Month: Aug 2014

Amazon and the Capitalist’s Dilemma

Jan Dawson wrote a great summary of Amazon’s business and gave some ideas on why Amazon might be buying Twitch.

I am very unfamiliar with Twitch, but Jan’s summary of Amazon fits some thoughts that I have regarding Clayton Christensen’s “Capitalist’s Dilemma”. I would like to touch on that here.

I previously wrote a very brief summary of the Capitalist’s Dilemma on this blog.

Not all innovations are equal. In fact, the majority of the innovations that are happening today are detrimental to economic growth. The authors dissect “Innovation” into three separate categories and argue that the one that create jobs (market-creating innovations) is currently being de-emphasized, while the one that eliminates jobs (efficiency innovations) is being highlighted.

Jan Dawson summarizes Amazon’s business as follows;

Essentially all of Amazon’s business rests on the transfer of spending from legacy categories to categories it competes in, whether that’s e-commerce replacing bricks-and-mortar retail or digital content replacing physical content (or even cloud computing replacing premise-based computing). As such, Amazon’s addressable market is directly tied to three factors:

  • the size of the legacy markets it’s seeking to disrupt
  • the degree to which those markets are shifting into categories Amazon competes in
  • the market share Amazon is able to capture.

From here, it is plainly obvious that Amazon’s business (with the exception of AWS perhaps) perfectly fits Christensen’s description of an “efficiency innovation”. That is to say, Amazon’s business eliminates jobs and is detrimental to economic growth.

Unlike Christensen’s “Innovator’s Dilemma”, the Capitalist’s Dilemma will not directly impact a company’s business. In fact, it will usually greatly benefit short term profits. Instead, it will slowly deteriorate the health of the company, leading to long term effects. Even more significantly, it will negatively affect the national economy as a whole.

This suggests that Amazon itself will benefit from its current focus on replacing brick-and-mortar retail. This may even be true in the long term. However, Christensen’s observations predict that the US economy as a whole will suffer.

P.S.

Using the Capitalist’s Dilemma as a lens, it is possible to argue that services like Uber are also mainly “efficiency innovations”. It’s definitely something to consider before singing praises of tech innovation.

Linux-on-the-desktop Pioneer Switching back to Windows

This post recently caught my attention;

“Linux-on-the-desktop pioneer Munich now considering a switch back to Windows”

This is very interesting because it relates to the current growth in Chromebooks and the new Chinese OS that is in development. It tells us how hard it is to move away from Windows.

Let’s look at why Munich decided to go back to Windows;

Schmid describes two major problems. The first is the issue of compatibility; users in the rest of Germany that use other (Microsoft) software have had trouble with the files generated by Munich’s open source applications. The second is price, with Schmid saying that the city now has the impression that “Linux is very expensive” due to custom programming. Schmid also appears to be an Outlook fan, bemoaning the loss of a single application to crosslink mail, contacts, and appointments.

Regarding the compatibility issue, Munich reportedly used LibreOffice on Ubuntu. At least in the open-source world, this is regarded a quite a good cross-platform solution. Munich’s decision suggests that it wasn’t good enough for a large scale deployment.

The question is, does the same apply to Chromebooks as well? I think it might.

Regarding the second issue, it warns us that “free” is not always the cheapest option. It is not always obvious what will cause costs to go up, but we must be aware that it is always a large possibility. I wrote about one example in this blog (“Japan’s Largest University Switching to Microsoft Office 365 from Google Apps (Docs)”).

It would be nice if I could get more information on this.

Can China Develop a Successful Operating System

Reuters reported that China is developing a homegrown operating system.

This is not the first time they have done this. However this time, they have a much better chance;

  1. China’s worries about the U.S. owning computing technology have largely been justified by the the revelations by Edward Snowden.
  2. China now is much more powerful in the computing scene. They manufacture most of the world’s smartphones.
  3. Chinese Internet companies have grown to the extent that they make a Google-less Internet a reality in China. Although they have yet to expand to other countries, China has demonstrated that they can develop viable alternatives to the most powerful Internet company.
  4. The dominance of Microsoft Windows has waned. In China, the majority of PCs ran Windows but only pirated versions of Windows XP. Now that Microsoft has ended support for Windows XP, China’s PC OS situation is up for grabs. This is even more so given that China has recently banned Windows 8 for government use.
  5. Although I don’t have hard data, it seems that the software industry in China is quite vibrant. There are many titles for both Android and iOS developed inside China. I suspect that there is quite a bit of software talent in China.

This time around, the Chinese OS seems to have a fair chance.

It’s obvious that this will be a Linux based system.

About General Electric’s Sale of their Appliances Business

One piece of recent news that I found very intriguing is that General Electric is currently considering selling its appliance business.

