Tech.pinions

I’m using the Chewy.com filing for IPO news to make a broader point about e-commerce and the niche opportunity in general. Specifically, how it is interesting to think about the success of more niche market e-commerce sites and why those sites may likely be a better commerce experience than Amazon.

There is an interesting observation I’ve been fond of that is specific to when a market gets mature that is worth repeating. When markets mature, it opens the door for niche experiences. Even though e-commerce is still less than 12% of US retail, the majority of US consumers have had an online purchase experience. E-commerce is a mature market and Amazon is one of the sole reasons it has matured. We can understand Amazon as the standard of e-commerce platforms in the US.

Standard platforms help drive markets to maturity. But once it happens once a market matures is where things get interesting. Mature markets, or one common standard platform, set the stage for a diversity of solutions to thrive. This is why after a market matures, we start to see more niche solutions show up in the market.

The behavioral science behind this is driven by the standard platform growing into something that is general purpose in its solution that it does a lot of things but none of them very well. As consumer behavior matures, in this case around online shopping, there needs, wants, and desires become more refined, and as a process, they look for more niche solution.

Chewy.com is an example of this, in that their selection, curation, services, and product portfolio are much more aligned with the interests of pet owners. This isn’t to say people can’t buy the same products on Amazon.com but that if Chewy.com has better reviews, services, product bundles, etc., that are more helpful and relevant as well as similarly priced as Amazon, then it makes it easy for consumers to purchase with Chewy and not with Amazon.

In my own personal life, I have an even better example with a site/app called Reverb. Many of you don’t know this but I’m a hobby guitar player, and I buy quite a bit of musical gear every year. One of my secret addictions is boutique electric guitar pedals to which there is both enormous creativity, diversity, and selection.

Reverb is fascinating to me because they are truly a musical instrument marketplace, in that they hold no inventory and just link you up with sellers, but with a valuable service layer on top. For example, Reverb has brilliantly used YouTube to create content channels to review gear, offer tutorials, cover industry news, and more, in order to spur interest to the items their sellers are offering on their marketplace.

One of my favorite channels is the Reverb Tone Report where new guitar pedals are regularly reviewed. What makes this interesting, is the boutique guitar pedal landscape sees many new product releases making it very hard to follow and discovery tricky. The Reverb Tone Report solves this and frequently causes me to buy a new pedal for my collection.

Video reviews for this landscape are incredibly valuable. Just like they are with beauty and fashion, high-tech, pets, toys, and more. These niche e-commerce sites do a vastly better and more relevant job providing trusted video reviews of the products they carry which makes the decision-making process much more helpful. By offering more relevant services for these niche markets and capturing the customers’ attention via relevant content, it eases the friction for point of sale to happen with them instead of heading to Amazon.

Interestingly, in many cases with my experience with Chewy.com and Reverb, a video review compelled me to buy a product, and when I price compared with Amazon, the product was not even available on Amazon.com. What this example caused me to think about is the way niche market players, in this case, related e-commerce will better serve a target audience than a general purpose player like Amazon. This goes back to an analysis I did on the idea of smaller companies focusing on profitable niches as a sustainable business.

Growth Challenges and Niche Segmentation
In Ben Thompson’s Stratechery daily update last week, he brought out a point that I think is one of the most important observations to understand as it relates to the biggest tech companies in the world. From his daily update:

There is a theme emerging here: there is reasonable doubt about just how much low-hanging fruit is left for the largest tech companies. Apple has sold the world iPhones, Google has stuffed mobile search, and now Amazon has seized the obvious parts of e-commerce; what comes next is much more difficult and expensive.

His point echoes a theme I’ve tackled many times over the years that the easy growth for many of these companies is over. By easy I mean, when a market is growing, and new customers are up for grabs. It seems that Apple, Google, Microsoft, and Amazon have largely reached the point where adding new individual customers is harder, slower, and a bit more difficult and as a result, their growth strategies turn to make the most money off existing customers. Note, this is an end-consumer point I’m making since three of the mentioned companies (Amazon, Microsoft, and Google) still have new customer businesses on the cloud platform side of their business.

With that backdrop of slowing end-user/consumer growth, the idea of niche players stealing a share of wallet from these platforms becomes interesting when you think about acquisition strategies. For example, you could argue Amazon should buy Reverb.com if they felt the music instrument industry was big enough dollar wise to add to their bottom line meaningfully.

This niche player theory is also a key part of the evolved thesis of many venture capitalists I work with. Their eyes are looking to those new investments that don’t necessarily plan to be a new Amazon, Microsoft, Google, or Apple, but to opportunities that look to better serve the customer of those platforms in a way that is intentionally underserved because it isn’t that interesting to the bigger players as of yet.

This is the new playbook to watch in a decade or longer which will be dominated by the big tech companies. By nature of their size and shifted focus, they will leave parts of the market open for niche players to serve. Then, inevitably, as their growth further becomes challenged, their eyes will turn to these niche players as acquisition targets in order to boost their bottom line. This has happened so many times before that it isn’t surprising to anyone who studied business history, but it is the cycle we found ourselves in an opportunity for those with a keen eye.

There were a few key insights that came from Apple’s Q2 earnings. One thing I’ve noticed through the years, and a reason I spend more time writing about Apple’s earnings than any other company, is that in many aspects trends within Apple’s ecosystem and their users, give us insight into other companies challenges and opportunities. In some regards, Apple is a bellwether for consumer market behavior.

iPhone Sales Stabilizing
In general, the smartphone market seems to be stabilizing. There are likely going to be times where Apple’s sales outgrow the smartphone industry, but in general, it seems the worldwide market is stabilizing, and we are getting a handle on what to expect in terms of annual volumes.

I wrote about this extensively after the holiday quarter where it was clear iPhone sales had peaked. It was inevitable and many lessons we learned tracking the PC category once it peaked applied to both Apple and the smartphone market. The biggest question on hardware makers minds when the PC peaked and began to decline was how low the bottom would be in annual sales. That was the question as companies planned roadmaps for hardware, and retailers made plans to carry inventory. For several years the market faced decline then stabilized. The smartphone market appears to be stabilizing a bit more quickly, and that is likely to the shorter life cycle (3-4 years) for smartphones vs. PCs (5-6 years).

