Wrist Computers, not Smartwatches

The words that we use to describe things and events profoundly affect how we think about them. We must be very careful of this when discussing any new category of product. 

In particular, we have to keep this in mind when discussing smartwatches.

Just think. Should we call them smartwatches or should we call them wrist computers?

If we call them smartwatches, we are lured to thinking that they will disrupt watches. 

On the other hand, if you call them wrist computers or wrist communicators, then you may think that they will disrupt smartphones, and eventually PCs. 

It is super important to be careful.  

Apple is Bringing Luxury to the Masses

By selling the 17,000 USD Apple Watch Edition, it would seem as if Apple is trying to become a luxury brand. Here I would like to discuss how I think this argument does not capture what Apple is really becoming. I don’t think Apple is trying to be a luxury brand at all. Instead I view this as Apple becoming a new kind of brand. A brand that brings luxury to the masses.

A luxury brand can only sell to a small portion of the total market. However, by becoming a luxury for the masses company, Apple is aiming to take both profits and volume from the markets that it targets. This is much like how the iPhone captured 10-20% of the global smartphone market (which made it the first or second largest vendor), with close to 90% of the profit share.

What do we mean by luxury?

“Luxury” has been an issue in the commentary surrounding Apple for quite a while. It used to be directed towards the reason why people buy iPhones as opposed to premium Android phones. With the Apple Watch, because of the gold Edition, this argument has become even more commonplace.

The problem is, nobody really seems to know what “luxury” means, and the people who do seem to use it somewhat differently. As Horace Dediu mentioned in a recent podcast, maybe it is time to stop using the term “luxury” and to come up with something new. This does however seem rather extreme given that other industries have been happy with this for decades.

I am not in any way an expert in neither luxuries nor fashions and hence I have no informed opinions on how these terms should be used. I do think that the distinction is important for understanding Apple Watch.

Price

Luxury is very often associated with price. Simply, cheap products are rarely luxuries and luxuries are usually pricy.

Looking at the prices of Apple Watch, the Apple Watch Edition satisfies the criteria for a luxury watch. It is priced from 10,000 USD to $17,000, with the emphasis on the 15,000-17,000 USD versions (10,000 USD is for the sport band which is rather unusual for a luxury watch).

However, the aluminium and stainless steel versions, which start at 349 USD and go up to 1099 USD are not exactly luxury. They compare in price to 200-400 USD watches from DIESEL (which calls themselves a “premium casual brand”), mechanical watches from FOSSIL. They are also at the low end of premium watches by brands like SEIKO and CITIZEN and at the high end of fashion watches from CASIO. It’s impossible to classify the aluminium and stainless steel Apple Watches as luxury.

Taking a completely different view, they tech view, you also find that it is squarely in the range of the iPad mini to iPad Air. The Apple Watch aluminium and stainless steel versions are actually at the lower end of Apple’s whole product line.

So although the gold Apple Watch Edition is certainly priced as a luxury product, the other versions are not. The other versions are simply premiums as are any other products in Apple’s product line.

Is Apple Watch luxury?

Since I don’t really understand luxury, I’ll defer explanation of the term to articles on the web. For example, here is an article by James D. Roumeliotis.

There is a classic litmus test:

  1. Is the product manufactured in artificially limited quantities? (i.e. the rarity factor)
  2. Does the firm have a story to tell? (i.e. history & pedigree)
  3. Is the firm portraying a unique lifestyle?
  4. Is craftsmanship the hallmark, which delivers products that only High Net Worth individuals (HNWI/UHNWI) can purchase without question?
  5. Does the brand offer authenticity?

In the video for the Apple Watch Edition, Jony Ive briefly mentions limited quantities so it would seem criteria 1. is satisfied.

Criteria 2. is satisfied by the very nice videos, which are available for all versions including the cheapest aluminium Sport model.

Criteria 3. is not met for any of the versions.

Criteria 4. is problematic. Jony Ive describes the highest level of craftsmanship (or care), but most of this is automated. This craftsmanship is mass-produced by precision machinery and is available for all versions. It is at the highest level, but is not exclusive for the rich.

