Made By Google Is More Like Amazon Than Apple

This week was finally Pixel week. Over the past couple of months, we have seen teasers from Made by Google Team as well as leaks and even a Best Buy Canada early release of what the Pixel 4 was meant to be. We also had some details on the Pixel Book Go, the Nest Wi-Fi, and the new Pixel Buds. What was missing, though, was how the Made by Google team was going to frame its story around these products.

I said before that how a company talks and introduces its products are as important as the products themselves when it comes to understanding the vision and the goals of the business. This week’s launch was no different. While some industry watchers criticized the presentation for coming across as choppy, I thought it followed a similar format to the Google i/o main keynote. Product people come on stage to tell their story, talk about their creation, and highlight those aspects they think are a differentiator. I appreciated the attempt to move away from a specs sheet focus and provide more information on the thought process behind the devices and features as well as addressing hot areas such as sustainability and privacy.

Made by Google’s Chief, Rich Osterloh, framed the context around the new devices, but also how the team thinks about the role these devices should play in the users’ life. As he talked about ambient computing and helpful technology, it was impossible not to draw parallels to how Amazon positioned its devices just a few weeks ago.

The devices are not the final product; the technology in them is. From cloud to chipsets to Google Assistant and Soli, the technology that users access is what was on stage in New York.

Helpful Technology and Ambient Computing

Rick Osterloh stressed multiple times how the hardware the team is building focuses on being helpful. The message should sound familiar as the helpful technology tagline was used by Sundar Pichai at Google i/o. If technology is helpful, it will be pervasive in our lives, and privacy will matter more. Of course, if the technology is helpful, we come to rely on it, which creates higher brand loyalty. Helpfulness also drives customer loyalty because the perceived value of the device or service is higher. So far, there has not been any talk about paid services, but I find this emphasis on helpful tech very interesting. I do wonder if framing tech in such a way opens up options for Google to switch some of its services or features to a paid model. This revenue opportunity might also include the prospect of selling their Titan M chip to partners, especially for those who want their products to be Android Enterprise Recommended.

Privacy will also matter when the devices we use disappear and computing powers services and experiences all around us. Google wants the technology to work in such a way that when everything is perfect, the devices disappear. Interestingly this is similar to how Surface’s lead Panos Panay talks about his devices and how they keep you in the flow. It might seem odd that a hardware brand would want its devices to disappear, but if you use any technology, you know you don’t necessarily need to touch or look at a device to get a level of benefit that makes you love it. It is even easier to understand that when the device encapsulates values that are software and services driven and come from the same company.

A Focused Hardware Approach

And so, as much as Pixel 4 might be the iPhone 11 Pro competitor and Pixel Buds 2 might be Made by Google’s take on Air Pods, I cannot help but think that Made by Google’s goals are way more similar to Amazon than Apple. They might play in the same segments as Apple does, and avoiding the comparisons is impossible, but the measure of their success will not be market share but rather the continued adoption of and increased reliance on Google Assistant and the services that are powered by it.

One aspect where Google and Amazon might differ in approach is in the number of devices they decide to bring to market. It is quite apparent, though, why this is the case.

First, investment and leverage. Google has had a somewhat tricky road to hardware. We all remember how much the negative Motorola numbers impacted earnings, so the investment is much more thoughtful now. It is clear Made by Google wants to get to consumers where they get the highest return either on service engagement or cloud. It also means that Made by Google might try and leverage their devices more like they did with the new Nest Wi-Fi and the Google Assistant and smart hub integration. The partner ecosystem can also help Made by Google find those segments where there is value and those where there isn’t. The first smart display product with Google Assistant was brought to market by Lenovo. Following the positive reception of the category, we saw Made by Google launch the Google Home Hub line.

The second factor that makes a difference is, of course, Pixel. The Made by Google phone allows Google Assistant to be with the user all the time. This means, for instance, that no car dedicated device is needed to get to the users while the commute from the office to home. Amazon’s lack of phones means that they need to deliver compelling devices for those situations where users would turn to the phone by default.

No doubt in my mind that being in hardware, software, and services business for Google, Apple, Amazon, and Microsoft makes perfect sense. You just need to stop looking at the hardware as a stand-alone revenue generator and consider the impact it has on driving overall business revenue.

Amazon’s Event and Its Fifteen Alexa Incarnations

Based on my experience last year, I was expecting Amazon’s event to be packed full of products, and it was. Yet, the more I listened to Dave Limp walk us through everything new, the more it was clear that there was only one product around which not just the event, but the entire line of devices is focused on, and that is Alexa. I know, you might think I am stating the obvious here, but what I mean is that Amazon considers Alexa the actual product they sell. If you think about it this way, it becomes much easier to understand why we see Amazon invest in so many hardware categories. This approach makes Amazon a very different hardware vendor and not just because they are prepared to break even. What we saw at the event where devices that did one of three things: expanded use cases for current users, lowered the barrier of entry for new users and helped Alexa get outside the home.

The Elephant in the Room: Privacy

Before getting to the new hardware, Dave Limp addressed the privacy concerns that were raised in the press over the past few months. Aside from reiterating the ability users have to delete any recording, he also introduced new ways in which consumers can interact with Alexa to find out more about why Alexa does certain things.

These two simple utterances: “Alexa, tell me what you heard?” and “Alexa, why did you do that?” help Amazon do three things:

Educate users on why and how things happen. Asking Alexa why music started playing and being told someone in another room on another device asked to play such music, or asking Alexa why she was answering when you did not actually mean to engage and have Alexa explain she heard her name when you might have said Alex, all help users understand how the underlying technology works. It turns some of what might be perceived as secret magic into a rational explanation, increasing transparency.
Make users feel more in control, not just of their own data but also in their relationship with Alexa.
Finally, it continues to build trust and bond through the exchanges as it is Alexa who is explaining to them what is happening.

Ultimately, Amazon and all other providers of digital assistants will continue to be scrutinized, and rightly so, as we put more and more of our lives into their hands. Finding the right balance between wanting users to share data to improve performance and relevance while being very transparent about how such data is used will remain a key driver of trust, engagement, and loyalty.

Driving New Points of Engagement and Creating New Points of Entry

Amazon added new features such as the voice of Samuel L. Jackson, the Food Network Kitchen (great pairing with the new Amazon Smart Oven) for cooking classes, and new smart alerts for Alexa Guard. These all aim at growing engagement for current users by finding new things to do with their devices and Alexa. New accessories like the Echo Glow, also help to add value to devices, like an Echo Dot, that you might already have in your kids’ bedroom. Possibly the simplest of products among what announced was the Echo Flex. An extremely affordable wireless-smart speaker that can add Alexa’s functionalities in those rooms where you want Alexa’s brains and voice but for which you do not wish to make a significant investment.

The opportunity to appeal to new customers comes in the form of a new Echo Dot Clock, Echo Show 8 and the Echo Studio. I think it is fair to say that sound had not been Amazon’s strongest value proposition with its Echo devices. While it had improved with newer generations, consumers bought Echo devices for their functionality first and then for sound. The new Echo Studio aims to change that thanks to a collaboration with Dolby that benefits both the hardware and the new Prime Music HD service by adding Dolby Atmos sound. The quality of the sound is impressive, and as you would expect, Amazon is making sure Echo Studio also works with your TV either as a single speaker, a pair or with your subwoofer. The best way I have to describe the sound is that it is incredibly immersive, letting you hear instruments you did not realize were there before. The main difference with stereo is that the music is not coming from two specific points, but the different sounds that make up a track are all around you.

The quality of the sound coupled with the aggressive price point of $199 will put pressure on other smart speakers that had been differentiated based on sound. HomePod, in particular, will feel the pressure, given Apple Music subscribers can access the service through Echo devices. As I doubt Apple will play on price, I am curious to see if there could be an interest in differentiating their sound quality even more by embracing Dolby Atmos for an HD version of Apple Music.

Taking Alexa out of the Home

Alexa continues to dominate in the home, but things are quite different once we leave, and we rely on our smartphones for most of our day. Amazon is undoubtedly aware of this, and much is done to make Alexa more readily accessible when we are out and about. The Echo Buds, a Bose collaboration, free Alexa from the smartphone giving us access to navigation, music, and search. The deal with GM also brings Alexa outside the home as her functionality is added to Chevrolet, Buick, GMC, and Cadillac cars that are 2018 and newer and have compatible infotainment systems.

These new devices coupled with an earlier announcement for simplifying multi-wake-word support speak to Amazon’s desire to limit frustration and make consumers pick Alexa because of the superior experience not because it is the only choice. The outside world is much more unpredictable than our home both in terms of context and requests, which is something Alexa still needs some practice on. The more entry points Alexa will have throughout the day, the more value she will deliver. Other two products launched under the “Day 1 Editions” program will also help Alexa be with us all day: Echo Loop and Echo Frames both aimed at being with us all day.

Continuing to Learn

The “Day 1 Editions” Echo Loop and Echo Frames are not developers’ products, but rather ready to ship products offered on an invitation-only basis to a selected number of customers.

Echo Frames are a voice-first experience delivered through prescription glasses. Rather than convincing people to wear glasses all the time, Echo Frames are aimed at people who have to wear glasses and might be interested in using them as a vehicle for voice-first interactions.

Echo Loop is a ring that you can tap and talk into to access Alexa more quickly than reaching for your phone. While many were expecting a smartwatch, I find Amazon’s interest in experimenting with different wearables fascinating as we know how hard it is to be successful in the smartwatch market that mostly remains an Apple Watch market, especially in the US. The way you would interact with Echo Loop is quite similar to how you use Apple Watch to access Siri. Interestingly I thought that cupping my hand close to my ear to listen to Alexa’s voice coming from the ring or putting my hand in front of my mouth as if I was yawning to speak to her was much more natural than raising my wrist to speak to Apple Watch although Alexa’s voice was much fainter than Siri’s.

The feedback loop that Amazon will create with these customers who will approach usage in a very open-minded way, similar an early adopter, will be extremely useful to Amazon to finesse the products both with features and use cases and ready them for more mainstream customers.

Amazon ended the list of new announcements with the introduction of a new wireless protocol called “Amazon Sidewalk targetted at extending the working range of low-bandwidth, low-power, smart lights, sensors, and other IoT devices. By extending the range using the unlicensed 900mhz spectrum, customers will be able to place smart devices anywhere on their property even without a Bluetooth, Wi-Fi, or cellular connection. An ambitious project that has opportunity way beyond the consumer market, something Microsoft should keep an eye on.

Why is Everybody Getting into Wireless Earbuds?

In just over a week we have heard rumors that both Amazon and Microsoft Surface might be bringing wireless earbuds to the market. This should be no surprise to anyone, but not for the reason that most highlight which is: wanting into some of Apple’s action with AirPods.

There is no question about Apple’s success with AirPods. Apple managed to get AirPods across gender, age, and even income level despite their price point not putting them in the “most affordable” category. The experience is described by many as magical. In a study, we, at Creative Strategies, conducted with Experian when AirPods first came out, customer satisfaction was the highest for a new product from Apple. 98% of AirPods owners said they were very satisfied or satisfied. Remarkably, 82% said they were very satisfied. By comparison, when the iPhone came out in 2007, it held a 92% customer satisfaction level, iPad in 2010 had 92%, and Apple Watch in 2015 had 97%.

Assuming Microsoft and Amazon are just after the revenue that a good set of wireless earbuds could generate is a little shortsighted.

Voice and Ears

Ambient computing and voice-first are certainly big drivers for both Microsoft and Amazon. As computing power is spread out across devices and digital assistants are helping to bridge our experience across them, voice has grown in importance as an interface. Many consumers are, however, less comfortable shouting commands across a room or speaking to technology outside the “safety” of their own home. As voice moves into the office, the need and desire to be able to speak quietly to an assistant and hear it back is even more evident.

Wireless earbuds that can be worn comfortably throughout the day allow us to build a better relationship with our assistants and, even more so, build our reliance. Interestingly, I would argue, this is where AirPods have not been as successful as Apple might have hoped for but certainly, through no fault of their own but more due to some limitations Siri has.

For both Alexa and Cortana, who do not have a smartphone they can call their own home, wireless earbuds are a great way to be with a user in a more direct and personal way rather than being relegated into an app. As I often say, this is not about consumers having only one assistant but making the assistant they use more often more intelligent and therefore creating a vicious circle: the more I use it, the more it gets better, the more I want to use it.

Eyes and Ears

Aside from voice and ambient computing, another trend that will benefit wireless earbuds is augmented reality. Starting with phones, consumers can build on the habit of wearing wireless earbuds while consuming information through their phones. Creating a habit and making wearing wireless earbuds natural rather than bearing the stigma that Bluetooth headsets had when they first came to market.

In a non-distant future, as we see more use cases focusing on displaying information across apps and we will move from phones to glasses, wireless earbuds will play an even more critical role in our augmented reality experience.

No Longer an Accessory

Whether they are critical to our relationship with a digital assistant or they help us immerse in an augmented reality experience, what is clear is that headsets overall are no longer an accessory but a device in their own right that for many vendors will grow into a platform.

Sensors already allowed headsets, whether buds, over the ear or on the ear to become smart to improve user experience, like when detecting if you are wearing them or not to determine if you want to pick up an incoming call from the phone or the headset. Plantronics and Jabra have had these kinds of features for years. Improvements in miniaturization added functionalities that turned some earbuds into wearables, or hearables devices, if you prefer. Devices that can track full workouts like the Bragi Dash. Considering the great work Microsoft had done with Band (not so much on the hardware but capabilities) they could even think beyond Cortana and leverage some of that know-how to deliver a fully-fledged hearable solution increasing stickiness and return on investment.

I would not be surprised if Apple considered the role AirPods or Power Beats Pro could play as a wearable device as an alternative to Apple Watch for those users who do not want to wear a watch but are interested in fitness tracking. I would also expect Samsung to consider a “sport” or “active” version of their Galaxy Buds to cater to a similar market.

AirPods have certainly become the benchmark for wireless earbuds in the same way iPhone has been the benchmark in the smartphone market. The “AirPods killer” is the earbuds’ version of the “iPhone killer” in the smartphone segment. Yet, I find that when it comes to wireless earbuds, there is much more dynamism in what brands can deliver and how they differentiate building on what their core competencies are, including artificial intelligence and machine learning, which will make it harder to compare like for like.

Why the EU decision about Google does not change the future for an Amazon Phone

Last week the European Commission fined Google five billion dollars for breaching the E.U competition rules. Among other things, the European Commissioner for Competition Margrethe Vestager claimed that Google helped kill off competing OS forks that were developed, including Amazon’s Fire OS for smartphones. According to Vestager, Google told handset makers they couldn’t sell any devices running other such forks if they wanted full access to services like the Google Play store on their other Android devices.

