- 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.
- 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.
- 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.
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.)
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.
“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.
- Both Windows and Android gained popularity on the back of the success of the Macintosh and iPhone respectively.
- 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.
- 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.
- 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).
- 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.
- 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.
It seems that Silicon Valley is at last waking up to what Uber really is.
- “Monopoly as the Uber Business Model”
- “Understanding That Unregulated Monopoly Was Always Uber’s Central Objective”
I am a bit disappointed that it took this long for Silicon Valley to see this, but I suppose better late than never.
Over a year ago, I wrote this;
The question is will Uber be a sustainable business? Will it raise prices after venture capital runs out and there is no competition left? If they are forced to employ their drivers as employees and if they have to also pay for their driver’s cars, which is quite possible long term, can they still maintain current prices? If Uber becomes a monopoly, will they be any better than the regulated monopolies before them for both the drivers and the customers? I have serious doubts on this, and unless Uber discloses the sustainability of its business, commits to future low prices and the welfare of its drivers, I think that strictly regulating Uber makes a lot of sense. The last thing that you want is for Uber to kill your local taxi industry, and replace it with one which is just as expensive (potentially more) and where all the profits are funnelled to a Silicon Valley company far away. This is why we have anti-trust laws, for example, and this is why we regulate industries (like the public transport, mail, health and food industries) that directly affect the welfare of our citizens.
The point that I want to emphasise is that if the US is killing itself as a result of its relaxed views on anti-trust and disdain for regulation, then so be it. I do not mind the world’s largest superpower shooting itself in the foot.
I am however not OK with how the US is exporting this to other countries. If Uber is killing local taxi industries in developing nations, preventing the deployment of public transport by providing an artificially cheap option, and in general making these countries dependent on the US for basic needs, then I see this as a new form of colonialism. This is what Gandhi fought against with the Swadeshi movement.
And we should also note that this is not restricted to Uber. One could argue that the stagnation of tech in developed countries has caused Silicon Valley giants to search for growth in the developing nations, and their huge resources are allowing them to use predatory, money-losing tactics. It’s just that since the US is inherently an inwards-looking country and nowhere near being truly cosmopolitan, they don’t realise how much damage they’re causing.
Just see how much China’s Internet has prospered by shutting out Silicon Valley.
If Silicon Valley wants to earn money in developing nations, I see no problem in doing so. However, they must compete on equal terms. They must earn profits. For example Apple is OK because even in developing countries, they charge the same price (which turns out to be super-premium in these places). Apple does not drive out local competitors, but encourages them to copy and provide the same features at lower prices (again, look at China). Local cheap competitors thrive because of Apple.
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.
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.
- 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.
- 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.
- 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.
- 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.
- 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;
- We will see strong growth of the iPad in 2017 onwards. 2017 will start slow, but growth will accelerate.
- Since growth will come from “productivity” segments, the seasonality of iPad sales will become less severe.
- 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.
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
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.
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.
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.
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.
Eric Schmidt has previously mentioned that Google’s company policy was “to get right up to the creepy line and not cross it”. And despite occasions where it has got itself real trouble by sniffing in on data from personal WiFi routers as Google Maps cars roamed the streets, the general public has not made a huge fuss over privacy.
However, it is not as if the general public is totally oblivious to the privacy issues. There have been reports, for example, that young adults (being more tech savvy) take more security/privacy measures than their elders. Interestingly, the young adults are more concerned with hiding information from their parents than from Google and Facebook, which is obvious when you think about it. A Pew Research survey also show “Some 86% of internet users have taken steps online to remove or mask their digital footprints, but many say they would like to do more or are unaware of tools they could use.” I have also seen similar surveys in Japan.
If this is the case, then it seems like there is a delicate balance in place which reflects Eric Schmidt’s quote, where online privacy is a serious issue for many, but not quite enough for a public backlash. The Internet trackers are a whole have been successful in coming close to the creepy line, but also in not having crossed it.
The next question is then, how will the Internet trackers including Google, Facebook, and a slew of other online ad brokers, cross the line? When will they do something that is so creepy that the public will revolt?
The key to understanding this is, I think, by recalling why the US does not appreciate Edward Snowden. Snowden uncovered rampant privacy intrusions on a massive scale by the NSA. However, the US citizens do not seem to care so much. They seem happy to let the NSA collect data, as long as the information spied upon is not used against themselves, but against terrorists. Of course, I’m sure that US citizens who come from the middle east are not so reassured, but for the majority of Americans, they simply don’t consider themselves as the victims.
Looking at it this way, the creepy line will be crossed when and only when the massive data collected is used against the majority of citizens, and not against terrorists, in a way that is easily noticeable and potentially harmful. For example, re-targeting ads are getting very close to the line because they demonstrate in an unambiguous way, that Google is carefully watching which 3rd party websites you visit. This is completely unlike the previous generation of search or display ads. Re-targeting ads have reminded the public that Google is watching your every move. The only thing that has to happen now is for something to demonstrate that this information can be used to harm you, and then the creepy line will most likely be crossed.
Thus we should next focus on when the public will consider the information gathered by Google and Facebook to be dangerous and harmful. If the information that they have is used in crime in a way that the majority of citizens can identify with, then I would most certainly expect a backlash. This will be when the creepy line will be crossed. However, Google and Facebook themselves have no intention of harming their users, so it won’t be them that cross the line. It will be someone else.
There is no doubt that the information in Google’s servers is potentially damaging. Google probably has the most harmful data if revealed. Unlike Facebook or Apple where you typically send the information yourself, and are unlikely to send stuff that will harm you down the road, Google collects everything. They collect all your searches, all the places that you’ve been to, and all your emails. You do not select which information to share with Google, so the good and the bad get sent there.
I think we a just one major security breach or one major malware attack away from a crisis of confidence. Google itself will not cross the line, but malware can make this happen. Current malware does not collect the privacy/location information from Android devices or Google accounts, but this is because the business model is not there yet. If somebody decides that this is indeed something that they can make money from, then this will happen, and I expect it will bring down Google’s data collection practices down along with it.
Security breaches are becoming more sophisticated and more targeted. Large leaks of accounts are reported quite frequently, although not all of them can be entirely trusted. Indeed, one could imagine hackers announcing the leak of a large number of bogus accounts, just to scare the public into responding to phishing emails. As long as this trend continues, I believe that the largest threat to Google’s data collection practices will be a security breach and not a sudden awakening to privacy by the public.