Thoughts on AR and Smartphones

Apple’s recent announcement at WWDC 2017 of ARKit has suddenly sparked a new interest in AR, and just a few days ago, Google responded with their ARCore API which does basically the same things. These APIs promise to bring sophisticated AR to all owners of compatible smartphone, dramatically enlarging the addressable market. This has excited pundits and developers alike, and it is now very likely that we will see AR breaking out of the early adopter market and into the early majority.

I would like to jot down my thoughts on this, regarding how innovation tends to happen, and also regarding how this affects the smartphone market as a whole.

The innovation trajectory

Innovation usually starts out as basic research or a new invention somewhere in a lab setting, with specialised and extremely expensive equipment. Then it becomes a specialised instrument that is somewhat cheaper, but still  very hard to use, catering only to the enthusiasts. Finally, it becomes cheap and easy enough to use for the majority of the market, leading to an explosion of usage.

If you look at the PC market for example, it started out when computers like the ENIAC were first invented. Then after revolutions in semiconductors, the computer became cheap enough for enthusiasts to own and tinker with, but still the people who used them were tinkerers. This was the era of the Apple II, Commodore and Amiga. Then as the IBM PC and clones came out, the price came down whilst performance improved dramatically and application software became available, making the PC both useful and affordable thus bringing it into the mainstream.

What we are seeing with ARKit very much mirrors this. We started out with work that was done in the labs, and we recently started to see implementations that require special headsets and powerful PCs connected to them. It was clear at this point that these devices would not go to the mainstream, and the developer community in general did not yet think that it was a market worth pursuing. With ARKit, we are likely to see an IBM PC moment where AR goes mainstream on devices that are affordable and where the developers are also excited to reach large audiences.

One interesting thing to observe is, although the innovation in the lab tends to follow a steady path, the introduction into the mainstream can feel very abrupt, caused by new products being introduced into the market. ARKit is one of these examples. Windows 95 is another. So is the iPhone of course. Sometimes the company introducing the product if far ahead in technology, but this is not necessarily the case. Looking at Windows 95, one could argue that you could be technically behind, but still make a huge and abrupt impact to the market. Judging by how quick Google was to introduce ARCore, it would be fair to say that Apple’s ARKit team was not also necessarily ahead of Google’s, but simply had the right marketing priorities in place.

Implication for smartphone sales

Until very recently, the general narrative was that innovation in smartphones had winded down, and that there was increasingly little to differentiate the new high-end flagships from the models from previous years, or those from mid-tier vendors. However if ARKit and ARCore become mainstream and are adopted by major developers, this changes the whole game. Apple’s ARKit reportedly only works with A9 chips and above, which means that any models prior to the iPhone 6s are not eligible. The iPhone 6 which was introduced in 2014 will not be able to run ARKit apps and neither will the iPad Air 2 (also introduced in 2014). The situation on the Android side is even more dire (as usual) with only the Pixel (introduced in late 2016) and the Samsung Galaxy S8 (introduced in 2017) being eligible to date. Therefore these two platforms may become a strong differentiator for the newest and greatest models, and drive customers who would have otherwise have been content with an old or midrange model to look upmarket.

This has quite a few implications.

  1. Since we know that the high-end smartphone market is generally dominated by Apple and Samsung, this trend will strongly favour these two companies.
  2. Regarding the iOS vs. Android balance, in the high-end (dependent on country) this often is tipped towards iOS. Therefore, we might see a rise of iOS market share.
  3. The interesting thing is that since ARCore currently only supports the Pixel and the Galaxy S8, and since sales of the Pixel are minuscule to date, in reality the vast bulk of ARCore capable smartphones will be Samsung models. As a result, depending on how Samsung plays its cards, it may be possible for Samsung to exert a huge amount of power over Google. Samsung might customise or add proprietary features and APIs to ARCore that would take advantage of the specific hardware on their devices (which might be Samsung silicon), and since the bulk of the market will be Samsung devices anyway, the developers might bite this time. Samsung has been flexing its muscles looking for a chance to break away from Google’s control for quite some time (Tizen, Samsung Pay, security features, etc.), so it would be interesting to see how they plan to take advantage of this situation.

According to Clayton Christensen’s theories on integration and modularity, markets where customers are still looking for innovation should generally favour integration due to the capabilities that this makes possible, and in the smartphone market, the integrated players are Apple and Samsung (Sony is also interesting in that it is integrated around the hardware that matters most – the imaging sensors). It will be interesting to see how this all plays out.