It’s not that I’m surprised that it’s selling the business. What I find interesting is that it took them this long. And in fact, GE’s appliance business is not really in bad shape, and makes OK profits. GE is simply focusing on the hugely profitable businesses that it has. It doesn’t seem that the appliance business is bleeding profits at all. Annual sales were 8.3 billion USD, and had 381 million USD in profit. If fact it is even growing at 1.6% CAGR since 2009.

From a marketing perspective, the appliance business appears to be the ultimate commodity. Innovation is slow and Asian companies like Samsung have been making competitive products for a long time (of course, before Samsung there were the Japanese as well). This begs the question, why haven’t low-cost Asian manufacturers disrupted the whole market? Why are high-cost Western manufacturers still in business?

If you look at the competition, it appears that US and Europe companies are doing quite well, keeping even the almighty Samsung at 10.5% U.S. market share. The brands that dominate the market are Whirlpool (USA) and General Electric (USA). Globally, Sweden-based Electrolux is the second-largest appliance maker behind Whirlpool. Amazingly, despite commoditization and international competition, the US and the Europeans still own the US and the global appliance market.

If you look at the consumer electronics business, things are very different. Hardware manufacturing is almost completely dominated by East Asia. Virtually no smartphones are produced in the US? Apple is the only successful US-based smartphone brand (now that Lenovo owns Motorola). The exact same can be said for personal computers, TV, radios and all the popular consumer electronics products.

Looking at this the other way, why is the USA still so strong in software? Why do the Japanese and the Koreans lag far behind in software? What makes the software industry more immune to disruption by the emerging east Asian companies?

There is a lot to be learned here. What is obvious is that although commoditization surely results in small profit margins, it does not follow that low-cost entrants will emerge to engulf the leaders. It is less clear what market conditions and strategies allow the leaders to prevail (albeit at low margins), and what causes them to lose out to the entrants.

Lessons From the IPhone 5c (part 2)

Despite the speculation surrounding the next iPhone launch and a possible cheaper version, there is little discussion about the iPhone 5c and what Apple might have learned from it.

I mentioned this recently on my blog. In particular;

The sales of the iPhone 5c seems to have improved later in the product cycle. That is, the ratio of iPhone 5c as a percentage of total iPhone sales has risen. I have also anecdotally observed this in the super-subsidized Japanese market. Hence I suspect that the recent rise in popularity of the iPhone 5c is not directly related to price. It is possible that some consumers simply want a product that displays their individuality, like a fashion item.

A recent comScore survey supports this idea.

NewImage

We see the iPhone 5c being popular among teenagers and young adults. They are particular popular among women in this age group. This supports the idea of the iPhone 5c being popular among fashion conscious groups. This is definitely a demographic that Apple would be interested in targeting.

Also, comScore mentions that there were 15 million iPhone 5s users in the USA compared to 6.4 million iPhone 5c users. These is a large difference, but the iPhone 5c is still undoubtedly a very popular phone.

This suggests that Apple would continue to carry an iPhone 5c-ish product line. In fact, it is not unreasonable to predict that, instead of using last-year’s technology in their plastic-adorned products, Apple could decide to use the same flagship technology.

Since I have absolutely no inside information, I can only say that this is a possibility. It will be however interesting to see what Apple does with the iPhone 5c.

HTML5 Is Not Yet Good-Enough

Another company is moving away from HTML5 and into native app development for mobile.

“Gree admits failure with browser-based mobile gaming, shifts half of workforce to make native games for iOS and Android”

This trend is not new and ever since Facebook (a huge HTML5 proponent) admitted that HTML5 was a huge mistake, HTML5 development has been on the defensive.

What we saw and still continue to see is, whenever the user experience is an important feature, native app development is the better approach.

This doesn’t mean that every developer must ditch HTML5 and go native. There are many cases where user experience is not the priority. In these cases, it might be still more practical to chose HTMl5.

Rather than debating HTML5 vs. native app development, it is more worthwhile to try to understand what this continuing trend means for the evolution of smartphones. My view is that this trend suggests the following;

  1. The user experience of HTML5 is still not good enough. That is to say that users value the smoothness, responsiveness and beauty of native apps. Users notice the difference.
  2. This would also suggest that the smoothness of the iOS user interface in comparison to Android, is still highly valued.

What’s interesting is that PC users never really demanded smoothness or responsiveness, and were more or less content with Web interfaces. I wonder why.

The Low Cost iPhone

A very interesting article on Bloomberg today by Bianca Vázquez Toness.

“Indians Flaunt 4-Year-Old IPhones as Apple Builds Appeal”

“You flaunt an iPhone, but you don’t flaunt an Android,” said Punit Mathur, a 42-year-old vice president of a digital media company who switched to a new iPhone 4s from a Nexus 4. An iPhone 5s that would cost 53,500 rupees ($874) is too expensive, “but the 4s is still an upgrade,” he said.

