something new to come along and replace their thermostat, refrigerator, lighting, doorbell, or baby monitor. Most of these things are well established, work just fine, are reliable, affordable, and easy to use. Replacing these items with more expensive, less reliable, more complicated technology just doesn’t sound like a good idea to most people. There are, though, people willing to buy and use these technologies, and a number of companies have benefited from the openness of these early adopters who want to spend lots of money on gadgets for their homes.

Some exceptions have crossed over

Some exceptions to this pattern have crossed over to the mainstream. Those exceptions include – to some extent – Nest’s original product: its thermostat. That device meets several key criteria which make it unique in the broader home automation category:

• A small number – in some cases, just one – are needed for the average home
• The installation is somewhat intimidating but doesn’t require complex electrical skills
• There is a promise of a clear return on investment from smarter use of the home’s HVAC system

Straightforward installation, a whole-home solution with few constituent parts, and a return on the cost of purchase are not claims many other smart home solutions can make. That has allowed the Nest thermostat to sell better than most products in this category (indeed, it’s about the only smart home product in the new home I built a couple of years ago). Other product categories require electrical expertise, devices to be installed throughout the home, and cost a lot of money with increased convenience the only real benefit.

Maxing out a series of small markets

The challenge, then, is the addressable market for most smart home technology is pretty small, composed of innovators and early adopters in the classic technology diffusion curve. As a result, many products are attempting to squeeze every opportunity out of these small markets until they’re maxed out. Nest has been criticized for not innovating more around its original product but I suspect this is the result of a deliberate strategy to saturate many individual product markets rather than focus on ongoing significant improvements in a single market. This helps to explain Nest’s acquisition of Dropcam, its smoke and carbon monoxide detector, and the other products it’s been rumored to be working on. There’s more mileage in opening up new markets than there is in squeezing incremental value out of existing markets already nearing saturation.

Alexa as a smart home device is a red herring

I see some people referring to Amazon’s Alexa as a more mainstream smart home or home automation product, and I think that’s actually a red herring. Yes, it can be used to control smart home devices but I suspect (a) only a subset of Alexa devices are used for this purpose and (b) such a focus would limit its appeal to a niche within that smart home early adopter category. I think Alexa’s potential is much broader than that and it’s precisely because it isn’t just a smart home controller. Alexa isn’t extending the smart home market – it’s more mainstream precisely because it’s not limited to that small and limited opportunity. Having said that, it likely appeals to the same sort of early adopters as smart home products do but it appeals to others as well and that’s its strength. This is also why others will likely follow Amazon into this category even as the smart home market continues to fizzle – it shows more short-term promise.

Nest’s challenge

Nest’s challenge, then, isn’t just the internal struggles within an Alphabet subsidiary but that the smart home market has failed to cross over into the mainstream. As such, Nest’s addressable market is limited. It can expand its opportunity by moving into new sub-categories of the market but those are being competed over by more and more companies eager to tap into these same opportunities, which makes its path ahead even more challenging. I’ve written before about some of the things that can help unlock a larger smart home market but most of the short-term challenges are here to stay. That’s going to make life tough for Nest and any other company that makes its money selling smart home gear.

The marketing machine around 2-in-1s has been at full speed for a few years now. As Windows 8 was coming to market, hardware vendors, Intel, and Microsoft all put their thinking caps on to see how they could take advantage of the new OS to sell new PCs.

A Recap

Between the beginning of 2011 and the fall of 2012, tablet sales, in particular iPads, were ramping up. The Windows camp was very eager to position tablets as being inferior to PCs while acknowledging the more mobile form factor was something Windows was embracing and, with it, a more touch-friendly interface. At the same time, Apple was eager to position iPads more like smartphones than PCs. Why not? Consumers were certainly buying more of the former than the latter. Around that time, we started to see 2-in-1s and hybrids surface as a label for devices that looked like a notebook but had a detachable screen that could be turned into a tablet.

Fast forward two years and, at the 2014 CES, Intel started promoting notebooks that not only doubled as tablets but also ran Microsoft’s as well as Android’s operating system. Some called these “PC Plus”. This attempt to make up for the shortfalls of the Windows 8 touch experience by adding Android did not really sit well with consumers, especially as most of those devices were priced much higher than any single OS hybrid. Needless to say by spring, that endeavor was abandoned and so was the term.