Criteria 5. is something that is something that I don’t understand. I won’t comment on this.

What you see is that all versions, even including the aluminium Apple Watch Sport, satisfy a number of the criteria for luxury. In fact, the only criteria that the gold Edition uniquely satisfies is that regarding limited quantities.

Luxury for the masses

Apple Watch is actually a “luxury for the masses”. By automating and mass producing what previously required a high level of craftsmanship, Apple has brought luxury products within reach of the masses.

Importantly, this is not unique to the Apple Watch. Nor is it something that is recent. Almost all Apple products have been produced with the same amount of care and precision machining for quite a while now. What Apple is saying is that the attention and care to detail they have been exercising for years on products ranging from the iPad, iPhone, MacBook, iMac to the PowerMac, has always been worthy of luxury status.

The Apple Watch Edition is not a special product. It is just like every other Apple product.

A note on fashion

An aspect that was not previously an topic for Apple, but is now a topic for the Apple Watch, is fashion. In the article I linked to above,

However the nature of fashion is ephemeral and change. Pick up a copy of September Vogue and judge for yourself.

Although there are some fashion brands that are very pricey, price itself is not a criteria for fashion. Fashion is more about change.

This is why we have fashionable Swatch watches from under 100 USD. It is perfectly OK to be cheap but fashionable.

It is very possible that the Apple Watch would be fashionable. The prices certainly do not preclude it. Also like Swatch, there are a wide variety of bands and clock faces to choose from which allow the wearer to express their individuality. Brand power is also likely to be a key in fashion, and the Apple brand is certainly one of the favourites among e fashion conscious people.

What I find interesting about fashion is its dynamics of change. Fashion can change very quickly in the span of a year or two. It can also be rapidly obsoleted. Therefore, if there is a strong fashion aspect to the Apple Watch, we have to accept the possibility of a very, very rapid uptake, which could even be faster than the previous tech adoption champion; the iPad.

We should look out for how often the Apple Watch appears in magazines and news dedicated to the fashion conscious. If it is significant, then we might see an extremely quick ramp in adoption, an adoption rate that is characteristic of fashion.

Why does this matter?

The distinction between what it means to be a luxury, premium or fashion is important because it defines the addressable market. A luxury product in the pure sense must have exclusivity, and hence the market is limited. That is why Swiss watches only capture 3% of the total watch market in unit sales. This compares to iPhone having over 10% market share of global smartphone shipments and having about half the smartphone market in the US and Japan. Add to the fact that most people nowadays don’t even wear watches, and you have to conclude that the luxury watch market is pretty small from Apple’s perspective.

It’s not that Apple seeks to maximise profits. It’s that Apple seeks to make meaningful contributions. And you can’t really change the world by just targeting the luxury segment.

Luxury for the masses

I believe that Apple is aiming to bring luxury to the masses, and has actually been so for quite a while. If fact Apple has from its very beginning, always been a “for the masses” company.

With the Apple II, Apple brought personal computing from the hands of hardware enthusiasts towards software enthusiasts. With the Mac, Apple made personal computing easy enough for everybody to use. With the iPhone, Apple brought personal computing away from office environments and into more personal settings. Apple has always been about expanding the number of people who can use their products, and increasing use-cases.

Apple is misunderstood because in bringing their products to the masses, they do not rely on cheap prices. People think Apple targets only the premium and luxury segments of markets, while forgetting that these markets would often not have existed without Apple in the first place.

Categorising Apple as a luxury or even premium company does not capture the essence of what Apple strives to do. We must understand Apple as a “for the masses” company. What is new with the Apple Watch is simply that this time, Apple has explicitly brought luxury to the masses.

State of Non-Game Revenue on Google Play

Back in February, App Annie released a report on Google Play and App Store revenue in Germany. The central theme was that Google Play revenue had surpassed App Store revenue in Germany, which actually isn’t very surprising given the large number of Android users in Germany (StatCounter suggests that in other developed countries, Android market share is generally lower). What is startling is the chart showing how small non-game revenue is on Google Play.