Predicting Technology Adoption

Today we see many new ideas and product categories being introduced into the market. We see smart speakers, AI assistants, self-driving cars, wearables, VR headsets, smart homes and many more. Not all of these will be successful and become a part of our future lives. Surely some eventually will, but only after many years of mediocre sales mainly as an enthusiast’s toy. Others will become instant hits, and will be used by the majority of people within a decade or even shorter. Despite all of these sharing a common early enthusiasm, the eventual fates will be very different, and predicting which trajectory each product category will take is not an easy task. However there are some frameworks and theories which we can apply, so here, as an excercise to test my own understanding, I will try to do just that.

Smart Speakers

This is a very interesting product category to test and apply the Chasm theory of Geoffrey Moore and the Disruption theory of Clayton Christensen.

The Chasm theory applies to new category products that require customers to learn and change their behaviour. Essentially, the Chasm theory states that there is a very wide divide between the early adopters and the early majority, due to the lack of connection between these two different types of customer. The early adopters do not act as reliable references for the early majority, and hence technology diffusion cannot rely on word-of-mouth. Thus a deliberate and focused strategy is required to bridge this gap. On the other hand, Disruption occurs when the core appeal of a preexisting product that caters to advanced users is made available to a wider audience through technology or business model advancements. As a result the market share of the preexisting product is significantly reduced (hence the word Disruption), often not necessarily by stealing the preexisting product’s customers, but instead dramatically increasing the size of the pie. Often in Disruption, the benefits of the preexisting product will already have been defined and will be very apparent to the new users, and so there will not be a Chasm to cross. This can make adoption very rapid.

In the smart speaker market, and with the introduction of Apple’s HomePod, we will witness both of these theories simultaneously at work.

For the Amazon Echo and Google Home products, we will see the effect of the Chasm. Both of these products stress the AI assistant features which are new and without precedent in the market. Therefore the companies will struggle to define the must-have value proposition, and to educate consumers as to why they should own one. Geoffrey Moore advocates a whole product approach to overcome this, something that neither company is particularly known for. I therefore predict that both these products will seriously struggle to be widely adopted.

On the other hand, we see Apple’s HomePod taking a more Low-end Disruption approach. Instead of touting AI assistant capabilities, the HomePod takes aim at high-end audio and making that accessible to people who would appreciate high-quality sound, but who are unwilling to invest in the learning and the equipment. Therefore, this approach will not experience a Chasm. Potential customers already know what they are getting and do not need to be educated on why they would enjoy good sound. All they need to decide is when they are going to save up, and therefore we are likely to see a much faster adoption rate with this marketing focus.

As a result, my prediction is that the HomePod will be a hit akin to the AirPods, easily surpassing Amazon Echo sales in revenue and even units. As a result we will see both Amazon and Google changing direction and copying Apple’s approach by making speakers with at least acceptable sound. The smart speaker market will rapidly expand as a result, but only because the marketing approach is not about the AI assistant capabilities but the high-quality music.

Self-driving cars

Self-driving technology is also likely to follow a Chasm trajectory. Without a preexisting product with a similar value proposition, people will have to be educated on the benefits, especially if regulations require that the driver cannot fully delegate the role of driving to the AI, and must be available to intervene at any time. We will see a lot of early adopters, but for a long while, that is likely to be all. Even if full autonomy becomes a reality soon and regulations allow the computers to work without human supervision, I am not convinced that many people will immediately recognise the benefits since there is no preexisting market.

Wearables

This is product category that we know is in the Chasm. The benefits of the Apple Watch for example have been hard for even Apple to define, and consumers have yet to be educated of the benefits. Apple is certainly the most experienced company when it comes to crossing the Chasm (it was the company that succeeded in popularising the mouse and the GUI), but still it will take time.

The problem for wearables is that there is no preexisting product to disrupt. For example, except for a very limited number of people, tracking your heartbeat is hardly necessary regardless of how expensive or complicated the devices may be. Notifications on your wrist is also something that most people cannot immediately grasp the benefit of. On the other hand, it is also obvious that with only a minuscule screen size, a watch cannot replace the current day smartphone, no matter how powerful it may be or even if it is connected to an LTE network. Without a preexisting product, it’s very hard to understand what a wearable is good for. It is difficult to understand what benefit it can provide to a customer.