The EU press release stated:

“In doing so, Google has also closed off an important channel for competitors to introduce apps and services, in particular, general search services, which could be pre-installed on Android forks… Therefore, Google’s conduct has had a direct impact on users, denying them access to further innovation and smart mobile devices based on alternative versions of the Android operating system. In other words, as a result of this practice, it was Google — and not users, app developers, and the market — that effectively determined which operating systems could prosper.”

Fire OS did not kill the Fire Phone

It is easy to blame the lack of success of the Fire Phone on Google, but the truth is that, while the ability to leverage the Google Play Store could have helped, there was more about the phone that made it a hard sell. The price point and many of the features were aiming at higher-end and experienced users. Yet, the lack of brand share in the smartphone market, lack of apps and limited channel availability made it hard to appeal to a target audience that was already taken by either iOS or Android.

We also need to remember that Amazon introduced the Fire Phone back in 2014 when its brand in the device segment was nowhere near as strong as it is today thanks to its Echo line. Of course, the Kindle e-readers were very successful, but there was skepticism on whether or not Amazon could take its brand and expertise to other tech products. So much so that, back then, the Fire Tablets were still called Kindle, a name that was dropped a few months after the Fire Phone’s announcement.

For both smartphones and tablets, apps were more important than anything else, which is why the inability of Amazon to take advantage of the Google App Store certainly contributed to the premature demise of the Fire Phone. Developers were far too busy with iOS and Android to spend further time developing for Fire OS when the opportunity was uncertain.

Content vs. Apps

As both the smartphone and the tablet market matured, apps and content started to have a much more balanced role to play in driving user engagement. This was undoubtedly something Amazon was expecting and counting on as a revenue opportunity when it thought of the Fire Phone and Fire Tablets. Amazon music and video services had been in place for quite some time by the time the Fire Phone was introduced, but the streaming portion of such services only started after. There is no question that much of the value Fire Tablet users get from those devices comes from the content that Amazon makes available on them. Content that Amazon can leverage across Fire TV and their Echo products too.

The Challenge of taking Alexa Outside the Home

Since Google was fined, some have hypothesized that if indeed the EU’s decision holds, Amazon might have another go at the smartphone market. A lot has certainly changed in Amazon’s favor for a reboot of that smartphone attempt. But other challenges arise.

Alexa is, of course, the one to benefit the most from an Amazon attempt at launching its own smartphone. Alexa on other smartphones has not been as successful as it would be with a much tighter integration between hardware and software.

Other Amazon’s services have little to gain from a dedicated Amazon smartphone in my view. This is mostly because the Amazon, Kindle, Video apps all work very well on other devices and are much less dependent on being a “default” option on an optimized OS. Volume is value when you are making your money through content and services and not hardware.

Alexa becoming the one and only assistant on a phone might, however, not bring as much return to Amazon as some might think. I believe that while our dependence on Alexa is grown in the home and so is our level of satisfaction, our expectations for what we want Alexa to deliver outside the home might raise the bar too high. Alexa knows enough about us in the home to be useful but does not really know as much as Google and Apple know about us overall. Being the default agent on the phone would not change that as most of what makes other assistants more knowledgeable are the services and the apps we use from mail to navigation to search.

Considering the challenges of the smartphone market as well as the need for a regionally-tailored approach – Amazon’s worldwide offering is not as comprehensive as it is in the US – there is a much stronger short-term opportunity for Amazon that does not even have to wait for Google to lose its appeal to the EU decision. Amazon must change the perception users have today of the Alexa app on a smartphone.

The Alexa app must shift from a command center to an engagement center. As a user, I only go to the app to troubleshoot or add and manage a skill. While Amazon added texting and calling options, I don’t think these have proven to be very popular with users leaving Alexa pretty much isolated from our day to day outside the home.

Amazon should start thinking more about how Alexa can be useful to us when we are out and about. Can Alexa be our home away from home? The increased and improved focus on the app and a couple of strategic partnerships with vendors would provide a good enough return to Amazon in a market, the smartphone market, which as critical as it has been for the past ten years should not be the focus of tomorrow.

The Real Threat to Apple: The Invisible Device

This article is exclusively for subscribers to the Think.Tank.

Thoughts On Apple’s E-book Appeal

On Monday, December 15, 2014, Apple’s appeal of the e-book anti-trust case was heard. Here are some of my thoughts on the matter.

Drug Dealer Analogy

Deputy Solicitor General Malcolm Stewart…called in to defend the antitrust ruling…tried several times Monday to compare Apple to a driver who carries a narcotics dealer to a drug pick up.

The point of his analogy…was that, if Apple knew book publishers were engaged in an unlawful conspiracy to fix the price of e-books and was prepared to facilitate that conspiracy, it was as guilty as they were.

Judge Dennis Jacobs would have none it. Narcotics trafficking, he pointed out, was one of the very few “industries in which the law does not look with favor on new entrants.”

The packed courtroom erupted in laughter. ((All quotes — unless otherwise indicated — are taken from the article entitled: “They laughed at the DOJ’s e-book antitrust case against Apple” by Philip Elmer-DeWitt @philiped DECEMBER 15, 2014))

The “Drug Dealer” analogy illustrates how differently the two opposing sides see this case. The Department of Justice sees Apple as the ringleader who galvanized the Book Publishers into performing an illegal act. Apple sees itself not as the driver of a getaway car filled with drug dealers but, as a bus driver who should not be held accountable for the subsequent illicit actions of that buses’ passengers.

But Apple’s protestations of innocence go much further than this since they don’t believe that either they or the Book Publishers were committing a crime. Apple contends that, in challenging Amazon’s book selling monopoly, they were performing a public good. Going back to the Department of Justice’s analogy, Apple doesn’t think they were driving a getaway car or a bus. Apple thinks they were driving a fire truck on its way to put out the monopoly fire caused by Amazon. In Apple’s view, their actions should have been applauded by the Department of Justice, not condemned.

Per Se

The appeal is likely to turn on an obscure legal point: Did the district court judge commit a reversible error when she found Apple guilty “per se” of a horizontal price fixing conspiracy?

From the admittedly skewed perspective of this recovering attorney, “per se” is anything but obscure.

A quick example might be helpful. If you were driving down the road and the truck in the next lane exploded, you would need to prove negligence in order to collect damages. But if the truck were carrying dynamite, the truck would be considered inherently dangerous. No proof of negligence would be required by a plaintiff. The truck would be considered — by virtue of carrying a dangerous cargo like dynamite — negligent per se.

In the Apple e-book anti-trust case, Judge Cote treated Apple like a truck filled with dynamite. The Department of Justice was not required to prove Apple was in violation of anti-trust law. Illegality was assumed.

The key legal question was whether the Apple’s conduct as a new entrant in the e-book market should have been viewed as “per se illegal”—in which case it could be simply presumed to be anticompetitive—or whether it should have been judged under a more demanding “rule of reason” analysis, in which case the fact finder (which here was Judge Cote) had to undertake a much more searching investigation of all the circumstances in order to decide whether the conduct was pro-competitive (i.e., benefitted consumers) or anticompetitive.

I know about one one-thousandth as much anti-trust law as does Judge Cote but, even so, I could never shake the feeling that it was a mistake for her to apply the “per se” standard to Apple. And I’m not the only one who felt that way. Apple obviously disagreed with the Judge’s stance and they had relevant case law from the Supreme Court to back up their position.

Apple argues that vertical price-fixing agreements — for example, between an e-book distributor and e-book publishers — are not per se unlawful. At trial and in its appellate brief it invoked the Supreme Court’s ruling in Leegin Creative Leather Prods v. PSKS that vertical price restraints must be weighed by the more forgiving “rule of reason. ((”Why Apple’s e-book appeal is a big deal by Philip Elmer-DeWitt @philiped DECEMBER 14, 2014))

Why Not Amazon?

When the Department of Justice charged Apple with conspiring to fix the price of e-books, the case was widely seen in both Silicon Valley and New York publishing circles as an error of enforcement.

Why was Apple, a giant in its own right but a new entrant in the e-book market, being prosecuted and not that other giant, Amazon?

Amazon, after all, had an 80% to 90% share of the e-book market — a monopoly by almost anybody’s standard — and was selling the publishers’ most important titles below cost. ((Book News: Apple Enters A New Round In E-Book Price-Fixing Fight DECEMBER 15, 2014))

This case has always been confounding to the majority of those who study anti-trust law. Instead of pursuing Amazon, the monopolist, the Department of Justice pursued Apple, the new entrant. Some of the members of the Appeals Court also viewed this as odd.

At times Judge Jacobs came close to suggesting that the government had prosecuted the wrong company. At the very least, he said, a horizontal initiative “used to break the hold of a monopolist” ought not be found to be illegal per se. He likened any collusive conduct on the publishers’ part to “mice getting together to go put a bell on the cat.”

Prices

This case has always been about prices. The Department of Justice views high prices as anti-consumer — and therefore in violation of anti-trust laws — and low prices as a public good. The problem with this approach is that it is both bad economics and bad policy.

Bad Economics

Economists know there is no such thing as a “fair” price but non-economists don’t see it that way at all. Most consumers view high prices are always bad and low prices are always good.

Take, for example, the price of oil. When prices go up, people are outraged, oil companies are castigated in the popular press and governments hold hearings. When prices go up, it’s viewed as an evil conspiracy led by evil conspirators and it’s darn well got to be stopped.

And when prices go down? Nary a whisper is heard from consumers, conspiracy theorists or government regulators. When prices go down, it’s due to supply and demand — just economics doing its thing. Economic theory seemingly never works when prices go up but always works perfectly when prices go down.

The government’s anti-trust enforcers seem to view the economics in the Apple e-book case in the very same simplistic way as most consumers view oil prices. High prices are bad. Low prices are good. End of story. After Apple entered the e-book market, book prices went up. To the Department Of Justice’s way of thinking, what more did one need in order to prove that Apple and the Book Publishers were anti-competitive co-conspirators?

Turns out, one needs to know more. A lot more.

The judges appeared to give weight to this suggestion, and to accept (Apple’s) contention that a brief price spike, which damned Apple and the publishers before Judge Cote, should not result in an automatic finding of illegal price-fixing. Instead, (Apple) said the price spike was limited only to the five publishers, and that the overall effect of Apple’s entry to the ebook market dramatically benefited consumers since many more players were willing to enter the market.

Bad Policy

In addition to being bad economics, the government’s position on pricing was also bad policy. The Department of Justice saw itself as the protector of consumers. If consumers were hurt by Apple’s actions then, in their view, Apple was in violation of anti-trust law.

But the purpose of anti-trust law is to provide more competition, not lower prices, and that’s exactly what Apple was doing. By focusing on prices instead of competition, the Department of Justice completely lost sight of its mission.

Of Course Prices Went Up

I have always viewed the Department Of Justice’s stance on pricing to be non-sensical. OF COURSE PRICES WENT UP. Amazon was selling some books below cost and AT A LOSS. This is a classic way to monopolize a market and is often characterized as predatory pricing. When Apple entered the market, Book Publishers added contractual clauses that caused Amazon to lose its ability to sell books at a loss. Rising prices were not an indication that Apple was gaining an anti-competitive advantage, they were an indication that Amazon was losing an anti-competitive advantage.

When Apple tried to point this out to Judge Cote she would have none of it. She quite clearly stated the wrongdoing of Amazon did not exonerate Apple. And in a sense, she was quite right. For example, If the guy in the car next to you is driving 30 miles per hour over the speed limit, that does not excuse you from getting a ticket if you are driving a mere 15 miles per hour over the speed limit. The wrongdoing of others does not excuse your own wrongdoing.

What Judge Cote stoutly ignored was context. Apple’s actions were not occurring in a vacuum — they were occurring in response to Amazon’s actions. Using my speeding analogy, Apple may well have been speeding but, in their view, they did not deserve a ticket because they were acting like a fire truck, rushing to put out the monopoly fire initiated by Amazon.

Judges Jacobs and Lohier seemed quite concerned that Judge Cote had used the wrong standard, but Jacobs’s qualms clearly went much further—seeming to question the government’s judgment in ever having brought the case. His problem was that Apple was a new entrant that was bringing competition to a market that had been, until then, dominated by a “monopolist,” Amazon. Judge Jacobs also repeatedly referred to Amazon’s $9.99 pricing policy, whereby it sold books at below the wholesale acquisition cost, as “predatory pricing,” and seemed to suggest that Amazon was obviously using it as a means of maintaining its monopoly dominance.”

Conclusion

If Apple loses at the Appellate level, there is no doubt in my mind that they will appeal the case to the Supreme Court. If the Supreme Court accepts the matter, the case will live on.

And if Apple wins? I very much doubt if the Appellate court will dismiss the case outright. It is far more likely that they will remand the case to a lower court in order to have a portion of it re-litigated. Once again, the case will live on (and on and one and on…).

If Apple wins its appeal, the most interesting question to me will be whether the Appellate Court remands the case to Judge Cote or to a different Judge altogether. Common sense would tell you that it’s a bad idea for an Appellate Court to chastise a Judge and then ask that Judge to be objective when re-trying that same case again. But we in the legal profession do not see ourselves as subject to those emotions so readily exhibited by ordinary people. In fact, we sometimes do not see ourselves as people at all.

There is no shortage of lawyers in Washington, DC. In fact, there may be more lawyers than people. ~ Supreme Court Justice Sandra Day O’Connor ((Excerpt From: Robert Byrne. “The 2,548 Wittiest Things Anybody Ever Said.” iBooks. https://itun.es/us/h_yeB.l))

If the Appellate Court were to remand the case Judge Cote, they would be saying that she made a mistake in law. If they remand the case to a different Judge, that would be highly unusual. And highly suggestive, as well.

There Are No Muggles. We Are All Wizards Now.

I read the first three Harry Potter novels to my son. It’s a fond memory strengthened by the fact the books were quite good. In each, the young Harry Potter straddles two very distinct worlds, the magical world of wizards and the familiar world of non-magical folk, Muggles. Us. Except, this is not true, not anymore.

There are no Muggles. We are all wizards.

I realized this while texting my son baseball playoff updates — as I was flying across the country, 30,000 feet above the ground.

Think of it. Nearly 2 billion of us carry wands. We call them smartphones. These semi-magical devices enable us to connect with nearly anyone at any time from any place. We can instantly access the world’s knowledge. Always in hand, always at the ready, we use these “wands” for work, for play, to protect us, to make our lives better. They know us, know where we’ve been, what we like, answer to our voice.

Point your smartphone at the sky and learn what planes are flying overhead, even what satellites are circling the globe.

Hear a sound and your smartphone will tell you the song — using the appropriately named Shazam app. Point your smartphone at a complex math equation and it supplies the answer. This is magical.

Want to use your smartphone-wand to put out the lights, turn on the television, fill your surroundings with music? Done. This is magical.

Magic is now commonplace, like air, or water.