Google Plays Rapid Rise in Germany EN pdf 10 17ページ

Clearly, if your app is not a game and you want to make money from it directly (either from an up-front payment or an in-app payment), then it doesn’t make that much sense to develop for Android, and the situation hasn’t improved much.

I have also discussed non-game revenue in some previous posts.

  1. Non-game Apps Growth in the Google Play Store
  2. Non-Game Apps: iOS App Store vs. Android Google Play

Apple Is Not Focusing On Luxury

The pricing of the gold Apple Watch Edition tells us that Apple is not focusing on luxury. Instead, they are focusing on fashion.

First read Benedict Evan’s great post on why Apple is making a gold watch.

Apple retail is a self-funding marketing operation. So too, perhaps, is the gold watch. Apple might only sell a few tens of thousands, but what impression does it create around the $1,000 watch, or the $350 watch? After all, the luxury goods market is full of companies whose most visible products are extremely expensive, but whose revenue really comes from makeup, perfume and accessories. You sell the $50k (or more) couture dress (which may be worn once), but you also sell a lot of lipsticks with the brand halo (and if you think Apple’s margins are high, have a look at the gross margins on perfume). 

His argument is that Apple created a gold watch for marketing purposes. They aren’t really serious about selling you a gold watch, and they don’t care if they don’t. They care that it’s on the cover of Vogue magazine and lots of people talk about it.

This would have been different if Apple had made the price of the gold Edition something like 5,000 USD. Then there would be normal people buying it and the volumes would be pretty high. High enough to make a significant contribution to total sales of the Apple Watch.

Horace Dediu for example was predicting something like 5,000 USD. That probably would have been the correct price if Apple was trying to optimise for revenue and profits. John Gruber predicted 10,000 USD which was still very far off from the actual 17,000 USD. In his case, he was simply pricing based on competitors; competitors whose gold watch prices aren’t optimised for revenue generation either.

The aluminium and stainless steel versions are very affordable

So now that we’ve got the gold Edition out of the way, we can turn our attention to the aluminium and stainless steel versions at $349 USD and $549 (for the non-sports band Watch). These are very affordable, especially for a high-build quality tech product. They are iPad prices. Although they are only a bit more expensive then Swatches or Casio G-Shocks, they are in the same range as Fossil watches.

And anyone suggesting that these are luxuries or jewels is simply confused. They have been blinded by the gold Edition, which is probably exactly what Apple intended. Fashion is a much better way to describe them.

One important thing to note is that if you wear a Swatch on casual occasions, then in many cases, you will also wear a separate watch for more formal ones. However with the Apple Watch, you are expected to wear the same watch at all times, switching bands to suite the occasions. Since the bands for Apple Watch are also quite affordable, this is easily within the reach of normal fashion enthusiasts.

Apple is not focusing on luxury

It should be very clear by now that Apple is not focusing on luxury. If they were, then they should at least have 5,000 USD luxury models that they can sell at meaningful volumes. Instead, the only models that Apple is serious about selling in volume are much cheaper. They are priced not at luxury prices, but fashion prices.

What does it mean for Apple to focus on fashion?

Apple in many ways has always been somewhat fashion minded. They have always made computers that look very nice, and with the iMac G3 lineup, they had a variety of colourful bodies to choose from. Even the current iPhone lineup has three colours to choose from.

Apple has also attracted the attention of a large number of case manufacturers, many of which who provide very fashionable designs. There is an abundance of fashion surrounding Apple’s offerings.

Apple has always been focused on fashion. Nothing has changed.

The iPhone Did Not Disrupt the Mobile Handset Industry

Yesterday, I wrote about how smartwatches would be a sustaining innovation relative to the watchmaking industry, but instead by a disruptive innovation relative to the smartphone industry.

To illustrate my point, I described how smartphones were a sustaining innovation (and not disruptive) to the mobile handset industry, and how smartphones were instead disruptive to PCs.

