Opening Up iOS And Implications

In the 2016 WWDC Keynote, Apple showed how it was going to open up Siri, Messages and Maps. It also showed how it was going to allow VoIP apps to show incoming calls just like how the default Phone app does; using the full screen.

Now if this was just Messages, then we might think that this was in response to the popularity of messaging apps like WeChat which work as platforms. However, if you listen to the State of the Union presentation after the Keynote, then you learn that even Xcode has opened up. It then becomes apparent that this is not just a simple response to WeChat, but a deliberate iOS-wide and even Apple ecosystem-wide direction that Apple is coordinating with their extensions system.

This extension system is not something that is new. In fact, it is an extremely old idea that is more often referred to “plug-in”. It is the idea that allowed browsers to provide rich multimedia experiences before the advent of HTML5. It is the idea that allows programming editors like Eclipse to become very rich tools for a huge number of programming languages. It has already been proven that this mechanism allows programs to be used for occasions that were never envisioned by their original creators, and can be very useful and effective. Although it does tend to add a layer of complexity for the end user, it is undoubtedly a feature that can have widespread impact.

Given that the extensions are likely to be very popular, then it is worthwhile to try to predict how they will advantage Apple and/or dis-advantage its competitors.

  1. Let’s ponder whether Google would open up Maps for example. Would they let third party apps provide the restaurant and shop recommendations layered onto Google Maps? What would be the implications for their business model that depends on showing sponsored recommendations in a more prominent way?
  2. Would wireless carriers be happy with VoIP apps that can integrate into the iOS to behave in just the same way as the default Phone app?
  3. Would Amazon open up its store so that random online stores can integrate themselves in the categorical listings and search results?

Many of Apple’s competitors provide the app layer for free and monetise at the extension layer. Google Maps plans to monetise by providing advertisements relevant to your location, but the Apple Maps extensions will allow third parties to provide this instead of Apple. Similarly Amazon provides an online store website with good search, recommendations and reviews. It monetises when people actually make purchases, which is similar to the layer that Apple’s extensions live in.

What we see here is that Apple has created a powerful extensions mechanism ecosystem-wide, that is almost guaranteed to be popular, and which may conflict with the business models of Google, Amazon and many other competitors.

The implications will be interesting to watch.

Is India Really The Next Big Opportunity In Tech

A lot has been made about how important India is to tech, and what a big opportunity the 1.2 billion population is.

While that maybe true, I think it is also important to contemplate the possibility that this may not actually be the case; that despite its huge population, India may not yet be an attractive investment.

Rakuten Ventures had this to say at Tech in Asia Singapore 2016.

While India has a population of 1.2 billion, there are only about 40 million to 50 million people who actually have “real” smartphones – and not those weird Android permutations – and who are at least in the middle class, earning about US$10,000 a year.

If you’re looking at ecommerce alone, you’re talking about a demographic that has been shrunk from 1.2 billion to 40 million or 50 million. That’s basically the addressable market […] For us, when we look at a market, we ask ourselves: ‘Can we get in at the price point we want? Can we actually see a lot of these platforms accrue the value that they want?’ We don’t see that yet.

Objectively, the International Monetary Fund puts India’s GDP per capita for 2015 at 6,162 international dollars, which is less than half of China’s at 14,107. While obviously growing quite quickly, it isn’t necessarily growing that much faster compared to other countries with similar absolute levels. Although macro data obviously does not tell the full story, it does support Rakuten Venture’s view to a certain extent.

If we do accept Rakuten Venture’s view that ‘while India has a population of 1.2 billion, there are only about 40 million to 50 million people who actually have “real” smartphones’, then it does seem like other markets which aren’t receiving as much hype, might actually hold larger potential.

I think this is something worth thinking about. It might be more important to look at metrics of usage like Web usage or Twitter usage to understand how many people do have “real smartphones”, or use the ones they have as such.

Thinking Of Xiaomi, And What Services Are Profitable

One common narrative is that the profits in tech are not in hardware nor even in software, but in services. The poster example for this trend is Xiaomi, a company that is supposedly subsidising the cost of its smartphones, and making it up with profits from services.

I have always had a problem with this logic. My problem resides in the fact that not all services, even the very successful ones, are profitable. Another problem is that the most profitable tech company in the world, Apple, is making its money, not because it has the best services in the world, but because it has the best devices (which are a combination of hardware, software and services). It doesn’t seem to be as simple as services = high profits, hardware = low profits.

In this light, I think it’s important to look at exactly what kind of services Xiaomi is offering. This Wall Street Journal article is a good place to start.

