This week’s Techpinions podcast features Mark Lowenstein and Bob O’Donnell discussing a host of 5G-related news items from the past week including the results of the critical C-Band auctions for mid-band 5G radio spectrum, the announcement of T-Mobile’s new unlimited Magenta Max 5G data plan and what it implies, and the debut of HPE’s new telco-focused division and its first offerings, as well as the new partnership for 5G infrastructure between Intel and Google.
One of the biggest issues facing the tech industry right now is significant delays and a backlog of semiconductor foundries. Almost every tech category has seen a boost to demand, and that led to a dynamic of significant demand and not enough supply of semiconductors.
While an unanticipated surge of demand is a chief cause of the chip shortage, China’s initial shutdown this time last year due to the pandemic was going to cause delays for the entire year regardless of an uptick of demand. The surge in demand exaggerated this problem even more, which now brings an important observation to bear.
When I wrote last week about Apple perhaps partnering with Intel, I was only scratching the surface of what should be on every tech companies mind if their products rely on semiconductors in some way. This shortage is brought about because of the lack of foundry options for semiconductor companies. TSMC has had the clear lead for several years, and if you want a product on leading-edge process, your only option was TSMC. Samsung kept pace, but they hit some snags with their 10 and 8nm product which led some of their customers to go to TSMC.
While TSMC is not a semiconductor foundry monopoly yet, we are seeing a glimpse of what the world may look like if TSMC either is the last foundry standing or, at the very least, having a multi-year advantage on leading-edge process technology.
In either scenario, competition is painfully impacted. If only a few of the biggest tech companies, with scale and money, have access to leading-edge process technology and transistor designs, then those companies will maintain an edge on everyone else because they will be the few who can actually secure inventory. Everyone else will have to wait to get their chips to market. This is not a good scenario.
While TSMC is investing in foundries in the US, right now in Arizona, it will take several years to build out and be ready to start producing wafers. But the dynamic of TSMC having a monopoly on the leading-edge process, at a minimum, is concerning since they control who can get supply AND they could control pricing. This is why it is of the utmost importance that foundry competition is established and remain.
Yesterday Joe Biden signed an executive order to investigate the issues surrounding the chip shortage and look to strengthen the supply chain. Many hope for a renewed focus and more investment around the Chips Act and actively look to make US-based foundries more competitive.
Semiconductor foundries are not startup opportunities. Therefore, the US government’s options are Intel and Global Foundries to support US-based semiconductor manufacturing. While I do hope there is more around the Chips Act that can be established, I do not have the most faith in the government to help solve this. Which is a key reason I mentioned Apple, as I feel it makes more sense for private enterprise to help Intel via joint ventures or supply commitments.
The Art of Dual Sourcing Foundries
Given the reality, both short and long-term is the industry will only have a few viable foundries supporting the growing demand and need for semiconductors, companies who can strategically execute a dual-source strategy will be well-positioned.
This was always something Broadcom did well. I recall many conversations with their executives who were proud of the fact their chip design libraries were portable, and they could make them at whatever foundry they saw fit. Qualcomm is similarly executing a dual-source foundry strategy as they have versions of the same chipsets made at both TSMC and Samsung.
Companies that dual-source will be extremely well-positioned to weather a number of different storms that could come their way. From the geopolitical that I have outlined before, national economic issues, global catastrophes, etc. While this isn’t discussed as much publicly for obvious reasons, it is top of mind for many executives in the supply chain and those whose companies make products via semiconductor foundries.
While I keep circling the wagon on this, the fundamental point that needs to be addressed in the long-term is how to keep foundry competition alive. I believe Intel is critical to that future, which is why the industry needs to be concerned with Intel’s future whether they buy chips from Intel or not.
There’s been a lot of excitement around the trajectory of PC sales in 2020. The pandemic clearly reinvigorated demand for PCs, and sales could have been even greater had the market not faced component shortages. Working from home, learning from home, and fighting boredom at home drove upgrades as well as new sales, expanding the overall userbase. Sales reached volumes we had not seen for almost 20 years.
Many were eager to point out that the rise of smartphones at PCs’ expense was rebalanced as consumers and enterprise users alike rediscovered the PC. I think a more realistic read of what 2020 brought to the PC market is that more time was spent on PCs at home than ever before. And this was rooted in the fact that everything was done more at home than ever before, and with that, more was also done digitally. If you’re looking at the time that a typical knowledge worker would have spent on the PC at the office, it probably didn’t change much. It just so happened those working hours on a PC were taking place at home. One trend that did change with everybody transitioning to online life was that with more time spent doing things online, sharing devices became much more difficult. This meant that, on average, household penetration grew, with many seeing a one on one PC to human ratio.
As we look forward, of course, the big question that PC vendors are asking is what happens to this base when we return to a more predictable life pattern that involves activities outside the home. I purposely don’t want to call it the new normal or back to normal, mostly because I hope that what we will go forward rather than back both in working and school embracing a richer, more equitable digital transformation. Everybody is trying to predict how this new base is going to behave going forward. Yet, for the chip vendors, Microsoft, and every PC brand in the market, the focus should be on keeping these users engaged with that PC they might have bought in 2020. Only continued engagement will move that 2020 sale to a 2025 upgrade. Focusing on an upgrade is certainly better for the industry than focusing on a sale.
