Why Does Google Collect Personal Data?

DuckDuckGo has this to say.

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Let’s think about what this means for a second.

  1. If DuckDuckGo can make enough money to turn a profit, then imagine what Google could earn even if they did the same as DuckDuckGo. Given Google’s vastly larger resources, reach, brand and advertiser relations, they might even be earning as much as they do now.
  2. Personal information collection is most useful in the cases where the user has not explicitly expressed intent. For example, personal information can be used to choose which ads to show a user in a banner ad or a feed. Since the user will already have provided intent in a search, the additional benefit of personal information is actually quite small, as demonstrated by the solidness of DuckDuckGo’s revenues.
  3. Google makes money most off search. Their display ads (AdSense) are barely growing and only a small fraction of total ad revenue.

Apparently, Google could be almost as profitable as it is now even without personal data collection.

Then why do they do it? What would happen if certain regulations like the GPDR come in effect and outlaw rampant data collection? What would happen if Apple continued to improve its privacy protecting features and prevented Google from collecting this?

DuckDuckGo shows us that Google’s revenues might not be harmed at all.

Bottlenecks and Google’s Acquisition of HTC’s Design Team

It has been reported by IDC that Google’s Pixel phones sold only about 2.8 million devices since launch a year ago, which is less than 1% of the total market, and totally unfitting for a company of Google’s wealth, dominant position and brand recognition.

It was not the appeal of the phone, the hardware, the software, nor the integration of the two that caused mediocre sales. Indeed, the Pixel phone was met with rave reviews and was sold out at least during the early launch period in the places where it was sold. Instead most people believe that it was the meagre supply and the dearth of distribution channels that made it very difficult for people to get hold of them.

If this is true, then what Google needs to do is to fix this bottleneck. It needs to fix manufacturing, component procurement, distribution and marketing and not the design of the phone. It needs to make sure that people can purchase them without undue difficulty. If Google can manufacture tens of millions of phones and make them available through the regular channels, then they will have a winner.

In short, instead of purchasing the hardware design division of HTC which will probably not help the supply and distribution issues at all, Google should hire people like Tim Cook, Phil Schiller and Eddy Cue.

iPad Revival?

Apple reported its 2017Q2 (Q3 by Apple’s calendar) results yesterday, and many analysts were surprised by the very strong iPad sales which were 14% YoY by shipments.

However, this was pretty close to a prediction that I had made in December last year, even before the new, cheaper iPad and the 10.5 inch iPad Pro had been announced. I had said

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.

This is very much in line with the results that were announced, although the positive results came in a quarter early, most likely due to the cheaper iPad which I did not know of when I made the prediction.

As for reasons behind the sales increase, Apple put enterprise sales first and education sales second. Although they did not give any quantitative contribution data from each market segment, this aligns with my prediction that the revival of sales will be “productivity” driven.

With this successful prediction under my belt, I am quite confident giving predictions for the next two quarters. 2017Q3 will also be very strong YoY with growth possibly in the 20% range. Again, “productivity” will be what drives the growth. As for 2017Q4, there will still likely be good growth but not as significant as the preceding two quarters. I expect single digit or low double digit growth for this quarter. This is driven by the large “entertainment” iPad sales during the holidays, which I expect are still decreasing YoY and which will dampen the growth from the “productivity” sector.

Overall, my thesis that we are witnessing a long term revival of the iPad has been strongly enforced. Some analysts seem to think that the strong sales for this quarter are a one-time effect due to the introduction of the lower cost iPad. However, I expect strong growth to continue, proving these explanations to be false.

Why Discontinue the iPod Nano and Shuffle

Yesterday, Apple announced that it had discontinued the iPod Nano and Shuffle, and that the new iPod line-up would now simply consist of only two iPod Touch devices.

Back when the iPod was introduced into this world (2001), Steve Jobs unveiled the "Digital Hub" strategy in which the PC would be in the centre of you digital life, connecting and managing all the content that you either acquired through your devices (still cameras or camcorders) or purchased (via iTunes or via physical CDs). This was also an assertion that despite the negativity surrounding the future of PCs at that time, the Mac would actually continue to thrive through successful execution of this strategy. Fast forward to 2011, Steve Jobs announces iCloud, which essentially replaces the central position of the PC in the "Digital Hub" with cloud-based services. PCs, iPhones and iPads will be equal citizens and will sync to the cloud; PCs will no longer be the Hub that connects everything together.

Apple has diligently executed on this strategy. For example, managing your photos no longer requires a PC, and even the ones that you only have on a memory card can be transferred to your iOS device (via a card reader) and synced to the cloud. For your music, you can purchase and listen to it from your iOS devices as well as your PCs.

The only devices that still required a PC, the holdouts from the Digital Hub era, were the iPod Nano and the Shuffle. Therefore, Apple's decision to discontinue these projects is symbolic not only of the decreased role of audio only devices, but also of the diminished role of PCs for consumers.