Mr. Lei expects big growth in services built around the smartphone ecosystem. Each day, Xiaomi’s 130 million users use their phones 115 times for a total of 4.5 hours on average, he said. The company has set up a marketplace for online commerce and services, including things as diverse as video, news, financial services, television sets, air purifiers and luggage. “We’re a huge content platform,” he said. “All our [traffic] numbers are astronomical.”

The services described here are all quite commonplace. There are many companies doing video and online commerce, and technically it is very straightforward to do. Online financial services are also provided by many companies, and there is little reason to believe that Xiaomi’s offerings are significantly better than average. The selling of branded television sets, air purifiers and luggage is really low-tech, and in many ways what we would consider a commodity. If these are the services that are profitable for Xiaomi, then we have to rethink what it means to be profitable in services.

It would seem that profitability in services is not directly tied to the innovation provided. At least Xiaomi doesn’t believe so. Instead, Xiaomi seems to be selling mediocre services and products to its loyal fan-base, and it appears to believe that this is how to make profits.

The way I see it is this;

Android smartphones are unprofitable because of hyper-competition. The promise of high-growth lures companies into this market, despite very low short-term profits. On the other hand, commodities like air purifiers. luggage, online financial services etc. have a proven business model that is at the very least, more profitable than smartphones, partially because competition is less fierce. Therefore, one business model is to gain the trust and loyalty of customers by selling good smartphones at cheap prices, to the extent that you become a lifestyle brand. Then sell mediocre but profitable lifestyle products with your branding to these customers.

In a nutshell, gain customer loyalty through high-tech, but earn profits from low-tech.

And “services” is the low-tech part. Which also means that it’s relatively easy to copy.

Update

Just to extend this argument and make it more interesting.

Imagine if Google decided that it needed another business model outside of advertising. Imagine if they adopted the Xiaomi model. What might we see?

I could imagine;

  1. Google branded bicycles, apparel, furniture.
  2. Google banking and insurance services.
  3. Google virtual shopping malls.

Mind you, none of these need innovative tech inside them. Just do what everybody else is doing but leverage the power of your brand to earn higher-than-average margins.

iPhone: “Good Enough” is Nowhere In Sight

A central tenet of disruption theory is that the threat of disruption occurs when products start to overshoot the market. Back in 2012, Horace Dediu posted “Is the iPhone good enough?” and offered a way to measure whether or not the iPhone has reached this point.

Horace suggested measuring sales of the newest model against the year-old versions that Apple sells in parallel at discounted prices. I am not currently aware of any data for this, but there are other ways (although not quantitative) to see whether this is the case. For example, you could look and see if the excitement over new products is high or not. You could see if the average selling price is increasing or decreasing. You could look at whether the new features are being used by the general public (and not just a few enthusiasts).

Judging from the record launch weekend sales of the iPhone 6s/6s plus which were just announced by Apple and from the glowing reviews of the new 3D touch feature, it seems that the iPhone has managed to escape becoming “good enough”. That is, they have discovered new features that customers truly want, and more importantly, their customers still trust Apple to deliver significantly better experiences with each new release. Of course we are only looking at the launch weekend, when sales are mostly supply constrained, so what we have right now is not a very good indicator of consumer attitude. It still seems very positive though.

Contrast this with the situation on Android where average selling price is falling, and each new Samsung Galaxy S release is getting less attention with each coming year. This is what you would expect from a market that has reached “good enough”, and sure enough, we are seeing Samsung being disrupted by low-end entrants. There is a stark difference here.

So back to Apple. Many pundits were worried that Apple would not be able to deliver a phone that would excite customers over new features, after picking the low-hanging fruit that was larger displays for the iPhone 6/6 plus. This does not seem to be the case. It seems that the innovation engine inside Apple is still running very strong, and that they still have ideas for new features that customers will be eager to upgrade for. That is to say, although pundits may declare smartphones to be “good enough”, Apple has stuff in the labs that will raise the bar when introduced. As long as these features keep rolling out and capturing the imaginations of consumers, “good enough” won’t come to the iPhone.

This also means that if Samsung (or any other Android OEM that aims to sell phones profitably) successfully copies the iPhone’s new features, then they will too manage to escape the “good enough” trap. That is the challenge though. Without controlling the software, Samsung will have difficulty getting traction with something like 3D touch.

Google Now And The Priorities At Google

Mark Bergen (@mhbergen) wrote an interesting story on Google on how most of the original Google Now team has left the company, mainly due to a lack of prioritisation.