In some brief conversations, I had with investors last night the question of whether the worst is behind us for iPhone sales. While it does seem from an iPhone business revenue perspective the worst is behind us, thanks to higher ASP and stable margins (for now), there is still likely to be some unpredictable fluctuation in unit sales as certain markets still stabilize their refresh cycles.

One key strategy for Apple in stabilizing iPhone sales is their trade-in program. This has always been a win-win strategy for carriers and their customers, and it makes a lot of sense for Apple to invest heavily in this program. It was interesting to hear Tim Cook talk about the success of this program. This was the key part of his commentary that stood out to me:

Our retail and online stores continue to be a key point of innovation. As we mentioned in January, we’ve been working on an initiative to make it simple to trade in a phone in our store, finance the purchase over time, and get help transferring data from the old phone to the new phone. As part of this initiative, we rolled out new trade-in and financing programs in the U.S., China, the UK, Spain, Italy, and Australia. The results have been striking. Across our stores, we had an all-time record response to our trade-in programs, and with more than four times the trade-in volume of our March quarter a year ago.

It seems from this quote, Tim Cook is signaling the more regions, and stores, that support these trade-in programs the bigger upside potential to keep predictable patterns of iPhone sales. For Apple, this is crucial and brilliant strategically in helping them assess demand and handle build-inventory. It also puts them one step closer to their consumer controlling more of the phone purchasing experience than when a consumer buys the device through the carriers (which is still a terrible experience).

Apple’s retail remains one of the most under-appreciated assets Apple has at its disposal to better manage the relationship with their customers in a very Apple (good user experience) way.

The other part of these trade-in programs worth mentioning is Apple then has a resale market for trade-in phones. Most people don’t know these programs are a carriers best friend because it allows them to sell a phone twice and the second time often being to enterprises buying in volume. Tim Cook also mentioned on the call the high penetration of iOS in the enterprise and the strong demand of enterprises to buy iPhones. Many businesses purchase refurbished iPhones for their mobile fleets, and it is healthy revenue; Apple can get a slice of when it comes to their trade-in programs.

A Few Points on China
It is worth highlighting a few things related to the China market. Apple’s management indicated the initial concerns they had over China after the December quarter might not be as worrisome as previously thought. There are things like government stimulus plans, pricing changes from Apple, and the success of their trade-in plans which has helped create a more positive outlook from China. A point about the trade-in plans in particular, which was one thing Tim Cook said was doing specifically well in China. Chinese consumers have long sold their devices to the grey market in China and used that money to buy a new smartphone. This is already a normal behavior in China; it is just that most outsiders never saw it because of how hard it is to track the grey market. In fact, it was this grey market that led to a massive installed base of iPhones (>100 million) in China before Apple was ever officially partnered with a carrier there. The point I’m making is China was a market always poised for success for an Apple trade-in program, and I expect that to be overwhelmingly successful in China.

Were Chinese consumers leaving Apple? This is a question I often received as there was a common reception that because of WeChat being a dominant platform, consumers would jump back and forth. This never really happened in mass, however, as most consumers stuck with their platform of choice. That being said, it is noteworthy that both Android (not a single OEM) and Apple have very high loyalty rates in China. It does not appear there is, or ever has been, as many platforms switching in China than we have seen in other markets historically. Looking back, it is clear the economic issues in China paired with rising iPhone costs was the biggest reason for the drastic slowdown.

All of that should be encouraging for Apple since they are manageable problems and they are not losing customers. This also paves the way for more services innovation locally from Apple in China as they start to invest in a more services specific (gaming, video, etc.) strategy for China.

Lastly, Services is Still a Story
I think I’ve written more about Apple’s services as a theme than any other Apple topic this calendar year. But it is for a good reason. Just look at how investors respond to Apple’s services growth. Apple sees declines in iPhone sales and revenue yet continued growth in services and the stock is responding positively largely thanks to the services upside potential.

I jokingly tweeted yesterday that it would be ironic if Apple finally gets the PE they deserve because of their services business. But it would be ironic, yet in a way predictable. Investors seemed to largely subscribe to the idea Apple would always face competitive threats from low-end priced devices. Even when the iPhone continued to prove that theory wrong, it never seemed to change investors views. But, investors love predictable revenue businesses which is exactly what services are. This is why the continued success of Apple’s services revenue, now the second largest business from a revenue contribution standpoint, will continue to drive Apple’s stock up.

But this services strategy has another dynamic I think is interesting. If Apple can get the majority of their customers as a services subscriber in some capacity, it practically guarantees that customer is never leaving the Apple ecosystem. Which, if we carry that logic out, means Apple can almost guarantee hardware sales of not just iPhones, but also whatever comes after iPhones (like AR glasses maybe), and a range of other hardware and accessories. The deeper Apple goes with services and getting their base of customers to buy into their services the near impossibility it will be for competitors to steal their customers with future hardware. Services will be the ultimate lock-in for Apple.

This is why it is imperative Apple succeed with services. If they don’t, it makes them a bit more vulnerable in whatever the next technological phase develops into.

Some years ago, when I was overseeing a major customer conference for a client, I had the chance to do a fireside chat with Masayoshi Son, Founder, and CEO of Softbank. He had just purchased Comdex and was beginning to look closer at US companies to expand his business reach.

One of the things he told our audience is that he had a vision for his company and that his vision spanned a 300-year time frame. He had spoken to select media about his 300-year company vision before my interview with him and had already been ridiculed in the media for what was called an “outlandish idea” considering his visionary time span. US businesses have trouble envisioning a three year or five -year plan, let alone crafting a vision for hundreds of years into the future. In fact, the Western Mind has difficulty with envisioning the future and leaves that to science fiction writers instead.

I have been having discussions with people I know who understand the eastern mind and are especially experts on China. They point out that 50-100+ year plans are not unusual for many Asian political leaders, who have grand visions for their countries and start developing very long-range plans as soon as they take office.

One of my China Sources tells me that China’s Belt and Road initiative is a good example of this long-term global planning and explains their strategy to become an economic superpower to rival the US.