Since many people will understandably have an issue with smartwatches disrupting smartphones, I think I should go into a bit more detail. Instead of going into logic, I will give my understanding of what happened when the iPhone entered the market (Christensen’s mistake) and examine the parallels with the Apple Watch.

  1. Smartphones did not disrupt the mobile phone market: Many people think that the iPhone disrupted the mobile phone market. Disruption means that new entrants successfully displaced the incumbents. While this is certainly true that one entrant, Apple, gained 8.4% market share of total mobile phones, if you look at the other players, the mobile phone market is still mostly comprised of incumbent companies that used to sell feature phones. These companies were fortunate that Google provided Android for free, so that they could easily and quickly develop their own smartphones. Some may note that Blackberry and Palm almost completely disappeared. I would argue that if you look at the total mobile phone market, they were never more than a small niche so they weren’t really incumbents at all. As for Nokia, they simply bet the company on the wrong horse. If they had chosen to use Android, there is little doubt that they would have still been a force to reckon with.
  2. Smartphones disrupted PCs: To understand this, you have to lump smartphones and PCs together to create a “personal compute market”. Ben Bajarin has done this, and the following chart shows what has happened. PCs have clearly been overrun, and importantly, neither Microsoft itself nor any of the PC OEMs (with the exception of Lenovo which is very agile at M&A) successfully made the transition to smartphones. This is what disruption looks like.
    Ben BajarinさんはTwitterを使っています Microsoft s journey of computing platform share through the years http t co taFsFr1sZp

Here, I’d like to look at this in a bit more detail. The thing is that if we take a look at the mobile handset industry before and after the iPhone, there certainly has been movement in the dominating players. At first glance, it would look like there has been some kind of disruption. However, as I will point out below, the truth is that disruption came from cheap Asian manufacturers and not from Apple.

Gartner Says Worldwide Mobile Phone Sales Increased 16 Per Cent in 2007
Source: Gartner 2007

Gartner Says Sales of Smartphones Grew 20 Percent in Third Quarter of 2014
Source: Gartner 2014

The Handset Industry Was Disrupted By East Asia

In the above tables, we see Nokia’s rapid decline and Samsung’s ascent. We also see Motorola and Sony Ericsson disappearing from the scene whereas LG maintained its position. Huawei, TCL, Xiaomi and other Chinese and Indian OEMs rose quickly.

This is the combination of a few of events;

  1. Korean manufacturers rapidly grew their presence, overtaking Western and Japanese firms. Korean companies simply made high quality devices and components cheaper than their rivals.
  2. Mobile handset users in both China and India exploded. To cater to these huge markets, homegrown companies sprung up and were successful. The rise of Chinese and Indian manufacturers is simply a result of the explosion of these markets.
  3. Nokia made a very large bet on the wrong technology. Nokia correctly understood that it would not be able to differentiate if it went with Android. However, there was not yet a good alternative OS so Nokia decided to bet on Windows phone in the hope that it would arrive in time. It didn’t. I’m sure that few people would disagree that Nokia would still be relevant if they had adopted Android.

Regarding item 1), this is exactly what Japan did in the 1960s and 1970s, disrupting US electronics and automobile manufacturers. Emerging industrialised nations capitalise on cheap labour and new factories to create high quality products at low cost. Just as Japan initially started out as a cheap, low-quality manufacturer, but quickly moved up the ladder to become a high-quality one, so has Korea in the last decade. The rise of Samsung in particular is simply a consequence of this.

The role of Apple in this is that it created a shake-up. It created a fast changing environment where every company was scrambling to produce a device capable of competing with the iPhone. These environments typically favour quick-moving entrants which have nothing to lose. In the case of Japanese electronics companies, it was the transition to transistors that shook up the environment. In automobiles, it was the oil shock that shifted attention to more efficient cars. Likewise, the iPhone did not directly disrupt the phone industry but instead created a volatile situation which the Koreans could then exploit.

Regarding item 2), this is again very obvious. When the vast majority of smartphone hardware is being made in China anyway, it is natural that Chinese firms would create their own brands. The iPhone has nothing to do with this.