In the later Harry Potter books, we learn of “horcruxes,” small objects, like a medallion, that literally contain bits of a person’s soul. Horcruxes are obviously real. Think of the Apple Watch, loaded with sensors, embedded with an entire — and entirely swappable — computer on a chip. This tiny object, placed upon your skin, knows where you are, where you’ve been, your heart rate, maybe your blood pressure, your voice, your history. This deeply personal information may last forever, reflecting you to whomever possesses the object.

I cannot be the only person who feels wizard-like powerful when I literally pause live sporting events on my television.

Look. You will soon have your very own invisibility cloak.

According to the scientist-wizards at University of Rochester, “this is the first cloaking device that provides three-dimensional, continuously multidirectional cloaking.” How? By using readily available technology that almost certainly will radically drop in price and availability:

“With four lenses arranged in exactly the right way, The Rochester cloak creates a space in which anything that exists in between these lenses are hidden from sight. Unlike most other invisibility cloaks currently being worked on, the object being hidden here is able to remain hidden even when looking at it from multiple angles.”

Catch that? Yes, there’s more than one invisibility cloak under development.

It’s time to acknowledge we are all wizards and possess the tools of wizards. It’s not through magic, but brainpower, ingenuity, relentless effort, access to knowledge and high risk capital that made this magical world possible.

3D printing is transfiguration, transforming one object into another.
Algorithms are our sorting hat.
Google Now is a remembrall.
Neural networks, like Inception, are the branch of magic known as Occlumency. More about ourselves is known then we know about ourself.
Social media is the Pensieve, storing our memories forever. Or, perhaps, our very own Mirror of Erised, revealing the “deepest, most desperate desire of our hearts.”
Direct brain-to-brain interface is in development. This doesn’t even exist in Harry Potter’s world.
Ray Kurzweil is no doubt hard at work on a resurrection stone.
That scar, there on Harry’s forehead? Haptics. Touch it, and it reveals what’s inside.

Snitches are real.

Last week, Amazon announced the Echo. This small device sits in your home and answers to your voice. It will play music, tell you the weather, read the morning’s news to you. Oh, and it learns. What magic trick can do better?

As our magical tools learn still more about all of us, about the world around us, and as “virtual” reality continues to progress, we might, yes, literally, live in a world where ghosts are common. Friends, family members, colleagues — and the departed — all (virtually, visibly) available, wherever we are, whenever we need them. In fact, it seems to me this will be so by no later than 10-20 years from today. Ghosts before driverless cars.

Oh, the Marauder’s Map? That’s Waze. No big deal.

Wizard Or Squib?

Now what? What do we do with all this magic swirling about us, accessible with the touch of a finger or the sound of our voice?

First, embrace our powers, but remember to use them always for good.

Second, and while I am not suggesting we send our children off to wizarding schools, certainly our 20th century Muggle school infrastructure must be demolished. Let’s not make squibs of our own children.

Third, embrace the magic. It is ours, it is who we are. For our sons and daughters, it is the world they are born into.

What magical devices do you use? What new magic awaits us all?

I Was Wrong And The iPhone 5c Is Still A Failure

The best way to defeat the iPhone is to create a superior alternative to the app ecosystem. With widgets, notifications, continuity and inter-app processes in iOS 8, Apple did just that. Woe to Android, Windows Phone and anyone who hopes to see Apple falter this decade.

Unless, of course, I’m completely wrong.

Perhaps there’s some amazing technology out there waiting to leapfrog iPhone. Perhaps the new iWatch and iPhablet and all the various Kits and Plays fail to entice. Maybe Tim Cook and Angela Ahrendts succeed in transforming Apple into a luxury brand, turning the iPhone into a “Veblen good” and moving the company from high margin computing to higher margin fashion.

This seems unlikely. Nonetheless, on the cusp of the big Apple launch event, I am thinking not of new products, but of past ones, and not only of successes, but failures. When I labeled the iPhone 5c a “failure,” readers did not hesitate to emphatically declare I was wrong.

Wrong.

The iPhone 5c was a failure both in terms of sales and for how it diminished Apple’s image as an innovator. I may never have been so right as when I declared the 5c a failure. Expect it to be erased from Apple Stores before this year is out.

The 5c will not be the last Apple flop. I suspect the primary value of any iWatch, at least in the first few years, will be to show people you have an iWatch.

Carry That Weight

I understand if you vehemently disagree with my assertions. Tomorrow brings us new products but will not necessarily end any long standing debates. For example, despite the adoption of Chromebooks and the gutting of the great LA Public Schools iPad experiment, I steadfastly believe in the merits of my plan to give an iPad to every child in America. Similarly, regardless of what every other tech writer is saying, and no matter what Apple introduces tomorrow, I still think NFC is a waste of Apple’s talent and our time.

Going on public record can be daunting. Certainly, it is filled with missteps. Here are two minor predictions I have for tomorrow’s event:

Apple will offer universal content search and a single log-in across apps for its Apple TV
The company will launch consumer-grade, home-optimized iBeacons

Now a big one:

The weeks-long stream of “leaks” is well orchestrated and not at all coincidental. Apple plans to reveal a great many products tomorrow but few will ‘wow’ and several are almost fully dependent upon multiple partners. CarPlay and iPhone payments may be great — but these will take time and usage and third party vendors to make successful. As the ecosystem expands, Apple has less control. This forces them to talk up the product whereas in the past, the product spoke for itself.

We will know shortly if I am right.

Some predictions take longer, however, and are not as clear-cut. My very first Techpinions column, from February 18, 2013, focused on — believe it or not — the Apple iWatch. I wrote:

Very soon, sensors throughout our homes, on our pets and possibly inside our bodies, all monitored or even controlled by our smartphone, will be the norm. Imagine now if these were ad-subsidized devices, like Android or Kindle, offering no escape from the latest marketing pitch or sponsored social media update. Is this a tolerable future?

I know. Brilliant.

But a paragraph later I followed up with:

The next design battle will almost certainly not be about “skeuomorphism” versus “flat design”. Rather, monetizing hardware, the Apple way, versus monetizing data and advertising, the Google way, will set the stage for this next great battle.

Incorrect.

Nearly 2 years later, this was a battle that never happened. The market has embraced both models, not chosen one over the other. Perhaps, as wearables and smart homes become more common place over the next many years, this will change. That’s a rather weak prediction, however.

Here’s a bold one. From March 18, 2013:

As the blogosphere pronounces ‘Apple is Doomed’ at every turn, I can’t help but thinking we have it wrong. Apple will have its ups and downs, no doubt. It’s just, the more I follow Apple, the more I study Steve Jobs, the more I suspect that, while he could not live forever, Jobs absolutely believed his creation, Apple, could. Literally.

Am I right or wrong?

Fixing A Hole

Confession: sometimes I secretly blame you for when I am wrong. In “iOS 7 Game Changers,” I spoke glowingly of AirDrop:

I predict AirDrop will have a paradigm-shifting impact on content sharing – which means it should have a paradigm-shifting impact on social sharing sites, particularly Instagram, Facebook, YouTube and LinkedIn.

Hundreds of millions of iPhones with simple, real time, on-the-spot sharing, all thanks to AirDrop. Big transformative things were supposed to happen. I really believed what I said. So why do almost none of you use this “paradigm-shifting” feature? (Because it’s not necessary, that’s why. I did not think it through at the time.)

Of course, some outrageous ideas may yet come true. Just over a year ago I recommended Apple:

Integrate iCloud, fingerprint technology, and an open API. Touch any connected screen and it instantly re-calibrates itself to our preferred, personalized settings, ST:TNG-like. In this way, Apple becomes the company that manages every screen in our life, everywhere, all the time.

I think this is a near certainty within the next 10 years.

Oddly enough, it’s the stuff that seems patently obvious where I get the most pushback. Following last year’s big Apple iPhone launch event, I stated:

Asking Apple to go down market is like asking Microsoft to no longer charge for software. It runs counter to their history, their strategy, their culture and skill set, their strengths, their leadership and how they recruit, reward and incentivize their staff.

…and took a great deal of flak for that.

I contend it was true then and more so now. That even the most expert Apple analysts refuse to accept this makes it no less correct. The 5c was a mildly painful reminder the company cannot go down market. That Apple is moving further up market is no surprise to me.

Getting Better All The Time

I think I have maintained a reasonably high average for prognostication. For example, fully nine months before the actual Amazon Fire Phone was released, I explicitly stated here that:

An Amazon smartphone would be focused on getting us to shop more — from Amazon
The widely reported “3D” screen technology would be a bust
No Amazon Phone could possibly hope to compete with other devices unless it was completely free, which I seriously doubted would happen

You’re welcome.

Unfortunately, there are those predictions that are quickly proven wrong. Just two months ago I wrote:

Given Android’s headstart in wearables, it’s hard to see Apple winning any wearable app wars. Given the limitations of its market reach, it’s similarly difficult to see Apple winning the “smart home” market without buying its way in.

What was I possibly thinking? With Mac, iOS and HomeKit — and a premium user base — there may be no company with a bigger head start here than Apple.

Apple will reveal much tomorrow. I predict this will be a once-a-decade event, with a stunning array of new products, services and partnerships. However, despite all the talk, all the tweets, all the analysis, we will not know the full impact of the company’s efforts for years to come.

Nokia Has Fallen. America Wins The Smartphone Wars.

Nokia has fallen. Not even the name will remain. America’s victory in the smartphone wars is complete — for now.

Last week’s news from the front lines of the smartphone wars illuminates the scope of America’s rapid mobile ascendency.

From Microsoft:

“Microsoft acquires Nokia’s smartphone and mobile phone businesses, its design team, most of its manufacturing and assembly facilities and operations, and sales and marketing support.”

From Facebook:

Mobile active users are 1.01 billion as of March 31, 2014, an increase of 34% year-over-year.

From Apple:

“We sold almost 44 million iPhones, setting a new March-quarter record.”

And the week before, from Google:

Q1 2014 earnings totaled $15.4 billion in revenue, a 19% increase over the previous year’s $12.95 billion. Oh, and their Android platform is on nearly 80% of every smartphone in the world.

Designed By Apple And Google And Microsoft In America

iOS, Android and Windows Phone – American designed, American-led operating platforms all – account for nearly 98% of the global smartphone market, a truly stunning statistic. There appears no line on the horizon.

As the world rushes to replace their mobile phones with smartphones, even Microsoft, now a distant third, is well positioned to fully capitalize on mobile. Their takeover of Nokia includes the company’s very popular Asha brand of hybrid smartphones/featurephones, as well as Nokia’s traditional handset business, which still ships more than 200 million devices a year. (Second only to Samsung)

Should America celebrate these results?

Yes.

Should the rest of the world take bold, perhaps costly action to limit the continued rise of America’s mobile dominance?

Probably they should try.

The Pivot To Mobile

How did America so convincingly win the smartphone wars? First and foremost by attracting, developing, retaining, and fully incentivizing the best and brightest.

Vision and execution are also paramount. Consider:

Apple’s relentless pursuit of optimizing hardware while simultaneously improving upon and expanding the modes of interaction with that hardware.
Google encourages, captures and then attempts to make sense of (and profit from) the multiple data streams we generate.
Facebook seeks to connect the world on a fully human level.
Microsoft has spent the past four decades making computer applications more empowering and productive.

Also, and despite their vast size, these companies move with speed. Witness Facebook’s head-turning pivot to mobile. I think Mark Zuckerberg should be hailed for this accomplishment.

Weaknesses Along The Front Lines

Are there weaknesses in America’s smartphone leadership? Several, in fact.

Apple

iTunes is the center of Apple. It’s what locks us in, it’s what helps lure new customers. iTunes revenues are falling on a per-user basis. If iTunes spending falls on a per-user basis, I believe hardware margins will follow suit. Apple is optimized for hardware margins. The iTunes trend line thus appears ominous.

Google

Google still does not have an effective messaging strategy. This is confounding. There may be no more important mini-platform in the near term than messaging. Facebook, of course, battered its way into this critical market, dropping $20 billion on Instagram and WhatsApp in a single year. Google will almost certainly need to do the same. Larry Page has the wherewithal to follow suit — does he have the necessary humility? I am not convinced.

Google’s primary response to date, requiring SMS and messaging to default to Google’s Hangouts service, seems a rather anemic response.

Facebook

Though it claims over a billion mobile users, Facebook has no smartphone platform. This perpetually locks them out from critical user, usage and location data. That Facebook is now looking to buy its way into the wearables market, which potentially delivers incredible amounts of user data, should be no surprise.

That said, what will Mark Zuckerberg do when the ‘monopoly’ money runs out? Successful businesses aren’t sustained on buying up others’ creations.

Microsoft

Despite the well reviewed Windows Phone 8.1 OS, Microsoft has yet to reveal it can create a thriving mobile-first business.

Manufacturing

Microsoft’s purchase of Nokia notwithstanding, the vast majority of manufacturing of every piece of smartphone hardware is outsourced. The case has been made that regular interaction with new materials and new manufacturing processes will lead to those companies (and nations) becoming the primary source of innovation, thus trumping Apple, Google et al. This idea has not been borne out and I suspect it never will. Shedding our manufacturing abilities has no doubt damaged America’s middle class, but not its technology leadership.

Money and the Snowden factor

Smartphone platforms almost certainly contribute to a nation’s economic well-being and security. Smartphones link people, telecommunications and banking, holds our most personal information, tracks our movements, manages our identity, logs our purchases, connects us to first responders, and provides vital access to news, cultural and learning resources. We have to assume larger nations in particular are keenly incentivized to repel America’s technological reach. This is especially true in a post-Edward Snowden environment.

It’s not simply a matter of geopolitics, of course. Real money is at stake. Google and Facebook are effectively banned in China — and the in-country alternatives are now worth billions.

Over 90 million smartphones sell in China every quarter. China may decide to lock out Apple and Microsoft — or demand unreasonable ‘rents’. If China creates barriers to Apple, for example, or perhaps does all it can to promote or subsidize homegrown companies such as Xiaomi, then certainly Apple’s growth potential will be diminished.

I would also not be surprised if government sponsored firms in India or Indonesia, for example, purchase BlackBerry or commit significant resources to improving the open source version of Android (AOSP), which is free of all Google services. Success by any means necessary.

Why This Matters

Smartphones are the next great phase in computing’s decades long remaking of work, play, learning, commerce, creativity and connectivity around the planet. They connect us with nearly everything. America is in the lead now. Americans may wish to celebrate this. To remain at the top, however, will demand vigilance, daring and vision.

Each phase of the computing revolution appears to come faster than the one before. The smartphone wars will soon be the technology revolution of the past.

Who Won The Mobile Tech Olympics?

Business is a combination of war and sport. ~ André Maurois

The Long Summer Of The Microsoft Monopoly Olympics

Computing was pretty simple for the last 15 years: PC plus a browser. Both are splintering now. ~ Benedict Evans (@BenedictEvans)

Once upon a time — long, long ago in 2006 — the Personal Computing Olympics used to be oh-so-simple. First off, you weren’t even invited to the games unless you were bosom buddies with Microsoft. And almost everybody who attended got a medal (but Microsoft took home most of the Gold, if you know what I mean). It was the long summer of Microsoft and we thought that it would never end.

