Unpacked for Friday November 3rd, 2016

The On-Demand Fail – by Ben Bajarin

Just over a year ago, I shared some thoughts regarding the “On-Demand Economy”. In particular, why it works in China but may find struggles here in the US. I highlighted the US-based struggles in the form of two major problems:

First, US-based on-demand services lack two critical things which make many of these O2O services in China successful. They lack scale and they lack low-wage workers. The reason these services have a chance in China is because, in a city like Beijing, there are over 19 million people living in relatively close proximity. In Shanghai, there are over 22 million people. Several large tier 1 (meaning more developed and wealthier) cities have populations between 8-11 million people. China has an estimated 700+ million people in cities. Many of them living in developed cities and are considered part of the rising middle class, with higher disposable income. Contrast this with the United States where only 10 cities have populations of over 1 million people. Number one is New York with over 8 million, Los Angeles with over 3 million, and Chicago with just short of 3 million people. I make these points because on-demand startups like the ones I mentioned will require scale of close proximity urban living and this is something China has at much greater numbers than the US.

Second, China has low-wage workers. This is probably the most salient point about the contrast of the two on-demand economy markets. In China, you can not only have goods or services delivered in an hour or less but at costs only slightly above what it would be for you to go out and acquire the goods or services on your own. The economics work for not just the wealthy. Contrast this with the US where I know of a CEO of a large startup in San Francisco who pays $25 for a burrito once a week to have it delivered to his office from his favorite burrito joint. He could have walked down the street and paid $8 but instead wanted to stay in his office and work.

There has been some public news around funding rounds for on-demand startups like Door Dash, but this recent scoop on Instacart is interesting.

Instacart changed the terms of their payment structure and, it turns out, workers delivering for the company are earning less. The company claims this is necessary for the company’s continued growth. This is the lack of low-wage workers problem staring Instacart right in the face. They want to lower prices for delivery because the premium for on-demand services is way too high to ever go mainstream. To account for that, the on-demand companies were taking hits on their margins which is also unsustainable. This is the beginning of the likely downward spiral for US-based, on-demand startups as the entire system is unsustainable and prices simply can’t come down enough in this model to make it attractive to a significant part of the market.

It seems logical that there is a market for food and grocery delivery but it will likely be filled by Amazon or someone else with a better structured unit economics model. The idea is sound. The current execution by on-demand startups is not.

There is a Wider Opportunity than Large Enterprises for Microsoft Teams – by Carolina Milanesi

Last Wednesday in New York, Microsoft launched a new online chat application called Microsoft Teams. I attended a parallel event in San Francisco aimed at giving me the opportunity to demo Microsoft Teams at the end of a broadcast of the official launch event. The best way I have to explain Microsoft Teams – not Skype Teams as it was rumored leading up to the event – is it is a portal through which all team interactions happen. It is a web-based chat that adds to office 365 Enterprise and Business editions and will roll out in early 2017. It adds to current services like Skype and Yammer vs replacing their functionality, offering different options to users. While at first, Teams look very much like Slack, a few minutes playing with it shows the similarities are more on the look and feel of the portal than the actual functionalities. While you have teams and channels like you do in Slack, Microsoft Teams turns more into a hub where different tools plug into it from Microsoft and third parties that have access to open APIs.

As the presentation got under way and we moved to testimonials, it was clear who Microsoft’s target customers are: it is the large enterprises already invested, not just in Office, but in SharePoint, Power BI, Delve, OneNote, Planner, etc. It was also clear Microsoft was speaking to IT managers, not users. Microsoft Teams will be pushed down to users by IT which oftentimes sees even the most useful app met with resistance just because it is perceived as an imposition.

I believe Microsoft is missing two big opportunities: user push and education.

Letting individual users access Teams could have been a much stronger weapon against Slack vs. the IT mandate approach. Appealing to the user side and how work can be facilitated by a tool like Teams focusing on how it scales up but also how it scales down would have spoken to users more than IT managers. The only time there was a mention of users during the presentation was for trivial things like stickers and gifs. While it is true messaging has an entertaining component, I think it is patronizing to come across as implying all it takes for users to be happy is a sticker.

Education is another area where Microsoft is currently losing to Google and Apple and one that should be a priority when it comes to collaboration. It should be a priority for the short term opportunity of deployment but, more importantly, for the long term opportunity to hook millennials to the platform. Microsoft told Mary Jo Foley that Office 365 Education will eventually get Teams but I strongly believe the right way would have been to make it available in the Student Edition of Office. Once again, Microsoft is thinking top down rather than bottom up.

Overall the event seemed a bit of a contrast to the Devices event from the previous week where so much attention was given to individuals vs enterprises and creators vs employers. The focus was on empowerment of the individuals which ultimately is what Teams does but it did not come across as well in the positioning.

Fitbit and GoPro’s Results Highlight Challenges of Niche Hardware Companies – by Jan Dawson

I wrote a column last December about the challenge of being a one-trick pony in the consumer technology market. Two of the three companies I cited as examples in the article were Fitbit and GoPro. At the time, their businesses were generally doing well but the risks associated with being a niche hardware vendor have come home to roost at both companies since. Fitbit’s growth has slowed significantly, squeezing its margins, while GoPro has been shrinking markedly and losing money for four straight quarters.

Though each company has its own problems, they share most of them. They both provide hardware in categories with limited addressable markets – both fitness trackers and action cameras are niche propositions. In both cases, they also suffer from the combined effects of device abandonment and low upgrade rates among their bases. And both companies are facing low-end commoditization as well as encroachment from increasingly capable smartphones and other general purpose devices like smartwatches.

In both cases, the companies have dismissed concerns over saturating markets but it’s increasingly hard to ignore that these companies dominate their respective market segments, yet struggle to grow. The excuses for poor growth change every quarter, but the performance trends are remarkably consistent. Both companies have attempted to diversify into new areas – Fitbit into corporate wellness and GoPro into media. But neither company’s strategies are yet bearing meaningful fruit. Indeed, neither even breaks out revenue from these new categories in its financial reporting.

The future looks somewhat brighter for Fitbit, which continues to be profitable and is at least growing modestly. GoPro projects another year of losses in 2017, though also a return to growth. The challenge with GoPro is it’s missed its own guidance and analyst expectations so often recently, it’s hard to take its guidance seriously. The big question around both companies has to be whether they are best suited continuing to go it alone or whether they would do better as part of bigger consumer technology companies that could wrap ecosystems around them and leverage economies of scale and scope. Both are certainly considerably cheaper for potential acquirers at the end of the week than they were on Monday.

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Ben Bajarin

Ben Bajarin is a Principal Analyst and the head of primary research at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research and he is responsible for studying over 30 countries. Full Bio

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