Summary

  1. The iPhone did not disrupt the mobile phone industry.
  2. The mobile phone industry was disrupted from the low-end by Korean manufacturers which were climbing up the ladder from cheap, low-quality to cheap, high-quality.
  3. The iPhone only served as a catalyst for change. It did not directly influence the direction of the shift.

Sustaining Innovation and Disruptive Innovation in Cameras

A recent tweet from @charlesarthur on the camera market very nicely captured the difference between sustaining innovation and disruptive innovation. Let me explain.

Charles ArthurさんはTwitterを使っています How a segment dies http t co BkAkU49CHl

  1. Digital cameras started penetrating the consumer market around the year 2000. They were initially had very bad resolution and colours were inaccurate. Battery life was also a huge issue. Despite this, they took off in sales because you could view your photo immediately after you took it, and you didn’t have to go to your local photo processor.
  2. Initial deficiency is a hallmark of disruptive innovations. Disruptive innovations often start off as a “toy” that however provides significant convenience to low-end users. In this sense, digital cameras completely fitted the bill.
  3. However, if you look at the players in the market before and after the digital revolution, you notice that they are almost identical. The exception is that Casio gained significant market share (due to first mover advantage). Otherwise the main players, Nikon, Canon, Olympus all maintained their positions and enjoyed increased sales during 2000-2010. Clearly, digital cameras did not end up being disruptive to the film-camera market. Instead it was sustaining.
  4. The reason for this is that the incumbent film-camera makers were motivated to make the shift to digital. Digital cameras were significantly more expensive than film cameras and drove a replacement cycle that would not have been existent without the new technology. This was financially very appealing to the incumbents. There were technical hurdles like manufacturing the CCD cameras. However, there were modular CCD manufacturers who were willing to supply these to the previously film-only camera makers. Hence film-cameras makers were both willing and capable of making the shift to digital. This is why only Casio, with its first mover advantage, was able to gain significant footing among the film-camera incumbents.
  5. Since 2010 however, the incumbent camera makers have collectively seen a large drop in sales. This is due to cameras on smartphones. Instead of the traditional camera makers, the winners in this new market are Apple, Samsung, LG, HTC, etc. They are the smartphone makers. What happened here is unmistakably disruption.
  6. Smartphone cameras were also initially very poor compared to the regular digital cameras. Like digital cameras ten years before, they also started out as “toys”, which however provided significant convenience to the user because you could immediately upload the photos to the Internet. Technology-wise, smartphone cameras were no better than digital cameras were in the year 2000, relative to the incumbent products.
  7. The very different outcomes are a result of the difficulty of transitioning to the new market. I don’t mean difficulty in technology. I mean difficulty in flipping the whole organisation from top to bottom. For film-camera makers, it was relatively easy to transition to the digital-camera market. They were still selling cameras through the same channels to the same users. Film camera makers did not have to change their business models or their sales and marketing organisations at all. The only issue was technology and even this was easily overcome through modularity. However, for camera makers to transition to the smartphone market, they have to change their technology focus, their distribution channels, their sales and marketing organisations and everything else in between. This was too much for them to do. Instead, they focused on the higher-end of the market (digital SLRs and mirrorless cameras) where they could still thrive while maintaining their organisations and business models which worked, but only until smartphone cameras became good enough for all except the most demanding photographic tasks.

So there you have it. The takeaway here is that the most important element of a disruptive innovation is whether the incumbent is motivated and capable of embracing it or not. If the incumbent embraces the innovation, then disruption will not occur. However, if the incumbents don’t do so, then they will be disrupted.

It is usually not the technology that decides whether disruption will succeed or not, but rather whether or not the company organisation is capable of embracing it.

Quick Take on Disruptive Potential of Smartwatches

Just a few quick notes on the disruptive potential of smartwatches.