Two years later and here we are. Windows 10 got to market and, with a redesigned UI, the focus on touch has increased. The term 2-in-1 is in full flow and so is the animated discussion about what device would be the perfect PC replacement. Camp Windows and Camp Apple both are trying to convince users that the new tablet plus keyboard design is the perfect one although each camp thinks, of course, they have the best solution.

It is understandable that, with close to one billion consumer PCs in use, the interest in wanting users to upgrade what they have is strong as is the temptation to think in terms of replacement. I’ve pointed out in the past how consumers with old PCs are really not engaged with them as they relegated the least appealing tasks like file management (all be it, important in their eyes) to these devices.

Replacement Does Not Scream Exciting

I have never been a fan of the term 2-in-1 as it sounds more like a compromise than a best of both worlds. I am even less of a fan of this obsession with wanting to place a new category of devices — a tablet with a keyboard or a notebook with a detachable screen — as a replacement for a PC. I struggle to understand why anyone would care to replace something that does not play a very important role in their life. If they did, replacement for me implies a like-for-like substitution which certainly does not help the new devices. Of course, consumers expect technology to improve and so they know what they buy today will not be the same as what they had. Yet, if they are thinking in terms of replacement, they will not be looking to do new exciting things, they will not look to spend more time with it, they will not be proactively curious about what the combination of the new OS plus the new hardware will offer.

Think about the different experiences you go through when you are buying, say, a comfy pair of shoes to wear at work all day or to help you survive a trade show. The experience is very different than when you go out looking for a pair heels. Or, when your family car must be replaced as opposed to when you are out looking for your own sports car. For the first search, reliability and quality are certainly important but budget might be capped vs the second search which will see an added irrational component to it.

This is why I feel strongly that vendors should move away from positioning devices as a PC replacement. Consumers have proven they are willing to buy things that do not directly replace anything. Smartphones are the best examples. When we started to buy those, and mobile phones before them, we did not buy them to replace our home phone. Initially, it was about taking the “phone experience” out of the home. Later, it was about doing much more by adding the internet and new apps and taking the mobile computer experience out of the home. Some of what we were doing was something we used to do on our PCs but consumers were not thinking about it that way. We have also witnessed that, while familiarity might help in some cases, if something is compelling and easy enough to use, it will take off. The iPhone did not really look like something we had before nor was it positioned as the replacement for something.

Vendors in the Windows ecosystem should focus on:

1. mobility at no compromise, which goes beyond hardware to embrace cloud and software
2. richness of apps in both repertoire and quality
3. new features that Windows 10 brings, some of which are linked to touch and pen input which would not be familiar to older PC users but that they more likely than not use regularly with their phones and tablets.

It is about giving consumers something new they can get excited about and, most importantly, something that will play an important role in their day to day lives.

Be Smart, Don’t Limit Your Opportunity With A Label!

Talking about replacements is as bad as wanting to put your device in direct competition with a specific category. Because of the form factor of the 2-in-1s and the current marketing, consumers see them differently. For some consumers, 2-in-1s are a PC, for others they are a tablet and for still others, a new category in its own right. This is why any communication about being better than a PC or better than a tablet only risks taking out a chunk of the market opportunity. There are also devices like the Surface and the iPad Pro that transcends all labels — something I will have to explore in a separate article.

A little over a week ago, I attended the Jazz Fest in New Orleans. Thousands of people showed up from all over the country to eat great food and listen to great music. Being an overly observant student of humanity, I took particular interest in observing how many people I saw with a wearable tech product of some kind and, when possible, started a friendly conversation to see how they liked their chosen piece of wearable technology and what motivated them to purchase it. After all, crowds, and lines in particular, always present a great research opportunity. Here are a few observations.

Wearables are certainly showing up in more places. Jazz Fest presented a unique and diverse opportunity and spotting either a Fitbit, an Apple Watch, or a Garmin was not an uncommon sight. Our latest consumer smart survey on the wearable market yielded a 23% ownership of some wearable tech product. Fitbit remains the most owned wearable tech brand in our consumer panel and my observations from the crowd came to the same conclusion. Our data also suggests Fitbit ownership skews more towards women than men and that was the observations in the crowds. Beyond who owned which device, I found great value in something our consumer research panel could not yield. A chance to see these people in person. There was a distinct set of profiles I observed.

