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.

Imagining An Attack That Could Wipe Out Trust In The Cloud

In a previous post, I described how the public confidence in services that collect your private information is getting closer to crossing the creepy line, and that any security breaches that actually harm customers would likely be the final straw that break the camel’s back. I also mentioned that instead of Google, Facebook and others, I predict that the final straw will actually come from hackers intruding into our devices and accounts.

Here, I want to elaborate on the example that I have in mind. Before this however, I want to update the reader on a relatively new form of malware called Ransomware. Ransomware is holds your data hostage and importantly, instead of just causing you trouble, it blackmails you to send money. Also of great significance is that Ransomware creation can now be outsourced.

Ransomware works because victims are willing to pay money to get back their files. However, now that we often have more valuable data on our smartphones or in the Cloud than on our PCs, it is reasonable to assume that hackers are right now thinking of new ways to hold your private photos, your location data, or messages that you might want to keep secret as hostages.

For example, a recent Apple Ransom scam  asked for a $30-$50 ransom or otherwise they would do a factory reset. The author advises that you simply ignore this because you can easily recover with a backup. However, what if the scammer had threatened to publish all your photos, your emails, your location data, etc. on the web for all to see. Would you still ignore the scammer? Unlike the iCloud celebrity photo leak, this is something that could happen to any normal person, and this is what makes it so scary.

This is not about Apple vs. Google/Facebook or about any single company’s approach to privacy. If such attacks became widespread, it could cause people to be scared of storing anything in the cloud, despite whatever security measures each individual company took. Of course two-factor authentication will help, but not enough people use it yet.

Advanced two-factor authentication systems may mitigate the worries in the future. However, if such attacks strike now, I fear that the companies that depend on the cloud will have a hard time getting people to trust them once again. Given the potentially widespread consequences, I think this is definitely something to give due thought to.

Smartphone Sales Down In Japan, But Android Hurting Most

MMRI released their report for mobile phone sales in Japan for he first half of 2016, and the results were not good. 

  1. Total handset sales decreased by 10.9% YoY. 
  2. Smartphones decreased 8.4% YoY. 
  3. However, looking at iPhone sales, this decreased only 3.1%, resulting in an increased market share of 40.7% (including feature phones).
  4. Importantly, Sony which is 2nd in market share saw a 28.5% drop in sales, while Sharp which is 3rd in smartphone share fell off a cliff with a 46.4% drop. 
  5. The sharp decline has been attributed to the government decision to restrict what they consider excessive discounting of devices. The government thinks that by restricting discounting (some smartphones are sold for free by carriers if the purchaser agrees to a 24 month contract), carriers will eventually reduce the prices of their data plans. However, data plan prices have yet to come down, and are actually increasing depending on your usage pattern. 

What this suggests is that when customers are more exposed to the real price of smartphones, it is the Android users who either decide to buy cheaper devices, or hold on to their devices longer. The iPhone users seem to be less sensitive to price increases. 

In a nutshell, the Android market has a high level of price elasticity whereas the iPhone market does not. 

I believe that the iPhone markets and the Android markets are actually different despite both being smartphones. Customers buy each for different needs, and they are not interchangeable. This is similar to how Mercedes and BMWs do not share the same market as cheap cars; the role of luxury cars is not just transportation. 

Twitter Grows 13% in Japan

Twitter Japan announced on the 2nd November that user growth had been 13% (+5 million) for the past 9 months, bringing the Japanese monthly active user count (MAU) to 40 million in September. This compares to Twitters MAU growth in the rest of the world, which is essentially flat.

In December 2015, Twitter Japan announced that 10% of MAUs were from Japan.

I have written on this topic several times on this blog. What I think is most important is that the features and characteristics of social media platforms are not dictated by what features they have and do not have, but instead are determined by the users themselves. Therefore, all the pundits that say Twitter should do this or Twitter should do that are essentially clueless because they only know how they or their close circles use Twitter, but are mostly blind to how other are using it. Analysing what features are available does not capture what people use a social service for, nor does it give you any idea of how people would use a new feature when available.

Social media needs social analysis. Furthermore, you need to analyse many societies and not one society.

東京オリンピック2020エンブレム問題のターニングポイントは?

まだ確定的な情報はないようだが、東京都から佐野研二郎および博報堂に200億円が支払われるという話が出てきている。

いままでは具体的な金額の話がなく、単に盗作ではないかという疑惑だけだった。しかしこれだけの金額が税金から支払われるとなると、都のほうから納税者への説明責任がクローズアップされるだろう。舛添都知事も動かざるを得なくなるのではないかと私は期待する。

期待としては選考過程にメスが入ってほしい。しかし競技場問題でも踏み込んだ話には一切発展していないので、残念ながらそうならないかもしれないと予感はしている。

Update

そうかも知れないなと最初っから思っていたのだが、やはり200億は誤報だったようだ。