Then along came Mobile. Mobile changed the game as radically as if the Olympics had switched from Summer Games to Winter Games. The world of computing was turned on its head and it would never be the same. Oh, Microsoft tried to play in the new Mobile Winter Olympics, but they were ill prepared. Surprisingly in foresight, but unsurprisingly in hindsight, the new Winter games left them cold.

One Olympics, Two Champions

So much for the old Olympics and the former Olympian. Let’s turn our attention to the New Mobile Winter Olympics and the question of who won them. The answer? Well, it depends upon the question you ask.

It is not the answer that enlightens, but the question. ~ Eugene Ionesco

You see, the Tech Olympics — just like the real Olympics — are divided into two very different types of games:

2) Objective Games that are determined by clocks, tape measurers and other quantifiable metrics — like Speed Skating, Downhill Slalom and Ski Jumping.

So who won the Tech Olympics — just like who won the real Olympics — depends on how you score the games. Are you judging based on how the market responded or how the press responded or are you judging based upon objective measurements? Two very different ways to measure. Two very different types of winners.

The Subjective Olympics

And the medalists in the Subjective Olympics are:

Gold: The Google and Android twins walked off with the Couples’ Gold Medal. The Judges raved about their mobile acumen and no one else even came close to matching their exquisite market share.

Silver: Samsung came in a very strong second for the Silver Medal. Some argued that they should have won it all, but Samsung was all strength, no subtlety; all power, no grace. Four years ago, no one even expected that Samsung would be at the games, so they should be grateful just to be standing on the (Android) platform.

Bronze: And the Bronze goes to Amazon, of course. True, Amazon did not have a particularly productive Olympics. They over-performed in revenue, but under-performed in profits. But none of that really mattered to the Judges. Amazon’s coach was brilliant, their business model dazzling and their potential awe-inspiring. The Judges awarded the Bronze to Amazon not on merit but because it was clear to them that Amazon was destined for greatness.

Off The Podium: Apple? As if! Pushed off the podium altogether. All sorts of glitzy performances, but they only entered a few, select events, they had the smallest team at the Olympic Village and they could muster only a paltry market share, to boot. On the whole, a most disappointing performance.

Oh, it was true enough that Apple had its fanatical, cult-like following, but Apple’s fan base was oh-so-tiny in comparison to the other contestants and it was full of pretentious baristas and other obnoxious types. Apple simply didn’t fit the Judge’s image of what it takes to make a champion.

The Objective Olympics

The medalists for the Objective Olympics were a different story altogether. Let’s do them in reverse order:

Disqualified of Did Not Finish: Sony, Panasonic, Sharp, BlackBerry, Palm, Dell, and far too many others to list. Some started too soon, some failed to finish, some did both.

Shut Out: Microsoft talked a big game, but they finished with no medals. However, they vowed to win the next Olympics, for whatever that’s worth.

Bronze: The Bronze? No winner. The podium remains empty.

Silver: Samsung of course, with a strong showing. 309 million units, which represented 39.5% of total Android shipments in 2013.

Gold: In a surprise to absolutely no one who was paying any attention and to absolutely everyone who wasn’t — the Gold went to Apple. And it wasn’t even close.

Scoring The Objective Olympics

[pullquote]I like long walks, especially when they are taken by people who annoy me. ~ Fred Allen[/pullquote]

“Apple!” cried the outraged Subjective Olympic judges. “Apple, the winner? And no medal for Google and Android? Impossible. Outrageous. Unheard of! The fix is in!

“Well, you see,” the Objective Judges calmly explained to their irate brethren over and over again, “in the Objective Olympics, we judge things by objective criteria and Apple walked away with them all — save one.

1) Apple gained mobile phone share. ((Gartner: Apple gained mobile phone share as smartphones overtook feature phone sales in 2013))

2) Apple dominated mobile platforms. ((Apple’s control of the app economy stronger than you know;
—
The Smartphone App Wars Are Over, and Apple Won))

The Smartphone App Wars Are Over and Apple Won” Yep. If you care about have the best/newest. Ben Thompson (@monkbent)

3) Apple dominated profits. Their profits went UP from 78% to 87.4% in 2013. And just to give you an idea of how much Apple dominated, iTunes — which is their “loss leader” — grossed half as much ($17.5B) as all of Google combined. ((Mobile phone market hits ‘the great moderation’;
—
Including hardware, iTunes grossed about $175b in 2013))

Market share is the right metric for Android’s business model. Revenue is right for iOS’. The two aren’t mutually exclusive. ~ @mtabini ((via ArrAySee @ArrAySee))

4) Apple INCREASED their Enterprise dominance. Apple’s iPad took 91% market share of enterprise devices. iOS took 73% overall. ((Apple’s iPad takes 91.4% share of enterprise tablets; iOS takes 73% share overall
—
Apple maintains enterprise dominance; Windows Phone lags
—
iOS Dominates Enterprise Market with 73% of Mobile Device Activations))

5) Apple dominated brand loyalty. iPhone owners have “blind loyalty” and will buy anything Apple makes. 78% of UK iPhone owners ‘couldn’t imagine having a different type of phone now. ((Study: iPhone owners have ‘blind loyalty’ and will buy anything Apple makes
—
78% of UK iPhone owners ‘couldn’t imagine having a different type of phone now))

Two Different Ways To Judge, Two Different Types Of Olympians

“What, what, what,” sputtered the flustered Subjective Judges. “If the facts favor Apple, then the facts must be Apple Fanbois!”

Yeah, they kinda are.

[pullquote]Android’s increased market share HAS NOT come at any cost to Apple’s iOS[/pullquote]

It’s been apparent for years that Apple was taking the high end of both phones and tablets and that Android was taking almost all of the rest. What HAS NOT been apparent to many is that Android’s increased market share HAS NOT come at any cost to Apple’s iOS. As noted, above, despite Android’s massive increase in market share, Apple’s numbers in platform, profits, Enterprise and customer loyalty all went UP.

Did you hear about the guy that lost his left arm and leg in a car crash?  He’s all right now.

Did you hear about the company that lost all the profitless market share they weren’t ever competing for? They’re all right now too.

In Olympic terms, Apple didn’t enter the most events, Apple didn’t win the most medals, Apple didn’t win any medals in any event that they didn’t enter, Apple didn’t win any bronze or silver medals, but Apple kept its eyes on the prize and they took home the Gold in every event that they participated in.

Market share is the right metric for Android’s business model. Revenue is right for iOS’s. The two aren’t mutually exclusive. Not that hard. ~ Marco Tabini (@mtabini)

Using market share alone as the one and only measure for who won and who lost the Mobile Tech Olympics borders on the delusional.

[pullquote]Life’s hard. It’s even harder when you’re stupid. ~ John Wayne[/pullquote]

It’s like awarding the Gold Medal to the hockey team that had the most shots instead of the most goals;
It’s like awarding the Gold Medal to the speed skating team that had the most players instead of the fastest time;
It’s like awarding the Gold Medal to the curling team that threw the most stones instead of to the team with the stones closest to the center of the target.

Never underestimate our ability to ignore the obvious. ~ Po Bronson

The Next Olympics

So what happens at the next Olympics? Well, like former president George Bush, I have opinions.

I have opinions of my own, strong opinions, but I don’t always agree with them. ~ George W. Bush

I’ll save my analysis of the future of Blackberry, Apple, Chinese Android, Samsung Android, Nokia Android, Microsoft Windows Phone and Google for next time.

Post-Script: Join me on Twitter @johnkirk.

The Death Of iPhone. The Death Of Android. The Rebirth Of Facebook.

Well, that was a heckuva week.

Google sells Motorola for billions less than they paid for it. Apple sells millions fewer iPhones than nearly everyone expected, then directs guidance lower. Facebook becomes a mobile first company, for real this time. Amazon investors prove they don’t quite have unlimited patience. Yahoo remains last decade’s news. Microsoft probably has a new CEO, one with zero connection to Nokia. Oh, and they now make better commercials than Apple.

Anything else?

What we learned from last week’s machinations is that everything we think we know about the smartphone wars is completely, utterly false — or worse, meaningless. Barely a fortnight ago, on this very site, I told you: “The smartphone wars are not over.” Nothing has been settled, least not the future. After last week’s fun-bumpy-tweet-filled ride, does anyone still dispute this?

Know this: The current market for smartphones, and all they are subsuming, transforming, re-making, inspiring — which is in fact all of the things — is itself under threat, betrayed by its own relentless innovation and rapid success. Yet, far too many analysts and bloggers stubbornly cling to the fiction that somehow, smartphones can alter every market they touch while continuing on a merry upward slope unscathed by their own destructive deeds.

The most basic assumptions about this market are nothing more than faith-based analyst alchemy.

Time now to kill the dominant fictions in the smartphone wars.

The Death of iPhone

Fiction: Apple owns the high-end of the smartphone market.

If you are making assumptions re iPhone (or Android) sales growth based on an imaginary perceived share of a market that is already on the cusp of disrupting itself, then you are making faith-based decisions. It’s that simple.

As I wrote months before last week’s earnings announcement, if Steve Jobs was alive he would never approve the iPhone 5c. The 5c is a rare self-inflicted wound, the elevation of profits over values. Only, that is not the cause of Apple’s weakness in their iPhone business. The trouble is the smartphone market itself, which I am beginning to suspect does not actually exist. Bear with me.

The persistent belief among analysts that as much as 90% of the current mobile phone market (nearly 5 billion users) will transition to smartphones is a religious ideal, nothing more. Repeat after me: There is no total addressable market (TAM) for smartphones. The very concept is a fiction. Indeed, we may already be within months of Peak iPhone, a year or two from Peak Smartphone. For billions of people, voice, robust SMS/MMS services, and perhaps some form of digital identity is more than they will ever need. What can Apple provide them? Even at, say, $300, nearly everyone on this planet cannot afford and will never need an iPhone.

It gets worse.

I carry my smartphone with me all the time and use it for far more than I can list here. For the majority of that time, however, I don’t actually need a “smartphone”. What I really need is something like a credit card-sized piece of glass that supports rare but necessary voice calling, possibly video calling, can display a virtual keyboard for texting, and includes a mag-stripe (and/or chip) for payments. Create this and the smartphone market is gone, reduced to the equivalent of the dusty home desktop PC. Given the rapidity of innovation in this market, I should reasonably expect to have my (truly) smart card by no later than mid 2016. No iPhone necessary — in barely two years.

Tim Cook must know this. This is likely one reason why Apple stockpiles so much cash. When you’re dependent upon a single product line, iPhone, for about 60% of your revenue, and that market may vanish in a few years, then your focus necessarily shifts to maximizing profits of that product line and funneling those profits into entirely new offerings.

Apple doesn’t release many new products. I suspect that is about to change in a very big way. Expect to see several new products and product lines from the company over the next year alone. Some designed for nothing more than padding iPhone margins. Others, desperately in search of that next big thing.

The Death of Android

Fiction: Android is unassailable

Google cut itself free from the anchor that was Motorola. They strong-armed Samsung into more closely following the sanctioned Google Android playbook. Wise moves.

I sense fear.

Yes, Android dominates smartphone market share. Look closer. What many call ‘Google-free’ Android, AOSP, now garners a solid second place — and is growing at a rate much faster than ‘real’ Android.

AOSP is the “open-source software stack for a wide array of mobile devices with different form factors.” It can power Amazon’s Kindle line, or smartphones made for use in China, for example, where Google search, map, Play and other services are not terribly popular and not welcome by the government.

Does this matter?

Absolutely. Google no doubt believes that AOSP is a necessary sacrifice. It’s availability ensures the rapid spread of the “Android” template and prevents iPhone or Windows Phone, for example, from garnering another new user. It seeds the future for ‘real’ Android — and it is hoped, heavy usage of those most profitable Google services. Except, this is false.

The fact is, the rapid, global embrace of smartphones has altered the entire value proposition of web search and web services — Google’s bread and butter. AOSP may presently be little more than Android without the Google, but it could ultimately become a fully-fledged ecosystem alternative in its own right, one that directly competes against Google on everything that matters to them, and not just in China, but in Japan, South Korea, Brazil, USA, everywhere.

Thus, while I suspect last week’s moves by Google signal the company’s preparations to launch an assault on the Chinese market, it may already be too late. The world’s biggest market for data and smartphones can do just fine without Google. Which means: everyone can.

It gets worse.

Extremely popular mobile services may now have a vested interest in supporting AOSP’s growth. Popular social messaging apps such as Line, WeChat or WhatsApp no doubt noticed that Google made its Hangouts service the default messaging app for Android Kitkat. They won’t sit still for such bullying. What’s to stop them from integrating their service and AOSP and offering a low-end smartphone in the developing world?

In the short-term, perhaps none of this happens. In fact, I expect Google to best Apple as the world’s most valuable tech company, possibly within a few weeks. Save the celebrations. Google’s value arises strictly from it’s ability to capture more of our habits, more of our actions, and monetize them across a near-endless supply of strangers and brands. What we are learning, however, is that despite the rapid spread of Android in all its forms, there are effective alternatives to Google services across every smartphone platform — even its own. Little wonder, then, that Google is moving quickly into moonshots, driverless cars, the connected home, consumer hardware, health and more. Such moves are driven by fear, even if they are shrouded in boilerplate Silicon Valley boasting.

The Rebirth of Facebook

Fiction: Unbundling Will Kill Facebook

Like that persistent meme that teens are abandoning Facebook, the idea that Facebook is being unbundled to death — via messaging apps, social picture apps, Christian dating sites and the like — is simply false. Facebook is benefitting from the unbundling trend.

In fact, after badly stumbling on mobile, after the laughable dung heap that was Facebook Home, the brief marriage to HTML5, and the spats with Apple and Google, Facebook is doing better than ever. More than half its revenues now comes via mobile — no smartphone OS necessary.

This is in large part because the company is embracing the unbundling strategy, shrewdly leveraging its billion users and their extant Facebook identity and eagerness to share everything. That some people want to share only some aspects of their lives with only some others at some times and places, via text or image or video, is fine — every 1 and every 0 feeds the growing Facebook engine.

Let a thousand apps bloom. Facebook will be there.

Barely a year ago, analysts were convinced Facebook was doomed given its utter dependence upon iOS and Android. Now, a case can be made that smartphones, once thought as the device to bring the developing world into the global sphere of the Internet, is already on the cusp of being disrupted. In this new world, it is Facebook (and our Facebook ID) that will connect us all to one another.