Smartwatches will not be disruptive to watches

This is very important. This tells you who will be the main players in the smartwatch market in the mid- to long-term. Smartwatches add features to traditional watches, and will often be more expensive than comparably built watches. Therefore, it makes perfect financial sense for incumbent watch makers like Seiko, Citizen, Swatch, Tag Heuer, Casio, and others to make a smartwatch. We are already witnessing this. If incumbents are motivated to fight back, the probability of an entrant being successful is greatly diminished.

Whether the incumbents (traditional watchmakers) can succeed in making a good smartwatch is another question, but given that the operating system is already freely available as Android Wear, and that the Shenzhen ecosystem should give them the electronic components that they need, it is likely that despite not having prior excellence in electronics, incumbent watch manufacturers will be able to create smartwatches that are almost as good as the ones coming out of Samsung, LG, Motorola, etc. Since brand and design are very important for selling wearables and that there is no easy way for entrants (smartphone OEMS) to acquire a strong brand image (i.e. they don’t sell strong brand images in Shenzhen), it is likely that the incumbents (traditional watchmakers) will prevail in the smartwatch space.

Smartwatches will be disruptive to smartphones

Instead of being disruptive to watches, smartwatches will be disruptive to smartphones. Smartwatches will make many of the smartphone computing tasks more convenient and easier to accomplish. Although their current functionality is rather limited, it is very likely that advances and innovations in both hardware and software will quickly expand the scope of tasks that we can accomplish with smartwatches.

For the most part, this will be a new-market disruption as opposed to a low-end disruption. In low-end disruption, you would typically target the least demanding customers. However, in the current format, smartwatches will depend on the user also having a smartphone nearby. A typical user will need both a smartphone and a smartwatch, so they will not be the least demanding customer.

Instead, smartwatches will be new-market disruptions. They will enable customers to interact with computers and the Internet in ways that were previously impossible or cumbersome.

Now in the previous section, I argued that traditional watchmakers will prevail in the smartwatch market. They will gain share of the total compute time per user. The question then is, who will lose share? Who will be disrupted by this new market disruption? My argument is that here the incumbents are smartphones and that smartphones will be disrupted by smartwatches.

Without going into detail, this is what I expect the smartwatch landscape to look like after the dust has settled;

  1. Apple will be the undisputed number 1. They will aggressively innovate on the Apple Watch, even to the extent that it cannibalises the iPhone. The Apple Watch will gradually become more and more independent of the iPhone.
  2. The current Android smartphone OEMs will initially play in the smartwatch market, but they will fail to make profits due to their lack of brand power. Eventually most will retreat from the smartwatch market and focus on making big and powerful smartphones. The few that remain will only get the scraps from the very low-end of the market. The exception might be Samsung. If their Tizen operating system enables them to innovate faster than Android Wear, there is the possibility that Samsung will be able to profit from smartwatches (due to the lock-in they get).
  3. Current watchmakers will be the major Android Wear players in the smartwatch space, especially in profits. The electronics will be provided by the Shenzhen ecosystem or a chipset provider (maybe Intel). Depending on how well Google can monetise from Android Wear, we might see some rapid innovation.
  4. Smartwatches in general will become more and more independent of smartphones. Ultimately, people may not carry a smartphone but instead carry a MiFi-like cellular connection device paired to their smartwatch (due to the battery requirements of connecting to a cellular network). For tasks requiring a larger screen, customers might carry a tablet-like device. The theme here is that smartphones will be at least partially replaced by smartwatches.

Final thoughts

Clayton Christensen famously misunderstood the disruptive potential of the iPhone. He saw it as a sustaining innovation to feature phones, and expected the incumbents to quickly respond and shut out the new entrant (Apple). Part of his mistake is that he failed to see how the iPhone would be a new-market disruption, making PC tasks possible on a mobile device.

We should be careful not to repeat his mistake. We need to be careful in understanding to which markets smartwatches are sustaining, and to which markets smartwatches are disruptive. If we fail to correctly assess this, we will end up with the opposite prediction.

Here I make the potentially controversial prediction that the traditional watchmakers will prevail and that smartphone OEMs like Samsung, Motorola and LG will drop out of the market. This will be the measure by which my understanding of disruption theory should be judged.