The state of the consumer PC market pre-pandemic was characterized by a large number of users that had what I would call “an emergency PC”. Most of their computing needs were taken care of by smartphones mostly, but they would use a PC for those tasks that required a larger screen, a keyboard, and maybe some applications that just did not run on mobile. That emergency PC did not drive any emotional attachment or a strong need for an upgrade. Even when a user would consider an upgrade, the budget they would allocate was limited because the PC’s value was seen as limited, except for gaming. 2020 changed that. 2020 emphasizes quality computing experiences, from video calling to connectivity to brighter and larger screens. Consumers realized the need for a better PC experience, and with that realization came the willingness to invest more in their purchase. This is great news for the industry, regardless of where overall sales end up as average selling prices had been falling outside of the premium segment for quite some time.
So what now?
If most of us transition back to a more smartphone-first computing experience, where does that leave the brand-new PC we bought over the past year? Will PC life cycles return to a pre-pandemic average, or will they shorten? I would argue that a few things have changed in favor of shorter life cycles and continued engagement on a PC. I would also argue that every vendor in the PC ecosystem has his work cut out to continue to show the value by focusing on strengthening the app ecosystem, continuing to drive designs that highlight the overarching experience rather than individual features, and finally showcasing what can be done with these new PCs.
What are the factors that I think play in the PC favor?
First of all, that our digital life has grown. Whether you’re thinking about gaming, or entertainment, or online shopping and telehealth, we have been doing a lot more through a screen, and some of these experiences have been better or more convenient than doing them in person. While some of this time will return in person, I firmly believe the overall time spent online will remain higher than before the pandemic and the kind of activities we will be done using a PC will be more engaging than in the past.
When it comes to business, there are two factors positively impacting demand. First is the recent awakening of many organizations on the importance of driving employee engagement and satisfaction through the tools, hardware, and software provided to get the job done. While I do not expect every employee to benefit from this newfound awareness, I anticipate knowledge workers and first-line workers will. The second factor is the continued increase in security threats and the high risk associated with that. This, coupled with a higher number of remote workers, will get organizations to broaden their portfolio of enterprise liable devices to adequately cater to their users.
Aside from returning to increased mobility, what plays against PC demand are two main factors: continued supply chain constraint and limited budgets. The supply chain will likely return to normal by the second half of the year, vaccine rollouts and Covid variants permitting. Spend will vary depending on the markets. There is more clarity in mature markets, where especially on the commercial side, organizations might shift some spent from other budgets such as travel to ensure every employee is taken care of. What is certain is that the pandemic caught many businesses unprepared, and this is not something they want to repeat. On the consumer market, it might be time for some out-of-the-box thinking when it comes to financing and other incentives that work so well in the smartphone market.
Some bullish forecasts see 2021 PC volumes above 350 million units. While that might be possible from a production perspective, I would expect some inventory replenishment will occur, leaving sell out to be flat to only slightly up 2020 volumes.
This article is exclusively for subscribers to the Think.Tank.
When Apple introduced the Apple Watch, they initially positioned it as jewelry that also told time and a few health features.
However, over the last three years, Apple has added many health and fitness features to the Apple Watch, most recently adding ECG and Blood Oxygen monitoring.
Since Apple introduced the Apple Watch and made health monitoring a reason for it to exist, I have wanted two other distinct health features.
The first is related to blood sugar readings for people with diabetes. I have been a diabetic for over 25 years, and at least three times I day, I had to prick my finger to see what my blood sugar readings were and adjust my insulin dose accordingly.
About five years ago, I began using the Dexcom Continuous Glucose monitor to monitor my blood sugars electronically and do away with the pinpricks.
The Dexcom Glucose monitor consists of a sensor patch that I place on my stomach with two tiny prongs that get inserted into my belly that analyzes the interstitial fluids to read my blood sugars. That sensor is connected to a Bluetooth transmitter that then sends that reading to my iPhone, and through the Dexcom app on my Apple Watch, I can see what my blood sugar readings are 24/7.
Three years ago, Apple hinted that this type of blood sugar reading might be able to be done via some special light sensors in an Apple Watch someday, and I admit that I got excited about this prospect. Although my medical insurance covers 50% of the Dexcom product cost, I will pay about $1500 a year for my share of the Dexcom bill.
At CES, a Japanese startup, Quantum Operation, put a glucometer into a watch. Although this was a prototype if indeed Quantum Operation has solved how-to but a blood sugar sensor that uses light to get blood sugar readings, this would be a breakthrough.
Three years later, Apple still has not found a way to add this feature to the Apple watch, although I have seen recent reports that this feature could be in the new Apple Watch later this year.
Samsung is also planning to add blood sugar testing light sensors to their watch shortly.
This would be a promising development that suggests a light sensor-based blood sugar solution could be built into smartwatches in the future.
The second feature that I wanted in the Apple Watch has been for it to read my blood pressure. I had a triple bypass in 2012 and need to take my blood pressure daily. Some attempts to do this with smartwatch bands make the smartwatch bulky since it uses the band like a BP cuff to expand like traditional blood pressure readings you get in a dedicated blood pressure monitor.
At CES, Biospectal showed off its Biospectal OptiBP, which lets a person use a smartphone camera to measure blood pressure. This technology was introduced last fall, and Forbes did a great piece on this product launch of what I consider a highly important health monitoring technology.
If you have been to any doctor, you know that taking your blood pressure is one of the first things they do in any visit. This is because it can tell them a great deal about a person’s heart health at the center of many medical conditions.
This company used CES 2021 to highlight it. The company said a recent independent large-scale clinical study from Scientific Reports in Nature validated Biospectal’s OptiBP ability to measure blood pressure with the same degree of accuracy as the traditional blood pressure cuff. It uses the smartphone’s built-in optical camera lens to record and measure a user’s blood flow at the fingertip in half the time it takes with a traditional cuff (about 20 seconds). I could not find the minimum smartphone camera requirements to allow for this type of BP test. However, I suspect more recent smartphone cameras could be used for this. OptiBP’s proprietary algorithm and optical signal capture methods turn light information into blood pressure values by optically measuring blood flow through the skin.