In fact, when you consider the newly announced HomePod which is very much an audio-only device, the argument that this is just about audio-only devices being obsoleted by smartphones no longer holds water. Apple clearly thinks that audio-only devices even without adequate touch screens have an important role. The difference between the HomePod and the iPod Nano and Shuffle, and the reason why one is being newly introduced while the other is being discontinued, is more about being connected to the Internet and being able to directly download/stream content. It is also about being able to use Siri, which again requires an Internet connection (at least today).

This suggests that maybe in the near future, we might see an iPod Shuffle-like device again. This time however, it will use Siri as its main user interface, and it will connect directly to your iTunes library in the cloud or download songs from Apple Music. It might actually be worn on your wrist.

The Law of Conservation of Attractive Profits and Samsung’s Record Quarter

It is being reported that Samsung will soon report a record quarter for its semiconductor business, taking it past even Intel for the first time ever. This is not totally unexpected and is an continuation of a upward trend that started back in 2014. It is also an expected consequence of the modularisation of the smartphone hardware industry as a whole, following a theory that Clayton Christensen originally coined “The Law of Conservation of Attractive Profits”. I have mentioned this quite a few times on this blog as well.

  1. Will Attractive Profits in the Android Ecosystem Move to Component Makers?
  2. More on Attractive Profits in the Cloud
  3. Android OEMs and The Law Of Conservation Of Attractive Profits
  4. The Law of Conservation of Attractive Profits And Personal Computing
  5. Google and the Law of Conservation of Attractive Profits

In a nutshell, the component manufacturers that can produce differentiated products will earn very good profits as the smartphone market becomes more modularised. This is similar to how Intel dominated CPUs during the PC era. 

This does not require near-monopoly power, and so this is what we are also seeing component manufacturers like MediaTek, Qualcomm and even Sony’s semiconductor business showing strong earnings, whereas on the other hand, almost all handset makers are struggling.

Going forward, I expect that the component industry as a whole will show strong profits and earnings. However the market is very competitive, and only those with competitive offerings will reap the benefits. This shifts the balance heavily towards already established incumbents, namely Samsung. Similar to how Intel successfully fended off the threat from AMD using Celerons, I doubt that cheap Chinese semiconductor players will ever unseat them, unless we again see an innovation like the smartphone which will disrupt the whole ecosystem.

How The HomePod Is A Very Typical Apple Innovation

Although I do not have a source handy, I recall that Steve Jobs mentioned in an interview long ago that back during the Apple II days, he had figured out that there were many more would-be software enthusiasts (programmers) than hardware geeks (those that could build and program one-board computers like the Apple I). This philosophy was reiterated in many Apple commercials, for example the Macintosh tag-line, “The computer for the rest of us.”

This, I believe, is the philosophy behind the HomePod. 

  1. Audiophiles today spend a lot of money on buying high-end equipment, contemplating the acoustics of their living room and where to place their speakers. It is reasonable to assume that there are vastly more people who would simply appreciate great music, compared to the number of us who are eager to learn and implement acoustic theory.
  2. Like the Apple II, the Mac and the iPhone, the HomePod is a vastly more integrated system compared to the mainstream alternatives at the time. It is part of Apple’s ecosystem for a great music experience. This has the effect of making the “Chasm” easier to cross, accelerating widespread adoption beyond early adopters. 
  3. It addresses an existing and proven market. We know that there is a market for good sound. We know that people still enjoy entertainment in the living room. Unlike the “smart speaker” market which is undeveloped and still highly speculative, we know the consumer profile to target with the HomePod.

With the HomePod, Apple is taking a proven strategy that has worked for them many times. In my opinion, there is very little doubt that it will easily surpass other “smart speaker” sales, simply by virtue of targeting a proven and vastly larger market.

Quick Thoughts on the 2017 WWDC Keynote

  1. HomePod illustrates very clearly how Apple thinks differently from the rest of Silicon Valley. Here, Apple is going after a market that exists and a need that has been explicitly sought after by consumers. Apple is simply providing a significantly better solution to this market. This is similar to how the iPod entered a market already built and served by the Sony Walkman, and is similar to how the iPhone entered one already built by Nokia and Blackberry. This is in contrast to Amazon and Google who are trying to create a new market. The market adoption dynamics will be very different.
  2. Safari’s tracker blocking solution is interesting and will protect users privacy. Importantly, customers have noticed and have been worried about the spooky retargeting ads, and by providing a remedy for this, Apple will position itself well. Equally important however is that this will not significantly change the dynamics of the advertising market. My position is that targeting itself has not significantly contributed to the shift to digital marketing, and only to the relative market share among the digital advertising networks and Google/Facebook. The real driver of ad spend is still eyeballs and has been this way for decades. Neither ad blocking nor tracker blocking will change this. My prediction remains unchanged that Google will continue strong growth for the next few years, but will drop to single digit growth around 2020 due to saturation of the digital advertising market as a whole and competition from Facebook.
  3. The iOS 11 improvements for the iPad are hugely significant, especially in combination with the work that Apple has been doing with IBM and other corporate IT vendors/consultants. Although there still likely remain obstacles that will not make the iPad a true replacement for laptops, the improvements are large enough to encourage many people to give the iPad a second look as a work machine. We can safely predict an uptick of iPad revenue going into the later half of 2017.