Fitness:
The core driving factor for ownership of a wearable is still health and fitness. This is why most people buy one and is the hook to drive wearable ownership for at least the time being. However, there were two types of health profiles I observed and learned from conversations. I break wearable ownership into two categories because of this. Those who are already fit and regularly engage in some fitness activity like running, training, etc., and those who are not fit but are trying to be. A third category was slightly less common than the other two — people with an existing health condition using a piece of wearable tech (generally recommended by their doctor) to monitor their activity level and maintain specific health goals.

Within the general crowd, Fitbit is winning the fitness angle with those looking to maintain and those looking to get more fit. Garmin on the other hand, has a clear lock on the hardcore fitness crowd. This group consists of serious long distance runners, cyclists, and people in dedicated athletic training. While Fitbit is the market share winner and the brand of choice by general fitness consumers and those wanting to be fit, Garmin was one the serious fitness fanatics prefer.

Fashion:
When it came to those consumers were wanted the fitness angle but also had a clear bend toward fashion (I could tell this by their choice of clothing and other accessories) Apple has this group locked up. From my conversations with Apple Watch owners, we have learned the Apple Watch skews toward those where fitness and fashion were priorities. A third priority was also found, but in much lower quantities than the previous two — those who had an affinity for technology also found that a driving motivator for buying an Apple Watch.

Fitness, fashion, and tech seemed to the common angles for Apple Watch owners as a combination more so than any other wearable.

Combining these findings, along with our primary research on the wearable category, it is clear the biggest single driver is health and fitness. That is the reason most people put something on their wrist when before there was nothing in most cases. People want to stay healthy and larger portions of consumers are looking to get healthy. This segment I think presents one of the biggest upsides for the category. As wearable tech helps us to become smarter about our own bodies, to understand what is good and not good for us and, most importantly, to develop healthy and life changing habits, then I think this category begins to ramp to new levels.

So where do we go from here? The technology still has a way to go but this is still the fastest growing category in consumer tech. Making it the one real bright spot, from a hardware standpoint, of the consumer electronics industry. I expect everyone in the market today is playing the long game and at Google’s developer conference in a few weeks, and Apple’s next month, I expect this to be a key topic area.

Most consumers (69% from our research) still have no plans to buy a wearable this year. However, what has changed is almost 20% of the market said they are more interested in a wearable than they were six months ago and nearly 30% of non-wearable owning consumers today say they could see themselves owning one some day. So consumer sentiment is positive, despite the negative narrative most try to project onto this category.

I’m still bullish but I’ve said from the start this adoption cycle will be much slower and more gradual than other products of the past few years. I stand by both convictions.

Over the last three weeks, I’ve spent an enormous amount of time talking face-to-face with technology investors in San Francisco, Silicon Valley, New York, and London. These conversations tend to be wide-ranging, covering numerous topics in a typical hour-long session. But there was one subject that came up in every single one of my 20+ meetings: Augmented Reality (AR). Interest in this topic is off the charts and tech investors are eager to learn everything they can about this burgeoning market. I came away from these meetings more convinced than ever of my two fundamental theories around augmented reality. First: it won’t happen fast and it won’t be easy, but AR is going to have a profound impact on how we all interact with technology. Second: the enormous challenges of bringing AR to market—first to IT buyers and later to consumers—will drive a new wave of technical innovation that will generate massive amounts of new value within the tech industry.

New Challenges, New Opportunities

Part of the reason I’m so bullish on AR is I’ve had the privilege of testing some of the early devices and each demonstration has an undeniable WOW factor. More important however, is that, once the rush of trying this new technology subsides, you can’t shake the undeniable feeling it isn’t just for show. AR will drive massive real world opportunities right out of the gate. I’ve talked about the key verticals where AR will hit first in a previous column but it feels increasingly inevitable it will eventually impact just about everything and everyone.

But these massive opportunities won’t come easy. Nearly every aspect of a future AR experience is going to require big leaps in new hardware components, new types of interaction models, next-level applications, and connected services we’ve yet to even conceive.

