Priorities

Recently we saw two reports about bugs in the Chrome browser on Windows.

One bug was about font rendering. It turns out that fonts on Chrome looked bad because Google neglected to update Chrome so that it would take advantage of the new font rendering technology provided by Windows.
Importantly, both Internet Explorer and Firefox had been using this technology for ages, and Chrome was the only major browser that was still using the old, outdated font rendering API.

The other bug is related to battery consumption. Apparently Chrome fails to throttle down its power consumption even when the browser is just running in the background. This bug can be traced back to 2010, which means that Google has knowingly neglected this bug for 4 years.

This eloquently tells us what Chrome’s priorities are not. Chrome does not prioritize beautiful font rendering and it doesn’t prioritize low power consumption.

Interestingly, this is in direct contrast with Apple. Apple prioritized typography and has very good font rendering. The quality of the fonts are also very high. In power consumption, Apple has emphasized this on their mobile devices, their laptops, their operating system, and even specifically on Safari for quite a while.

Chromebooks in Schools

It seems that Chromebooks are quite popular with schools.

I’ve covered this topic before and the story hasn’t changed from then.

What continues to be interesting is that Chromebooks appeal is not necessarily to the end-users, but to the “orifices”. The TechCrunch article explains;

A lot of schools were sold on iPads right after those became available and students probably still prefer them over Chromebooks, but they are relatively expensive compared to Chromebooks and harder to manage. Google also offers admins easy ways to manage large Chromebook deployments from a single console while Apple is still catching up when it comes to this.

Basically, Chromebooks are sometimes preferred over iPads because the hardware costs and the school IT administration costs are cheaper. And the reason they are easy to administer is because there is less that you can do with them.

I see Chromebooks as the equivalent of cash-registers.

Not a very sexy topic.

Thoughts on How to Prevent Disruption

Although I don’t have Clayton Christensen’s publications handy (I lent them to my brother), I’ll try to outline situations where low-end disruption won’t happen. We will then be able to see how the iPhone fits.

Raising the bar

Low-end disruption only occurs when the current product starts to overshoot customer expectations in terms of jobs-to-be-done. Hence one way of preventing low-end disruption is to constantly raise the bar; that is to raise customer expectations.

Apple has done this many times throughout the life of the iPhone.

Initially, they realized that the fluidity of the user interface was more important for touch interfaces compared to mouse interfaces. By raising expectations for a fluid interface, they forced Android to invest in catching up for years (Android has just recently gotten fluid interfaces right).

Touch ID and raising user awareness of privacy and security is another example. Although the effects are still to be felt, they are trying to make this a must-have feature. They want to make it so that anyone going back to Android will feel insecure.

Appealing to non-tech aspects

Low-end disruption happens because technical improvements push the capabilities of the device to the point where it exceeds the jobs-to-be-done. Technical improvements in tech are especially fast thanks to Moore’s law. Conversely, this means that other aspects of a product are less likely to improve so fast and will be less susceptible to low-end disruption.

The areas that Apple focuses on are design, user interface consistency, simplicity, etc. These areas do not usually improve rapidly, and in fact, consistency and simplicity are often compromised as technology improves (too many features are crammed in).

By making a major appeal of their products independent of Moore’s law, Apple makes it less likely that technical improvements will rapidly make their product “good enough”.

This is not to say that design, user interface consistency, simplicity cannot overshoot user expectations. They can. Look at the interface for cars or toothbrushes. The thing is that in tech, these issues are very difficult to solve and furthermore, very few companies other than Apple are seriously attacking these.

The jobs-to-be-done of luxury items

Low-end disruptions often enter the market at significantly cheaper price points (although they have to be still making profits to be truly disruptive). Although this is not the only way to enter the market (they can use simplicity for example to expand the addressable customer base), this is the simplest to understand. However, this low cost strategy is unlikely to be effective against the iPhone because price itself is a positioning statement of the iPhone value proposition. In other words, the iPhone is in a sense a luxury.

The iPhone is, for many people, the only luxury item that they own. Apple has succeeded in making the iPhone one of the most affordable luxuries. The iPhone is the only luxury product that both celebrities and huge numbers of teenagers own. You can get iPhones for free with subsidized contracts, but that product is the exact same device that billionaires lust for.

The iPhone is a mass-market luxury item. In fact, I even hesitate to use the word “luxury”. This is quite unique and you don’t see this kind of thing anywhere else, in any industry.

Luxury items have very different jobs-to-be-done from regular ones. In addition to being comfortable and high-quality, they have a “status” component; they have to show off your well-being and your good taste. On seeing you own one of these items, other people must judge you favorably by it.