Here is how The Center for Strategic Studies explains this important program backed by Chinese President Xi Jinping:

“Chinese President Xi Jinping hosted the leaders of 28 countries and representatives from several other countries at the Belt and Road Forum in Beijing on May 14-15, 2017. Announced in 2013, the Belt and Road Initiative (also known as One Belt, One Road or OBOR) aims to strengthen China’s connectivity with the world. It combines new and old projects, covers an expansive geographic scope, and includes efforts to strengthen hard infrastructure, soft infrastructure, and cultural ties. At present, the plan extends to 65 countries with a combined Gross Domestic Product of $23 trillion and includes some 4.4 billion people.

I encourage you to read this synopsis as it lays out the idea that China wants to be the center of the trading and commerce universe and by building the types of roads and shipping ports linked to these 65 countries, an All Roads lead to China concept and strategy is taking shape. President Xi is driving this program, and along with his One China Policy, and his most recent promotion to the president for life, he is guaranteed that he will be its leader and director for years ahead in trying to make China the dominant economic world power again. And you can bet he is already grooming his successor whose goal will be to continue driving what at least a 100-year strategy is. Chinese insiders believe Chen Minor could be Xi’s successor to carry on this vision when Xi no longer can lead the party.

Xi Jinping Has Quietly Chosen His Own Successor

Another area China wants to dominate is tech and more specifically, Artificial Intelligence. The book that lays this strategy out clearly is Kai Fu Lee’s “AI Super Powers-China, Silicon Valley and the New World Order.”

This is a fascinating read by one of the smartest people I know in tech and who understands Chinese World domination strategy well. As he points out, China is devoting billions of dollars, and thousands of engineers working full time on AI breakthrough technologies and fully expects to be the dominant player in AI even though the US, at least at the moment, is ahead of them in AI research.

China also wants to be a tech powerhouse like the US. When I am in meetings in China, I am always surprised to find how many people in these meetings have doctorates in one of the many computing and engineering fields. Their education system favors math and the sciences and is building a workforce that is highly tech literate. Part of their 100-year goal is to create a tech-driven country that can use tech to advance China’s goals and to minimize their reliance on the US created technology.

While China is methodically plotting to be the economic power of the rest of this century, US companies still mostly plan quarter by quarter. And when laying out future strategies, they are hard-pressed to envision any long-term vision and company directions more than 10 years out.

At the same time, our government is in turmoil with infighting at every branch of government and at best, at any given time, they are laying out a US vision for the future based on presidential four-year terms. Even if a leader has a long-term vision for the country, getting that vision funded and passed by a split congress is difficult if not impossible in the Washington climate of constant bickering and partisan stonewalling.

It’s no wonder that China and Russia continue to try and hack our elections and use social media to sow discontent within every level of politics. By also taking aim at every US citizen, they assure that the US is mostly treading water when it comes to driving a unified long-term vision for America. And it will take a unified America to combat the world dominating economic threat China will pose in the future.

China’s main quest will be in Asia, while Russia has a similar quest for Europe. Next week I will share thoughts gleaned from Russian experts I have talked to about Putin’s similar vision for Europe and how China in the East and Russia/Europe in the west could isolate the US and minimize its economic power in the future.

Many of my long-time readers know I have somewhat of a double life. I have a high-tech life and my low-tech life. My high-tech life involves lots of the latest, often unreleased gadgets, where I try and live in the future and make sense of what all that means. My low-tech life involves a lot of gardening, farming, and animal husbandry. I often merge these lives, like in this story of how my iPhone and YouTube were a real-time midwife as I assisted my first goat birth. Or when I tested my drone to see if I could use it to herd my goats. But recently, I had another merger of tech and the farm life when I had a chance to FaceTime, the game warden.

We recently started raising a flock of sheep. We invested in four females, and a male and our desire is to build a flock and keep them pro-creating. Early this spring we successfully started having lambs born from all our female ewes. It’s always a great time on the farm when babies are born, and our kids love going out and playing and holding the newborns.

But, we live in the country, very close to the mountains, and because of that, we have frequent unwanted predators in our area. We have had several close run-ins with Mountain Lions with people in our neighborhood but not yet in our yard. We have had issues with Bobcat’s killing our chickens and Coyote’s as well, but I’ve never lost a larger animal in our livestock to a predator. Until recently.

We first lost three of our babies to a Coyote, I think. Then a few weeks later we lost an adult ewe, and that is when I got more worried. Especially, since I see regular Mountain Lion sighting posts on Nextdoor. So I wanted to make sure a Mountain Lion did not kill our ewe, so I called the game warden. The country posted a request to report any Mountain Lion sightings as they are trying to track it and trap it.

Considering I had not lost a larger animal to a predator I couldn’t tell if what killed our ewe was a Coyote or a Mountain Lion, so I reached out to the county. I had heard if there was suspicion of a Mountain Lion they would come out and do an inspection. Eventually, I got a call back from the Game Warden.

I didn’t have all day, and I couldn’t leave the sheep in my yard for days so I was hoping the Game Warden could come out sooner than later. But then he made a request I did not expect. He has currently in the Santa Cruz mountains dealing with another issue but asked if I could FaceTime and then show him the kill and he could asses it virtually. I thought this was interesting because he had no idea if I had an iPhone, but given more than half the adults in the US have an iPhone it wasn’t a bad bet. I figure if I didn’t have an iPhone I probably could have sent him pictures, but since we both could FaceTime, it made it possible to do an assessment in real-time.

So we started a FaceTime video call, and I followed his directions and showed him every angle and detail he asked for during our brief 10 min chat. Ultimately he concluded it was a Coyote and then offered some suggestions as to how to keep Coyote’s at bay, most of which I already knew.

What’s the point of my story you ask? Well, this event struck me that video conferencing, or FaceTime, in particular, has truly and very quietly gone mainstream.

When Apple first released FaceTime, it was one of those technologies we all assumed would go mainstream but it diffused quite slowly. A number of reports had come out early on talking about the number of users regularly using FaceTime. There were even some reports about how this would impact carrier networks, data plans, and broadband in general. But then it all went quiet, and people stopped talking about video calls altogether. It was hyped as the next great communication medium and then total silence.