Although we need further reports to confirm this and to get a picture of what the consequences may be, I found this very interesting because it aligns with some predictions I had made previously.

  1. Predicting Android’s Change Of Direction: Thoughts from Andy Rubin’s Demotion (Apr. 2013, in Japanese)
  2. Who Is To Blame For Samsung’s Bad Fortune? (Nov. 2014)
  3. Android No Longer Competes With iOS (May. 2015)

Mark Bergen’s article in essence says;
1. Google Now was born within Android.
2. Larry Page heavily prioritised it, but then became too busy with moonshots.
3. Sundar Pichai de-prioritised Google Now as an independent intelligent assistant, and moved it from Android to Search.

My argument was that whereas Andy Rubin wanted Android to be the best mobile operating system in and of itself, Larry Page (and consequently Sundar Pichai) thought of it as a gateway to their Search cash cow. Hence priorities are determined based on potential contribution to the Search business, and not on the merits of Android itself. It seems to match Mark Bergen’s discussion, with the exception of heavy support from Larry Page, which I didn’t expect because of how he removed Andy Rubin.

At this point, it is difficult to say whether Google Now should be a priority for Google or not. I suspect that Android is more focused on emerging countries than developed ones, and if so, then de-prioritising Now makes sense. It’s also unclear whether Google Now will really provide good advertising opportunities. Despite theoretically being attractive for ads, I do not know of any mechanism provided by Google for purchasing ad space, and it is possible that it isn’t really very good. Sundar Pichai may be fully aware of the consequences of what he is doing, and that he is convinced that it is better for Google long-term. Google’s multiple projects were always in conflict in one way or another, and it’s possible that Sundar is simply clearing the mess up.

What I do worry about is the fate of Android OEMs. Android, if it is to compete with iOS at all, needs to have features that are unique to it. Tight integration of Google Now seemed to be a great opportunity. Without it, Android will struggle even more in the high-end. As a result, profits for Android OEMs will get even worse.

App Stores as Commodities

Analysts all know that Android smartphone hardware is being commoditised and the implication is that value is moving up into the cloud. The idea is that hardware OEMs will no longer be able to earn profits, and the only profits in the ecosystem will be gained by players who own cloud services. Thus Google will profit as will Xiaomi, which supposedly has a good cloud business in China.

I disagree. Whereas I agree that hardware is being commoditised, I do not assume that the beneficiary will necessarily be the owners of cloud services. Instead, the profits will simply be made in any layer in the value chain which provides a service/product which has not been commoditised (i.e. products/services for which customers are willing to pay a premium). This layer is not necessarily cloud services or even services in general. It could even be hardware components.

What is important to realise is that all cloud services are not created equal. There are cloud services which provide little added-value and are hence easily commoditised. On the other hand, there are cloud services which provide immense value which can not be replicated by competitors, and which earn disproportionate profits. Hence there will be unprofitable and commodity cloud services, just as there are profitable and differentiated ones.

One of these commoditised services (there are actually quite a few) is the Android App Stores. We know, for example, that there are more than 10 of these in China (1, 2) with huge numbers of downloads and revenue. Obviously, from a technical point of view, creating a good App Store is not difficult. Here, I’d like to point out that Japan has its fair share of App Stores as well.

  1. AU Smartpass App Store: This is the app store for the second largest carrier in Japan. For 3 USD per month, users can download as many apps they want from the AU Smartpass App Store. Included in this monthly fee, subscribers can also get a free anti-malware service, a “find my phone”-like service, data backups, 50GB of cloud storage, etc. The application for this store is prominently placed on the top screen of the Android devices that AU sells, just next to the Google Play App icon.
  2. Softbank App Pass: This is the app store for the third largest carrier in Japan. The price is similar to the AU store at about 3 USD per month.
  3. Rakuten App Store: This was just released on August 19th. Reportedly, it has about 390 applications and will offer 10% discount on the price of apps in the form of loyalty points. Developers will also be paid 75% of the regular price, as opposed to 70% for Google Play. Essentially, Rakuten will run this app store on only 15% margins as opposed to 30% margins for Google Play. The interesting thing here is that in addition to being the largest e-commerce company in Japan, Rakuten also owns an MVNO and will preinstall this App Store application on all the devices that they sell.