Hence to satisfy the jobs-to-be-done of a luxury item, you have to satisfy the following;

  1. It must be well designed in a way that conveys its luxuriousness.
  2. The build quality must be exceptional.
  3. The whole brand and all the customer touch-points must be luxurious.
  4. It must be expensive relative to other products.
  5. It must be associated with some aspiration figures.

Technical progress in the Moore’s law sense will not make these conditions any easier or less costly to satisfy. In particular, luxury products cannot be cheap which means that the most often used low-end disruption strategy, namely making a cheaper product, cannot be applied. In order for any company to satisfy these jobs-to-be-done, they have to invest in a completely different set of activities.

Therefore, luxury items are hard to disrupt. Tech companies in particular don’t usually have the skill set or investments in place to compete.

Different between luxury and fleeing to the high end

In Disruption Theory, incumbents will often flee to the high end in response to a low-end assault. That is, instead of catering to the mass-market, they will focus on serving the high-end niche which requires the very features that overshoot the mass-market expectations.

On the surface, if you look at the prices of the products, this seems to be equivalent to a luxury strategy. This is incorrect. Luxury products are focused on satisfying a completely different jobs-to-be-done. Selling luxury products do not require more features or higher specifications at all. They are more focused on making the customer feel better about themselves through the experience itself and social recognition. Hence the ability to design and produce feature-laden, high-spec products does not give you the capability to enter this market.

What Apple has made the iPhone a luxury experience at a price that is affordable to the mass-market. This has come through a collection of efforts that companies like Samsung or Google have very little experience in. Celebrities like Steve Jobs and Jonny Ive, great design, precision manufacturing techniques, boutique retail stores, investment in and use of quality materials (sapphire glass) are all part of this.

Without this investment, it is very questionable if Samsung will be able to pursue a similar “luxury for the mass-market” approach. Instead, they would have to flee to the high-end and target consumers who prefer top-spec machines. As Christensen describes, if the low-end entrants eventually improve their offering or if the phone specs get defined solely by components (as was the case with PCs), then fleeing to the high-end will be in vain in the long term.

Summary

In understanding how Apple seems to escape disruption, it is very important to truly understand the jobs-to-be-done. Instead of focusing on product features and specifications, you must consider the social and emotional aspects of the jobs-to-be-done. By doing this, you can easily map Apple into Disruption Theory and reach to conclusion that Apple is quite difficult to disrupt from the low-end.

You also have to realize that different aspects of a product have different sensitivities to low-end disruption. Tech-oriented features are very sensitive to disruption whereas others are not. Tech companies are easily disrupted simply because they focus too much on the tech. By focusing on non-tech stuff, you can become less vulnerable to low-end disruption.

Importantly, this is not necessarily the same as fleeing to the high-end of the market. Most luxury brands are difficult to disrupt, but at the same time cater only to the very high-end. This is one way of doing it, but it is also possible to be luxury but also mass-market. Disneyland is a good example where you get great hospitality but at reasonable prices. This is where the iPhone is going.

The problem for many tech-companies is that they tend to have a history of tech and tech only. They do not have the non-tech aspects within the organization and even if they did, their brand would not convey that. This is why many companies create new brands for their luxury offerings (Toyota Lexus for example). Since a luxury brand is in many ways a contract for exceptional product & service, and also a signal of financial well-being, the historical tech-brand often won’t do. It would be interesting to see if Samsung eventually creates a new smartphone brand and an accompanying distribution for their high-end devices.

Apple is escaping disruption using a combination of ideas which can be mapped to Christensen’s Disruption Theory. I sense that they understand that the underlying force driving disruption is Moore’s Law, and that is why they invest so much in the non-tech aspects that Moore’s Law doesn’t directly touch. (even in tech investments, they invest in sapphire glass for example; also unrelated to Moore’s Law thus less quickly imitated)

What Are Smartphones Used For?

Given that the majority of time spent on smartphones is in apps, it is appropriate to look at what apps are being downloaded in order to understand what people are actually doing.

Below is a list of top downloads in various countries, taken from App Annie’s statistics (iPhone and Google Play: The list is too long to put on this blog post, so please go App Annie to see all the entries).

You can immediately see that the lists for iOS App Store and Google Play are very different;

  1. Google Play is dominated by messaging and communication applications. Specifically, Facebook, Facebook messenger, WhatsApp, Skype and Instagram.
  2. On the other hand, iPhone users seem to be downloading a lot of other stuff. The top ranking apps are not dominated messaging and communication apps. There are a lot of games and some music apps.