This is not just in consumer behavior but also in the enterprise. The number of regular video conferences as an everyday behavior for work and collaboration is all but normal for many enterprise workers. A fundamental way we talk and collaborate is now mainstream and became so rather quietly. This observation is what interests me the most.

I have written before about how I see my teenage daughters using FaceTime for homework, and now Group FaceTime for remote hangouts. But among Gen Z it seems their primary communication is either by text or by video call. They literally never just “talk” on the phone. I have several close friends in construction and they FaceTime almost daily with their foreman’s to talk over plans or inspect work. What is interesting about this is that it allows the company to take on more business when a foreman can be remote and still visually inspect areas of a job. In this case, it isn’t always a total replacement for physically being there, but not every inspection completely requires an in-person appearance. It used to, in the days before video calls, but now they can be even more productive by being “transported” to different job sites via FaceTime.

I mentioned the workplace, and as remote working becomes more the normal, the ease of video conferencing is not a regular activity. Part of what makes this possible is not just that broadband is so good now the quality of the video conference is amazing, but that we also have remote collaboration tools from screen share, to whiteboard, and the broadband is good enough that every collaboration experience is fluid with no delays or jitters. I just recently did a video conference with a client in Taiwan, and even they admitted this was better than flying 15 people over to meet with us and equally as productive.

Video calling, video conference, remote collaboration using video in real-time, and more is a sleeper trend I’m fascinated that doesn’t get enough attention. It seems like a fairly transformative behavior that is a big deal that slowly crept into our regular behavior without anyone really blinking an eye. Perhaps there is something to be said about this type of technological adoption and how some of the most life-changing technologies may be the ones that are most quietly diffused.

I have been a subscriber to Texture, the magazine subscription service that Apple bought in early 2018. This service has close to 300 magazines and, in my case, I subscribe to about 35. I subscribe to all of their food, tech, news and sports magazines and the two diabetic publications they have in Texture. If I had to pay for all of these on an annual basis, it would cost me over $600. Instead, I pay $120 annually. Of course, I don’t read all of them each month, but I get through as many of them as I can in my free time.

As Texture evolved, it added special sections where it curated top news and features extracted from many of the publications, and I could tailor these to my own personal preferences. This made keeping up with the most important stories published each month possible. I also liked the layout and format of the IOS Texture app, which sadly, will be shut down completely on May 28, 2019.

The reason this app is being shut down is that it has been integrated into the News+ app and is now a key feature of the Apple News service subscription. Since I am a big reader of magazines, subscribing to Apple News+ is a no brainer for me since it is the same price I pay for Texture but now get Apple’s curated News Service too.

However, I am in the minority when it comes to being a serious magazine reader. According to Forbes, “The newsstand’s decline is epic. Magazine circulation on the newsstand peaked in 2007, with a sales volume of $4.9 billion total. That number fell to an estimated $2.0 billion in 2017, according to the News Group, one of just two remaining magazine wholesalers.

The good news is that digital magazine readership is showing signs of some stability. These trends surely are part of Apple’s decision to back Digital magazines in their News+ service.

As for the state of Digital news, Journalism.org weighed in on this topic last summer:

“Gauging digital audience for the entire newspaper industry is difficult since many daily newspapers do not receive enough traffic to their websites to be measured by comScore, the data source relied on here. In the fourth quarter of 2017, there was an average of 11.5 million monthly unique visitors (across all devices) for these top 50 newspapers. This is nearly the same as in 2016 (11.7 million), making this the first year since we began tracking the trend that did not show a double-digit rise in web traffic: There was, for example, a 21% increase from 2015 to 2016 and an 18% rise from 2014 to 2015.”

While the numbers of news readers were flat, it did not see a decline. And Apple hopes that their News+ service can help this number of readers for newspapers and news sites rise in the future.

MediaWeek reported recently on what type of devices are used to access digital news, and not surprisingly, mobile devices were used often as digital readers:

“Eight in ten of the 13.2 million digital news media readers use mobile for general internet access and while this number is still surpassed by computers and laptops at 83%, mobiles will grow faster. Tablets are used by 46% of digital news media readers for internet access, and readers use an average of 2.4 devices to access the web.”

But the pitfall for Apple comes in the competition for new subscriptions that are already eating into people’s budgets. Our latest services research among US consumers shows that video subscriptions represent the highest number of paying subscribers. Music services represent the second highest as a whole, while News is only 7%. See chart below:

Subscriptions are a tough business, and consumers generally have a lot of them already. People also have to pay at least $75 for their monthly cell phone bills as well. So a news and magazine subscription on top of that could be hard for a lot of people and families to pay for and most likely not seen as a must-have as much as video, music and cell phones are to them.

In other data I’ve seen, looking at subscription intent, 63% of consumers are not considering a news subscription of any kind. That is a significant headwind for Apple News+ or any combined news service aiming at a US audience.

In my case, I pay $10 for Apple Music, $10 for Apple News+ and I also have Apple’s 2-gigabyte storage plan, which also costs $10. So each month I am already paying Apple $30. Add Apple’s new movie/TV subscription, and at the very least I would be paying Apple $40+ a month. I also pay for Netflix and Hulu.

In a recent twitter comment, Ben Bajarin suggested that Apple might end up doing some bundled subscription of Apple Music, Apple News+ and Apple TV+ for a reduced fee. I don’t know if this is true or if it will happen, but I think the idea of paying Apple perhaps $30 a month on top of their Netflix subscription, cable and cellphone bills may a bit hard to swallow for American families whose budgets are already stretched.

Apple recently introduced Apple TV+, which is more likely to be of greater interest to family’s if they are to add another subscription service from Apple. Although I am personally bullish on Apple News +, this is the one new subscription service from Apple that represents the greatest challenge for success, even though I believe it is one of Apple’s most important service offerings in their pipeline.

Yesterday, Tesla had what they called an Autonomy Day at their headquarters in Silicon Valley. The focus was on autopilot features, and they highlighted their custom silicon development for the first time since announcing they were moving away from NVIDIA’s solution.

One specific quote from Elon struck me and stood out as a statement about how far Tesla is in front of their competition in autonomy. Elon stated that all current Tesla’s being built already contain the technology (hardware) for fully autonomous driving. He said all Tesla has to do is continue to evolve the software. Basically, if you buy a Tesla today, you will have a fully autonomous car in the future via software updates. There is no other car company competing today who can make such a claim. And I’m not sure any car company competing with Tesla will be able to make that claim in the near future.