What is clear to me is that App Stores are a commodity business. Although Google Play currently has, and will probably continue to have the largest selection of apps in the world, this does not mean much if the most popular apps are being sold on alternative app stores at significant discounts or as an all-you-can-eat package. Customers will purchase most apps from the cheaper app store, and only download apps that they cannot find there from the Google App Store. Unless the Google App Store matches the prices of the other App Stores, Google will lose business.

It will not be difficult for other countries to replicate this business. You don’t necessarily have to match the vast number of apps in the Google Play store; you just have to get the more popular titles (for your country) on board, and promise a higher revenue share for the developers, while discounting for the customers.

Illustration Of Why India’s Market Is Difficult For Apple

I’ll just show some graphs that clearly illustrate the differences between the smartphone markets in China and India, and tell us that Apple still needs to do a lot of basic groundwork in India before it can expect iPhone sales to boom there.

The data is taken from StatCounter, and I have used mobile operating system (excluding tablets) web usage share statistics going back to June 2010.

China
StatCounter os CN monthly 201006 201507

India
StatCounter os IN monthly 201006 201507

  1. Web usage from iPhone in China was already above 10% in Jan. 2011. This is presumably mostly due to gray market phones or the second-hand market since Apple wasn’t selling nearly that much iPhones in China back then.
  2. This suggests that the Chinese market was already primed for a big jump in iPhone purchases, far before the iPhone became available on their largest carrier, China Mobile (2014).
  3. In the Indian market however, there is absolutely no priming of iPhone demand. Web usage from iPhone is very small.

It is clear that for iPhone to succeed in India in the mid-term, Apple has to be pretty aggressive. The situation is nowhere like how the Chinese market was.

Android No Longer Competes With iOS

The Google I/O keynote on May 28th 2015, confirmed a thought that I have had for a long while.

On April 3rd 2013, I wrote a post (in Japanese) titled “Predicting Android’s Change Of Direction: Thoughts from Andy Rubin’s Demotion” (「Androidの方向転換予想:Andy Rubin氏の降格を受けて」). In that post, I argued the following;

  1. Andy Rubin considered Android to be very valuable in and of itself. For him, it was important to make Android the best that it could be. This meant being better than iOS.
  2. Larry Page is not very interested in Android itself. His interest is in Google’s cloud services, and Android is only one of many initiatives to maximise their user base.
  3. Hence Android’s market share itself is not important, nor is controlling Android an imperative. Even if iOS, Firefox OS or Tizen expanded their market share, that would not be a problem as long as they used Google’s services.
  4. Android does not need to be the best smartphone OS.

From this, I predicted that Android would stop trying to copy iOS in the attempt to get iOS users to switch. Instead, Android would probably focus on the low-end in order to expand the use of smartphones in markets where iOS would not have a strong presence.

The 2015 Google I/O keynote strongly suggests that this indeed has been their strategy ever since. The signals that I observed were;

  1. Android M itself (excluding the cloud services that would also be available on iOS), no longer adds major features that would give it an advantage over iOS.
  2. The announced Photo service is also available on iOS from day one. Now on Tap which is not feasible on iOS which is why there isn’t an iOS version.
  3. The improvements on offline connectivity are geared towards countries where Internet connectivity is unreliable or expensive compared to the average income.

Google itself mentioned that Android M is mainly about fixing bugs and annoyances in Lollipop, and if that is to be believed, then the next version of Android coming out in 2016 should have many more features. However, since I am now more confident of my reading of Google’s strategic imperatives, I am pretty sure that this will not be the case. I predict that the 2016 version of Android will also not have any major new features.

In short, I am now sure that Google no longer intends to compete with iOS with Android. Essentially, they are giving up the high-end smartphone market to Apple and they are cool with that. Instead, Google sees Android as a vehicle to spread their services to market segments that iOS cannot penetrate.

How will this strategy fare in the future?

This strategy is sound if Google’s sole objective is to learn about what people are doing. However, from a financial standpoint, there are many risks. By far the largest risk is, what if Apple is successful in distancing itself from Google? What if Apple somehow succeeds in significantly reducing the number of Google searches performed on iOS?

There are several dark shadows on the horizon in this regard.

  1. Google search may no longer be the default search engine on Safari. (link)
  2. The vast majority (75%) of mobile search ad revenue comes from iOS (from Goldman Sachs)
  3. Apple has been working to reduce iOS’s search reliance on Google, and the ability to display Wikipedia search results in Spotlight have reduced Google clicks(9to5mac).

It seems that either these reports are false, are insignificant, or simply that Google’s management is oblivious to these threats.