The Biospectal OptiBP for Android app is in public beta and available now in the US, UK, France, Germany, Spain, and Switzerland. Biospectal OptiBP for the iOS app is planned for release later this year. The company said that interested participants could register for the public beta or sign up to be notified once Biospectal OptiBP becomes available in their country.
These are breakthrough developments that bode well for wearable health monitors and gives me hope that sometime soon, Apple, Samsung, and others may be able to add these two new health-monitoring features to eventual smartwatches and even fitness trackers.
Clubhouse has gained quite a bit of attention lately. Before I share how I’m viewing the audio platform that is Clubhouse, I think it is helpful to give a little context around the audio opportunity.
For a while, I have known that something was going to happen around a pure-play audio platform for 3 years or so now. The reason I knew was because of my work with the VC community. Several years ago, I did the rounds with most of the top-tier VC firms, and they ran me through their central investment thesis for the next several years. The audio was the most consistent thesis I saw that showed up in nearly all VCs investment thesis.
Essentially the thesis for audio was this. The visual opportunity is gone. YouTube, Snapchat, Instagram, Facebook, Netflix, etc., has sucked up all the available time to view something visually with our eyes. Basically, the battle for the eyes is gone, but the battle for the ears is a different story. We commute, we exercise, we walk, and in general, we do things where we can’t always stare at screens. This is where the opportunity for the ears comes into play. Pure play audio is an area most investors believed there was room to compete for consumers’ time. And thus, something in audio was going to come out of this.
Many investors believed Podcasts were the audio opportunity evidence but knew Podcasting platforms were mostly settled and would not be an investment opportunity. Then came Clubhouse, and now we have a highly evolved take on many previous audio platforms.
If you aren’t familiar with Clubhouse, it is basically an app where anyone can host a room, start talking, and people can show up to listen. Hosts of the room can invite listeners up to the stage to participate or call on listeners to ask a question to those on the “stage.” You can liken it to talk radio with listener participation, a panel at a conference where people with subject expertise have a moderated discussion, or even as one of my followers on Twitter pointed out like the days of Ham radio where people could connect and talk to each other even if they didn’t know each other.
The clubhouse is the evolution of many former audio meetings but not a 1:1 comparison to any of them. It is like many things but not exactly like any of them. This perplexed a lot of investors, but given their thesis, it was only a matter of time before Clubhouse raised funds.
What I find curious is the black and white nature of Clubhouse. The public commentary I’ve seen, at least, in general, paints it as the next big thing or a total failure waiting to happen, which will get crushed by other players. Its future is not so black and white, but when something new shows up, we don’t totally understand. This dynamic seems to be common, and quite curious.
The reality is Clubhouse could be big, or it could fail. Both possibilities exist. I agree with the investment thesis I explained, and pure-play audio is certainly an area of opportunity.
That being said, what I find interesting about audio, is how different it is from video. Video allows people to be more passive or let their brain shut off. Audio is a different story. Listening requires much more attention by the listener. Listening was at risk of becoming a lost art. This is why I think the pure-play audio opportunity is so interesting. One’s audience is potentially much more captive than any visual platform. And captive audiences are lucrative.
Lucrative niches have always been my personal thesis of how the digital world breaks up. I’ve always believed Facebook would struggle because it is too general-purpose as a platform. It was successful at first because it was general-purpose in nature and ultimately why it may fade into irrelevance someday. If your business is advertising, subscription media, or direct-to-consumer content or products, then a focus on a niche is your only way forward. Platforms that empower focused niches, like Substack for niche newsletters, or Shopify enabling as a platform for niche businesses, or in this case Clubhouse for niche audio, all become enablers of lucrative niches with little to no upfront cost.
While it is unclear Clubhouse’s fate, what it is enabling as a platform is the most interesting part of analyzing from my perspective. I caution being too optimistic or too pessimistic at this point. It’s easy to write things off we don’t fully understand yet but, as the thesis I laid out, there is something here.
Helping Intel stay in the semiconductor manufacturing game should be among one of the highest priorities for all US-based technology companies. While TSMC is the leader in manufacturing process technology, they remain a geo-political risk should China decide to enforce its will on the region. Samsung is not far behind, but being a Korean company, again, future politics guarantee no safe bets. Having a leading semiconductor company founded and based in the US is incredibly strategic given how critical semiconductors are to our digital future. Apple may be one of the only companies that can help Intel right the ship.
Why Intel is in this Position
It took a combination of slowing CapEx spends for leading-edge fabs and technical hurdles transitioning from one process node to the next for Intel to now be two process nodes behind TSMC and Samsung. As I wrote for subscribers last week, there are reasons for Intel to hold out hope internally that their process and their architecture are good enough to keep their current course. But when you analyze how Intel got here, it hangs heavily on the volume of premium and cutting edge semiconductors moving to Arm and not x86.
At its best, the x86 market is a 330-350m a year in total shipments for client and server CPUs. Arguably, only a small fraction of that market sells at premium price points necessary to justify the investment in cutting edge process technology. Once upon a time, Intel was increasing their CapEx annually and roughly every 18-24 months, building out a new foundry for cutting edge process. As the PC market matured and refresh rates dramatically slowed, it made it harder for Intel to justify the CapEx for leading-edge nodes on a two-year cycle, and thus they moved more to a 3.5 to a four-year cycle.