I have driven several friend’s Teslas and used the auto-steer future. And while we can’t consider that fully autonomous today, it is one of those things that when you try it for the first time, it feels transformative. Like you are living the future. Tesla is the automotive example of the famous William Gibson quote that “the future is here; it’s just not evenly distributed.” Over the next 20 years, or so, as we work out the technology to provide fully autonomous solutions, I’m confident autonomy will be a staple feature of every automobile.

I have been sitting on some research, working out what exactly to do with it, for a while now. My friend Aaron Suplizio of Experian and I ran a comprehensive research study on Tesla owners. We wanted to know what Tesla owners thought of their Tesla’s and what specific features they loved, didn’t like, and overall how they used all the features on their car. Our study is way too long to share all of it here, but I did pull out some specific data points around the autonomy features Tesla’s have packed into them.

Firstly, we ran a lot of questions about customer satisfaction. We tested satisfaction overall and on nearly every feature of a Tesla. For the chart below, I pulled out the specific autonomy features related to the overall Autopilot feature to show how satisfied consumers were with each one.

Rarely when looking at someones, customer satisfaction number do they break out the percentage for each answer. Almost always when someone mentions customer satisfaction, they give you an overall satisfaction number that includes the Very Satisfied and Satisfied. I always break this out in our data to show how many people say very satisfied vs. just say satisfied. I’m of the opinion that a product has truly nailed a high customer satisfaction number when the majority of answers are in the very satisfied category. Here, that shows that Autosteer is a killer feature and one that is very well liked by Tesla owners.

The second chart I created is the frequency of use of the same specific autonomy features.

I found it particularly interesting that 55% of Tesla owners are using auto-steer at least once per day. Considering auto steer only works in certain conditions, like a freeway, this suggests many of these owners are frequent commuters but that when Tesla’s are truly fully autonomous in all situations, this frequency number will go up. I can imagine a future survey we do when fully autonomous cars are possible, where we find it rare for people to be manually driving their cars at all on a daily basis.

When you look at the frequency of use for summon, for example, that is another feature that is limited to only certain conditions. I think this number would go up quite a bit as well once it works all the time in every situation.

Generation I Don’t Want to Drive
I greatly appreciated this article in the Wall St. Journal called Driving? The Kids are So Over It. I appreciate it because it’s timely and relevant for me. My oldest daughter just turned 16, and we are currently helping her work toward her license. What she fails to understand is that we don’t want to drive her everywhere she wants to go. Yet, she refuses and shows nearly no interest in driving. Which I can relate mostly related to in that I am not a fan of driving either, but at the end of the day, driving is often a means to an end. For kids today there has to be an end, and as this WSJ article points out, they have a harder time seeing that end, and driving as a means, than many generations prior.

I remember when I got my license, and I couldn’t wait because there were so many places and things I wanted to do that my parents did not want to have to drive me around to do. What I did not realize at the time was that getting my license was not just freedom for me but freedom for my parents also. I literally can’t wait until I don’t have to play chauffeur to my daughters and their liberation is mine as well.

But where we struggle is in their desire to drive, but right now we are sort of forcing them to drive. My hope is when my daughter starts working at a local theme park this summer that she will understand the means to the end driving is. I don’t expect her to want to drive there and, like me, I’d take getting driven where I need to go over driving every day of the week.

It isn’t surprising to me we hear of 16 yr olds not wanting to get their license right away because they don’t see the need. But this particular behavior pattern becomes an interesting question when not only self-driving cars become a reality but also in an era where car ownership is being questioned due to the broader ride-sharing economy.

At Tesla’s Autonomy day CEO Elon Musk announced an interesting new robotaxi service that would allow Tesla owners to let their cars become RoboTaxi’s and perform a ride-sharing service while they are at work or at home. This is a fascinating idea, in an era of Uber and Lyft, where you can earn money with a ride-sharing side hustle from the comfort of your office desk or couch.

However, this also leads me to believe Tesla itself will build and offer a ride-sharing fleet as a way to bring in extra revenue for the company. If Elon Musk is right that Tesla is far ahead of the competition, including Waymo, then a Tesla fleet focused on ride-sharing could make quite a disruptive idea and a revenue boom for Tesla.

Autonomy is automotive is going to be one of the most interring storylines to watch. Tesla will pressure nearly all the other car companies and how they respond is crucial. Most importantly, car companies will need to get out of their own way and let the technology companies like NVIDIA, Waymo, etc., provide them with complete solutions if they have any chance of competing with Tesla. I’m not sure many current automotive brands will survive the next 20 years without serious adaptations to their way of thinking about the future of automotive.

Yesterday’s note got quite long, so I saved some talking points for a follow-up today. I’ve also had several discussions with investors focused on Apple and Qualcomm which helped me flesh out a few more thoughts as well.

The FTC Case Still Lingers
There is an ongoing ITC case as well, but I’m going to focus on the FTC case for now.

I wrote up my thoughts overall on the FTC case, which was heavily lobbied by Apple. It was fascinating actually to see Apple’s opening statements in the short-lived trial in San Diego earlier this week. Their entire argument and main points were nearly identical to the FTC’s when trying to paint a monopolistic picture of Qualcomm.

At this point, while a settlement is a possible outcome of the FTC and Qualcomm, I think it would be tough for the FTC to rule against Qualcomm. Their entire argument did center around Apple as the prime example. As a part of this settlement, Apple has just signed a license and essentially agreed to the very thing they thought was abusive and illegal.

Hopefully, you can see where the issue may lie bot in public perception but also in the total case the FTC tried to make when your prime example settled and signed a license and agreed to drop all litigation. If Qualcomm’s business model was as illegal as the FTC purports then why would the biggest, strongest, and most innovative company in the world agree to sign up to their business model? I understand it isn’t quite that simple, but in the court of public opinion, it is that simple.

Is Qualcomm’s Licensing Business Model Finally Justified?
Qualcomm undoubtedly felt their business model was under direct attack. And ultimately, the idea of patent holders being able to get fair value for their inventions was similarly under attack. There was significant investor concern that should some of the litigation and regulation go unfavorably for Qualcomm their entire business model could be in question.