Remember that Apple initially positioned the Apple Watch as a fashion item and a high precision timepiece. The significance of this strategy was that they adopted the value proposition of a preexisting product, which enabled them to connect to customers who were not typical early adopters, thereby speeding up adoption and leaving Android Wear in the dust. Also note that while the regular smartphone manufacturers like LG have recently decided to wind down their smartwatch efforts, traditional watch vendors have started to do the opposite. Regardless of whatever tech is included in the product, at this early point in time where most consumers have no idea what tech can do for them, the value proposition of SmartWatches remain mostly the same as traditional ones and therefore the traditional vendors are the ones that have a story to sell.

Smart homes

Again, this is a product category with no predecessor. Even if you were rich enough to employ a maid or a butler, I suspect switching on the lights would not be typically something that you would do via voice commands. What has been much more critical and aligned better with what people typically hired maids for, was cleaning up and vacuuming the floors, something that Roombas do quite well without any need for a voice controlled “smart” UI. This is why we have seen pretty rapid adoption of these vacuum robots whereas Smart homes are still very much an enthusiast’s toy.

Smart homes will predictably hit a Chasm. The benefits are not clear and therefore only early adopters will buy these things. This will continue to be the case for at least several years. Early majority customers will not understand the benefits without a whole product strategy around a key use case, whatever that might be. Adoption will take a long time, if ever. On the other hand, we will continue to see innovations that use computer, sensor and software technologies to make household chores easier and quicker to do. It’s just that switching on lights is not one of those chores that is a recognised burden on our day-to-day lives.

Summary

The key framework that I’ve used above is to first identify if there is a precursor to a new product category and to see if that has already made consumers aware of the features and benefits. If so, and if the new product has the potential to dramatically increase the market, then I predict that we will see rapid adoption (whether its will be Disruptive or Sustaining depends on whether the incentives to pursue the new product aligns with the business models of the incumbents). Otherwise, we can expect the new product category to follow the technology adoption life cycle and to hit the Chasm. Since the Chasm can be overcome with a whole product strategy, whether or not the market players have experience in this is key to adoption speed.

With this framework, we can predict the rapid adoption of smart speakers by virtue of Apple’s high-quality music strategy, the relatively good adoption of smart watches due to Apple’s experience in whole product strategies and marketing, and the slow adoption of self-driving cars & smart homes due to the current lack of either.

It is also important to note that the key players during the early adopter phase are not necessarily the ones that will make it through to the early majority phase. The Commodores and Amigas of the early PC market did not thrive when PCs became mainstream. Likewise, it is a fallacy to assume that the companies that are currently “winning” in smart speakers and self-driving cars or even Artificial Intelligence in general will enjoy their early lead as the market goes mainstream. More likely than not, other companies that are better positioned for the early majority market and the specific use cases will take it from them.

Out of the markets that I have described here, the smart speaker market is the one that is most likely to see significant action in a year or two due to Apple’s fresh approach. I expect to revisit this post and review my predictions mid or at the very latest late-2018. Other ones will probably still be stuck in the early adopter market and it will be harder to say whether my predictions were right or not.

Corporate Culture

Steve’s DNA will always be the base for Apple. It’s the case now. I want it to be the case in 50 years, whoever’s the CEO. I want it to be the case in 100 years, whoever’s CEO. Because that is what this company is about. His ethos should drive that—the attention to detail, the care, the ­simplicity, the focus on the user and the user experience, the focus on building the best, the focus that good isn’t good enough, that it has to be great, or in his words, “insanely great,” that we should own the proprietary technology that we work with because that’s the only way you can control your future and control your quality and user experience. And you should have the courage to walk away and be honest with yourself when you do something wrong, that you shouldn’t be so married to your position and your pride that you can’t say, “I’m changing directions.” These kind of things, these guardrails, should be the basis for Apple a century from now. It’s like the Constitution, which is the guide for the United States. It should not change. We should revere it.

In an interview with Bloomberg's Megan Murphy, Tim Cook describes the DNA, the Constituion of Apple. There are some things to note here.

  1. There is no mention at all that relates to WHAT Apple will do or create. There is no mention of computers, silicon, software, artificial intelligence, art, luxury or anything to do with the final product, other than a focus on customer experience and building the best.
    2. It is all about the HOW. The attention to detail and the aspiration to be "insanely great". Controlling core parts to make sure that Apple can do this.