The story is a bit different with Arm. When you see the economics of smartphones and the sheer volume of annual smartphone shipments ~1.2 billion, with premium smartphone sales being ~300-350 million (compared to 60-70m for PCs), it is easier to see how this market was large enough and economically stable enough for TSMC to keep investing in leading-edge process technology so aggressively. But, while few may want to admit it, Apple is a big reason TSMC is able to confidently keep investing in cutting edge process technology. Because the bottom line is, you need to have a customer(i.e., product demand) to justify the investment. Apple is a big enough customer of premium smartphone chips and thus worth it for TSMC. Intel alone is no longer a big enough customer of premium PC and server chips, and thus their ability to spend on leading-edge fabs suffered.
The hard truth for Intel is the x86 market alone is not big enough for Intel to justify the CapEx for leading-edge foundries. And that challenge is compounded by the fact that Apple was Intel’s largest customer for premium x86 chipsets, and now Apple has moved to Arm, and x86 chips are not Apple’s future. If Intel continues in the foundry business, they have no choice but to make chips for other customers, AND they need to be a full Arm foundry. Something they attempted and failed at for a variety of reasons. There is where a joint venture between Apple and Intel could be strategically beneficial to both companies.
How Apple Helped TSMC Achieve Process Leadership
I don’t want to dismiss the technological achievement of TSMC by being the first foundry to 7nm, 5nm, and likely the first to 3nm. Anyone who knows transistor designs knows how hard it is, at a micro level, to keep shrinking silicon. However, Apple helped make it easier for TSMC to justify the RND and CapEx costs and to continually invest in leading-edge process technology by being their largest customer, always committing to the latest node. I am not convinced TSMC would have the clear lead they do in process tech without Apple.
As a customer of supply chain components, Apple likes to buy in advance, in bulk, and write big checks to secure pricing and inventory. This played a role in TSMCs confidence to keep striving and investing in cutting edge foundries. While there is no official joint venture between Apple and TSMC at a foundry level, it is a deep partnership. TSMC has committed space, equipment, and supply to Apple. Even if not a JV or partnership on paper, it is very close to that in reality. But, TSMC is the only game in town for Apple to build their A series and M series chips on the leading-edge process. And this is where the real risk comes in and why Apple may want to have Intel as a plan B.
TSMC and Geopolitics
There is no secret among semiconductor insiders that TSMC, based in Taiwan, is a strategic technology asset for both the US and China. It is also no secret, China is spending large sums of dollars trying to develop semiconductor independence, and a lot of that strategy hangs on their own local foundry, SMIC.
If you follow the news, there are worries of increased tension between China and Taiwan. Taiwan is independently governed. But China considers it part of its territory. While a lot of my logic is game theory at this point, should China consider TSMC essential to their plans for semiconductor independence, which would also grant them semiconductor leadership, it is not out of the realm of possibility that China could officially reclaim the region. Nearly every technology executive dealing with the supply chain I know has been worried about this and I’m sure it is on Tim Cook’s radar as well given his deep knowledge of the Asian supply chain.
In that scenario, the risk for Apple and the many other companies who manufacture their semiconductors with TSMC is China either prioritizing their needs at TSMC over others or cutting off supply as a whole. Again, not a great business, but not out of the realm of possibility given how central semiconductors are to our digital future.
Samsung is another option as Samsung Semiconductors is rolling out their 5nm solution, and it appears to be quite good. Samsung Semiconductors also makes chips in the US at a foundry based on US soil, and Samsung as a backup is a viable option. Unless, of course, semiconductors’ importance does indeed become a national strategic asset for the future, and thus Korea decides to pull Samsung back locally. Even if one doesn’t buy Samsung is geopolitical risk, should the worst-case scenario happen with TSMC, Samsung would be in a position to be the only leading-edge fab companies like Apple, Qualcomm, Nvidia, AMD, could use and could create price hikes and supply constraints.
Back to Intel
What I’m laying out is a worst-case scenario, but it is a plausible scenario. Intel is the only future-forward guarantee to a foundry from the perspective of US-based companies making computing devices. And because Apple is the largest purchaser of premium semiconductors on the cutting-edge process, Apple is the best positioned to do a joint venture with Intel to help them invest in future nodes and secure space in their foundries for all their future Arm-based products. This would position Apple to make their Arm-based chips on US soil with a US company.
A move like this would be highly strategic and beneficial for both Apple and Intel, and the US. Of course, Apple could be a part of a JV between TSMC and Intel where TSMC 5 or 3nm chips are made for Apple and Intel foundries, but there is still a risk and no guarantee Apple would have continued access to TSMC technology should China be aggressive. As I said, Intel is the only guarantee in what may become an actual chip war between nations.
This week’s Techpinions podcast features Carolina Milanesi and Bob O’Donnell analyzing the recent quarterly earnings from Amazon and Google, chatting about the release of a new range of videoconferencing hardware and software from Poly, and discussing Microsoft’s new Viva employee experience platform and the potential impact on hybrid work environments.
This article is exclusively for subscribers to the Think.Tank.
Over the last year, there have been many stories about how Intel has lost market leadership in process technology and has had trouble meeting some of the demand for PC and server chips as both markets heated up in 2020.
Intel is still at least two years away from moving to 7 nm while TSMC and Samsung are already at 7nm and working on 5 nm for 2023. At the same time, demand for processors is rocketing due to higher demand for chips beyond PCs and servers for use in the auto industry that is moving rapidly to electric cars, IoT, and edge computing devices, and high interest in digitizing just about everything we use in our daily lives.
Intel is investing in upgrading their current fabs and expanding their current fab in Viet Nam, but my good friend, Jim McGregor, a Principal at Trias Research, wrote a piece for EE Times this week that theorizes a way for Intel to expand their fab strategies faster.