The Dogs of War

What I think last week’s official numbers and clever machinations reveal is that the “smartphone” market, which most still believe is a pitched battle between iOS profit share and Android market share, is, in fact, merely the initial wave in a coming tsunami, one that will deliver highly personal, nearly ubiquitous and ever-engaging computing and connectivity to all who want it and nearly all who do not, and in forms we have yet to imagine. Hardware profits and OS marketshare, be damned.

The smartphone itself may be no more than a fleeting, ten-year-blip in computing history. There will be no 30th anniversary for the iPhone. Android will betray its maker. Owning your own smartphone ecosystem does not matter. Everything is in flux. My verse is the destruction of everything — and the great tech companies of our day happily, foolishly oblige.

As Jim Morrison said, “no one here gets out alive.”

2013 Winners And Losers In Tech

We track, analyze and oftentimes promote technology because of its overarching, mostly positive impact on our own lives and throughout the world. It’s many disparate parts, incorporating intellectual property and global manufacturing, hardware and software, content and creativity, when brought together at exactly the right time, in exactly the right way can be both uplifting and magical.

While we may not fully understand all the long-term ramifications of what our technology has wrought, we can know its winners and losers. In 2013, much like the harsh, unblinking truth at the final whistle of some great sporting clash, knowing who won and who lost was surprisingly rather easy to discern.

Winners

Amazon

There wasn’t even a close second.

Hardware, content, search, real-time pricing algorithms, personalization and a near-infinitely scalable platform. There is no more high tech company than Amazon. Yes, $AMZN has (only) gone up this year. If Jeff Bezos is to be believed, and the evidence certainly suggests so, then the company is just getting started. Amazon is the low-price leader in retail, a behemoth in cloud services, the first place most of us think to visit when we think about buying anything — and the unmatched leader in big ideas.

Google Glass is so Spring 2013. All anyone is talking about now are Amazon delivery drones. Amazon is more than talk, of course. It took Amazon to offer live, personal (“Mayday”) support for every new Kindle tablet user. Did Apple, king of the locked-down, high-margin, customer-focused hardware-based ecosystem, even consider such an audacious idea?

Amazon, not Silicon Valley, is the new home of really big ideas. Amazon embodies a scope of business, a level of execution, and a breathless vision that I don’t think even Google can match. They won 2013.

Twitter

A highly successful IPO, a highly engaged user base, the new home for breaking news, the place we share our most joyful moments, greatest tragedies, and idle thoughts. Apple execs say damn near nothing outside of highly staged events. Yet both Tim Cook and Phil Schiller tweet often.

Tablets

What, exactly, is the purpose of a tablet? No one seems to know. I cover the industry and typically recommend them only to grandparents and toddlers. Microsoft finds the tablet so utterly confounding — despite 10+ years of effort — that they can still only envision such a device with a keyboard attached. The numbers do not lie, however. At least, not in 2013. Tablets are everywhere. Per IDC, 220 million tablets moved just this year alone.

Team iOS 7

iOS 7 is audacious, shocking, beautiful as a European runway model, and just as brittle.

If you were part of the team that developed iOS 7, congratulations. The iOS 7 adoption rate is already nearing 75%. With around 500 million iOS devices in use, that’s 375 million devices running with your OS — about triple the latest Windows operating system.

iOS should fuel Apple for at least another generation, and iOS 7 points the way forward.

Gaming and Gamers

A new Playstation, a new Xbox, and a new chip (A7) powering Apple iOS devices make 2013 the best time ever to be a gamer. Add in social media gaming, a billion smartphone users, and ‘computer games’ are now as ubiquitous as Miley Cyrus gifs.

Female Tech Execs

I believe Marissa Mayer’s strategy, such as I can divine, consigns Yahoo to a permanently middling presence in our lives. Much content, some personalization, cloud-scale, new acquisitions and several new mobile apps all point toward nothing more than news, views and reviews of the sort our parents now get from morning TV talk shows. Doesn’t matter. The market has spoken and the money people obviously like what Mayer is doing.

Meanwhile, Meg Whitman is righting the busted ship that is HP and Sheryl Sandberg is making the day-to-day adult decisions at Facebook. Since Tim Cook is determined to transform Apple into a “casual luxury” brand, I can absolutely believe the rumors that Apple’s next CEO will be Burberry’s Angela Ahrendts. That’s quite a line-up.

Road Warriors

All praise the glories of the market. In-flight WiFi became possible, then practical, then profitable, then widespread, and then the government — surprise — changed the rules. Now we can keep our electronic devices turned on, legally, throughout our entire flight. Self-interest mixed with technology is a powerful combination.

Google Lawyers

What a year! Google lawyers fought off Oracle, got a judge to agree that digitizing and making “out of print” books freely available was a public service, signed a sweetheart deal with the FTC, despite a monopoly position in search which they have frequently abused, and the late Steve Jobs’ thermonuclear war on Android has not slowed down the world’s most popular OS even in the slightest. I’m assuming there will be quite the cash bonus from Larry Page to his merry band of lawyers.

Considered: Kickstarter, Pinterest, iTunes (seriously), iPhone 5s, and the ‘smartphone’.

Losers

Computing technology is deeply personal yet seeks to connect us with everyone and everything. It can eradicate the worst parts of our past, re-invent our very notions of the future and captivate our present. Oftentimes, however, it flops worse than a petulant soccer player on a losing team. This year’s biggest losers in tech:

Facebook Home

Facebook Home was such an utter, abject, laughable failure that you probably already forgot that it ever existed. I suspect that the mysterious illness that prevented Google’s Larry Page from talking for so many months stemmed from his laughing hysterically when he first saw Facebook Home.

Steve Ballmer

I believe no non-founder ever gave more of himself, his talents, his passions, his sleepless nights, as Steve Ballmer gave to Microsoft. Ballmer helped Microsoft become so big that it — literally — scared governments and sent the mighty Steve Jobs, fortuitously, scurrying off as far away from “personal computers” as he possibly could.

Nonetheless…Microsoft’s stock has done better since Ballmer announced his “resignation” then it did during the decade he actually ran the company. Worse, much worse, and nearly inconceivable, is that there are over a billion smartphones in use plus hundreds of millions of tablets and nearly everyone has absolutely no Microsoft software inside.

For all I admire about Ballmer, and I admire much, the company’s failure in mobile computing is, in my opinion, a far more devastating capitulation than Time Warner buying AOL at the absolute top of the market.

Smartwatches

Samsung’s Galaxy Gear commercial is glorious. The watch itself is Kanye-cool. Only, no one bought one because there is no need for one. The year of the smartwatch was anything but. Galaxy Gear flopped. Apple’s iWatch never appeared. The Pebble watch was essentially a high-margin toy purchased by Silicon Valley insiders. Not wanted, not needed.

Google Maps

Every quarter, as Google reports anew the latest Motorola loss, we are presented with yet another reminder that Google’s purchase of Motorola was a profound strategic mistake.

I don’t think it’s their biggest. Rather, that would be Google’s decision to consign iOS users with an inferior version of Google Maps — for years. That led to Apple’s decision to offer its own mapping service. As Charles Arthur notes, Google Maps has already lost tens of millions of iPhone users — possibly Google Inc’s most lucrative customer base. Hubris.

Siri

Apple’s existence now spans across five decades. In all that time has the company ever promoted a device or a service as prominently, as consistently and as aggressively that has gone so utterly unused as Siri? Siri is now more than two years old and still doesn’t work as it should. Worse, even if it did we would still rarely use it.

Skeuomorphism

We all learned what this word meant when Apple killed it off. It was time.

The Third Mobile Platform

As of this moment, smartphones now sell about a billion units a year. This massive, industry-shifting market belongs almost entirely to two platforms: Android and iOS. Symbian is dead. BlackBerry is at death’s door. There is effectively no Tizen, no Firefox OS in actual use, no Ubuntu and nearly no Windows Phone.

Has the industry consolidated this quickly, despite being this big, this global? As much as I believe there is room for a thriving Windows Phone ecosystem, the market itself, in every region and across every demographic, tells us that iOS and Android are enough for nearly everyone. Perhaps 2014 will surprise us.

Considered: Obamacare website, PCs, privacy, BlackBerry, the “cheap” iPhone, and RSS.

If Jeff Bezos Is Serious About An Amazon Phone He Better Take Out His Wallet

Over the past several weeks, rumors of an “Amazon Phone” have become more persistent, if no more credible. The rumors stick, of course, because Amazon has years of experience designing, developing, selling (and I assume servicing) personal mobile computing devices — the Kindle line of eReaders and tablets. In addition, Amazon operates its own Android app store, has a very successful cloud infrastructure platform, and manages one of the larger direct-to-consumer smartphone channels. Add to this the company’s robust digital media ecosystem — books, music, movies and more — and it’s easy to understand why so many believe Amazon can and will make its own smartphone.

There’s only one problem: every time we might use an “Amazon smartphone” we most certainly are (via their cloud, apps, payments platform, rumored smartphone sensors and integrated services) visiting Amazon.

And Jeff Bezos has taught us that every time we visit Amazon we should demand and we should receive a whole host of free goodies. This alters the entire Amazon smartphone equation.

Free Free Free!

A famous Bezos quote is “there are two kinds of companies, those that work to try to charge more and those that work to charge less. We will be the second.”

I won’t call Bezos a liar, the quote is accurate. Only, it’s not complete. Bezos and Amazon often do charge less than the competition. They are like WalMart in this regard. Where they are different, however, is in making that (slightly) lower price even more appealing by throwing in a feast of freebies.

Amazon Prime, for example, is damn near a steal for my family — just on shipping costs alone. There’s also the many free streaming movies we get for being Prime “subscribers.” We get free books on Kindle, free Android apps, free cloud storage for our many digital belongings and much more. Then there’s all the sales taxes we’ve saved by choosing Amazon instead of buying local. I shudder to add those up.

The modus operandi of Amazon isn’t “cheap” or “low price.” Rather, it’s using other people’s money — including some from Wall Street — to subsidize the company’s most favored customers.

I am happily one of Amazon’s most favored customers.

But I have no intention of getting an Amazon smartphone, however. Not unless Bezos hands me a great deal more freebies than ever before.

All Amazon All The Time

Matthew Panzarino of TechCrunch recently provided details on the rumored Amazon smartphone(s).

Amazon is planning two devices, the first of which is the previously rumored ‘expensive’ version with a 3D user interface, eye tracking and more.

Another feature said to be planned for the device, but not yet locked for release, is an image recognition feature that lets users take a shot of any real-world object and match it to an Amazon product for purchase.

Count me as highly skeptical on any of this. An actual value-enhancing 3D screen — before Samsung, Apple, Sony, LG or Motorola? Eye tracking and image recognition that really works? From the company that is primarily a web commerce and services concern?

Worse, the company suggests they may charge us for their smartphone! Recall, Amazon publicly told AllThingsD: “we have no plans to offer a phone this year, and if we were to launch a phone in the future, it would not be free.”

If it’s not free, what could be the actual selling point? Better hardware? Better software? Better ecosystem? That seems extremely unlikely. Lower prices? Between iTunes and App Store pricing and Google giveaways, how much lower could Amazon go?

Answer: they’d have to start paying us to use the device.

It’s the opposite of free!

This is not so far-fetched.

The Opposite of Free

Smartphones are profoundly altering commerce. We use them to buy, to research what to buy, to see what is available to buy — at this moment, at this exact location, and from whom. We use our smartphones to complete the purchase, to make the payment, to store our coupons, to ask our friends for recommendations.

Amazon wants badly to capture and monetize as much of this action, and as many of these steps, as theoretically possible. Give Bezos his due for thinking in such grand terms.

Everything Google does, for example, is to get us to provide more of our personal information, which they can then monetize. Everything Amazon does is to get us to make more of our purchases through them. An Amazon smartphone would no doubt be designed for just that.

Which, from a user’s standpoint, sounds absolutely dreadful.

An Amazon smartphone could only work if Amazon paid us to use it.

Amazon is a Tiger. Jeff Bezos the Tail.

In a recent piece in BusinessWeek, Bezos and Amazon are reverentially lauded:

Today, as it nears its 20th anniversary, it’s the Everything Store, a company with around $75 billion in annual revenue, a $140 billion market value, and few if any discernible limits to its growth.

I’m less sure of that last bit. Admittedly, I use Amazon regularly. The reasons are clear:

the sales process extracts only minimal pain
the products are available within only a few days
the prices are reliably low
all the free stuff the company throws in with every purchase

Just one of those goes away, however, and I will look elsewhere — possibly even make my purchases elsewhere. Which means there is at least one very obvious limit on Amazon’s growth: if the rubes who are subsidizing Amazon’s most favored customers ever rebel, us most favored customers just might go elsewhere.

I can’t say when or if that will happen. But, I can say that if the Amazon smartphone is not free, as Amazon says, then it will have to compete with other devices. I simply do not believe Amazon can win on a level playing field.

I could be wrong. There may well be an Amazon smartphone on the horizon. It may turn out to be great. Time will tell.

But I am certain of this: Jeff Bezos better be ready to pull out his wallet if he’s serious about entering the smartphone wars. I will make him pay a fortune for my business. I suspect we all will.

Further Analysis of Amazon

This article is exclusively for subscribers to the Think.Tank.

4 Mobile Business Models, 4 Ways To Keep Score

The hundred meter dash, archery, weightlifting and the long jump are four very different Olympic sports with four very different methods of keeping score. The hundred meter dash is scored on speed. Archery is scored on accuracy. Weightlifting is scored on strength. The long jump is scored on distance. You don’t judge the participants in the hundred yard dash by how much weight they can lift. That would be the wrong way to measure them.

“…looking at ‘smartphone share’ or ‘profit share’ or ‘platform share’ all tell you something about the industry, but all three metrics mislead you if you try to treat them as a way to see who’s ‘winning’, because ‘winning’ means different things for Apple, Samsung or Google. After all, Google may well still make more money from searches on iOS than it does from searches on Android.” ~ Ben Evans, On market share

Hardware manufacturing, advertising, “razors-and-blades” content sales, and platforms are four very different business models and they have four very different methods of keeping score too.

You don’t take the metrics used to measure one business model and apply them to another business model. That would be the wrong way to measure them.

Each business model demands its own specific forms of scoring. The goal should be to devise, discover, or discern a form of measurement that properly and accurately reflects how a business is performing in the business model in which it is participating.

Biathlons, Triathlons and Decathlons are all unusual Olympic events in that they group together several disparate sports and then determine an overall winner. Think of Apple, Google, Samsung, and Amazon as Olympic teams that compete with one another in the four interrelated mobile business models – hardware manufacturing, advertising, “razors-and-blades” content sales, and platforms – a sort of Quadrathlon. Each team has its strengths and its weaknesses, each team wants to win the events that they’re best at and maximize their score in the other events in order to win the overall Quadrathlon.

Let the games begin!

Hardware Manufacturing

Last week I tried to explain how using only market share to analyze mobile hardware manufacturing was not only the wrong way to keep score of that business model but that it was actually obscuring the real score.