One day, smartphones will cease to be as important as they are today. In fact, it's even probable that computers, software and even artificial intelligence will become commodities within the current century. Companies that are predicated on indexing all of the world's information or AI or robots, may find themselves clinging on to a commoditised utility.

Apple's DNA transcend this. Apple has a value system that is future proof in the span of centuries. Even if Apple decides one day to exit the smartphone market, the DNA can live on and Apple will likely continue to prosper (although maybe at a smaller scale).

There are not too many companies that last even for a few decades. The average life expectancy of an S&P 500 company is now a mere 15 years. Probabilisticly, only a few of the tech bemoths of today will make it to 2040. When the babies born today enter the workforce, out of Apple, Google, Microsoft, Amazon, Facebook, and Samsung, they will most likely only encounter a couple.

When we look at the dominant companies of today, we should keep in mind that we are looking at what IBM, Sun Microsystems, HP, Xerox, Sears, Nokia looked like in their respective heydays. The formulae for companies that continue to prosper for decades and even centuries is still not well understood by the business academia, but I think that it is noteable that Apple's DNA is future proof.

How Can Android Wear Succeed?

I know I’m very late to the party, but I recently noticed this post via a comment on “The Overspill” newsletter by Charles Arthur.

“Until we have an Apple Watch of our own, no one is going to take Android Wear seriously (opinion)” link

Essentially, this article calls on Google to create their own Android Wear watch instead of leaving this to their partners.

If Google is serious about Android Wear, it should be serious about building Android Wear watches – full stop. Only Google has the long-term motivation to keep the platform alive, and only Google can afford for its hardware business to be a zero-sum game in the name of building up an ecosystem. Without our own “Apple Watch” to act as a guidepost, as proof that a better smartwatch can be made, Android Wear seems doomed to continue on in stagnation and obscurity.

Of course, the problem with this argument is that it does not align with how Android nor Windows became popular. Google did not have to build its own phone for Android to gain steam. Similarly, Microsoft did not have to make its own PC to make Windows popular. In both cases, the respective companies followed a strict OEM partnership strategy. Essentially, this argument suggests a lack of understanding on why Android and Windows became popular in the first place.

  1. Both Windows and Android gained popularity on the back of the success of the Macintosh and iPhone respectively.
  2. Both Windows and Android were low-end alternatives to the Macintosh and iPhone. They did not necessarily bring something new, and in fact they started out being downright inferior. They were however cheaper.
  3. Due to the success of the Macintosh and the iPhone, customers were already aware that a GUI and a touch-based smartphone were very good ideas and that they would be useful. Apple had already educated customers to the benefits, and had primed the market. All that Google and Microsoft had to do was to make the same benefits accessible to the rest of the market.

So applying this to the state of smartwatches, we can foresee the following scenario that would take us to the success of Android Wear.

  1. Apple will continue to work hard to educate customers on the benefits of a smartwatch. Apple will explore what features resonate, and what a smartwatch would actually be useful for (something that is still quite ambiguous).
  2. Once the Apple Watch starts selling something like 20-30 million units per year, then a) customers will be fully aware of the benefits of a smartwatch and b) Google will know what to make.
  3. Then all that Google needs to do next is to collaborate with their partners to develop such a smartwatch that is half the price of an Apple Watch, and to bring the benefits to Android users. Importantly, it is OK for this smart watch to be downright inferior. Since Android users are currently >80% of the smartphone market, there is a potential for Android Wear watches to exceed Apple Watch sales someday.

My point is, Google does not need to make its own smartwatch. Doing so would not move the needle one bit. Instead, what Google needs to do is to keep their OEMs cosy until Apple Watch goes mainstream, and make sure that their team can pounce then. The risk here is that Samsung is going their own way with Tizen OS, and will not be with Google when the moment arrives. Google has to make sure that Sony, LG and others will not follow suite, and this is indeed the only meaningful thing they can do.

The funny thing is even among the huge tech giants, it is only Apple that can predictably make a new category product go mainstream. All the rest can do is follow.

Predictions For 2017: iPad Sales Growth

This is the second in my series of posts where I make predictions for 2017. The first one was about Autonomous Driving.

iPad sales growth

2016 was the year when we started to see revenue growth (but not unit growth) in the iPad. Many were quick to say that this was due to the introduction of the iPad Pro, but I think this misses the fundamental dynamic of what is happening in the tablet market. In fact, I have said in this blog multiple times, that most tech pundits have not understood the dynamic of the tablet market from the very beginning. The people who attribute revenue growth squarely on the iPad Pro inevitably expect a very slow growth going forward, since they do not see continuous growth drivers. My prediction is different in that I expect accelerated growth that will be in the high single digits.