Update

Since many people will understandably have an issue with smartwatches disrupting smartphones, I think I should go into a bit more detail. Instead of going into logic, I will give my understanding of what happened when the iPhone entered the market (Christensen’s mistake) and examine the parallels with the Apple Watch.

  1. Smartphones did not disrupt the mobile phone market: Many people think that the iPhone disrupted the mobile phone market. Disruption means that new entrants successfully displaced the incumbents. While this is certainly true that one entrant, Apple, gained 8.4% market share of total mobile phones, if you look at the other players, the mobile phone market is still mostly comprised of incumbent companies that used to sell feature phones. These companies were fortunate that Google provided Android for free, so that they could easily and quickly develop their own smartphones. Some may note that Blackberry and Palm almost completely disappeared. I would argue that if you look at the total mobile phone market, they were never more than a small niche so they weren’t really incumbents at all. As for Nokia, they simply bet the company on the wrong horse. If they had chosen to use Android, there is little doubt that they would have still been a force to reckon with.
  2. Smartphones disrupted PCs: To understand this, you have to lump smartphones and PCs together to create a “personal compute market”. Ben Bajarin has done this, and the following chart shows what has happened. PCs have clearly been overrun, and importantly, neither Microsoft itself nor any of the PC OEMs (with the exception of Lenovo which is very agile at M&A) successfully made the transition to smartphones. This is what disruption looks like.
    Ben BajarinさんはTwitterを使っています Microsoft s journey of computing platform share through the years http t co taFsFr1sZp

Now if we apply this to the current smartwatch situation, we can expect the situation I described in 1) to happen to the current watchmakers, and the situation I described in 2) to happen to the current smartphone OEMs.

So for current watchmakers, they will quickly adopt the new emerging technology, and the freely available Android Wear will help them immensely. The Shenzhen ecosystem will also help on the hardware side.

On the other hand, smartphone OEMs will dabble in smartwatches in the same way that DELL and others briefly entered the smartphone market (Dell Streak 5, HP iPaq). Notice the bulkiness and inelegance of their offerings, which reminds me of the bulky and unfashionable Android Wear devices that we are currently seeing from Smartphone OEMs.

In a few years time though, I predict that smartphone OEMs will mostly exit from smartwatches, just like DELL and HP did. There seems to be something that holds back incumbents in the higher spectrum of the market from creating something that is simpler and more elegant.

Uber Is Clearly Not For the United States

When I hear of all the talk of Uber coming out of the United States, I am struck with a sense of disbelief. I cannot understand why the Americans, who at least in my impression seem to think that buses are very undesirable or even dangerous in certain cities, have suddenly come to love public transportation.

Luckily, there are statistics for this. The Flowing Data website compiled data from the United States Census Bureau’s 2013 American Community Survey and created a great interactive map in addition to the following chart.

NewImage

The vast majority of Americans go to work driving alone in their cars. Although there is a bit of carpooling, any mode of public transport is very, very rare. Really, there isn’t any surprise here.

The United States is very obviously not the ideal market for an taxi-like service. Uber is only skimming a very small portion of the transportation market; one that taxi-drivers used to own.

Examples of Smartphone Specialization and Implications for Google’s Control

A while back, Bob O’Donnell wrote a piece on Techpinions titled “Tablet and Smartphone Futures: Specialization”.

Ultimately, technology products are likely to follow the path of other mass-produced goods, such as cars, appliances and even clothing. In all those markets (and many more), the ability to specifically target different types of consumers and then create products that match the unique needs/interests of those different consumers is what allows companies to thrive. Now, it’s time for technology companies to step up to those challenges and give us the breadth of product options that the market is hungry to see.

I very much agree with Bob’s point. The wider a product penetrates a market, the more diverse needs it will have to address. This is what has happened in almost all markets, and although personal computing devices are different in that customers can install software to customize to their preferences, there is little guarantee that this is sufficient to satisfy the very divergent needs.