“The truth is that focusing on market share as the primary metric is the only way to paint the iPhone as anything other than a roaring success.” ~ John Gruber

I suggested an alternative measurement known as the “Fair share profit analysis,” in order to generate some perspective but, truth be told, the only real way to accurately “score” who’s winning in hardware manufacturing is with net hardware profits. When it comes to selling mobile hardware, do Apple, Samsung, HTC, Motorola, etc. really care what their market share is? No they do not. That’s the top line, a means to an end. The only thing that matters when they are selling mobile hardware is profit. That’s the bottom line, the end for which the means were made. Market share is all well and good but only if it brings home the profits. Keep your eyes on the prize – and profits are the prize.

So who’s winning the medals in the olympic sport of mobile hardware manufacturing?

Source: “Who’s Winning, iOS or Android? All the Numbers, All in One Place”

Awards Ceremony: Apple walks away with the Gold (both figuratively and almost literally), Samsung takes the Silver and no one else even medals. The Bronze podium stands empty.

Advertising

The only proper way to score advertising is net advertising profits retained. Market share and platform may be used to garner advertising revenue but they are only the means and they should never be confused with profit, which is the end.

Today, there are three great truths in mobile advertising:

1) Google is killing it in mobile advertising.
2) Google is killing it in mobile advertising…but mobile advertising is still relatively small; and
3) The vast majority of Google’s mobile advertising revenue is generated on the iOS platform, not the Android platform.

1) Google is killing it in mobile advertising.

Google dominates the mobile search market with 93% of US mobile search advertising dollars, according to eMarketer. Facebook is at No. 2.

2) Mobile advertising is still relatively small.

The mobile ad market alone stood at roughly $4.1 billion at the end of last year, up from $1.5 billion at the end of 2011. Google, currently has more than half the mobile ads market with annual revenues of around $2.2 billion.

Just to keep things in perspective, mobile ad revenue only accounted for 9% of all online ad revenue last year, although the percentage of mobile ads vis-a-vis other online ads is rapidly growing. And mobile ad revenues paled in comparison with mobile hardware sales. While it took an entire year for ALL mobile ad revenue to reach $4.1 billion, Apple alone, and in 90 days, and in what many considered a down quarter, brought in revenues of approximately $31.4 billion just from iPhone and iPad sales.

3) Google is making its advertising money on iOS, not Android

“(I)t’s Android’s large market share that is the winner for Google. The more Android devices being used, the more Google services with Google ads are being used.” – Virtual Pants

Actually, not so very much. Most of Google’s advertising dollars are generated by iOS’s relatively smaller market share, not by Android’s massive market share.

Source: MoPub

Take a good hard look at the chart, above. The iPhone ad spend doubles the ad spend share of ALL of Android. The iPad almost matches ALL of Android BY ITSELF. And even the lowly iPod has one-quarter of the ad spend that ALL of Android does. Market share is all that matters? I don’t think so. That’s like arguing that acreage is all that matters in real estate. The size of the lot does matter in real estate but location, location, location matters more, more, more. And market share does matter in mobile advertising but it is the location of the market share that matters even more.

— Apple’s iOS Mobile Ad Metrics Dominates Android

— Why 75 cents of every dollar spent on mobile advertising is spent on iPhone and iPad

— iOS leads Android in mobile ad revenue

— Apple’s iPad dominates online shopping traffic & revenue generation

— iOS Still Top Platform For Monetising Mobile Ads, Opera’s Q1 Study Finds, iPhone Also Beating Android For Generating Ad Traffic

— iPad Still Dominates Tablet Ads With iPad Mini Gaining, Velti Finds

“My belief, though, is that what Google is winning with Android is a booby prize — overwhelming majority share of the unprofitable segment of the market.” – John Gruber

When it comes to ad revenues and profits, we shouldn’t be counting Android as a single entity anyway. Ad revenues don’t help Android, the platform. They help specific digital stores. Ads going to Amazon, Google, and the various stores in China and elsewhere need to be broken out separately, not lumped together.

Awards Ceremony: Google wins the Gold and they win it going away. But they receive their Gold medal standing on the Apple iOS platform, not the Android platform.

Silver and Bronze? I’ll let you decide if it’s Facebook, Yahoo, Microsoft’s Bing or someone else. They’re all so far back that it doesn’t much matter now anyway. That may change over time but we’ll have to wait and see how this market develops.

“Razors-And-Blades” Content Sales

“(T)he razor and blades business model, is a business model wherein one item is sold at a low price (or given away for free) in order to increase sales of a complementary good, such as supplies…” ~ Wikipedia

The “razors-and-blades” business model is tricky to score.

— Hardware revenues and profits mean NOTHING in the “razors-and-blades” model. In fact, it’s not unusual to LOSE money from hardware (razor) sales.

— Market share means both nothing and everything in the “razors-and-blades” model. It means nothing because it doesn’t actually generate any profits but it means everything because it is a prerequisite to generating profits. In fact, the only reason you’re giving away your hardware in the first place is to acquire massive market share which, in turn, will hopefully lead to massive profits.

— Ultimately, the only way to measure the success of the “razors-and-blades” model is on the net profits generated by the sale of the complementary goods (razors). In mobile, the complementary goods are content such as music, video, books, etc. and apps. Amazon also has the added advantage of being able to sell everything from their sprawling retail catalog.

As I tried to explain in my tersely titled article: “Selling The Amazon Kindle Fire and Google Nexus 7 Is As Silly As Selling Razor Blades To Men Who Love Beards“, the “razors-and-blades” model makes no sense in this market space. At least it makes no sense to me. In the “razors-and-blades” model, the complementary sales – whether it be blades for razors, or ink for inkjet printers or games for gaming consoles – must be proprietary and must command a premium price. That’s the whole point. Give away the razor, make it back – and more – by selling the blades at a premium.

If you’re selling content, you want to be platform agnostic so that you can sell as much content as possible. This, in my opinion, should be Amazon’s strategy.

If you’re giving away hardware in order to sell content, then you want that content to be tied to your hardware product so that you can monopolize the sale of the complementary product and command a premium price.

In the mobile space, the complementary sales ARE NOT proprietary, they ARE subject to competition and they DO NOT command a premium price. Amazon and Google don’t sell content that is any different or superior to that being sold by Apple and other content providers and their content isn’t being sold at a premium. In fact, Amazon often sells their merchandise at a DISCOUNT which – in the “razors-and-blades” business model – is completely bat-manure crazy. ((Then again, we all know that Jeff Bezos is crazy like a fox.))

So who’s winning in the “razors-and-blades” business model? Why, surprisingly, it’s Apple and it’s Apple in a runaway.

— Google Play now at 90% of iOS app store downloads; iOS still holds a 2.6X revenue lead

Despite growing competition from other tablets, Apple’s iPad still accounts for a whopping 89.28 percent of e-commerce website traffic, and also rakes in more money on a per-user basis than any other platform. ~ Monetate

Distimo reports that iOS App Store revenues were 430% larger than Android during 2012. ~ Apple F2Q13 Earnings Call

“…iTunes inclusive of Apple’s own Software generates as much as 15% operating margin on gross revenues. That’s over $2 billion a year.” ~ Asymco, So long, break-even

Source: Canalys

Apple sells their content, not in order to make money but, in order to make their hardware more attractive so that they can sell ever more hardware and make ever more profits. With regard to tablets, Apple is playing the OPPOSITE game that the Amazon Fire and the Google Nexus are playing. While Amazon and Google subsidize their tablets (razors) in order to make money on the sale of their content (blades), Apple should be subsidizing the sale of their content (blades) in order to make money on the sale of their hardware (razors). But that’s not how Apple rolls. Instead, Apple sells their hardware at a premium AND they sell their content at a premium. That’s not supposed to happen but that’s just how good the Apple ecosystem is.

It’s like a walk-on winning the Olympic marathon while everyone else is stuck in the starting blocks.

You can say that it’s elitist or arrogant to argue that iOS users are better customers than Android users. But you can also say that it’s the truth. ~ John Gruber, Church of market share

One last thing. If Amazon and Google have an incentive to sell discounted hardware and premium content and Apple has an incentive to sell premium hardware and discounted content, one of those business models is going to fail and it’s going to fail hard. Since Apple is, so far, successfully selling premium hardware AND premium content, I’ll let you be the judge of how this is going to play out.

Awards Ceremony: I’m tempted to award all three medals to Apple just for having the sheer audacity to win a game that they didn’t even enter. But I guess Apple will have to console themselves with just winning the Gold.

And the Amazon Fire and the Google Nexus tablets? Disqualified for not understanding the rules of the game that they were playing.

Remember, Amazon and Google sell their hardware at cost. They don’t make a penny off those sales and they might even be taking a loss.

Market share? Yes, they have taken some minor market share…in a market where they are GIVING AWAY THEIR MERCHANDISE. And market share is not how you score in the “razors-and-blades” game. While the press and the pundits fawn over the market share of the Amazon Fire and the Google Nexus, what they’re entirely missing is that in the “razors-and-blades” business model, market share should be a GIVEN. I mean, honestly, if you can’t obtain overwhelming market share when you’re giving away your product at cost, then you should be ashamed, embarrassed, abashed, chagrined, humiliated and mortified ’cause you’re doing something terribly, terribly wrong.

You win the “razors-and-blades” game by scoring the most content profits. All those Amazon Fire and Google Nexus market share numbers that the analysts are always going gaga over? Meaningless. They should be removed from the count. They’re probably not hurting the sales of the other available tablets and they’re not helping the bottom lines of their makers either. There is zero proof that Amazon and Google’s hardware giveaways have led to increased retail sales which, after all, in the “razors-and-blades” model, IS the point.

And if you’re going to prophesy that market share alone gives Google data that will someday, somehow, be worth something to someone, then you need to go back and re-read how the “razor-and-blades” business model is scored.

What we desperately need in analyzing mobile computing is far more attention paid to profits and far less attention paid to prophets.

Next Time

Next time I will finish with the “mother” of all business models – platforms – and do the medal count.

Google’s Android Activations Are A Lot Less Cash Cow And A Lot More Bull. And That’s OK.

Read Part One of John’s column entitled: Android’s Market Share Is Literally A Joke

Read Part Three of John’s column entitled: Google’s Android Activations Are A Lot Less Cash Cow And A Lot More Bull. And That’s OK.

The author would like to gratefully acknowledge the contributions of Ben Bajarin and Steve Wildstrom. All the great ideas, that you agree with, were theirs. All the bad ideas, that you disagree with, were mine.

Why Internet Sales Taxes Are Inevitable

Later today, the U.S. Senate will consider, and probably pass, a bill that allows states to collect sales taxes on online purchases shipped from other states. Though its fate in the rabidly anti-tax House is uncertain, sooner or later this bill or something like it will become law. And it’s about time.

The taxation of online, and earlier, mail order, sales has long been a mess. In 1992, the Supreme Court said that states could only tax the sales of companies that had a physical presence (or “nexus”) within their jurisdiction. The court recognized this would cause a lot of problems and more or less begged Congress to fix them, a pleas that has gone unanswered for two decades.

Beyond general anti-tax sentiment, two arguments were raised against allowing states to impose taxes. One is that complying with the crazy quilt of state and local sales tax rules and rates was simply too complicated for sellers. The second, which arose with the birth of 0online commerce in the late 1990s, was that taxation could kill a promising new form of business in its cradle.

The first argument is still being made, most vociferously by eBay. But it no longer makes much sense. A database can quickly tell a merchant whether a given product shipped to a given address is subject to tax and at what rate. And at a time when Amazon.com is threatening to devour traditional retailing, the argument for infant-industry protection is ridiculous.

Indeed, it is the success of Amazon and other online sellers that make new tax rules inevitable. As long as out-of-state sales consisted mainly of Land’s End polo shirts and L.L. Bean duck boots, the loss of taxes was annoying to states, but tolerable. No more. I’m probably ahead of most shoppers, but if it’s not something I have to check out physically, if I don’t have to try it on for fit, and if it isn’t perishable, I buy it online. Yesterday, I received four separate shipments from Amazon (one of them actually a book, albeit a used volume I would have had great trouble finding in a store.) With shoppers flocking online, states can no longer forgo the revenue.

The Senate bill would let the jurisdiction where the buyer lives collect the taxes. Adam Thierer of George Mason University’s Mercatus Center favors an alternative system where taxes would be collected by the seller’s state. This does have the advantage of being considerably simpler for sellers, since they would only have to pay taxes to their home jurisdictions and would only have to follow one set of rules. But I fear it would lead to large-scale gaming of the system, with sellers rushing to establish headquarters in the few states, such as Oregon and New Hampshire, that do not impose sales taxes. (Thierer argues that competition among states to attract business with lower rates would be a good thing.)

The complexity of having to distribute tax collections to hundreds of state and local governments is a legitimate complaint about the coming system. But I suspect the ingenuity of American business will spring to the rescue with the development of services that will handle the chore for you. Come to think of it, who would be better able to use its cloud computing expertise and vast knowledge of state and local tax regulations to provide such a service than Amazon?

Google and Amazon: Doing It All Wrong

By the conventional standards of business, it would be hard to find two companies with a greater tendency to do things wrong than Google and Amazon. Yet both are regarded as outstanding success story. What is going on here, and what does it tell us about how corporations ought to be run.

Each company violates a fundamental rule of business. In the case of Google, it’s a failure to diversify its sources of revenue and profits while at the same time displaying a woeful lack of discipline in how it enters new businesses. For Amazon it’s a persistent, almost stubborn refusal to maximize profits.

A glimpse at Google’s income statement reveals just how narrow the company’s success is. Google took in $50.2 billion in the year ended Dec. 31. Of that revenue, $31 billion came from advertising on Google Web sites and another $12.5 billion from ads on Google Network affiliate sites. This means that Google’s original revenue-producing activities, AdWords and AdSense, accounted for 87% of its gross. Motorola brought in another $4.1 billion Everything else–the Google Play Android store, sales of Google Nexus branded Android devices, paid Google Apps, whatever else the company does to produce revenue–generated a mere $2.4 billion. Considering that Motorola suffered a heft net loss from continuing operations, it’s safe to say that search-based advertising was responsible for well over 100% of Google’s revenues.

The unprofitability of everything Google has tried does not seem to discourage the company. Under CEO Larry Page, Google has purged a number of its least successful products. But it continues to add efforts that have little hope of generating profit in the near-term, or perhaps ever. It is spending a good bit of money developing self-driving cars, though the technology seems years away from commercialization. It’s from from clear that many people away from such hotbeds of geekdom as the Googleplex or the MIT campus will ever be willing to wear, let along pay for, Google Glasses (above.) Who but a Google engineer is going to put down $1,299 for a Chromebook Pixel, a laptop that cannot run any programs other than a Chrome browser? And why is it messing around with same-day-delivery retail, a business that seems far outside its core competency–and a logistical and business challenge that no one has cracked?[pullquote]Classical economic theory says corporations try to maximize profits. Amazon and Google prove there are exceptions.[/pullquote]

Of course, the ad business is so profitable that Google doesn’t have to worry in the near term. It’s net margin was 21%, down from recent years but still very healthy. And investors seem happy. It’s stock is trading just a bit below its 52-week high of 844 and the price is 26 times 12-month trailing earnings, a sign that investors believe growth will be healthy into the future.