Here I will illustrate my thesis and show why we should expect strong growth in 2017.

名称未設定 numbers

The above chart shows my hypothesis for what has been happening in the iPad market from the beginning; why we saw a very strong introduction, followed by a decline, and then a plateau.

  1. First of all, I separate the iPad market into two distinct segments. The first is the “Entertainment” segment which includes gaming, video watching, etc. The second is “Productivity” which includes writing, drawing, video/audio production, etc.
  2. In the initial phase of the market, we saw a huge uptake of usage in the first “Entertainment” segment. Even though the iPad was a new category device, looking at its gaming and video capabilities, it was a clear and obvious replacement for mobile game consoles like the Play Station Portable and the Nintendo 3DS. It was also a simple replacement for secondary TV screens. Since consumers could easily see the benefits and how it would work, the initial adoption was very rapid. That is, there was no need for an early adopter phase where only a fraction of the population would understand the merits of the device.
  3. However, as smartphones gained processing power and larger screens, they also started to satisfy the “Entertainment” segment. Hence the later decline in sales for this segment which started to happen in 2013-14.
  4. All this while, the “Productivity” segment of the market was going through a regular adoption curve of new category products. That is in the first few years, only the brave early adopters used iPads for “Productivity”. However, the number of these users has slowly but steadily been rising. In many cases, this has been happening more in the corporate market than in consumer markets because frankly, “productivity” is more important for our work than for leisure. It is important to note that whereas larger screen smartphones are adequate for playing games and watching videos, it is really torture editing a spreadsheet on smartphones. The benefits of a larger screen tend to be more pronounces in the “productivity” segment.
  5. Therefore, looking at the sum of both segments, we will see something like the yellow curve where a period of decline will be followed by steady growth.

Although I have made the “productivity” segment to show linear growth in the above chart, in reality, it is more likely to be sigmoidal. Therefore, when the “productivity” segment gains steam, we are likely to see quite steeper growth.

From my thesis, I can predict the following;

  1. We will see strong growth of the iPad in 2017 onwards. 2017 will start slow, but growth will accelerate.
  2. Since growth will come from “productivity” segments, the seasonality of iPad sales will become less severe.
  3. We will continue to see strong sales coming from corporations, but sales to consumers may continue to be weak.

Since 2017 is still the early phase of “productivity” segment adoption, it might yet be a bit early to see a strong impact in 2017Q1 and Q2. However, I do expect 2017Q3 to show a significant effect. 2017Q4 will be less impressive due to the “entertainment” segment dominating during the holiday season.

Predictions For 2017: Autonomous Driving Reality Check

I am planning a series of posts where I make predictions for 2017. I will put each prediction out one by one, and I will only pick those that have a strong implication for how we think about tech and innovation in general. I will also try to pick those that are likely to actually happen in 2017, rather than something that will happen eventually. That is to say, I will make it possible to check if the prediction was correct at the end of 2017.

Serious autonomous driving fatalities

In 2016, we saw a Tesla owner killing himself in a self-driving car. We also saw Uber self-driving cars running red lights in San Francisco.

Tesla managed to wiggle out of the problem by putting the blame on the driver, who may have been watching a Harry Potter movie instead of being ready to resume control of the vehicle. Uber managed to put the blame on the driver, by saying that the driver was actually in control of the vehicle at that time (which frankly sounds rather unconvincing).

In 2017, more companies will put their self-driving cars into public roads. Fierce competition and investor pressure will mean that some companies will even do this prematurely, before the technology is truly ready. In effect, it is likely that we see something like the Titanic crashing into an iceberg. That is, we will see companies hastily putting autonomous cars onto roads before they are ready, possibly with more fatal consequences. For the sake of prediction, I would say that we will see at least two fatalities by June.

What will subsequently happen is very politic and depends on the huge lobbying power of the large tech companies. There will no doubt be a move towards regulation, but on the opposing end, we will also see an eagerness from governments to embrace the promise of innovation. It is difficult to predict which way the scales will tip.

What Is AI Good For?

With all the hype surrounding artificial intelligence, it is important not to get too immersed in the technical and science fiction aspects. Steve Jobs said “You‘ve got to start with the customer experience and work backwards to the technology.” and this is true of artificial intelligence as well. Although a full discussion is totally out of the scope of a short blog post, I would like to provide a few perspectives.