However, with this settlement, and the fact that Apple was the largest and strongest force against Qualcomm’s business model, I lean toward the opinion that Qualcomm is now justified as a part of this settlement. Meaning, the fear of further litigation or direct attacks on their licensing business model should be gone.

Which is probably why I heard from friends who work at Qualcomm that mood at the company was buzzing and as optimistic as ever. It even inspired a tweet from Qualcomm President Cristiano Amon.

Not only is Qualcomm’s business model now justified but so is also their position as an innovator.

Apple’s Influence
Interestingly, and this directly speaks to the massive influence Apple has on the supply chain and the market, but this settlement and Apple now a direct licensee of Qualcomm will make it harder for all other licensee’s to complain or file suits against Qualcomm. I had heard from many of my sources in the supply chain that this effort by Apple had given them hopes they would all be able to acquire more favorable license terms in the future and thus acquire a better financial position.

Now with Apple settling and essentially establishing a baseline of a licensing deal, it may actually reverse that leverage and give more back to Qualcomm as they go forward with their partners and licensees. What I mean is, say a licensee comes to them when their contract is up and says we want a better deal. Qualcomm will have the license deal with Apple as a way to counter in those negotiations. This is why, as a part of the settlement, I think Qualcomm fought for a higher license fee and then gave Apple more favorable terms for the cost of components, lump sum payment, and possibly royalty rate.

I’ve seen four different buy-side financial models that estimate the licensee deal to be in $8-9 which is right in line with Qualcomm’s range and much much higher than Apple originally wanted. This potential impact on the competition is one of the more interesting parts in my mind.

As I stated before, Apple would be vulnerable competitively if these efforts were a success and their legal pursuits ended up giving their competition a window to negotiate better rates on license and Qualcomm IP. Imagine OnePlus or Xiaomi, already gaining significant share in markets Apple wants like India (which are insanely price sensitive), the ability to offer even lower prices on their devices using the latest innovations from Qualcomm. Apple would have enabled this if they were successful in damaging Qualcomm’s business. If you follow my logic, then realistically, the best thing Apple could do competitively is to agree to a higher license fee and then work a better deal in other areas. Doing this would guarantee their competitors could not get a better licensee fee and thus use that savings to lower prices. Similarly, Apple would be granted a discount in other areas where their competition cannot use leverage, like scale, to negotiate a better price deal. All in all, what just transpired makes it much harder for Apple’s competition to go downstream with their prices and still make some money than if Qualcomm’s business model was hurt.

Many of Apple’s competitors at the lower price tiers live on very slim margins. To those competitors, every penny counts. Penny’s countless to Apple, to a degree, but their deal with Qualcomm makes it even harder for Apple’s competitors to pinch those pennies.

80,000 Patents
Lastly, I want to make the last point on Qualcomm’s patent portfolio. Whether Apple uses any of Qualcomm’s patents, which come as a result of its license, isn’t necessary. However, having access to this portfolio enables a few interesting things competitively. Firstly, Apple would have access to any innovations Qualcomm creates in the same way their competition will. We all know Apple is great at innovating but what if Qualcomm created something that enabled Apple’s competition (nearly all who have a Qualcomm license) to have some technology that further differentiates them. A Qualcomm license evens the playing field with all of Apple’s competition in the case Qualcomm had some real breakthroughs in the works.

Second, whether or not Apple uses any of Qualcomm’s latest innovations, the reality is most of Apple’s competition relies heavily on Qualcomm’s innovations to compete (Google, Samsung, OnePlus, Xiaomi, etc.). At the very least Apple now has a clear eye on all the things their competition has at their disposal.

Lastly, while Apple is a first class innovator, Qualcomm is no slouch either. Qualcomm likes to say of themselves; they are the R&D resource for the industry, and this is mostly true. In a phase, where Apple may be looking to be cautious in their R&D spending to save costs during a period of slowing growth, leveraging Qualcomm as an R&D resource via access to their patents is not a bad strategy. And there are several things Qualcomm does better than Apple and may have some useful technology as Apple seeks further to enter new categories like AR head mounted displays and beyond.

What a day yesterday! The biggest news of the day, probably even the month, is that Apple and Qualcomm have settled their dispute over royalties and licensing and dropped all litigation. There is so much to unpack about this and the broad implications for the industry. But the day was not over! Hours after the news broke that Qualcomm and Apple settled, which ultimately led to a deal for Qualcomm to supply chips to Apple and Apple acquiring a license to Qualcomm’s patent portfolio, Intel announced they were excited the 5g smartphone modem business! The day felt like weeks when all was done, but each event was entirely linked. Understanding how we got here is the crucial first insight.

The Long Road Back to Qualcomm
Bear in mind, and I’m trying to connect the dots. But, I know quite a bit about what chatter goes through the supply chain, so I feel like my hunch is correct with my interpretation of this timeline. Ultimately, I think Apple’s end goal had always been to acquire a Qualcomm license on their terms, not Qualcomm’s. My reasoning? Apple was single-handedly keeping Intel’s smartphone modem business afloat, and doing most the heavy engineering for Apple, simply so they could have some leverage on Qualcomm. This was one step in a longer plan. Apple then organized some tactical lawsuits, including heavily lobbying the FTC and ITC regulatory bodies to file suits against Qualcomm on the basis of antitrust. Apple was spreading a wide net, hoping to have a few favorable rulings which would force Qualcomm to make some changes to their licensing model, or at the very least, give Apple even more leverage to negotiate an extremely favorable license deal.

Some people have theorized that Apple wanted to dismantle Qualcomm’s licensing business model completely. This theory has never set well with me, because if you play that out to its logical conclusion, you realize that if Qualcomm’s business model was significantly impacted to the point that they can’t charge what is fair for their patents and have to charge much less, then that is actually very good for Apple’s competition. So if this was Apple’s goal, they would actually be enabling their competition to access a rich technology portfolio at a much cheaper price and as a result, be even more aggressive with their smartphone prices against Apple’s. In fact, one could argue that disrupting Qualcomm’s licensing business model would be disruptive to Apple because it would enable a significant amount of innovation by hardware companies who can offer much lower prices than they do today.

