Doing The Hard Things In Tech

When observing all the mega-hits that Apple has brought to the market the past 40 years, there is one consistent theme. Apple tries to do the things that are considered hard or even impossible at that time.

With the original Mac, they created a GUI-only computer that had a mere 128K bytes of memory. With the iPod, they synced 1,000 tunes (5GB’s worth) to your PC in an age where the predominant I/O (USB 1) was woefully inadequate (and tiny hard drives had just become available). With the iPhone, they shrunk a full blown PC into the size of a chocolate bar. With Mac OS X, they implemented a radically new graphical rendering system (Quartz Compositor) that taxed memory and CPU power and was unbearably slow on the hardware at the time, which only became usable years later with powerful new GPUs (MacOS X 10.2).

In all these cases, Apple was not shy to do something that most people at that time considered very difficult, if not impossible. Sometimes even Apple failed to do it well enough, and suffered the consequences of an inadequate product (low early Mac sales, super slow MacOS X 10.0, 10.1). But in the end, that is why they managed to differentiate, because others had not even started.

Apple’s approach to privacy can be seen in the same way. Whereas the common narrative was that you needed huge servers and massive data sets for good photo recognition, Apple has implemented machine learning on a smartphone that fits into your pocket. Of course they may be taking shortcuts, but so did the Mac 128K. What is important is that they took the challenge while everybody else was doing machine learning the old way (on powerful servers with less regard for privacy). Similarly, Apple has implemented a differential privacy approach which still has no guarantee of success. Even experts in the field are split and some say that the privacy trade-offs between machine learning effectiveness might result in a product that won’t work. Apple made the bet nonetheless. Apple chose to take the hard, possibly impossible way, by hobbling itself with the self-imposed shackle that is a privacy focus. They have thought different.

The simple reason why Apple’s approach has worked even once, is Moore’s law. Moore’s law is the central source of rapid technical progress and disruption, and it makes what is impossible today into something easy to achieve tomorrow.

No one who has seen the progress of silicon would doubt that Moore’s law will eventually make the processing tasks done exclusively on high power servers today, possible on the smartphones of tomorrow. We should also consider that the amount of data collected from smart devices must be growing even faster than Moore’s law (thanks to the shrinking size and ubiquity made possible by Moore’s law in the first place). Tomorrow, we will have many times more data than we collect today, and it is totally possible that the sheer vastness of data will make it possible to infer meaningful conclusions from differential privacy data, even when anonymised under very stringent noise levels.

Therefore, I predict that even though Apple’s approach to privacy may lead to a worse experience for the next couple of years, as Moore’s law kicks in, the difference will end up being negligible. By the time the general public become acutely aware for the need for privacy, Apple will have a powerful solution that in terms of user experience is just as good as Google’s.

The boldness to go all-in on a technology that just barely works, based on the hope that Moore’s law will save them in the next couple of years, is a defining feature of Apple’s hugely successful innovations. This is a formula that has worked for them time and time again.

This is what I see in Apple’s current privacy approach, and this is why I find it so typically and belovingly Apple.

Thoughts on WWDC 2016

Here I want to jot down some of my key thoughts after viewing Apple’s WWDC 2016 keynote.

Core Apps as platforms

We saw a lot of the core apps being opened up to developers. We saw this for Siri, Maps, Messages and even the regular Phone app. Developers can now write code that directly extends the functionality of these core apps. This makes each app its own platform.

  1. This provides a path through which Apple Maps may become much better than Google Maps for many parts of the world. Third parties can innovate on how to provide better shop recommendations/information, transit information, rather then replicating core functionality.
  2. The same can be said of VoIP apps. I have never had a VoIP app that had nearly as nice a UI as the iOS default Phone app. Now VoIP apps can simply focus on providing good connection and voice quality.
  3. Ditto for Siri and Messages.
  4. This approach is only possible in some cases because Apple’s business model does not rely on advertising. For example, Google Maps could have trouble integrating information from Yelp, because this would conflict with their business model of profiting from the recommendations.

Differential Privacy

This is still a bold experiment. It has not yet been proved that this will allow sufficiently advanced artificial intelligence. In the following months, this will be put to the test. Differential privacy may prove to be just as useful as the lax privacy that companies like Google employ.