Contextual interfaces

In my opinion, the right click in Windows 95 was a huge innovation. Prior to that, one had to look inside a huge array of options under a menu bar, or scan through a panel of small and often obfuscated icons. The right-click contextual menu showed a short list of tasks that were all relevant to the object that was currently selected and relieved you of this wasteful routine.

Although this may not strictly be classified as AI, the way that that it lessened the burden on the human brain was significant.

Similarly, one application of AI that would most certainly be very popular with users would be UI improvements that significantly reduced the need to scan through a list of options to find the relevant actions. In iOS 10, Apple has introduced AI that learns which emails should be sorted to which folders and intelligently provides a shortcut so that sorting emails is much quicker and easier.

Automated processing

Email spam filters learn what emails have a high probability of being span. From a user perspective, this is by all means artificial intelligence.

Although spam filters occasionally make mistakes, they help save our time and cognitive load by pre-filtering out stuff that is completely irrelevant to our work. Good spam filters also protect us from phishing attacks which can compromise whole corporate networks, and so it is no surprise that these are in high demand.

This is a very important market for AI.

Data Detectors

Apple had a patent for a very powerful technology commonly known as Data Detectors. This technology can detect addresses, event dates etc. inside text, and dramatically improves the user experience on smartphones where it is inconvenient to copy and paste.

The analysis of text, prediction of what a user might want to do with it, and providing a convenient and intuitive UI that enables the user to quickly get it done, can be a great timesaver.

Voice Recognition

It is well know that machine learning techniques have greatly improved voice recognition. Voice recognition has historically been valued by people who have difficulty typing. With mobile devices, voice recognition is convenient when you cannot use your hands.

Voice Interface

Graphical user interfaces are great for a stepwise approach for getting things done. However, since they operate by providing a list of options on a 2D screen, there is a limit to the breadth of commands that can be issued at any one time.

Command line interfaces and voice interfaces can get around this issue because they do not have to present a list of options. They are limited only by the ability of the user to memorise the available commands, and to issue them without referring to a menu. Hence voice interfaces are a convenient way to issue tasks quickly.

Summing up

My intention with this post was to show that there is much more to AI than a voice UI, and that from a practical perspective, the other applications have already proven to be very significant in terms of user benefit. Although voice UIs and predictive assistants like Google Now are interesting and futuristic, there is no reason why these applications will be the most useful and revolutionary.

Current advances in machine learning (Deep Learning) will build upon what we already have, and for smartphones with big screens, what we already have is a good graphical user interface.

AI, Voice UIs and predictive assistants should be evaluated based on their merits. How will they save us time and for what tasks? How will they help us when we cannot or it would be inconvenient to view our phone screens? How can they reduce our cognitive load?

Apple is pretty good at understanding what the user experience should be, and arguably, this will be just as important or maybe even more so than the underlying algorithms.

Peak Google Revisited

Almost a year ago, I noted that while a few prominent tech pundits had pronounced “Peak Google” at the beginning of 2015, Google was actually as strong as ever 12 months later.

In my post, I said that since no company keeps succeeding forever, anybody that predicts the demise of a company without giving a specific timeframe will always eventually be right. That is to say, any prediction without a timeframe is utterly valueless. I also noted that giving a timeline is extremely difficult.

However, I think we now have enough information to give a rough timeline on when we can expect “Peak Google” in financial terms.

Data points

I will lean on the following data points.

  1. The historically constant size of advertising spending
    In 2014, Eric Chemi writing for Bloomberg noted that the US advertising industry has always been about 1 percent of US GDP since the 1920s. This is significant because the US is much wealthier than it was 100 years ago, and it has gone though many ups and downs, even one world war in this time.
  2. The share of internet advertising within the whole advertising market
    According to eMarketer, total digital ad spending in 2017 will be 38.4% (77.37 billion USD) of total media ad spending. It will surpass TV ad spending which will be 35.8% of total.
  3. Google’s US advertising revenue is 31.00 billion USD in 2015, calculated from 67.39 billion global revenue of which 46% comes from the US. This is close to half of total digital ad spending (77.37 billion USD as noted above).
  4. Facebook’s 2015 advertising revenue was 17.08 billion USD. This is roughly a quarter of Google’s.
  5. As noted by Horace Dediu, economic growth in developing nations is not accelerating Google’s revenue growth. Despite rapid economic growth, developing nations are not becoming a larger part of Google’s revenue.