The entire article is worth a read but here is the crux of his theory:
The Plan (in theory)
“Now, everything I said until now indicates that it’s a bad time and a huge challenge to spin-off Intel’s manufacturing, so I propose going the other way. Rather than spinning off its manufacturing group, Intel should instead acquire GlobalFoundries.
This would give Intel instant access to more fab capacity for some of the product lines that are already outsourced and even some Intel products that can be manufactured on older process nodes. GlobalFoundries has fabs in Germany, Singapore, and the US. And although GlobalFoundries has stepped away from competing with TSMC and Samsung on the latest process node, it is still one of the top three semiconductor foundries in the world and the most geographically dispersed.
For GlobalFoundries’ largest investor, the Abu Dhabi Government through the Advanced Technology Investment Company (ATIC), the company’s progress to success has been slow and any hopes of building semiconductor fabs in Abu Dhabi appear to be gone. Now that GlobalFoundries is profitable, it can no longer be purchased at a bargain price, but I am sure the Abu Dhabi government would be interested in investing in other industries more likely to diversify the region’s economic base.
Through the acquisition, Intel would gain a management team that understands how to be successful as a foundry, and personnel accustomed to working with outside semiconductor customers. So, I would propose that the GlobalFoundries team lead the integration and eventual transition to being a foundry. Intel could continue to invest in more capacity, including at GlobalFoundries’ newest site in Malta, New York, which has the infrastructure and land for additional fab capacity.
Then, when Intel is in a good position competitively and has extra capacity, it could spin off the manufacturing group while maintaining an interest as both an investor and its largest customer. This would free Intel from the financial and capital overhead of being a semiconductor manufacturer while assuring that it has ample fab capacity for at least the foreseeable future. Intel would still have the option of leveraging TSMC as a manufacturing partner as well as providing the company with a dual foundry capacity with what would likely be the two largest foundries in the world.”
In the article, Jim did point out that the Intel and Global Foundries cultures would likely clash but that this could be managed. More importantly, Intel could gain, in the short and long term, more capacity to meet the increasing demand for processors needed to power our future digital world.
As I read Jim’s article, which I agree in theory could be an interesting strategy for Intel to at least explore, I could not get a sense of how incoming Intel CEO Pat Gelsinger would view this idea.
Pat Gelsinger is one of the smartest people I know. I got to know him when he was Andy Grove’s technical assistant and as he rose through the ranks at Intel until he left 11 years ago to EDS and then become CEO of VMWare.
He does not start in the CEO role until Feb 15th but I am sure he has been in discussions on how to move Intel forward at a time when they have lost ground to AMD and the competition for chips of all kind are accelerating.
Knowing how much Gelsinger is loved inside Intel, his transition to becoming their new CEO should be seamless. However, he will inherit one of the biggest challenges in Intel’s history and he may need to consider many non-traditional ways of doing business if he is to set Intel back on solid ground and moving forward again.
Perhaps acquiring Global Foundries could be one of those out-of-the-box ideas worth serious consideration.
This article is exclusively for subscribers to the Think.Tank.
This week’s Techpinions podcast features Carolina Milanesi and Bob O’Donnell analyzing the quarterly results from Microsoft, AMD, Apple and Facebook, discussing the growing battle between Apple and Facebook, and chatting about the RobinHood stock trading controversies.
Yesterday, Apple announced a record quarter where it became the third company to bring in more than $100 billion in a single quarter. The achievement is pretty remarkable given the timing. We are in an unprecedented global pandemic, where economic uncertainty is concerning, consumer confidence is shaky, and Apple and their carrier retailers having to close stores or limit capacity.
Those who recall the last major recession of 2008-2009 may remember that Apple was an anomaly during that recession. They continued to grow and shatter sales records despite a deep recession. At that time, the smartphone, or namely the iPhone, was one of the most talked-about products in the tech industry, so it was not a total surprise for me that Apple did so well in that recession, although it confounded Wall St. analysts. This time around, Apple was up against even tougher odds to have produced a record quarter, and sure enough, they crushed it. Their many markets and consumer dynamics that I think played a role in Apple’s monster quarter. Still, the thing that really stands out to me is Apple’s ability to have impeccable timing.
I firmly believe, Apple has the best understanding of their customer base than any other technology company in our industry. This does not mean Apple has been right about their customers or market 100% of the time, but they are extremely precise when you look at the body of decisions they have made regarding anticipating demand. If anything, they misread the market because they underestimated demand, not because they overestimated it.
When you listen to Apple executives on earnings calls, they mention performance relative to their assumptions whenever they discuss a past quarter or future quarter. Like most companies, Apple builds market models to try and anticipate demands, and more importantly, understand what product decisions they make and how that impacts sales cycles.
Another unique element of Apple’s customer base is the makeup of customer segmentation they have. As a product, iPhone is the only tech franchise that has customers that span the spectrum of consumer profiles. Apple has customers from bleeding-edge early adopters, all the way to late adopting tech laggards. This makes coming up with market assumptions extremely difficult since each of these consumer segmentations behaves differently and make purchasing decisions using entirely different factors.
Historically, Apple has seen a bigger portion of their customers buy or upgrade when either a design refresh occurs or a leap forward in technology is offered. The last true super cycle for Apple was the 2014 iPhone cycle, where Apple increased the screen size of the iPhone, introduced the Max, and had a design refresh. This cycle, Apple introduced four new iPhones, including the smallest and largest offered simultaneously at a launch. Included a design refresh and a wireless generational moment with 5G.