Furthermore, diversification is not necessarily aligned with the interests of the platform owners. In the case of Apple, they try hard to control the experience on their devices. They minimize customization options in the name of simplicity. They try hard to find a single one-size-fits-all that works well. In the case of Google, the first started by allowing OEMs and carriers to customize the Android OS, but then scaled back when they felt they were losing control of the platform, and that fragmentation was becoming an issue for developers. It is clear that the platform owners are discouraging diversification.

What we are seeing is a natural tension between conflicting requirements. In this situation, small changes in the market could dramatically shift the balance of power. This is why I’m very interested in observing how specialized products will enter the market, and what level of success they will achieve.

One example that cropped up recently is the announcement of some very interesting Android smartphones from KDDI, the second largest carrier in Japan.

The first exhibit is a smartphone targeted towards primary school pupils (miraie KYL23). Apart from the hardware which is designed to withstand the constant abuse that one can expect from small children, it has good Web filtering features, and can even track what swearwords and insults your child may have typed-in. You cannot use Google Play or other Google Services; instead, you install apps from a specialize app store.

NewImage

NewImage

Message pops up when you try to enter “ばか” (stupid). It tells you that you are using a bad word, and your parents will be notified.

When you think about it, it’s absolutely obvious that you don’t want to use a Google certified Android device on these smartphones, and you really have no choice but to go with AOSP.

As the smartphone market saturates and it becomes important to address the smaller niche markets, it is very likely that we will see even more customization. In this situation, the restrictions that Google applies for Google Play certification may be too limiting, and AOSP may see more adoption. Obviously, Apple will not play in this market.

Update

Importantly, the miraie KYL23 smartphone is manufactured by a Japanese smartphone vendor, Kyocera, which also sells Google certified smartphones. Therefore, although it has been rumoured that Google does not give out licenses to companies that also sell AOSP or forked-Android, this does not always seem to be the case.

App Annie Shows iOS App Store Widening Revenue Lead Over Google Play

As I have been mentioning on this blog for quite a while now, despite the impressive growth rates that Google Play is showing in revenue growth, data suggests that the gap in absolute revenue between it and the iOS App Store is actually widening.

App Annie has been my source for data. However, since about a year ago, they have made it quite hard to directly observe the gap. Now, in a recent report, App Annie has provided the chart that clearly shows this trend.

This that chart;

App Annie Index 2014 Retrospective EN pdf 5 39ページ

We can clearly see that Google Play’s revenue growth rate has been quite impressive, but that is only because it was quite small in 2013. In absolute terms, the gap is clearly widening. Hence the current trajectory suggests that Google Play will not catch up with iOS in revenue.

Breaking down the revenue, we can see why.

  1. As App Annie has previously shown and as they show again in their most recent report, revenue growth of both the iOS App Store and Google Play comes almost entirely from three countries; Japan, South Korea and the United States. Revenue growth from developing countries, the countries where Android is typically very strong, is still almost negligible.
  2. In both Japan and the US, iPhone is increasing market share. Therefore it follows that iOS App Store revenue in these markets should be outpacing Google Play. With the iPhone 6 and 6 plus, it looks like this is starting to be the case in South Korea as well. Therefore, iOS App Store revenue in winning in the countries that matter.
  3. Android is continuing to gain market share in the developing countries and download numbers in these nations clearly show tremendous growth. This however has very little effect on absolute revenue because in these markets, customers simply do not pay much for apps.

What else would I like to know

Now that it is clear that Google Play revenue will not catch up with iOS App Store in the foreseeable future, the next topic related to the app ecosystem that I find interesting is the status of non-game apps.

App Annie has noted in their Q3 2014 report that “Games drive nearly all Google Play Revenue Growth”. This is deeply disturbing. It suggests that the non-game categories in Google Play are barely growing at all.

When we revel in how technology has improved out lives, we are seldom talking about games. We are talking about apps that help us and our children learn things, apps that improve our productivity and apps that help us communicate. If these apps are not growing, then it suggests that tech is not improving or lives, but is in fact an opium that enslaves us to spend money wasting our time.

It would be terrible if this were the case.