Apple’s goal in these tactics was simply to gain more leverage on Qualcomm than they felt Qualcomm had on them. Part of this leverage would come if they won a few favorable lawsuits that devalued Qualcomm’s patent portfolio. Unfortunately, a few of those did not go their way. One, in particular, I found interesting, was a suit that Qualcomm brought on Apple around patent infringement for which a jury awarded a modest $31 million dollars to Qualcomm. But the most interesting part of that case was the jury valued just three Qualcomm patents at $1.41.

Qualcomm has over 80,000 patents, and while it would be impossible to set a price on each one, a price of $1.41 for only three could lead to an unwanted precedent by Apple.

Qualcomm’s defense in all of this was to defend its business model by bringing suits against Apple in patent infringement. Apple’s offense was to prove Qualcomm behaved in a monopolistic way. Qualcomm had won several other suits in Germany and in China were courts agreed Apple infringed on their patents. Quite simply, Qualcomm was successful in proving there was more value in their patent portfolio than Apple wanted to admit. Given Apple was seeking, and ultimately acquired via the settlement, a direct license to Qualcomm IP they needed to be able to justify the license + royalty + chip costs could not be justified, and they hoped the courts would help with that justification.

Intel’s Leverage
Bringing Intel into the fold as a dual source was another attempt at Apple to gain leverage over Qualcomm. During the days I attended the FTC trial against Qualcomm, it was interesting to hear Tony Blevins, Apple’s VP of Procurement talk about why they choose Intel and the bind they were in with Qualcomm feeling like Qualcomm could dictate terms to them, and they could do nothing. He also made the point to talk about how Apple always prefers to have multiple component sources because it allows them to negotiate better. So it’s clear Intel was there to add a second source and thus provide some leverage.

The only issue was Intel was not as nearly fully committed to smartphone modems as Apple wanted. From many of my sources, I heard multiple times that not only was Apple contributing vast resources to doing most of the engineering work on Intel’s modem but Apple also was the one who put forth the effort of getting Intel’s modem globally certified. Furthermore, Intel was taking a financial bath on the modem business and given the amount of work Apple was doing for Intel on the modem engineering, and I wouldn’t be surprised if Apple was paying next to nothing for the modem part.

Newly appointed CEO Bob Swan had also been confirming what I had known for years, that Intel was not interested in being in the modem business in the long-term. One of my game theories was always that Intel would ultimately exit the modem business and Apple would buy the IP to use in their own internal modem efforts.

When it comes to understanding the timeline that got us to this settlement, I believe Intel’s decision to leave modems was the first ball to drop. Apple’s ultimate decision was also likely swayed, if this rumor was true, that Intel was going to be late to 5G with a globally certified part. However, that was a symptom of the underlying problem of Intel not committed to the modem business and not investing in it as they should if they were serious.

Given how much work I know Apple was doing for Intel on modems, I think Apple knew for a while Intel was not a long term solution for them and I think that has been clear for 5G for over a year now. I am convinced Apple has known for a while they needed to go back to Qualcomm around the timing for 5G.

The Deal
One thing I did not know that came out at the FTC trial was that Apple was never a direct licensee of Qualcomm. This is part of the reason they went on an offensive strike. Apple did not like the idea of having to sign a license to Qualcomm IP, pay for that license, then still pay for the chipset. They call this the no license no chips policy and their whole argument in court was this was illegal double dipping because Qualcomm was one business with two divisions QTL and QTC. One sells chips, and the other sells licenses, and they are deeply intertwined. Apple was skirting around this by using the Qualcomm license of its contract manufacturers like Foxconn, but they had several agreements they entered into with Qualcomm which included things like a rebate payment from Qualcomm to Apple, exclusivity of Apple to use Qualcomm chips, and some agreed upon payments and rates. But Apple did not have a direct license deal with Qualcomm.

As a part of this settlement, Apple has now entered into a direct license with Qualcomm that’s the part that interests me the most. The deal, as we understand it, is a six-year license to Qualcomm’s full patent portfolio and a multi-year chipset deal with some options going forward.

We do not know how much Apple has agreed to pay for a license, royalties, or for the chipsets but we do know, from the court trial information that came out that Apple has never paid more than $20 to Qualcomm and after the rebate payment deal their costs were $7.50. So while it is totally I guess I’d wager the total deal came out to somewhere between $5-7 per device.

The straight forward part of this deal is simply Apple will get 5g modems from Qualcomm and can use any patents they want and not have to worry about patent infringement litigation going forward. But the big question in my mind is how does this impact Apple’s own internal modem efforts. Here is where I have some theories to propose.

The first is the obvious one, and Apple can buy Intel’s smartphone modem IP and use that as a part of their own internal efforts. This would not conflict with the current Qualcomm deal since Apple’s own modem is not likely a feasible option until 2022 or later and would give 5g more time to mature as a technology and Apple the time to get the 5g part ready for the global landscape. The second theory is a bit more interesting but also feels less likely. Perhaps, and I emphasize perhaps, as a part of this direct license Apple has with Qualcomm, the two companies can work together on a solution that integrates Qualcomm’s modem onto Apple’s A series SoC. This is the ultimate goal to embed the modem onto the SoC as it brings in benefits of power and performance vs. using the modem as a separate part on the board. Also, as Apple gets into more small form factor wearable solutions, it is essential the modem be integrated into their SoC. That is why the end goal is for Apple to design the modem onto their chipset designs.

This seems less likely, but would be super interesting, because it has never been done before. The other factor is if that were to happen then Apple would be even more deeply tied to Qualcomm since it would take quite a joint effort to accomplish an Apple design SoC with a Qualcomm modem integrated on it. But, given how hard the modem business is, and how Qualcomm does have the best wireless technology, I do not think this scenario is out of the realm of possibility.

This has been a fascinating story to watch and follow, and there are still some important parts to address in more analysis of this relationship as we see how it plays out.

We have known for a while Disney planned on launching a new digital subscription plan around Disney’s strongest brands. Already have a digital subscription offering for ESPN (ESPN+), and owning a majority stake in Hulu, Disney+ will round out Disney’s subscription offering and give them an extremely strong position as the way we pay for entertainment content changes. Before looking at what strategic advantages Disney has in this race, and the impact on the competitive market, it’s important to know that cord cutting (in the US) is accelerating at rates faster than previously assumed.