Supply chain reports in August indicated Apple was gearing up to build 75-78m iPhones. This seemed high given the market conditions. Apple’s timing proved to be impeccable, and this moment in the market was the absolute right timing for Apple. Apple sold a record number of iPhones, likely over 80m last quarter for a record number of sales. Revenue was at an all-time high, and Tim Cook mentioned on the call they believe they could have sold even more iPhones if their retail stores were open. But at the end of the day, Apple knew this year would have the makings of a strong cycle, pandemic aside, and had been planning for it years in advance.
I tweeted yesterday, and it is worth mentioning that 5G played a role in this cycle’s strength, particularly in China. Had Apple not settled with the legal battle with Qualcomm in April of 2019, they would not have had a 5G device out this year and not capitalized on this iPhone cycle.
While there is more we could dive into, particularly around Mac’s upside and the continued strength of Wearables and services, I did want to call out one thing Tim Cook said that I think bears repeating.
Investors on the earnings call kept focusing on the COVID-related lift to certain segments. Tim Cook called out that while the situation around COVID added some wind to the sails, he did not want to detract from also attributing the product itself as a driver. It is a subtle point, most would not disagree with, but I think it bears re-emphasizing that great products get the attention of consumers and move the needle. While COVID did provide some lift, let’s not let that take away from the highly desirable products to Apple customers.
In the late 1990s, I had the privilege of working with the State of Hawaii to help push the State to accelerate its rollout of high-speed internet connections for their schools.
Although I was born and grew up in Silicon Valley, many of the Filipino side of my family all lived in Hawaii. I was concerned about this State’s understanding of how important I felt the Internet would be for their schools.
I admit my concern was a bit selfish as I had many nieces and nephews in the Hawaii school system. I wanted them to have the same accessibility to high-speed Internet connections that had already become prevalent in California and other states on the mainland by 2000.
I worked directly with the Hawaii Governor at that time, Benjamin Cayetano, to help him and the Hawaii legislature understand the importance of the Internet to its schools and businesses. To his credit, Governor Cayetano moved swiftly to expand Internet connections to all of Hawaii’s schools and became a champion of various high tech initiatives to help the state expand its various tech programs.
An interesting side note to this is that a high-tech exec I know, who grew up on Lanai, knew that the schools there did not have Internet connections, let alone computers for their students. He personally bought computers for a computer lab in the one school Lanai has so that the kids there could have the benefits of their counterparts on the other islands.
Since that time, all States in the US have expanded their high-end internet networks to almost all of their schools and it has become a backbone technology for all education systems in the US and around the world.
However, the coronavirus has shown how unequal access to technology itself divides us. And the implementation of telecommuting has made these issues even worse and disproportionately harm Black and Hispanic Americans.
When people work from home or are forced to home school, they typically need access to a computer, internet speedy enough to handle video calls, and space to work without distractions — and there’s a clear racial divide when it comes to having these things.
Axios recently pointed out these disparities and listed the following data points-
- Per a 2019 report from Pew Research Center, 58% of Black adults and 57% of Hispanic adults have a laptop or desktop computer, compared with 82% of white adults.
- 66% of Black adults and 61% of Hispanic adults have broadband access at home. Among white adults, the share is 79%.
- According to a recent survey from WayUp, Black and Hispanic job applicants are 145% more likely than their white counterparts to be concerned about their ability to do a job remotely.
Solving this type of disparity needs to become a priority sooner than later in the current presidential administration. I realize they have higher priorities to deal with immediately related to the Covid-19 Pandemic, the economy, and other areas that are needed to get our nation back on track.
But making sure that all Americans have high-speed access to the Internet as well as the types of devices and tools needed to help them learn and work, regardless of race or creed, also needs serious attention.
From an industry standpoint, the prices of laptops and especially Chromebooks making it more feasible for even low-income families to have a least one device in the home that can connect to the Internet.
However, here in Silicon Valley, perhaps the most tech-literate area in the US, I have been told by at least two friends that some students in East San Jose’s less affluential region do not have computers of their own unless their school district supplies them.
We are in a digital age that demands connectivity and devices that connect to the Internet and equality mean that the US government, private agencies, and even corporate support need to take this challenge seriously and make sure all workers, as well as students, have equal chances for success.
This article is exclusively for subscribers to the Think.Tank.
This week’s Techpinions podcast features Ben Bajarin and Bob O’Donnell analyzing the Q4 2020 financial results from Intel and IBM, discussing Nvidia’s GeForce Now game streaming service and its potential opportunity and impact as a 5G service, and chatting about the rumors of a potential VR headset from Apple.
To the casual observer, the excitement around Apple Silicon is concentrated around the specific benefits to Apple and the competitive advantage awarded to Apple thanks to their efforts in custom silicon. There are, however, much wider industry implications.
I have been extremely bullish on Apple’s custom silicon efforts since before Apple silicon began showing up in iPhones. My analysis at Apple’s time acquiring PA Semiconductor stated the writing was on the wall for deeper vertical integration by Apple into more of their products. I vividly recall being at Intel not weeks after Apple’s acquisition of PA Semiconductor. The consensus was quickly established that Apple would make custom silicon a cornerstone of their differentiation and competitive advantage.
Since Apple has now proven they are a force to be reckoned with when it comes to custom silicon, a trend I’ve long predicted is about to accelerate.
Competing in the Race Requires Components Built In-House
A great analogy came to me as I was watching AMD’s CES keynote. AMD CEO Lisa Su invited to the stage, virtually, Formula One race car driver Lewis Hamilton. Hamilton’s presence on stage was mostly to talk about his love of gaming and how AMD helps push the bar in PC and console gaming. While trying to affirm AMD as an innovative technology company, he also made a fascinating point by remarking on how his own industry consists of highly customized components. He stated that all Formula One cars, which extend to all professional race cars, consist largely of components all built in house. The obvious reason for this is a competitive advantage. Every race car driver wants an edge above the competition, and the industry itself has established the only way to do that is with highly customized parts, not stock ones.