More importantly in my view though, is that differential privacy will allow Apple to get the most valuable data.

Privacy of health data is considered to be very important, especially genomic data. In genomic experiments using human-derived samples, great care is often demanded to defend the privacy of the donor. Google’s approach would probably be considered too relaxed to entrust such data, whereas Apple’s differential privacy may be sufficient. As a result, people might be very hesitant to give Google their DNA sequence information but not so for Apple (it might even be an FDA recommendation).

If this becomes the case, then Apple will have a huge advantage, not because it has better AI algorithms or more data, but because it has the most valuable data.

The same may occur with many other types of data. If this becomes that case, then Apple may gain preferential access to the more valuable and important data (that is not readily available by spying on your interactions with your phone). This will benefit Apple in the kind of conclusions that its AI will be able to make.

Google’s Justification

At Google I/O 2016, CEO Sundar Pichai showed a future filled with their artificial intelligence (AI).   It is all very interesting, but I do have some questions.

How much data does Google’s AI need?

Google’s AI is backed by enormous amounts of data about us. Data that is collected from photos that are publicly posted onto the Internet, and from photos that we upload onto the Google Cloud services from our mobile phones. Data from our messages on Gmail or events on Google Calendar. Data from the GPSs on our Android phones which tell Google where we are every hour of the day. Data from our browsers which tell Google (often without us knowing it), which website we have been visiting. No other company has access to similar amounts of private information.

However, what has not been answered is how much data Google’s AI actually needs.

Can effective AI be created without too much data?

A recent article by Steve Kovach on Apple’s next generation AI system is very interesting.

Siri brings in 1 billion queries per week from users to help it get better. But VocalIQ was able to learn with just a few thousand queries and still beat Siri.

This suggests that it is possible to construct a advanced AI system with magnitudes smaller data sets; data sets that do not have to be aggregates of private user information, but can simply be collated from a relatively small number of people who were paid for the work.

Of course we need to see the results to be sure. At the same time, I find it interesting that IBM Watson was able to win Jeopardy without tapping into huge data sets like those that Google uses.

Does an intelligent assistant mean you have to give up your privacy?

Apple tries hard not to see your private data. Apple believes that your private data belongs to you only, and that you should be the only one who holds the keys. Many people have questioned this approach, based on the assumption that widespread access to private information from millions of people on the server level is the only way to create a sufficiently good AI system.

Apple’s approach does not preclude the storage and analysis of personal data, as long as it happens in a way that Apple itself cannot see. One way to do this is to handle analysis on the smartphone. This is what the NSDataDetector class in the Mac/iOS API does. It’s actually pretty neat, and Apple has a patent on it. Similar but more advanced approaches could easily be implemented in iOS, given the performance of today’s CPUs.

The question is, is this approach sufficient? Will analysing your private data on your device always be much less powerful than analysing it on the server? Furthermore, will there be a significant benefit in collating the private data from strangers to analyse your own? If so, then Google’s approach (which sacrifices your privacy) will remain significantly superior. If not, then Apple’s approach will suffice. That is, you will not necessarily have to give up your privacy to benefit from intelligent assistants.

Does Google need the data for other purposes?

Let us assume that there existed a technology that allowed you to create an effective intelligent assistant, but that did not require that you give up your personal data. Would Google still collect your personal data?

The answer to this question is quite obviously YES. Google ultimately needs your private information for ad targeting purposes.

Could Google be using the big data/AI argument to justify the collection of huge amounts of private data for ad targeting purposes? I think, very possibly YES.

How Large Can Apple’s Services Grow?

In a recent post, I discussed that Apple has to grow outside of tech to continue growing. I also mentioned that the reason why Google and Amazon continue to grow is because, although they are tech companies, what they are selling is actually non-tech products to non-tech audiences (they are selling stuff like advertising slots, books and diapers).

So even as we see Apple’s services growing at 20%, and that it makes more money from services than from Macs, I think the more important trend to look for is how much they are positioned to earn from non-tech products.