So while Google’s attention deficit approach to new projects may defy business school wisdom, it isn’t hurting the company. And it is certainly benefiting consumers. We get goodies like Google Maps and Gmail for free, while Google funds the sort of research–self-driving cars–that once was the province of the government and that could have a big payoff for society, if not for Google.

If Google’s problem is a flurry of innovation that has produced little revenue and no profit, Amazon is a tale of profitless growth. Classical economic theory says the purpose of a corporation is to maximize profits, and while the research of scholars like A.A. Berle and and Herbert Simon long ago dismissed taking that notion too literally, profit motivation is still supposed to have something to do with business decisions.

Not, it would seem, at Amazon. The company’s revenues in the fourth quarter of 2012 grew 21%, and that was the worst performance in three and a half years. But profits are another story. In its best year, 2010, it netted just over 4% of sales while it actually recorded a loss last year. Amazon has relentlessly pursued growth with little regard to profitability. It has disrupted one market after another by undercutting the prices and business models of competitors.

And its investors love it. Like Google, it is trading near a 52-week high. Its trailing EPS can’t be calculated because of the loss, but Amazon is trading at a staggering 76 times expected 2013 earnings.

And customers love it too. Unless you are in a retail business that Amazon has demolished, you are most likely the beneficiary of Amazon’s predatory nature. Amazon has not only saved me money, it has saved me countless hours I would have wasted shopping. (Once you get Amazon Prime, the tendency to order stuff online rather than pick it up at the store become overwhelming. It’s a rare day we don’t get at least one Amazon package.) And while Amazon’s impact on retailing has been the most obvious, Amazon Web Services has drastically lowered the cost of starting any sort of online business.

So let’s hear it for Amazon and Google and their impossible business models. Eventually, Google will to find a moneymaking business to supplement search ads, whose growth is slowing. And Amazon investors’ patience with tiny or nonexistent profits won’t last forever. But for the rest of us, let’s enjoy it while we can.

Comparing The Profits of The Five Titans Of Tech

Introduction

Today’s five Titans of personal computing are Google, Microsoft, Apple, Samsung and Amazon. Horace Dediu of ASYMCO has created a side-by-side comparison of their respective revenues and profits.

Google

Google is a money making machine, but I think that many overestimate its profitability. As the graph clearly shows, Google doesn’t make nearly as much profit as does Microsoft, Apple or Samsung.

Further, we know that the vast majority of Google’s profits are still derived from its desktop advertising business. Android, for all its success in the marketplace, has not yet proven to be profitable to Google.

In a reversal of Microsoft’s business model over the past twenty years, all of the Android profits currently reside with the hardware makers rather than the software provider. Perhaps this is why Google is moving more and more towards making their own hardware. (Google currently owns Motorola and makes Nexus phones, Nexus tablets, Chromebooks and the newly minted Google Chromebook Pixel.)

Microsoft

Microsoft has been making ungodly profits for almost two decades. Microsoft’s problem isn’t profitability, it’s growth. Despite making money hand over fist, Microsoft has been unable to grow its base for much of the past ten years.

And Microsoft is facing serious challenges to even maintain the profits that it now has. In the above graph, the red portion of Microsoft’s profits come from Microsoft Office and the blue portion comes from Microsoft Windows. Both currently reside primarily on desktop and notebook machines. With those devices declining in sales and with phones and tablets rapidly growing in sales, Microsoft needs to make the transition to mobile and they need to make it fast or their two cash cows are going to be isolated and start to dry up.

Apple

As you can see from looking at the graph, Apple’s profits are not just good, they’re spectacular. They far outdistance the other four titans of tech. At yesterday’s shareholder meeting, Tim Cook reputedly said that Apple grew revenue by about $48 billion, more than Google, Microsoft, Dell, HP, RIM, and Nokia combined.

Apple’s problem is the perception that they are the next Microsoft – that they will continue to make great profits but that their growth will stagnate. The graph, above, does not seem to support that view, but past performance is not a guarantee of future profitability.

Samsung

Samsung is an amazing story in oh so many ways. By all rights, Samsung shouldn’t even be on this list of Tech Titans. For the past two decades, the PC manufacturers – the Dells, HPs, Lenovos, Samsungs, etc – were at the bottom of the tech totem pole. Always trapped in a race to the bottom, Microsoft and Intel took all the profits while the hardware manufacturers were relegated to fighting for the scraps.

No more. Samsung has turned that business model on its head. Android – like all licensed operating systems – was supposed to encourage a wide variety of hardware providers. But Samsung has swallowed the Android market share and the Android profit share whole.

Amazon

What can one saying about the amazing Amazon. Their revenues go up but their profits do not. And the less profit they make, the more successful they are perceived to be.

John Gruber once described Amazon as the crazy guy at the poker game. You simply don’t know how to play your cards against Amazon because they don’t play by any of the known rules. And you sure as shooting don’t want Amazon to come after you because they will sacrifice profits in order to win your market. And they are relentless.

Summary

So long as Apple is profitable and their ecosystem healthy, they’re not going anywhere. Microsoft is in it for the long run too. They have the money to sustain their efforts and they well know that they need to be in mobile or they will be locked out of the future of computing. Amazon appears determined to be part of the mix too.

The two titans that seem the most unstable to me are Google and Samsung. Google controls the Android operating system and the ecosystem but they make little profit from either. Samsung makes almost all the profit from Android, but they have little control over the operating system and they make little to no money from the sale of advertising, apps or content sales. That seems like an unsustainable relationship to me. Something has got to give and it’s clear that each side is weighing their options. Google is moving more and more towards making their own hardware and Samsung is flirting with a variety of different operating systems. The future is always uncertain but it seems clear that the relationship between Google and Samsung is certain to change.

More Amazing Amazonian Mathematics

Amazon announced today that “[a]pp downloads in the Appstore have grown more than 500 percent over the previous year.” ~ via Gigaom

Of course, we don’t know 500% of what, but what the hey, 500 is a big number, right? We should be duly impressed, no? As they say, it’s all geek to me.

We really need to coin a phrase for what Amazon is doing – releasing numbers without context. Not that Amazon is the first to do this, mind you. I’m sure the Romans were pulling this kind of stunt too:

“First Citizen, Julius Caesar announced today that ‘Our troop strength in Britain has grown by more than MDCCCLXXXVIII over the previous year.”

(That’s 1,888, in case you were wondering.)

Amazon can make all the pronouncements they want. But until they release real numbers, 500% or MDCCCLXXXVIII% of no information still remains…no information.

Dear Amazon: You don’t get to use words like “double”

On Tuesday, Amazon issued a press release entitled: “Worldwide Kindle Device Sales More Than Double Last Year’s Record Over Holiday Shopping Weekend.”

Here’s the thing, Amazon. You never told us last year’s sales numbers. In fact, you never told us ANY sales numbers. Double no information is still…no information.

Dear Amazon: Until you tell us WHAT you’re doubling, you don’t get to pretend that your use of the word “double” has any meaning or significance.

It’s Going To Be A Very Apple-y Holiday Quarter

Tightwads, Value Buyers and Spendthrifts

Oscar Wilde once said that cynics know the price of everything and the value of nothing. Similarly, tech pundits are often obsessed with price to the detriment of value. Despite all evidence to the contrary, pundits think that price is the number one consideration of consumers. In fact, some pundits seem to think that price is the ONLY consideration of consumers. But for most consumers, value is what matters most and price is only one component of that value.

There are three types of consumers: Tightwads, Value Buyers and Spendthrifts. There are two things you should know about these three types of consumers.

First, there are far more value buyers than there are of any other type.

Second, you not only want to ignore the tightwad customers, you want to actively avoid them. They’re a plague on your house.

Pundits seem to think that all consumers are tightwads and all of their analysis reflects that conviction. Smart companies know better.

Reality matters

Remember, reality matters. It doesn’t matter what the pundits think. It doesn’t matter what I think. It doesn’t matter what you think. What matters is what the market thinks. If our thoughts don’t reflect market realities, then we, not the market, are in the wrong.

Naysayers v. Reality

For the past month I’ve read and listened to every imaginable reason why Apple is going to fail. Well, Apple may fail eventually, but not this holiday quarter they won’t. Not by a long shot.

Here are a couple of miscellaneous reasons why I think Apple is just going to crush it this upcoming quarter

1) Mac Sales Continue to Grow

Sales of Mac hardware to U.S. businesses grew by 49.4 percent year over year in the September quarter, posting continued growth while PC sales shrank.

Charlie Wolf of Needham & Company highlighted Apple’s success in the enterprise as the “big story” regarding Mac sales in the September quarter. With PC sales to U.S. businesses declining 13.3 percent year over year, Apple had a 62.7 percentage point difference.

Yeah, yeah, yeah, I know. No one thinks that Macs are important because they’re still such a minority player. But they’re not so niche as you think.

Overall, the Mac’s unit share of the U.S. business market was 9.3 percent in the September quarter. That was up from 5.9 percent of total sales in June, and 5.4 percent in September of 2011.

Apple had an even bigger share of revenue of PC sales to U.S. businesses, accounting for 17.4 percent. That was also up from an 11.5 percent share in June, and 10.7 percent share a year prior. ~ AppleInsider

Overall Mac sales may even shrink this quarter, but their overall importance in the Enterprise will grow. Remember, phones are already outselling Windows machines and tablets are rapidly headed that way too. (EDIT: NPD: Tablets to Outsell Laptops in Q4, Beyond.) Windows is not nearly as monolithic as people think. And Macs are not so nearly as unimportant or niche as people think either.

2) China

Apple’s iPad shipments for China nearly doubled in the third quarter after Apple settled a lengthy dispute over the iPad trademark name.

People forget that over 60% of Apple’s sales come from overseas and that Apple’s overseas sales numbers are rapidly growing. Yes, it will be a big holiday quarter for Apple in the Western world. But it will be a big quarter for Apple in the rest of the world too.

3) Nielson’s Most Wanted Gift Survey

Have you seen the Nielson most-wanted gifts survey? I mean seriously, it is out of sight. What do American kids aged 6 to 12 want this holiday season? Four out of the top five items on the list are made by Apple.

Let’s take a quick look at the top six items on the list:

48% want iPads
39% want Nintendo Wii U’s
36% want iPod Touches
36% want iPad Minis
33% want iPhones
31% want computers

Now there’s a couple of observations that I take from that list.

First, Apple continues to maintain high consumer mindshare. People think Apple first.

Second, Apple’s popularity is growing. Despite a plethora of competing tablet, smartphone and gaming devices, kid’s attraction to the Apple brand in general and iOS in particular has grown steadily over the past three years.

Third, the iPad Mini is fourth on the list. Yet I strongly suspect that an awful lot of parents are going to walk into an Apple store looking for iPads and iPod Touches and they’re going to end up walking out of that store with an iPad Mini.

Fourth, as an aside, that list ain’t good for Microsoft. Microsoft has lost an entire generation of users – kids who will be growing up using Apple products, not Microsoft products.

It’s Going To Be A Long Harsh Winter For Some Of Apple’s Competitors

Why PC manufacturers Should Fear Apple

The tipping point for tablets has come and gone.

It seems like just yesterday that I was writing articles arguing that tablets were the next big thing. It seems like just yesterday because it WAS just yesterday.

But suddenly, it feels like that battle is over and and done with. If you look through the Nielson survey for whatever age, you see that tablets dominate. Not only are Apple tablets popular, non-Apple devices are on the rise too. Yesterday I was arguing with people who insisted that the tablet was a toy or a fad. As is usual with new ideas, we’ve suddenly moved from the “that will never happen” phase to the “of course that happened and I knew it would all along” phase. True, not everyone is convinced but for the most part the naysayers have learned to remain silent lest they be thought of as quaint, at best, or out-of-touch with reality, at worst.

The age of the tablets is upon us – (just as we all knew it would be, all along.)

Why Microsoft Should Fear Apple

Yesterday, Ben Bajarin wrote an excellent article entitled: “Why Competitors Should Fear the iPad Mini“. A couple of his key takeaways were that families expected to own more than one iPad Mini, that with an iPad Mini consumers feel they pay more but they get more and that “the tablet is taking the place in the hearts of many consumers as the new personal computer.” He couldn’t be more right.

The final word on Microsoft’s tablet efforts has not yet been written, but the preliminary reports do not look good. Not only has Microsoft missed a generation of phone users but now they are missing a generation of tablet users too.

PC sales continue to decline and there are reports that a staggering 42% of Windows users say that they plan to buy an Apple product – either a Mac or an iPad – rather than a Window’s 8 device. I take such claims with a huge grain of salt, but as I said in my article: “Windows 8′s Greatest Sin“, consumer’s now have choices that they didn’t have before. Microsoft is making their long-standing customers choose between Windows 8 and other options. And many are choosing to opt out.

Why Google and Amazon Should Fear Apple

Apple may dominate tablet sales, but there are going to be a ton of Google Nexus 7’s, Amazon Kindle Fire’s and even Barnes & Noble Nook tablets sold this holiday quarter. But the people buying those tablets are buying media tablets that run stretched phone apps. The people who are buying the iPad and the iPad Mini are buying a tablet that runs tablet apps and that can also act as a Media tablet. That’s my opinion. But I think that’s also the opinion of the market and I think we’re going to see that opinion expressed in hard sales numbers come this January.

Remember, there are three types of consumers: tightwads, value buyers and spendthrifts. Tightwads are going to be drawn to the Amazon Kindle and the Nexus 7 because of their subsidized prices. The Nook, at least, is trying to make money on the sale of its hardware. Kindle Fire’s and Nexus 7’s sales are empty sales. Neither Amazon nor Google makes a penny of profit until they sell additional goods, services or advertising. And their chances of doing that when selling to tightwads is not good. Not good at all.

You Can Hang Your Hat On It

I actually think Apple’s margins may be lower this quarter. They’ve introduced, re-newed or refreshed almost their entire line and some of their products – the iPad Mini in particular – will make them less than normal margins. But Apple’s margins are absurdly high to begin with. And since many of Apple’s products are supply constrained, the high margins truly reflect the high value that consumer’s place in Apple’s products.

The last time I paid attention to such things, Apple – a hardware seller – had higher margins than Microsoft – a software seller. That just shouldn’t happen. And in any case, I can guarantee you that Apple’s less than usual hardware margins are going to be far, far, greater than the virtually non-existant hardware margins of either Google or Amazon.