To establish this analogy more clearly to the tech industry, Apple products are more like Formula One race cars, which compete against a field of competitors using off the shelf components. As Apple goes deeper into in-house parts for their products, it will inevitably cause others to follow whether they compete with Apple or not.
This is the trend that will accelerate that I mentioned above. While it will be harder for most tech companies to go as deep as Apple in verticalization, I anticipate a much more widespread move to customization.
In an article last year, I dug into this broad semiconductor trend where I highlighted the importance of specific purpose chips over general-purpose ones. The computer industry was built largely on general-purpose silicon. The increased need to differentiate and compete on different planes drives the need away from general-purpose silicon and more to specific purpose chips that are used uniquely by product companies.
I made the point that I don’t think other tech companies will go as deep as Apple in semiconductor customization. Still, I think companies will be at a strategic disadvantage if they don’t include some custom or specialized chips that enable some unique product advantages.
Examples of this trend starting to accelerate have been popping up more often. Microsoft has worked closely with Qualcomm and AMD to offer specific customization to the chipsets that run in certain Surface products. The goal of that work was to differentiate these devices from the pack. Microsoft has even been rumored to be looking more deeply at designing, or co-designing, their own Arm processors, which could have both server and client impact. For many generations of Xbox, Microsoft has created some custom components and co-processors for years as well.
Amazon and Google have become more aggressive in custom/specialized processors to differentiate their cloud platforms. Amazon with its Gravitron processors, and Google with Tensorflow. Both key initiatives to help them compete more uniquely with specialized components and set themselves apart from competitors who use generic parts.
Qualcomm made some news recently that emphasizes this trend when they acquired Nuvia last week. Ex-Apple silicon engineers founded Nuvia, and they created a custom Arm architecture they intended to use for the server market. With their Kryo architecture, Qualcomm used a semi-custom design from Arm but mostly using a more generic Arm IP. Qualcomm recognized their ability to compete depends on more deep customization of technology at every SoC level. This Nuvia acquisition puts them back on the path to more deeply customized semiconductor offerings.
Years ago, the belief that more custom or specialized components were not needed because all computing would be in the cloud someday had never manifested and proven to be a much far off future even if it happens. What has become exceedingly clear is that differentiation at the software level is no longer enough for the tech sector’s biggest competitors. The idea of a “full-stack” company must now extend into components as well.
The race car analogy could not be more apt for the tech industry as the competitive environment increases in every market. The simple truth is companies will need to invest more in specialized components because the nature of competition will demand it.
The bottom line is the more companies create “in-house” technology that extends down into components, the better their chances at competing. The more companies rely on generic solutions, the more they run the risk of falling behind.
This week’s Techpinions podcast features Carolina Milanesi and Bob O’Donnell analyzing the CES 2021 digital trade show and the news and trends coming from it and discussing Samsung’s Galaxy Unpacked Event and the launch of their new Galaxy S21 smartphones.
Early in 2020, TSMC announced that they would build a $12 billion Fab in Arizona. In December, TSMC purchased the land it will be built on for $89 million.
I admit that I am still in the camp that believes broad manufacturing coming back to the US is a pipe-dream. However, I do see some specialized manufacturing in the US is feasible, and TSMC’s Fab project is a good example. While the actual push to build this Fab in Arizona is ripe with political overtones, it may turn out to be one of the better strategic moves for the US as it deals with multiple threats from China in the future.
The biggest threat I see on the horizon is China’s desire to nationalize Taiwan and bring it back under Chinese control. As I have written here in the past, I have spoken to top execs in Taiwan, and they are on high alert over the potential of China making a concentrated move to secure Taiwan and make sure it is part of China again.
This Dispute between China and Taiwan has been going on for decades ever since Taiwan broke away from China’s political stranglehold in 1949-1950. Under Taiwan’s leadership, Taiwan has developed a strong economy and is the home of the top tech manufacturers like Foxconn, Quanta, Compal, and TSMC, among others. In 1977, the US fundamentally agreed to back Taiwan and help them keep China at bay.
But given China’s recent moves in Hong Kong, Taiwan’s political and business leaders are deeply concerned that China will make some type of move towards trying to bring Taiwan back under Chinese rule as early as 2021.
One of the Taiwanese business leader’s concerns is if China is successful in nationalizing Taiwan, they could exert more control of their businesses. And it seems that one of the bigger prizes that could come out of the Chinese rule of Taiwan would be to get control of TSMC., or at the very least try and legislate who TSMC could make products for in the future.
One Taiwanese tech contact I spoke with at the end of last year told me that China’s national strategy to have products made in China and used especially in Chinese goods could be one other objective besides the political goal to unite Taiwan under the Chinese flag. This contact speculated that China could dictate where chips can be used and make Chinese products the priority.
This has huge ramifications for many US companies who use TSMC to make their processors. AMD, Apple, Samsung, and many others rely on TSMC for their chips. That is why putting a TSMC Fab on US soil is not only good for the US but a strategic one. It could be critical for keeping the flow of custom processors to US and European companies and keep TSMC’s growth moving forward.
I realize that the building of this Arizona Fab will only start sometime in 2021 and could take up to three years to build. In the meantime, the stakes in the US-China relationship are very high. Taiwan and its ties to the global tech supply chain are critical for the success of our tech industry. Allowing China to control this global supply chain through Taiwan could pose huge problems for tech companies in the future.
Taiwan and its ties to the global tech supply are critical for the success of our tech industry. Allowing China to control this global supply chain through Taiwan could pose tech companies’ problems in the future. There is another important point we need to consider a new Fab being constructed now.