AppAnnie Top Downloads

Now what does this mean? I suspect that this is telling us that Android users as a whole are using their smartphones for the essential tasks and the essential tasks only. By essential tasks, I mean communication. That is after all, what phones are for and what feature phones also did quite well with SMS.

Messaging and communication apps dominate Google Play but it is also certain that iPhone users download these apps too. Hence the dominance of this category on Google Play simply suggests that Android users don’t download much else on average. On the other hand, iPhone users download a lot more so the essential communications apps are lower in the rankings.

For example, App Annie has recently reported that Google Play worldwide quarterly downloads exceeded iOS App Store downloads by around 60 percent. However, Google Play downloads are most likely dominated by the essential messaging and communication apps, with little space left for others. If you are an independent app developer, the Google Play opportunity is probably much much lower than the total downloads number suggests.

What Happens When Hardware Makers Can Make No Profit

It is starting to be quite apparent that smartphone OEMs will no longer be able to earn profits. Ben Bajarin put together an excellent piece (paid article) on this in which he questions;

What is the “product” in the Android ecosystem? Specifically where are the revenue generating opportunities? As the answer inevitably becomes “not hardware”, the product offered must evolve. This is where the basis of competition will shift in the Android ecosystem. This shift will disrupt incumbents and open the doors to new entrants.

This is a typical case of what Clayton Christensen has called “The Law of Conservation of Attractive Profits”. I have described this previously in this blog.

As technology progresses and solves the most pressing problems in smartphones, the profits move away from the hardware assemblers to adjacent stages. Hence the predicament that Samsung now finds itself in. At this point however, it is not yet clear which adjacent stages will reap the profits. In particular, it should stress that is no by no means obvious whether Google services will become this stage or not.

Benedict Evans has also written about this on his blog.

It seems pretty clear now that the Android OEM world is starting to play out pretty much like the PC world. The industry has become unbundled vertically between components, devices, operating system and application software & services. The components are commoditised and OEMs cannot differentiate on software, so they are entering a race to the bottom of cheaper and cheaper and more and more commoditised products, much like the PC industry.

So what we are seeing can be summarized as follows;

  1. Hardware is no longer a profit generating opportunity in the Android ecosystem.
  2. Attractive profits will shift to adjacent stages in the value chain.
  3. We have seen something similar happen before in the PC industry.

Therefore, in order to understand how the Android ecosystem will evolve, it is important to revisit the history of the PC industry and to review what happened when profits could no longer be made in hardware.

There are actually quite a few independent things that happened. Here I would like to highlight “crapware”.

Crapware

Ken Segall describes the situation beautifully;

“Crapware: the search for lost profit”

It was only about three years ago that I attended an advertising meeting with the chief marketer in Dell’s consumer division. He had crafted his plan to meet sales targets for the coming year.

At the proper point in the meeting, Mr. Marketer made mention of the crapware on Dell computers. And yes, he called it crapware. He pointed out that margins being what they were, crapware actually accounted for just about all the profit on each sale. He invited the agency to come up with new suggestions for companies who might want to join the club — and pay Dell for the right to clutter up their PCs just a little more.

What’s a smartphone seller to do? Crapware to the rescue!

Mike Jennings reports his crapware findings for PC Pro. In a wide range of Android phones, he found a treasure trove of crapware installed by carriers: multiple app stores, security software, game demos, etc., etc. While you can remove this stuff from PCs with a little effort, not so with smartphones. Most of it is here to stay, installed in such a way that it can’t be removed by the user.

Quite simply, if hardware makers (or carriers) can no longer make profit, crapware will proliferate. Since the attractive profits have moved to the crapware owners, they will be willing to pay to have their stuff put in front of customers.

iOS App Store Revenue Growth is Outpacing Google Play Revenue Growth

App Annie has just released their report for Q2 2014. In their accompanying blog, they emphasize large growth in Google Play’s downloads in Brazil, Thailand and India. However, in contrast to the most recent report where they noted marked growth in Google Play revenue, this time they do not mention revenue at all in the blog.

This suggests that Google Play revenue was not too good. Here, I will try to reverse engineer the data that App Annie disclosed. I will try to figure out how Google Play revenue grew in relation to iOS App Store revenue growth.

What App Annie’s report reveals

Regarding revenue growth, App Annie’s report (the one that you can download for free here) only provides us with the following information;

iOS retained a strong lead in app store revenue over Google Play. In Q2 2014, the iOS App Store provided around 80% more revenue than Google Play. Mobile powerhouses China and Japan were the primary drivers of iOS revenue for Q2 2014. Up-and-coming countries Taiwan, Kuwait, and Turkey also contributed significantly to iOS revenue, each growing more than 30% quarter-over-quarter.