Let’s start with the hardware. Microsoft’s groundbreaking HoloLens product, shipping in developer kit form now for $3,000, has a multitude of sensors, cameras, speakers, and three primary processors: A CPU, a GPU, and an HPU. That’s right, Microsoft designed its very own 32-bit, X86-based Holographic Processing Unit because the company decided the traditional CPU/GPU arrangement didn’t provide enough of the right type of processing to handle the massive amounts of data input and visual output inside the HoloLens. And Microsoft isn’t the only company investing in new silicon designs to drive AR. Dozens of companies—some old and many new—are looking at this space, trying to figure out how to build new types of chips to drive innovative experiences.

Another area of interest is the cameras, sensors, and microphones inside an AR device that will help capture where a person is, the people and objects that surround them and, most importantly, what they are doing with their hands, their eyes, and their voice. An essential element of AR will be the successful capture of human input on a device without a keyboard, a mouse, or even a touchable screen. A wide swath of companies, from Microsoft to Meta, Leap Motion to Ultrahaptics, are working hard to tackle the complexities of using cameras and software to capture minute movements of the hands and fingers. Imagine manipulating data or digital objects with your empty hands (I’ve tested it, and it’s brilliant). Still others are trying to move beyond the somewhat rudimentary skills of today’s digital personal assistants to create voice-based interactions that work during mission critical, hands-free tasks.

Let’s not forget the screens. One of the fundamental differences between virtual reality and augmented reality is VR can utilize the high-resolution screens the industry has already created for smartphones. That’s because, with VR, you look at the screen but with AR, you need to look through the screen, so you can still see your real world surroundings. The challenges of manufacturing these screens will be a key limiting factor to a fast ramp for AR. It’s one of the only areas where Microsoft’s universally lauded HoloLens often gets dinged, as the company chose a relatively small viewing area as it wrestled with cost, complexity, and the battery power needed to drive the screens. Meta’s new Meta 2 product offers a notably larger viewing area, but must be tethered to a PC. And AR’s secretive darling Magic Leap, with $1.4B in funding, suggests its technology will be different from these types of screens altogether.

Of course, none of this amazing hardware is of much use without software to run it. One of the key elements of good AR software will be an application’s ability to collect and process potentially dozens of different inputs at a time and changing the experience based on new information. That software will need to be tied to back-end services, through high-speed connections, effectively turning future AR devices into the world’s most capable Internet of Things endpoints.

Early Days, Big Bets

All of the above excites me because, in the various challenges that lay before AR, I see huge opportunities for the tech industry to do what it has always done best: Solve difficult problems. Cranking the wheel on the next iteration of a smartphone, tablet, or notebooks is necessary but doesn’t exactly light the fires of our imagination. I believe the high level of excitement building around AR comes from the fact that, once you experience it, you realize this technology feels truly important. As a result, we’ll see big, well-known companies begin to make increasingly large bets here. And we will see a long and growing list of small companies that look to make their mark in one or two specific areas, hoping to be a part of the larger AR story down the road.

It is early days and picking company or even technology winners now is a fools’ game. But I will predict this: It’s going be an interesting, world-changing ride and more than a few companies will rise (and fall) as the tech industry works to make this new reality happen.

I’ve written a couple of times (here and here) for Insiders about smartphone upgrade cycles in the US. Today, I want to broaden the discussion a little and talk about something slightly different. This is something I touched on very briefly on the podcast this past week, but I’ll elaborate on it here. What’s becoming clear is we’re not just seeing a subtle lengthening of the smartphone upgrade cycle. We could start seeing a completely new behavior around smartphone upgrades which is much harder to predict than in the past.