The demand for processors for all industries is growing exponentially, and we are already seeing shortages impacting the Auto industry.
Engadget noted this week that ” Ford and Nissan are scaling back production in response to semiconductor shortages. Ford is idling an SUV factory in Kentucky this week, moving up downtime previously scheduled for later in 2021. Nissan, meanwhile, is reducing output at one of its plants in Japan.
Other carmakers may face trouble as well. Volkswagen said in December that it was altering production in China, Europe, and North America due to the shortage. Given the increased demand for semiconductors, it is good that another new fab is being constructed to help meet this growing need.
And it is even better, as well as strategic, that it is being built in the US.
This global hot spot will be one of the biggest issues to follow in 2021.
This article is exclusively for subscribers to the Think.Tank.
This week’s Techpinions podcast features Carolina Milanesi and Bob O’Donnell discussing the impact that social media platforms had on this week’s events in Washington, D.C., reviewing the new TV announcements from Sony and Samsung and the PC announcements from Dell, analyzing the automotive news from Harman and Mercedes-Benz, and evaluating the 5G-related news from Qualcomm and Verizon.
(Note that this was recorded just a few hours before Twitter banned Trump, Google removed Parler from the Play Store and Apple threatened to remove Parler from the App Store.)
Years ago, I stopped doing a predictions article, generally because they seem ridiculous, and most readers view them as fiction. I considered doing a predictions article of things I don’t think will happen, and I still think that is an interesting article but have yet to attempt it. But we still do get questions from clients and media about what we expect in the coming year. As analysts, we get to view the industry from a 20,000-foot view, and there is some benefit to that view in seeing broader trends and connecting macro trends to the microelements of tech.
The challenge for many who try to predict the future is the desire to make a bold prediction, something that will happen that could change a paradigm or bring something dramatically new. A new market, a new technology, etc., is what excites people, but it is not what I expect in 2021. Rather, the challenge we saw in 2020 and the rapid movement of digital transformation happening in both enterprise and consumer markets put a giant spotlight on the reality that tech still has a long way to go. There are still huge numbers of pain points, frustrations, less than elegant solutions that need to be fixed.
So for 2021, the tech industry’s mission is to double down on solving the significant pain points that exist all around us as we use digital devices. I expect this to be able to happen much sooner than years before, largely because of the incredible progress of cloud computing. When you look at the core reason many tech companies were able to make the adjustment to work from home, even if it was not perfect and inelegant, the reality was if this COVID-19 pandemic would have hit a few years earlier, many companies would have had no chance at a transition and many businesses would have come to a screeching halt.
In many ways, I remember how the continual advancements in Internet infrastructure of the 2000 decade led to the massive industry opportunities that hit all at once. Most of the decade was more evolution and solving pain points, and that work led to the mobile era. In many ways, I view the cloud infrastructure and the underlying innovation in silicon as a similar laying of the groundwork for what’s next. But what is next is not coming this year, and that is ok. As I said, there are still many pain points to solve.
Which areas can we expect more digital transformation and a continued emphasis on solving pain points? Well, nearly all of them, but the tech industry’s journey has always been one that is a transition from analog to digital. This is why every company will someday be a tech company, if not by-product then by the process. All processes move from analog to digital, and many products similarly will include more digital elements. This is one reason why the auto industry, and in particular Tesla, has been talked about so much. That is an industry whose products have all but abstained from modern technology. Tesla brought the auto industry into the digital age, and there is no going back. I include this industry in solving pain points, which leads to many opportunities ahead.
I expect more companies to embrace direct-to-consumer, and the number of new brands and new products to increase thanks to the ease of services like Shopify for brands to control their storefronts and go direct to consumers. 2020’s e-commerce surge will no doubt assist this effort going forward, and shopping and buying online for everything is now an ingrained habit for many consumers. While e-commerce has made great progress, there are still pain points to solve in the total experience, automation, delivery, and more.
This point on D2C includes entertainment content. We already see movies go straight to digital services, and I expect this to be the new norm and offer a wide range of new experiences and new content. However, the current unbundled streaming landscape is a hot mess, and while our research and many others proves more consumers are leaving cable bundles for other content services, they find themselves leaving one set of frustrations and finding a whole batch of new ones. There is a huge opportunity here for someone, and as of now, I’d bet on Disney to become the new super aggregator in some way.
Enterprise software is another example where many pain points remain. While many companies embraced the latest technologies to enable their workforce to remotely, it was inelegant to put it kindly. There is still tremendous work ahead to more seamless blend workflows for individuals and teams, and that effort will pay off even when people start going back to the office. I expect big leaps ahead in solving these pain points for this category in 2021.
Lastly, Healthcare is another where I hope more tech companies can make an impact. If anything, the COVID-19 pandemic has certainly shown how broken much of healthcare is in the US but has also shown a further opportunity for digital, like Telehealth and other digital services stand to benefit and bring new opportunities.
While I highlight a few areas, and I’m sure there are more we will see pop up in 2021, the bottom line is, while not sexy, the tech industry’s focus and main push will focus more on solving pain points than pushing brand new inventions, or innovations. This is a good thing because, in order to bring about the new computing paradigm, we need to solve current problems rather than just create new ones.
This article is exclusively for subscribers to the Think.Tank.
This week’s Techpinions podcast features Carolina Milanesi, Ben Bajarin and Bob O’Donnell discussing what they expect to be some of the most important tech industry-related trends in 2021. Specifically, they discuss hybrid work environments, the evolution of semiconductors, 5G and connectivity, corporate social responsibility, gaming, and hybrid cloud and edge computing.
This article is exclusively for subscribers to the Think.Tank.