Assumptions

I will also assume the following;

  1. Google will not find a new revenue source that will be large enough to significantly add to its top line.
  2. Google’s revenue growth will continue to be dependent on and on par with growth in the US.

Logic

  1. Since the size of total media ad spending is constant as a percentage of GDP, this is the hard ceiling of advertising growth in the US.
  2. Digital ad spending is rapidly approaching this ceiling. With already close to 40% of total ad spending, there is less and less room left for digital to grow.
  3. Google has close to half of total digital ad spending. Of the remainder, it is likely that Facebook is taking half of this. Google has little space to grow by increasing its share within the total digital ad market. In fact, it is more likely that Facebook will eat into Google’s ad market share. Note that one estimate suggests that Google & Facebook own 85% of the US the digital ad market.
  4. Since Google’s ad revenue growth has largely been independent of developing countries, it is reasonable to assume that this will continue for the mid-term.

In simple terms, there is no longer room in the advertising industry for both Google and Facebook. Since Facebook has more momentum, it is likely that we will see Google being increasingly squeezed. Although the total digital ad spending will likely still see mid double digit growth, Facebook will take the majority of this growth and Google will probably drop to single digit growth before 2020.

What to expect in the future

We are already seeing signs of more disciplined spending at Google/Alphabet, most likely in anticipation of a slow-down in growth. Given the highly talented people at Google, it is no surprise that they understand that the end of double digit ad revenue growth is near.

However, disciplined spending can significantly alter what projects companies chase. Unlike the current Google which constantly throws spaghetti on the wall, a fiscally disciplined Google would probably be more cautious. Within the next few years, I expect that we will see a very different Google from what we are seeing now.

Update

One important thing to note is that “Peak Google” will be a result not of any strategic mistake made by the company, but rather a result of the saturation of the digital advertising market. This has the following implications;

  1. The whole digital advertising industry will suffer along with Google. In fact, smaller and less established players are more susceptible to adverse environments. This is already happening

  2. The saturation of the digital advertising industry also means the saturation of the ad-driven Internet. Startups without a monetisation model will find it harder to bolt-on an ad-driven one later.

  3. Being the most established brand in digital advertising, it is likely that Google will maintain a very strong position in the market for years to come. Like Apple, the issue will be the lack of rapid growth.

Who Will Win The Next Big Thing?

Many people seem to think that the next big thing in tech will be artificial intelligence, and that Google is much better positioned to win than Apple. Other people think that VR/AR is the next big thing, and again, at least one of the companies that is currently announcing hot new VR/AR gadgets is going to win (and not Apple).

However, history has clearly shown that this discussion is without merit. In fact, when a next big thing does come along, the most unexpected company or a company that simply did not exist before, is the one that actually wins. Very rarely if ever, does the company that invests tons of money on the early stage research emerge as the victor.

Google did not exist yet when Yahoo, Lycos, Altavista and many others were first battling to become the telephone directory of the web. Apple was just a failed PC company that was finding success in music when Blackberry, Palm, Microsoft and Nokia were battling to bring smartphones to the masses. Again Apple was a company that was fighting a losing war against IBM when Steve Jobs visited Xerox PARC which had invested heavily in next generation computing research. Compaq did not exist when IBM introduced the IBM Personal Computer. Microsoft was not even in the OS market when IBM knocked on the door looking for an OS for the x86 CPU.

Time and time again, history has shown that when something really new comes along, the companies that seem to have the strongest position from both market and technical standpoints, are rarely the ones that win in the end. The companies that do win are those that we would not even think about, or the ones that didn’t exist. This is what Clayton Christensen’s Disruption Theory is all about.

Therefore from a historical standpoint, if AI or VR/AR succeeds in disrupting tech, it is actually very unlikely that Google, Microsoft of Facebook would win in the end. These companies are in the exact same positions regarding AI and VR/AR as were Blackberry and Palm prior to iPhone, or as were Yahoo, Lycos and others were prior to Google Search. They have invested heavily into research and also into developing the early market. However, they have not yet discovered the formula that would propel them into the mass market.

No matter how unlikely it may seem today, history is actually quite unequivocal on this. The large and established companies that pioneer an early market, do not reap the rewards when disruption happens and the market goes mainstream. The odds are against Google for winning in AI, and the odds are against Microsoft and Facebook for winning in AR/VR (assuming though that AI and AR/VR do end up being disruptive technologies and not simply sustaining).