The future is uncertain and predictions are always perilous. But if Apple doesn’t have a banner quarter, I’ll eat my hat. Then I’ll go out, buy another hat, and eat that one too.

It’s going to be a very Apple-y holiday quarter. You can hang your hat on it.

Selling The Amazon Kindle Fire and Google Nexus 7 Is As Silly As Selling Razor Blades To Men Who Love Beards

Gillette, Amazon, Google and Apple

— The Gillette business model is to give away the razor in anticipation of making profits from the sale of the blades.

— The Amazon business model is to give away the Kindle Fire for cost in anticipation of making profits from the sale of content and ads.

— The Google business model is to give away the Nexus 7 for cost in anticipation of making profits from the sale of ads and content.

— The Apple business model is to sell the iPad Mini for a profit…AND in anticipation of making additional profits from the sale of content and ads.

The razor blades business model

“(T)he razor and blades business model, is a business model wherein one item is sold at a low price (or given away for free) in order to increase sales of a complementary good, such as supplies (inkjet printers and ink cartridges, “Swiffers” and cleaning fluid, mobile phones and service contracts) or software (game consoles and games).

Though the concept and its proverbial example “Give ’em the razor; sell ’em the blades” are widely credited to King Camp Gillette, the inventor of the disposable safety razor and founder of Gillette Safety Razor Company, in fact Gillette did not originate this model.

The (razor and blades) marketing model may be threatened if the price of the high margin consumables in question falls due to competition. For the (razor and blades) market to be successful the company must have an effective monopoly on the corresponding goods.”

~ via Wikipedia

Three Flaws

There are (at least) three flaws in the Amazon Kindle Fire and the Google Nexus 7 business models:

1) No proof of sales;
2) No proof of profits;
3) No monopoly (proprietary) pricing available.

1) No proof of sales

The razor and blades business model works, in part, because when the razors are given away at cost or for free, they become ubiquitous, thus making it convenient for razor owning customers to purchase the company’s proprietary blades. There is no evidence to indicate that either the Amazon Kindle Fire or the Google Nexus 7 are selling well despite their subsidized sales prices.

It’s been estimated that the original Amazon Kindle Fire sold 4.7 million Kindle Fires over a 9 month span and that the Google Nexus 7 sold 3 million units last quarter. These numbers are estimates because neither Amazon nor Google are willing to release the actual sales numbers.

When you consider the fact that these are both subsidized products being sold at cost, those numbers are remarkably low.

2) No proof of profits

The razor and blades business model works, in part, because when the razors are given away at cost or for free, the profit is made from the blades. There is no evidence to indicate that either the Amazon Kindle Fire or the Google Nexus 7 are making substantial profits from the sale of content or ads. In fact, when you look at the company’s recent quarterly earnings reports, there is evidence suggesting that they are NOT making significant revenues or profits from tablet related content and ad sales.

3) No monopoly (proprietary) pricing available

The razor and blades business model works, in part, because the blades are proprietary and command the premium price neccessary to offset the lack of profit from the giveaway of the razors.

For the (razor and blades) market to be successful the company must have an effective monopoly on the corresponding goods.” ~ via Wikipedia

The Printer Example

Computer printer manufacturers have gone through extensive efforts to make sure that their printers are incompatible with lower cost after-market ink cartridges and refilled cartridges. This is because the printers are often sold at or below cost to generate sales of proprietary cartridges which will generate profits for the company over the life of the equipment.

The Game Console Example

(V)ideo game consoles have often been sold at a loss while software and accessory sales are highly profitable to the console manufacturer. For this reason, console manufacturers aggressively protect their profit margin against piracy by pursuing legal action against carriers of modchips and jailbreaks.

Atari had a…problem in the 1980s with Atari 2600 games. Atari was initially the only developer and publisher of games for the 2600; it sold the 2600 itself at cost and relied on the games for profit. When several programmers left to found Activision and began publishing cheaper games of comparable quality, Atari was left without a source of profit.

~ via Wikipedia

Neither the Amazon Kindle Fire nor the Google Nexus 7 have a monopoly on the content or the ads that they sell. They cannot command a premium price. In fact, if anyone can command a premium price on the sale of content, it is Apple because of their extensive distribution channels. While Apple is able to sell content in over 90 countries, the content sales channels for both Amazon and Google are extremely limited.

Cheaper is not necessarily better

There are rumors that Google may announce a $99 Nexus tablet next week. But in a subsidized model, cheaper is not necessarily better. In fact, it could be counter-productive.

The razor and blades business model works, in part, because when the blades are given away at cost or for free, they become ubiquitous, but there is no point in giving away the razors to men who love having beards. Similarly, there is no point in selling low-cost Amazon or Google tablets to customers who don’t buy their content or consume their advertising. Subsidized products attract bargain hunting customers and bargain hunters are as useless to Amazon and Google as bearded men are to Gillette.

The non-existent “Price Umbrella”

Apple is being criticized for selling the iPad Mini at $329 and leaving a “price umbrella” under which the likes of Amazon and Google tablets can grow and prosper.

There is no price umbrella. The Amazon Kindle Fire and the Google Nexus 7 are zero-margin products.

Let me say that again. Amazon and Google make zero profit from tablet sales.

No matter how much Apple lowers its sales price (and its margins) it won’t be taking any profits away from the Amazon Kindle Fire and the Google Nexus 7 because they already make no profits.

Now there is an argument to be made that lower Apple iPad Mini prices might reduce Amazon’s and Google’s tablet sales and therefore lower Amazon’s and Google’s tablet related content and ad sales. This presumes that lower iPad Mini prices would spur higher iPad Mini sales. If the iPad is supply constrained, (i.e,, Apple can’t make enough of them) this argument fails.

Further, both the Amazon and Google tablets are already selling poorly. And there is absolutely no evidence that Amazon or Google are making more than, or even as much as, Apple is in content and ad sales. Lower iPad Mini prices would have a negligible effect on Amazon’s and Google’s ethereal profits but it would have a significantly negative affect on the iPad Mini’s margins.

Giving razors to men with beards

“Never interrupt your enemy when he is making a mistake.” ~ Napoleon Bonaparte

Apple doesn’t need to lower its pricing to deliver “the tablet death blow” to its competitors. Apple’s competitors are doing a fine job of starving themselves of profits as it is.

When your competition is giving razors to men with beards and hoping to make their profits on the sale of blades, you don’t attack them – you ignore them.

7 Inch Tablets Employ An Odd Definition of “Success”

TROY WOLVERTON at the San Jose Mercury News, talks 7 inch tablets:

Just two years ago, Apple’s late co-founder and CEO Steve Jobs mocked small-screened tablets as “tweeners” that were too little to compete with the larger iPad but too big to compete with smartphones.

But after the success that Amazon and Google have had with small-screen tablets…

Whoa, whoa, whoa! Stop right there.

Success? What success?

Success is defined as: “the accomplishment of an aim or purpose.”

— Research in Motion, Samsung and other manufacturers introduced tablets with seven inch screens that flopped.

— It’s been estimated that Amazon sold 4.7 million seven inch tablets over a 9 month span.

— It’s been estimated that Google sold 3 million Nexus 7, seven inch tablets over the last quarter.

That’s not a “success”. That’s anything but a “success”.

Notice that the numbers for Amazon and Google are estimates. Their respective companies have not released sales figures. There’s a reason for that.

Also note that the Amazon and Google products are subsidized, which means that they are being sold at cost. What product wouldn’t sell well if it was sold at cost? Apparently, 7 inch tablets.

By way of comparison, Apple sells more that 5 million 9.7 inch tablets every month – at full price – and Apple is conservatively expected to sell 25 million iPads this upcoming holiday quarter. Again, at full price.

I have no doubt that the 7 inch tablet category is viable and I’m guessing that – starting on October 23rd – Apple is going to prove that in a big way. However, we need to stop talking about “the success that Amazon and Google have had with small-screen tablets” or we need to get a new definition for the word “success”. I’m leaning towards the former.

Why Amazon is Not Interested in TI’s Mobile Processor Group

Some reports have came out that Amazon is interested in TI’s mobile processor division. I find this extremely difficult to believe. I personally, think TI’s move to shift focus from mobile APs (application processors) and more into embedded chipsets is a fascinating market development. However, I think it is a serious stretch to connect the dots that Amazon would use their extremely valuable cash to acquire something they don’t really need given their business model.

If Amazon was in the for profit hardware business then I can see how a case could potentially be made for purchasing TI’s OMAP mobile AP group. However they are not in the for profit hardware business and are rather in the hardware as a service business. They make practically nothing on the hardware and within the business model they are entrenched in, it would take an incredibly long time if ever to recoup their investment in a semiconductor group.

Furthermore, TI licenses and ships the ARM core but does not have an architectural license to customize or alter the chipset design like Qualcomm, NVIDIA, Apple, and Samsung do. If the logic was that Amazon was going to use proprietary semiconductor assets to help them further differentiate their hardware, I’m not sure acquiring TI’s OMAP group would do this. In fact if this was the logic then it would be just as easy, and probably cheaper, for Amazon to acquire an ARM architecture license and simply hire a team of qualified SOC engineers.

However, because Amazon is building a hardware as a service business, it seems unlikely that making a large investment around hardware makes sense. Companies that are in the hardware as a service model are generally better served simply negotiating and buying components rather than making them.

Several reports also mentioned Amazon’s intent to get into the smartphone market and speculated that buying this group from TI could help this initiative. I continue to remain skeptical that Amazon will make a smartphone. I simply can’t see how it fits with their business model. Amazon is a retailer and any argument as to why a retailer should make a smartphone would be null in light of an argument that those same reasons can be accomplished with an app running on any platform. The many reasons why Amazon (a retailer) made a tablet does not translate into why they should make a smartphone.

Of course we can’t rule anything out in this industry, especially considering I would have never guessed an advertising company would have gotten into the smartphone hardware business. Or could I?

Battle Of The Tablet Business Models: Lessons Learned And A Look Ahead

RECAP

We’ve been looking at the tablet business models of Apple, Amazon, Google, Samsung and Microsoft. Today we wrap up the series by seeing what lessons we have learned and by asking ourselves what the various business models can tell us about the future of tablet computing.

Lessons Learned

Lesson #1: Subsidized tablet business models are a niche

The subsidized business models of the Amazon Kindle Fire and the Google Nexus 7 are very limiting. They can only be sold where their content is sold, they can only be sold to consumers who readily pay for content or consume relevant advertising and they will have little appeal to business, government or education. Even if they are fantastically successful within their confined market space, their markets will have little overlap with the tablets that focus primarily on the importance of apps.

Lesson #2: Subsidized tablet business models need to be measured differently and judged appropriately

We tend to judge all things tech by the number of units sold or by overall market share. We should, of course, be focusing on profit instead. Profit is the goal and profit is the standard by which tablet business models should be measured.

The subsidized tablets of the Amazon Kindle Fire and the Google Nexus 7 need to be judged, not by sales, not by market share, but by the profits generated by the sale of content and advertising. In a subsidized business model, nothing else matters.

Lesson #3: Conflicting business models are a sign of weakness

With the Nexus 7 and the Surface tablet, both Google and Microsoft have reversed their licensing models and embraced an integrated approach. There is nothing wrong with adjusting one’s business model to fit the times. There’s a lot wrong with having two conflicting business models.

Lesson #4: Platform Matters

Apple has the strongest tablet platform, by far, and it shows in their sales and in their profits.

Amazon seems to understand platform. However, subsidized business models seem geared more toward content than apps. The Kindle Fire is only a year old. We will have to wait and see how the Amazon platform develops.

Google doesn’t seem to get platform, even now. Their weak platform has not hurt them in phone sales (yet) but it’s crippled their tablet efforts. And with the introduction of the Google Nexus 7, Google has made it clear that they think that content, not apps, is what matters most.

Samsung almost certainly understands platform, but they have no control over the Android operating system nor do they control the way Android content and apps are sold. Their only choice is to suffer or get out.

Microsoft gets platform all too well but they are so very late to the game. The Windows Phone 7 platform went nowhere and Microsoft has to be terribly concerned that the Windows RT and Windows 8 tablets may share the same fate.

Lesson #5: Skate to where the puck is going to be

When the market is underserved, products move toward integration. When the market is over served, products move towards modularization. It seems to me that part of the problem with most of the current tablet business models is that their respective companies have misidentified where the market is over served and where it is underserved.

Apple: In my opinion, Apple is on the right path. Tablet hardware, software, and content distribution are becoming “good enough” and are in danger of being commoditized. Apps and ecosystem are still under serving the market and have a lot of room for growth. Apple is adding value and differentiating itself from its competitors by integrating hardware, software, content and apps into a single, cohesive ecosystem.

Apple’s problem is that they have traditionally not been very good at internet services. Look at MobileMe, Ping, Siri, Maps, etc. And internet services are the key to the future of mobile computing ecosystems.

Jonathan Ive is a genius who can design Apple’s hardware but he can’t design a database system that will work with iCloud. Tim Cook’s supply chain prowess turned Apple from a very good company into a great company. What Apple may need to thrive in the future is a Tim Cook for internet services.

Amazon and Google: I think that both the Amazon and Google subsidized strategies are fundamentally flawed. They are creating an integrated hardware and software product designed to add value via the sale of content. But content distribution has already been commoditized. It makes no sense to subsidize hardware sales in order to enhance content sales if the margins on content are de minimis.

Samsung: The problem with the current Samsung tablet model is two-fold. First, their hardware is only one part of the value chain. They do not control the software, content, apps or overall ecosystem. Second, the area where they add value – hardware – is rapidly moving towards “good enough” and commoditization.

Microsoft: In my opinion, Microsoft’s business model is focused on the wrong part of the value chain or stack. Windows RT and Windows 8 is all about creating a superior operating system. But the operating systems currently available from Google’s Android and Apple’s iOS are already more than good enough for most consumers. Microsoft is pouring all of its efforts into an area where consumers are already satisfied or over served. Windows 8 may or may not be a better mobile operating system than either Android or iOS but it is not so much better that it will compel the bulk of consumers to switch to it.

The Future

We obsess over tiny diferences between the hardware and operating systems of the various competitors but it is business models that dictate success or failure. Until those business models change, Apple has, and will retain, the lead in tablets. Both Amazon and Google have chosen to ghettoize their tablets. Their inability to generate substantial profits will be obscured by irrelevant sales numbers. Samsung tablets are nowhere and they have nowhere to go.

Microsoft is trickier. It first has to overcome the hurdle of creating a virtuous platform cycle. If developers can’t attract customers – if customers can’t attract developers – then nothing else matters because the platform will go nowhere. However, if Microsoft can overcome this initial, all-important hurdle, then they have a chance to be relevant. We should be able to gauge just how relevant they’ll be by this time next year.

Conclusion

The future of tablets will be determined by their respective business models. Yet most of the current business models are not even directed towards that future.