To clarify,

  1. Sales from the App Store are nice, but we have to be aware that the vast majority is from games, and most money comes from a small number of “whales” (online game junkies). It is overly optimistic to expect this segment to continue 20% growth in the mid-term. More likely, we will see a flattening of growth from games and maybe a slight increase do to healthy growth of the non-game segment (which will however not contribute too much to the total).
  2. Music is unlikely to grow rapidly.
  3. Other cloud business (probably mostly additional iCloud storage) may grow rapidly for a short time, but few people really need Terabytes of storage, and prices are likely to drop heavily with competition.
  4. Apple Pay is more interesting because people might use it to pay for all kinds of stuff, including non-tech stuff. It is easy to envision Apple Pay being used to purchase advertising slots, books and diapers for example. We know that VISA has revenues of almost 14 billion USD (and obviously, from its business model, a lot of that is profit).

In summary, to understand the growth potential of Apple’s services, I think it is important to look at the non-tech markets and to see how Apple could add a thin layer of their services on these. Apple Pay is a typical case, but I would not be surprised if they decided to play a more direct role in e-commerce, for example. In the long term, I expect that these will be the main contributors to Apple’s service revenue, not the App nor Music stores.

Update

Matt Richman has done a similar but much better analysis of the non-tech service opportunities for Apple.

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.

How Large Can Apple Grow

It has long been said that Apple earns more than 90% of all profits in the smartphone hardware business. Apple has also seen the first sales decline for more than a decade. It doesn’t take a marketing genius to see that it will be difficult from now on for Apple to grow this business in the future.

On the other hand, Google and Amazon are continuing to grow their businesses at a healthy rate. What is the difference here?

One perspective is to look at which buckets of spending each companies revenue is coming from. Take a look at the following fantastic chart that I took from The Economist; “How countries spend their money”

NewImage

Although I do have some issue with the figures in this chart (the spending on communications seems much too small, for example), it does illustrate the point that the whole economy is much more than tech. In fact, tech spending by the average consumer is probably only a bit larger than their cell phone bill.

Apple’s business is confined to tech. They only capture the expenditure that a person is willing to spend on communication and recreation. On the other hand, Google carries ads for everything from housing, transport, food transport, to education. Similarly, Amazon can capture a margin for every product sold through retail stores. Apple’s business in only tech, whereas Google and Amazon earn money from the mundane non-tech daily activities and necessities that have been part of the economy for hundreds of years. This is why Apple’s business currently has a hard limit whereas Google and Amazon are in markets that can enjoy growth for much longer. Consider that Google still have a very small portion of total advertising expenditure, and likewise Amazon has only a very small percentage of total retail.

Therefore, unlike Google and Amazon, Apple has to find new markets to enter if they want to continue to grow rapidly. Strengthening their position in tech profits doesn’t help them much if human beings only tend to spend so much on communications and recreation. They must enter markets like housing, transport, education and health. On the other hand, Google and Amazon do not. They just have to worry about being disrupted.

Another thing to note is that Amazon has much more business potential in physical goods than it has in digital. Digital goods like those that Amazon sell only serve the need for recreation and education. On the other hand, their physical goods serve recreation, health, clothing, furnishing and alcohol. These are collectively much larger buckets than the digital goods. It makes total sense that Amazon is not really interested in making money from digital goods, but is instead using them to attract customers for the physical ones.

Of course for Apple, entering new markets is something that it has done quite well in recent years. Recent activities and rumours suggest that it is going to enter transport and health. Its activities in education also should not be ignored. Personally, I would like to see enter housing since the housing market is often the centre of economic turmoil and Apple might do something good about that.

Waves in tech and how Apple and other tech companies grow

When looking at the rhetoric around whether or not Apple has will or will not continue to grow rapidly, I often sense that people are not looking back at the history of tech and trying to understand how the tech giants grew in the first place. I’ll try to go into this a bit here, and from this, I’ll try to understand Apple’s chances of future growth and escape from maturity.

Waves

Tech did not grow by companies single-handedly creating new markets out of thin air. Instead, tech grew on top of waves. The successful companies are those that rode these waves. The unsuccessful ones were the ones that missed them, or fell off half way. There have been many waves in tech.