An accompanying press release actually has more details;

In Q2 2014, the iOS App Store provided around 80 percent more revenue than Google Play, down from 85% the previous quarter. Mobile powerhouses China and Japan were the primary drivers of iOS revenue for Q2 2014. Taiwan, Kuwait, and Turkey also contributed significantly to iOS revenue, each growing more than 30 percent quarter-over-quarter.

So in Q1 2014

  [iOS App Store revenue] / [Google Play revenue] = 1.85 (approximate)

and in Q2 2014

  [iOS App Store revenue] / [Google Play revenue] = 1.80 (approximate)

This alone isn’t enough to get a good picture. We need to know how iOS App Store or Google Play grew in revenue from Q1 to Q2. Since I couldn’t find this data, we assumed it to be in the range of 2% to 20% and analyzed the results for each assumption.

Absolute iOS App Store revenue growth exceeds Google Play if growth > 4%

If we assume that iOS App Store grew 10% from 1Q to 2Q and combine the App Store / Google Play ratios, we can derive the following table;

スクリーンショット 2014 07 17 20 48 26

Here we see that Google Play would grow 13% while iOS App Store would only grow 10%. However, since iOS App Store is much bigger, iOS App Store actually grows more in absolute terms compared to Google Play (18.5 vs. 13.1). This means that iOS App Store is widening its lead.

The above table assumes 10% growth for iOS App Store, but we don’t have any information to tell us if this is true or not. App Annie does not tell us what the growth was. Therefore, we tested various scenarios for iOS App Store growth, resulting in the following graph.

スクリーンショット 2014 07 17 20 45 57

Here we see that for any iOS App Store growth above 4%, iOS App Store growth in absolute terms will be larger than Google Play absolute growth.

App Annie previously provided us a chart for iOS App Store and Google Play game growth. Since the game category constitutes 75% of total iOS App Store revenue, this chart should give us an idea of what the growth of the total iOS App Store revenue should be like. From this graph, it is reasonable to estimate 10-20% quarterly growth for 2Q14.

Looking at our various scenarios, this indicates that iOS App Store absolute growth was 40-60% higher than Google Play. This means that the revenue gap between iOS App Store is widening quite rapidly.

Since the App Annie narrative for Google Play growth has consistently been that Google is catching up with the iOS App Store, it is understandable that App Annie is shying away from highlighting these numbers.

Free Wireless Data For Specific Apps

In many countries now, carriers are exempting certain apps from data charges. For example, even if you are on a pay-as-you-go data plan, the data that you use through the Facebook app on your phone will not count. You have unlimited access to Facebook free-of-charge.

Although I had been aware of specific cases, I had not know of a source with more comprehensive information. This data has now become available through Allot Communications (Summary on GigaOM).

Some things that I find interesting;

  1. This is now available even in the US. AT&T even has a program where the content providers themselves pay the consumers’ data bills.
  2. 49% of carriers worldwide surveyed by Allot Communications have this kind of data exemption plan.
  3. Of these, 65% exempt Facebook.
  4. This increases ARPU (average revenue per user) for carriers and also reduced the churn rate, making it very attractive for carriers.

Some of my thoughts;

  1. If you were an e-commerce retailer, you would probably want to have your app included in the data exemption list. You might even be willing to pay for consumer’s data if the online purchases made up for it. In fact, there might be many e-commerce retailers who want to do this.
  2. As a carrier, you could choose to partner with only one e-commerce retailer if these retailers were poorly differentiated anyway. By doing this, you might get very favorable terms. You could even pre-install that retailers app on the smartphones that you sell.

My thinking is that carriers could profit quite a lot from this scheme.

Simple Reason Why Google+ No Longer Requires Real Names

Google announced today that they will no longer require Google+ users to use their real names.

The rationale is simple. Google+, although originally designed to be a Facebook killer, never became a serious contender.

Moreover, Google itself knows exactly where you live, where you commute to, which websites you frequent, which videos you like, what search terms you use. It can probably guess quite accurately what your real name is and what your job position is through your connected Gmail account. Google doesn’t need you to add a real name to your Google+ account. They already know, and much more.

Microsoft Now Officially Weeding Out Chromebooks with Price Assault

I’ve been writing quite a lot on this blog about Chromebooks. This is because it is a case study into what qualifies for a disruptive innovation and what does not. This story also tells us that corporate history is one yardstick we can use to determine whether or not the incumbent will address the threat of disruption head-on, or whether they will flee up-market.