State Of Online Advertising And Google’s Growth Prospects

In a previous post I discussed how Google’s growth was upper bound by total ad spending budget which has remained almost constant for a century, and that this suggested that double digit revenue growth at Google would probably end before 2020.

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.

The graph below is from a Morgan Stanley report and provides a forecast of the internet advertising landscape.

We can see that the combined revenue of YouTube and Google Search is projected to decline from 42% market share to 41%. This is a bit more optimistic than my prediction that Googles revenues will be squeezed, but nonetheless, it forecasts that Google will only be able to grow at the digital advertising average. (This year, this was mid double digits but according to eMarketer, this will drop to about 3% + total ad industry growth in 2020.)

Stages Of Innovation And When To Wage Wars

Benedict Evans wrote, as always, an excellent and thought provoking piece on the state of smartphone innovation. In this piece he mentions the following;

slowing innovation in the iPhone and in Android doesn’t mean weakness (“Apple doomed!” “Android falling behind!”) but strength: it reflects the fact that we are in a phase in which they’re unassailable. The fact that almost all of the white space has been filled in – the big problems solved – also means that we have left the part of the S Curve in which a new idea or execution could overturn the incumbent. They’re too feature-rich and, of course, have too much scale in units and ecosystem.

The main point here is that slowing innovation does not signal a weakness. Benedict attributes this to being at a phase where the incumbents are too entrenched that nothing could overturn them. I agree that this is certainly one aspect, but I wish to add one more thing. That is a portfolio management perspective. The growth-share matrix tells us that new companies will tend to enter businesses from the “Question mark” quadrant, high-growth markets with the potential to become lucrative. Conversely, companies will not invest in slow-growth markets but instead try to milk them. Therefore, from both a business incentive perspective (the growth-share matrix) and from a capability perspective (Benedict’s point), innovation will slow down in maturing markets and the threat of new entrants will also decrease.

Of course, that is only true until the next S curve comes along and resets the score, just as the iPhone did to both Microsoft and Nokia.

I also agree to this point, and would like to provide a different perspective. Assume you are a company like Microsoft or Samsung, a company that valiantly tried to create a mobile operating system that would challenge iOS and Android. Now what should your strategy be? Being held hostage to Google’s Android is obviously no fun, and your hope is that you will somehow control the ecosystem. We have seen how developing a smartphone OS did not work, most likely due to the reasons above. Instead, your strategy should be doing your best to capture the next S curve.

The work Samsung has been doing for its Tizen OS-based wearables is therefore a very sensible strategy. They have positioned themselves well in preparation for growth in this market. This is a war that Samsung has been wise to fight.

One final point that I would like to note is that although we are seeing slower innovation in smartphone features, this is not necessarily the case for the business models around low-cost hardware. We are seeing many low-end entrants in the handset market, and this is proof that there are many companies seeing growth opportunities. There will continue to be significant business model and manufacturing innovations in the low-end, and smartphones will continue to be exciting, especially in developing markets.

Alternatives To Amazon Go That Already Work

Amazon recently announced Amazon Go located in Seattle, which is currently in beta phase and which is planned to open to the public in early 2017. It is chock-full of image recognition and AI, suggesting that only the US tech giants investing tons of money in software can implement similar solutions.

Well guess what. Similar stuff is already being worked on in Japan. Announced yesterday, Panasonic and Lawson have announced an automated checkout system that puts the barcode scanners into the shopping baskets so that customers can scan while shopping, instead of waiting to scan at self-checkout registers. They have also announced that they will attach RFID electronic tags to each piece of merchandise starting February 2017, thereby eliminating the need for even the barcode scanning (you just put the items in the basket).

Although the current system still requires you to checkout at a register (which puts your groceries into plastic bags for you while you pay), the time required will be significantly reduced and hence the queues will be shorter.

More significantly, this system does not need large numbers of cameras scanning your every movement and is not creepy. You don’t need a smartphone and you don’t even need to give the shop your identity.

Going forward, it is clear that RFIDs are better suited than barcodes and could provide similar experiences to Amazon Go by having an RFID scanner located at the shop exit. RFIDs are still a bit expensive (I hear they cost about 10 cents), but if their usage scales, then we can expect this to come down significantly.

I hope this clearly demonstrates that AI is not the only solution to the issues we have in life, and there are often other less creepy but equally effective ideas out there. Notice that RFID is not new and that it is already a 10 billion USD market.

Update

Note that for example, the convenience store retail chain 7-Eleven is reported to have beaten Google and Amazon to the first regular commercial drone delivery service. Although I am sure that Google and Amazon are working on a more technically complex and advanced solution, this clearly illustrates that you do not have to be a tech giant to make these things work.