Digital productivity wave

This is the era when word processors and spreadsheets became popular (1980s to early 1990s). This created the first growth wave of PCs. Microsoft was the company that benefited the most from this wave. Both IBM and Apple initially rode this wave quite well, but they fell off half way.

Essentially, this was the digital productivity age. Word processors relieved us of the need to start out with a new sheet of paper every time we mis-typed a word (it allowed us to edit). Spreadsheets saved us from hours typing digits into calculators.

One thing to note is that the GUI revolution did not create a new wave, but instead empowered the ongoing digital productivity wave. The core job of tech remained more or less the same.

Internet wave

This was when the Internet took off and GUI-capable PCs made it accessible to mere mortals (mid 1990s to mid 2000s). Microsoft again rode this wave with Windows 95. The rise of the Internet also provided the wave which Amazon, Google, Facebook and others rode to become giant companies.

The Internet provided us with instant communication and information. It connected friends and co-workers via email. It connected shops and customers via the WWW. It allowed us to share photos via Facebook. It allowed us to find documents in the form of web-pages through search. This is significantly different from the previous digital productivity wave, which can easily be understood if you consider how the Internet wave changed how we presented our work. In the digital productivity wave, we still printed our work out onto paper. In the Internet wave, our work was shared digitally and instantaneously.

The Internet wave is still with us

The Internet wave has actually been very long. Starting in the mid 1990s, it is still going strong in 2016. The Internet companies are still growing, not necessarily because they are amazingly well run, but simply because the pie is growing. E-commerce is still a small portion of total commerce in the US and growing. Amazon is still riding this wave. Similarly, Internet ad spend is still a small fraction of total ad spend and this is what allows Google to continue to grow. The Internet is still growing, and in fact, this has been fuelled by none other than the iPhone which put the Internet in our pockets.

Apple’s maturity

Apple’s growth has slowed because although it dramatically expanded the time we spend on the Internet, it’s business model does not benefit proportionally with Internet usage. A single iPhone today is used much more on the Internet than it used to be in 2007. It is used for much more tasks, consumes much more data, and much more time is spent staring at their screens. However, Apple still charges basically the same amount of money per device. Apple does not earn significantly more money from the extended usage.

This is in contrast to Google and Amazon, both of which benefit proportionally from extended Internet usage. This is why Google still consistently grows at double digits whereas Apple’s growth comes and goes.

Finding the next wave

Although Apple could grow by finding a business model that grows in proportion to Internet usage (charging for content, services and payments), another way for Apple to escape maturity is to ride the next wave after the Internet.

Fundamentally, the Internet is about information and communication. Although these are very important facets of human existence, they are not the most important. Apple first entered the scene with digital productivity, and then rode re-ignited the Internet and communication wave with the iPhone. Similarly, Apple could provide tools to set fire the next wave.

One of these waves could be health. People living in developing countries spend their money on a plethora of things or which health is a huge portion. In fact, the money that we spend on health is much larger than what we spend on communication and entertainment (the current revenue centres of tech).

If Apple could find a way to benefit our health, keep us healthy, reduce our dependence on medication, improve the effectiveness of physicians, make health insurance more efficient, Apple would be opening the door to a huge market.

Thinking about Uber

The interesting thing about Uber and other services like AirBnb is that they are not just information services; they are the whole stack. Uber does not just notify taxi drivers where their customers are or assist payments; they provide the cars and the drivers.

In this sense, they operate outside of the Internet wave. They are entering the real world, and this is very different from what Microsoft, Google and Facebook have done before them.

This provides us with a hint at what the next wave could be.

What’s next for Apple

For Apple to find significant growth, they must find the next wave outside of the Internet. There is only so much left to do in communications if they continue with their business model of creating great products. Even VR has only limited potential if it is to stay within the boundaries of entertainment and communications.

If you look at where a individual in a developed country spends their money throughout their lifetime, housing, health, transportation, education are much larger than entertainment and communications. If Apple can successfully contribute to any of these markets, the current discussion of Apple maturing will soon seem utterly ridiculous.

Why Do Companies Outsource?

Last week, news broke out of Apple’s “McQueen” project; a plan to move Apple’s iCloud data away from Amazon’s AWS, Microsoft’s Azure, etc. and into its own data centres.