Consumers Want TV in New Ways
There are undoubtedly many factors to why cord cutting is accelerating. Luckily, I have multiple independent studies that all confirm the same accelerating trend of US consumers moving quickly to new services like Hulu and YouTubeTV, both making up the most popular new TV services on the market.

From a recent study on services we ran at Creative Strategies, 24% of respondents indicated they already canceled their cable subscription and are using streaming-only services for their TV/entertainment content. According to another research study run by UBS Bank, 33% of respondents in their study indicated their interest and consideration to cut the cord and go all in with streaming services. Notably, that 33% number is up from a similar study they ran in May of last year where it was 18%. Similarly, in our research study, 17% are actively researching switching from cable to streaming only. Interestingly, only 19% of consumers in our study said they are happy with their current cable bundle. Many of them indicated the only reason they are not changing at the moment is because of a bundle deal with the Internet.

One juicy nugget of insight I found in the UBS research study, was in the past few years consumers were doubling up on their cable subscription and a subscription to streaming TV service. Their most recent study found that number dramatically declined and those consumers were mostly streaming only now. What that tells is was people were not sure they could get all the channels and content they wanted in a streaming service, so they kept their cable as a backup plan just in case. The newest data suggesting they dumped cable and went streaming only is a big indication those services like Hulu and YouTubeTV do indeed deliver the same experience as cable and satisfy the needs of most of the market. This should be the most worrying stat for cable companies.

Traditional cable TV subscriptions have already been trending downward, and most forecasts for 2019 have traditional cable subscriptions declining 5-8% during the year. Consumers are waking up to the idea that streaming services actually give them more value for the money than their traditional cable providers and by the end of 2019 we are very likely to see north of 30% of the US market moved to a streaming TV package.

One last point here. Almost universally, in our study and others, younger demographics have no intention of signing up for traditional cable packages and are starting their adult lives all in with streaming. Which tells you the cable monopolies only have the older demographics as customers, and that won’t last forever.

Disney’s Global Brand
There is an equation which did not get enough attention when talking about Disney’s upside and that is their brand. Of all the streaming/online entertainment options on the market or coming, only Disney and Apple have a truly global brand. While you can assume many global markets know of Amazon or Netflix, the reality is they are not nearly as globally strong as Disney or Apple. Both companies abilities to attract a global audience and bring their services/content to more markets than the competition should be something to keep in mind.

Another factor that did not get enough attention is the retail footprint to Disney. Disney parks see over 150 million people every year, and their parks are going to be a big part of the strategy to market Disney+. Similarly, Apple has over 500 million retail visitors each year, and Apple is already aggressively pushing Apple News+ at their retail stores, and when Arcade and AppleTV+ come out, you can be certain they will promote those heavily in store.

Disney+ Impact on the Market
Competitively, I’m not sure people are correctly interpreting Disney’s subscription packages impact on the market. Disney+, in particular, feels like it will make it challenging for everyone outside of Netflix, Amazon, and Apple. The main reasoning for this is Disney+ price. For example, CBS all access is $5.99 a month and feels quite limited now next to Disney+ at $6.99. Disney’s price may hurt the competition the most making it very hard for them to price near Disney and thus will only see uptake at a price much lower than they want to charge in order to make a profit.

Rumors from within Hollywood circles is most networks, and even some studies, want in on the streaming services, but I think Disney will make it very hard for many of them to succeed.

It is also interesting to think about what Disney can do with Hulu. Conceivably, Disney is in the strongest position now to offer a holistic service offering including premium content, live and network TV access. I would fully expect Disney to offer a bundle with Hulu and Disney+, and possibly even some excessive experiences from ESPN+ and create quite a compelling service.

From the recent research reports I mentioned, Hulu remains the most dominant current streaming TV service by market share AND has the most mindshare in terms of intent to subscribe from those looking to cut the cord. Aligning the trends I outlined here, Disney’s presence behind these offering will only accelerate cord cutting, and likely drive Hulu to a commanding position in the market from a content distribution standpoint.

One of the digital markets that continues to surprise me is how large the gaming market is and its growth potential.

I am personally not a gamer for two reasons. In my 20’s, I was very competitive in traditional board and card games. When I say I was competitive, that is perhaps an understatement. There was one particular game I played with some new people while I was working in the St Louis area in which my own competitive streak was so off base that it actually scared me and I backed off from playing competitive games for a long time.

The other issue is that with digital games, I can get so immersed in them and waste some much of my time while I could be doing other valuable things. I do not want to find myself sidetracked by falling into a gaming trap that I know would consume me.

But I clearly am the odd-man-out when it comes to gaming. According to Games Industry Biz “The video games industry is on course to generate just shy of $135 billion in 2018. That’s according to research by market analysts Newzoo and shared with GamesIndustry.biz for the 2018 edition of our Year In Numbers infographic. The $134.9 billion market value marks a 10.9% increase over 2017.

As expected, mobile accounts for the bulk of the industry’s revenue — 47% of it, in fact, at $63.2 billion (up 12.8% year-on-year). Smartphones led the way here with revenues of $50 billion (up 14.2%), while tablets accounted for $11.4bn (up 7.8%).”

I found this stat that came as a real surprise to me. In years, past, Wimbledon had the largest sports prize cup at $2.98 million. Now, Fortnite’s World Cup prize is $3 million.

If you look at just eSports revenue alone, it is set to be a $1.096 billion market this year. But the cloud gaming market is set to explode and Google, Apple. Microsoft and more recently Snapchat, see cloud gaming as a major growth market and one that could help drive new services revenue to their bottom lines.

The chart below gives you an indication of just how big the cloud gaming market will be over the next four to five years.

When you look at the potential growth of cloud gaming, it is no wonder that Google, Apple, Microsoft and SnapChat and many others are jumping into this market and getting ready to be aggressive in launching their own gaming services.

How these companies manage their new gaming services will determine how much revenue it delivers to their bottom line. But the potential is big for these companies who already have millions of customers they can market too and make it a big part of their service offerings.