Although it is almost impossible to predict what will happen, I will just end this post highlighting a couple scenarios under which the Google might find itself vulnerable for illustrative purposes only.

  1. What if privacy became a block for AI penetrating the mainstream? What if consumers started to feel uneasy with the suggestions that Google’s AI made. What if a data breach at a major internet advertising company made it clear to mainstream customers that far more information was being collected about them than they had ever imagined? What if the technology emerged that made machine learning possible without compromising privacy? Would Google invest in this technology, or would it try to improve the AI results with its current privacy compromising methods? It is likely that Google will invest in the latter, which might be a bet on the wrong horse.
  2. AI could actually become the biggest threat to Google’s business model. What would happen if somebody came along with a good enough AI service which made web search obsolete, and which was combined with a monetisation scheme that was far less profitable than Google’s search advertising? Would Google copy that scheme, or would it wait until it found something that was at least as lucrative as the search business that it was cannibalising? What if this service took off, while Google was still looking for ways to maintain profits?

Apple’s Hidden Privacy Agenda

Is Apple being reckless?

One observation that some Apple pundits like throwing around is that Apple tends to add features with a broader future implementation in mind. For example, Apple added TouchID initially for unlocking your phone only. Then after a year or two, they added Apple Pay.

Although I think it would be wrong to expect Apple to be doing this for every feature, I do consider it very helpful to keep this in mind. That is, do not dismiss their actions unless you have throughly considered the possibility of a hidden agenda that will only reveal itself a few years into the future.

Apple’s stance on privacy is one of these actions.

  1. Most people have commented that Apple’s focus on privacy will strongly hinder, maybe even cripple their artificial intelligence efforts. This is very dangerous for Apple’s future because it is predicted that artificial intelligence will be a huge part of future personal computing.
  2. The plus side of a privacy focus is that it becomes a selling point for their products. However, we also know that today’s consumers do not care too much about privacy; at least, they seem to be happy to post photos on Facebook and search on Google.

Taking the two points above, it would seem reckless for any tech company to take the privacy position that Apple is holding today. The demerits are huge while the merits look benign. It looks like a totally irrational move for Apple that maybe enforced only because of Tim Cook’s personal beliefs in human rights. It does not make any sense, that is unless Apple has a larger agenda for the future; an agenda in which privacy plays an essential role.

Looking at Apple’s future markets

As I have mentioned previously, Apple cannot grow significantly larger than it is today without expanding into markets outside of tech. The market that tech can directly address, the market to which Apple can sell its current devices, is limited by the size of the economies in the countries which it sells to, and the amount of money each household is willing to spend on communications and entertainment. Apple has to move into different household buckets of spending. Furthermore, these buckets have to be large enough to drive revenue that can significantly contribute to Apple’s huge earnings.

Looking at what households actually spend their money on, one obvious contender is health. US households spend a huge proportion of their income on health, and for the countries which have an adequate healthcare system in place, health is a huge proportion of their government expenditure. There is a lot of money in health, and as populations in both developed and developing countries age, it is only going to get larger.

Apple is already actively involved in health. Not only does Apple have HealthKit, it also has ResearchKit which allows researchers to easily conduct large studies on patients and CareKit which allows patients to track and manage their own medical conditions. Importantly, privacy of health information is taken very seriously (unlike web history or location tracking data), and although I am no expert, it seems that there are rules and laws even in the USA for this.

For any company that seriously wants to get into health, data privacy is a hugely important issue. In particular, IT giants like Google or Apple will be held to higher standards, and expected to develop the necessary technologies if not yet available. They will be scrutinised by not only the authorities, but also by the regular press. If Apple wants to go further into health, prove the value of their services, and to extract revenue from this huge market, then they have to get the privacy issues sorted out first, and apply leading edge technology to protect patient privacy. This will be the prerequisite.

This is where I find Apple’s hidden privacy agenda. Apple does not need to have strict privacy to compete in the tech world against Google and Amazon. In fact, its privacy stance is detrimental for cutting edge artificial intelligence since server hardware will always be much more powerful than tiny smartphones for machine learning, and differential privacy will always negatively impact what patterns can be observed. However, to impact some key non-tech markets that Apple needs to venture into, privacy will be important and essential. Apple’s stance on privacy should be viewed not by which markets they are selling now, but on which markets they intend to sell to in the future.