This isn’t really a surprise or an insidious plan by Apple to damage its competitors. It’s obvious if you think about what the benefit of outsourcing is for any company.

Companies outsource if;
1. The technology is not a core strength of the company.
2. The technology will not be a key differentiator going forward.
3. There are cost benefits (mostly due to scale) of outsourcing.

In the case of Apple, cloud infrastructure was not a core strength of the company so it made sense to outsource at the onset. However, it became clear that the cloud would be a key differentiator going forward. Additionally, the scale of Apple’s cloud operations became huge, and hence the cost benefits of outsourcing became negative.

The only thing that was surprising to me was the fact that Apple was outsourcing at all. I would have thought that Apple had had everything in house years ago.

How Will iPad Sales Rebound?

With all the talk surrounding Apple’s new iPad Pro and its predicted assault into the corporate workplace, replacing legacy PCs, you would be forgiven for thinking that all is well in iPad/tablet land, and that sales are growing healthily.

Except that it’s not. iPad sales have been flat/declining since 2013 and up till the last earning report from Apple, there has been no sign that it has even hit the bottom.

Therefore, any analysis of what iPads future prospects are has to balance and ideally encompass two opposing trends. You need a holistic discussion.

The following are a few things that we might consider;

  1. The majority of iPad use to date has not been at work. Usage data by hour-of-the-day clearly indicates that iPads are used during leisure hours, and that work hour usage is much less.
  2. Smartphone hardware and software have improved to the point that a very large proportion of tasks can be performed on phones. It is questionable if there remains any common home computing task which definitely needs larger devices.
  3. As far as I know, corporate deployment of iPads has mostly been limited to special tasks for which PCs are ill-suited. Tablets have not yet replaced PCs in corporates in any significant degree, and we haven’t even seen any clues that this is imminent. Common reasons are the lack of support for legacy systems and software (which includes MS-Office).
  4. It has been commonly accepted that long replacement cycles are a major factor in the lack of growth in iPad sales. Well do you know what? Even the latest iOS 9 supports the iPad 2, introduced in March 2011. The only news coming out from Apple that might spark upgrades is the iPad Pro, but given its much increased price, we can safely assume that most current iPad owners will not upgrade their devices to the Pro.
  5. The iPad Pro with the new Pencil and software from Adobe make a compelling case for a device that graphic professionals would love. But we also know that this is a small market. Adobe Creative Cloud, for example, is aiming for a total of 6 million subscribers by the end of 2015. In comparison, it’s likely that the iPad installed base is several hundreds of millions.

Considering the above points, the following is what I’m thinking;

  1. Discussions about whether or not tablets will replace household PCs is totally irrelevant. The household PC market is probably shrinking rapidly, especially in usage hours, as people find that they can browse the web, download music, manage photos, reply to emails very comfortably from their smartphones. Discussing who will prevail in this market isn’t very forward thinking, and as time passes, the relevance of household PC replacements will diminish to the level of insignificance. It is questionable whether replacing household PCs will significantly contribute to increased iPad sales, even if it happened at a large scale.
  2. Selling to creative professionals will not significantly affect iPad sales. The iPad Pro is a great device, but the Pencil will not lift iPad sales.
  3. The iPad Pro is unlikely to mass accelerate the iPad replacement cycle.

It is blindingly apparent that what we have seen with the iPad Pro alone will not revive iPad sales. The answer will have to come from elsewhere. It will have to come from non-consumption of computing; i.e. the conversion of non-computing tasks into computing tasks.

Exhibit. 1: Diminishing role of PCs in household use.

StatCounter comparison US daily 20120816 20151001

This graph (from StatCounter) shows daily web usage by device type. The spikes in the data indicate weekend usage. In the blue line (desktop PCs), weekends show reduced usage. In the green (mobile/smartphone) and purple lines, weekends show increased usage. This shows how desktop PC usage skews to workdays and smartphone/tablet usage skews to weekends. Interestingly, as smartphone usage increases, desktop PC spikes get deeper. This suggests that mobile usage is taking away home PC usage, but not so much of work PC usage.

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.