The US Experience – Installment Plans Loosen Cycles

The focus of what I’ve written about in the past has been the specifics of the US wireless market, where the major carriers regularly report the percentage of their customers that upgrade their devices in any given quarter. The first of the two pieces linked above noted the introduction of installment plans for buying devices seemed to be accelerating the rate at which people upgraded their devices, based on the evidence at that point. The second though, noted the effect was becoming more complex than that and there was a discrepancy between two groups within the US carriers — one set seeing accelerated upgrades and the other, slower cycles. With another quarter of reporting under their belts, the carriers are now showing a more consistent trend in favor of longer upgrade cycles:

This past quarter, every one of the four major US wireless carriers saw a lower upgrade rate than a year earlier. AT&T and Sprint saw upgrade rates 1.6 percentage points lower year on year while, at T-Mobile and Verizon, the difference was one percentage point and 0.7 respectively. That makes for an average of 1.2 percentage points fewer upgrades in the quarter which, in turn, would mean over five percentage points fewer in the course of a year. Based on historic averages, that could mean a drop from 33% to 28% upgrading their phone each year, or a lengthening of the average cycle from around three years to closer to four years.

That’s a subtle shift, but still an important one – those few percentage points translate into millions of phones not sold this year that would have been sold last year. As long as the smartphone base continues to grow, the slowing upgrade rate is offset somewhat by new customers coming into the market, but the former effect is going to outweigh the latter going forward.

A Different Approach to Upgrade Cycles

The worry here is this isn’t just about a change in the way people buy phones in one market – the US. It happens to coincide with that trend in the US but there’s actually something else going on here as well. In the past, two-year smartphone upgrades were not just driven by the carriers’ approach to contracts but by strong consumer preference to regularly replace their phones. Major device makers have always ensured the two-year cycle looked attractive to consumers, with Apple in particular making cosmetic external changes on that basis for most of the history of the iPhone. But what happens if consumers stop thinking in those terms? What if, instead of upgrading every two years by default, they make a conscious decision each year to evaluate that year’s new hardware and decide to skip some versions? What if they skip two?

Now, some people have obviously always done exactly this – we all know someone who’s still carrying around a four or five-year-old smartphone and sees no reason to upgrade. They’re the reason why reported upgrade cycles have already hovered around three years rather than two – these are averages after all and, for every person who upgrades their phone annually, there are others who keep them for half a decade. The difference now is that even those who went with the default two year option previously are starting to change their behavior.

The example of Samsung’s Galaxy S6 last year is a great starting point for thinking about this. The hardware was significantly redesigned, with more metal and glass and less plastic, and the specs were also given a nice bump. But figures suggest many would-be upgraders simply passed on that device and decided to hang onto their S4 for another year. This year, Samsung continued with much the same hardware design, but is seeing better sales in the early running. What made the difference? Small tweaks like restoring external storage and waterproofing convinced people who took a pass last year to upgrade this year instead. People didn’t want to give up those features and were content to keep the older device they had and wait another year.

Consider the iPhone SE, Apple’s first premium 4-inch phone in two and a half years. Yes, Apple still sold 30 million 4-inch phones last year, but how many more people just held onto their aging iPhone 4, 5, or 5s? Just as some people seem content to forgo short-term personal relationships while waiting for Mr or Miss Right to come along, so some smartphone users are now happy to wait for the right device to come along. The iPhone SE takes advantage of this trend by tapping into specific unmet needs during a time when many have put their upgrades on hold.

Broad Implications for Phone Makers

The downside, though, is in the context of annual smartphone release cycles, misfiring just once could now be more costly than ever for phone makers. Leave out a feature many people rely on or simply fail to provide a really compelling new feature for people to hanker after, and you could miss out on an entire year’s worth of upgrades. Whereas the two-year cycle could be counted on to drive decent upgrades almost regardless of the hardware in the past, each new release now has to justify those upgrades much more. This puts lots of pressure on, for example, Apple’s next iPhone this fall and its ability to drive another big upgrade cycle. Tim Cook keeps reporting record numbers of Android switchers, but we’ve heard little recently about upgrade rates. Back in January, some 60% of the pre-iPhone 6 base still hadn’t bought one of the new handsets (we didn’t get an update on this stat in April). What if that pattern of behavior continues or worsens with a hypothetical iPhone 7?

Beyond Apple, smartphone makers in general are going to have to start thinking in new terms about smartphone upgrade cycles and what those look like going forward. On the one hand, it means doing whatever they can to make the two-year upgrade as attractive as possible, with significant performance improvements and new features. But it also likely means adjusting to the reality that the average cycle is going to continue to lengthen, which has dramatic implications in an increasingly saturated global premium smartphone market.