Either way, Google’s strategy makes it financially vulnerable due to an over dependence on iOS. Since Google still lacks a strong alternative revenue source to search ads, anything that causes it to lose this revenue will significantly slow the company’s growth. The only way to mitigate this risk would have been to attempt to capture the high-end smartphone market in collaboration with Samsung. This is very much to opposite of what Google’s actions suggest.

In conclusion

I am now quite sure that Google’s management gave up on the high-end smartphone market at the time when Andy Rubin was demoted on March, 2013. The past two years has seen Google focus on the low-end smartphone market, while deemphasising high-end features, and even fighting with the vendor that dominates high-end Android phones.

2015 is the year when we might see this strategy backfire. There are multiple reports that suggest that Apple will more aggressively distance itself from Google, and that this will have a significant impact on Google’s growth.

Importantly, by neglecting the high-end smartphone market, Google has burnt the bridges and has no backup strategy if this is indeed what happens.

Content Creation on Smartphone, Tablets and Watches

It surprises me that some people still say that smartphones and tablets are only good for content consumption, and not content creation.

That is only true if you totally ignore all the status updates on Twitter, Facebook, Instagram, etc. and declare that content on these social networks is too trivial and unimportant to be considered content.

One has to understand that the meaning of “content” has changed a lot with the development of technology. The content that was inscribed on the walls of the pyramids, for example, is very different from the random BuzzFeed article about Justin Beiber. Similarly, the content in the mobile age will be very different from the long-form blog-ish content of the Web 2.0 era. It will be more short form, more photos, and more multimedia. And for this type of content, smartphones generally trump PCs as content creation devices.

This will also be true of smartwatches. Whether or not smartwatches will become content creation devices depends not so much on whether they are good for writing long emails or blogs, but more on how communication forms evolve. And we can make a sure bet that the communication forms will evolve towards the most popular devices, hence if smartwatches become popular, then content will evolve to be better suited for these, which means shorter and more textual or emoji. With the huge strides being made in speech recognition, it is very likely that smartwatches will easily gain the capability to create these kinds of content.

What is important is that one has to recognise that both sides of the coin will evolve in concert. Saying that smartphones and tablets are not good for content creation basically shows how outdated your view of content is.

Android on Feature Phones

There has always been a big difference between Android and iOS web usage. One explanation has been that many Android users are actually using their smartphones in basically the same way as a feature phone; that they are used mainly for texting and voice, and not being used too much to connect to the rich Internet.

Now, in Japan, feature phones are transitioning to Android.

What an Android/Feature phone hybrid might look like

On March 3rd, 2015, I commented on a Techpinons article by Bob O’Donnell, giving a description of a fun Android-based feature phone that was recently announced in Japan.

Just to give you some ideas, let me talk about a fun phone that we have in Japan.

A Flip-phone / Smartphone hybrid!!

It looks just like a flip style feature phone, but the keypad also works as a trackpad so you can freely move a cursor around on the screen. It runs Android 4.4 on a quad-core CPU, doesn’t work with Google Play, but messaging apps like LINE run OK. It has a full browser, HDR, WiFi and LTE. You can download apps from an app store run by the carrier (in this case, KDDI). It also comes preinstalled with a maps app, which is, you guessed right, created and owned by the carrier. It even has an office suite!!

You can tether to your tablet, if you really feel like using a boring flat slate. It actually has some Continuity-like features to work together with tablets like tapping on a phone number on your tablet will make your phone dial the number.

So Bob, is this the kind of thing you are looking for?

http://www.sharp.co.jp/products/shf31/

When you run out of ideas, you should come to Japan!

Rationale for the transition

This Nikkei article does not have much in terms of news, but it explains how moving to Android is not really about features, but more about development costs.

Common wisdom is that feature phones are easier to create. That may be true if you are Nokia and you created phones that were sold in huge numbers worldwide. However, with the rise of Chinese manufacturers and the drop in smartphone component prices, this will not continue to be true in the long-term.

Who uses feature phones anyway?

One thing that the Nikkei article gets wrong is that feature phones are not used predominantly by older people.. In corporations for example, there are many people who use a combination of feature phones and tablets. Feature phones have longer battery life, and because the flip design allows the microphone to be closer to your mouth, they are better suited if your primary usage is voice. In many ways, the Android/Feature phone hybrid that I talked about directly addresses these users.

What does this say for Android usage?

These Android/Feature phone hybrids will not be used as smartphones and will not contribute to Android web usage much. Importantly, they will not contribute to Google’s ecosystem and they will not rely on Google services. In fact, it is likely that they will not be able to run the majority of Google Play apps.