My position which dates back to January 2013, is that Chromebooks will follow the fate of Netbooks. In fact, since the sales of Chromebooks are significantly lower than peak Netbooks, it will likely end as a dud that only the tech industry showed any interest about.

The thinking was very simple, and all I did was say that;

This time, if Microsoft decides to fight back, they would start providing Windows 8 cheaply to low-spec models like the Acer. They would also add free SkyDrive capacity. It is also likely that they would include free Office 365 to compete with Google Docs.

Microsoft has now officially started to do this.

Microsoft COO, Kevin Turner is cited as saying;

“We are going to participate at the low-end. We’ve got a great value proposition against Chromebooks, we are not ceding the market to anyone.”

NewImage

Microsoft is not invincible and there is no guarantee that fighting Chromebooks head-on will be net positive for Microsoft. It is possible that the low-end Windows devices will cannibalize Windows revenue without generating new revenue from Office 365, etc. What we do know however is that Microsoft’s corporate culture has repeatedly addressed low-end disruption head-on. It will undercut low-end disruptors if they ever gain a foothold.

This is simply a case of Microsoft doing what it has always done once again.

The Stupidity of Bashing the Failing

A recent article in The Economist was so stupid that I couldn’t resist writing about it.

Japanese electronics firms, Eclipsed by Apple

These kind of stupid articles are nothing new. As one would expect, the self-critical Japanese have been writing them years ago. I’ve criticized the logic that these articles use in this blog (1, 2 ).

It’s similarly easy to find the flaws in the logic that The Economist used;

  1. In the article, the author assumes that Japan’s culture of lifetime employment and the associated labor rules are at least partially to blame for Japan’s problems. In fact, this is the only hard reason that is cited. If this was true, then we should see a correlation between a countries willingness to fire workers, and the ability of that country’s corporations to bounce back from hard times. As a prime example of a country that doesn’t think twice about firing workers, we can use the US. Also, as another example of a country where firing workers is difficult, we could use Germany. Although we don’t have nearly enough data to make a statistical argument, I sense that we would have a hard time validating this correlation.
  2. Another problem with blaming it on Japanese corporate culture is that if you look back in history, back into the booming years (which was not always smooth riding, but instead had its fair share of bumps), the aforementioned culture was even more intense. In fact, Japan’s lifetime employment was once envied by at least some US authors. Unless you can explain how Japan’s lifetime employment actually seemed advantageous during the two oil-shocks, you aren’t really in a position to blame the current problems on it. Below I refer to a random article that I found on the web, but I recall that these discussions were abundant in 1970-80.
    > Coming at the peak of Japan’s industrial ascendancy, Abegglen produced his insider’s guide to competing against the Japanese challenge, Kaisha: The Japanese Corporation (Abegglen and Stalk, 1985). He repeated the argument that comparative advantages lay in the Japanese firm’s high levels of social integration around lifetime employment.

It’s easy to present theories why Japan maybe faltering. It’s actually just as easy to give a reason why Japan was booming in the 1970-80s. Being able to present a reason for either does not mean that you have a good theory, or that you have any real intelligence. It just means that you can look at two things that may or may not have any meaningful association, and conjure up some logic to say that one caused the other. It means that you have a bit of imagination. Even more embarrassingly, it shows that you’re not thinking with your head, but you are simply following the crowd.

To give a concrete theory that can be consistently used for a least a few decades (and will not look ridiculous after twenty years), it has to be applicable to a span of at least half a century. For a theory on Japan, it has to explain both the boom years and the current stagnation. It has to be a theory that can cause both the good and the bad, depending on circumstances.

For example, what you really want is a theory that can explain why the US consumer electronics industry, which invented the TV for example, is now very weak. Much, much weaker than the state that Japan finds itself in. Or you could try to explain why the company that invented the cell phone (Motorola) has been sold off to a China firm. Or you could try to explain what happened to PC makers in the US. Or you could try to explain what happened to the U.K. automobile industry. If you can come up with such a theory, then and only then will you be able to give some good advice to Japan. Then and only then will be able to predict what will happen to Samsung and the Chinese in the next 50 years.

It’s a bit like trying to understand why a split-fingered fast ball has a different trajectory from a fast ball. If you were only looking immediately after the pitcher released the ball, you would think that a split-fingered fast ball files straight. On the other hand, if you were only looking near the home plate, you would think that a split flies down. Neither it the truth on its own. To understand a single pitch that can change its trajectory so dramatically, you have to take a hard look at how the ball is spinning and how that interacts with the atmosphere. Instead of simply looking at the trajectory, it’s about time that business analysts started looking at spin and aerodynamics.

That is not what the article on The Economist was. It was just a bit of imagination.