Gives you a great idea of the strength of the Apple brand. It’s also amazing that moving from a Nexus 4 to an iPhone 4s is an “upgrade”.

The article also describes Apple’s strategy in India which is composed of a) using old or refurbished phones to get customers into their ecosystem and b) installment plans which break down the cost of an iPhone into 24 payments.

The important thing is that Apples 2Q2014 showed strong sales in Brazil, Russia, India and China. This proved to the world that Apple actually has a working strategy for the more cost sensitive markets. If Apple is to introduce a low-cost iPhone this year, the strategic reasoning will undoubtedly be rooted in the success they’ve already having.

As for the iPhone 4s being an upgrade for the Nexus 4, consider the following;

スクリーンショット 2014 08 08 20 52 07

I think that the key to understanding Apple’s low-cost iPhone strategy is being able to explain why the iPhone in this table can be considered an upgrade.

Lessons From The iPhone 5c

If the rumors are to be believed, Apple’s new iPhone will be unveiled in about a month. Most rumors point to a larger screen being used, but it is still unknown whether their will be a model that is significantly cheaper than the flagship. That is, will there be a model that will be priced in the $2-300 range, which is the average for mid-range Android smartphones.

I really don’t have much to say about this, except for the fact that it is a very complex issue (as Benedict Evans has pointed out), and that I think we should try to learn harder from the iPhone 5c.

What I have observed from the iPhone 5c is;

  1. A 100 USD price differential will not cause customers to abandon the flagship model and swarm to the lower cost one. In fact, cannibalization seems to be minimal. It is possible that if the price differential is increased to 200 USD or even 300 USD, then customers will move to the lower-priced model in droves. That is however unproven and the magnitude is highly speculative. It is feasible that a 300 USD will still result in minimal cannibalization.
  2. The sales of the iPhone 5c seems to have improved later in the product cycle. That is, the ratio of iPhone 5c as a percentage of total iPhone sales has risen. I have also anecdotally observed this in the super-subsidized Japanese market. Hence I suspect that the recent rise in popularity of the iPhone 5c is not directly related to price. It is possible that some consumers simply want a product that displays their individuality, like a fashion item.
  3. Sales of the iPhone 5c have been substantial despite it using the previous year’s technology. Hardware technology does not seem to be the driving issue.

My thoughts;

  1. Apple could sell a much lower cost model without worrying about cannibalization of the flagship.
  2. Apple could sell large volumes without going down to the regular mid-range price.
  3. The lower cost model will not sell just on price. It will need to have a fashion element that differentiates it from the flagship.
  4. For the technology inside the lower cost model, it is sensible for Apple to continue their current strategy. That is to use the former year’s flagship technology. Technology progress is not as rapid in the core CPU and RAM functions as it used to be, and the iPhone 5c is sufficiently fast. Having said that, it is important for Apple to invest in new hardware technology that can not be copied in a single year. For example, 64-bit and Touch-ID have given Apple more than a year’s head start. Sapphire will also be hard to copy given the supply chain situation.

Samsung Mobile’s End Game

With Samsung’s disappointing earnings, the Internet is awash with negative thoughts on their future. At the same time, there are some people who say that Samsung will continue to be successful in the high-end, even as the Chinese and Indians eat their market share in the low-end.

I have also chimed in with my idea on how to view Samsung’s situation.

Jan Dawson has done an excellent post which compares Samsung’s mobile business to other consumer electronics markets. What this clearly illustrates is that without significant differentiation, consumer electronics businesses ultimately end up being low-margin (<10%).

Given the strategic importance of smartphones as a potential hub for your digital life, competition in this market will likely be more fierce than other consumer electronic devices. Hence I predict profits will probably end up being much much lower than 10%.

At this point, we do not have any knowledge of how Samsung will counter this predicament. It will nonetheless be quite a steep uphill battle.

Understanding Hardware Modularization in the Android Ecosystem

Guru Prasad has an amazing website where he writes on a variety of topics related to India.

In the context of innovation in smartphones, he has written a wonderful series of posts which answer the following question in great detail and clarity;

“How do companies like Micromax & Karbonn offer smartphones which are similar to Samsung & HTC but at less than half the price?”

  1. Micromax Phenomenon: Propaganda or Reality?
  2. Part 2: Micromax Phenomenon: Propaganda or Reality?
  3. Part 3: Micromax Phenomenon – MediaTek Revolution
  4. Part 4: Micromax Phenomenon – Quad Core Myth & Propaganda

I suggest everybody who is interested in innovation to read all of these posts.

I myself have just started to read these posts, but I found this paragraph which I think sums up very well the reason why Samsung is struggling.

As we can see from the above examples, Indian companies like Micromax, Karbonn and others place bulk orders from Chinese OEMs and sell them under their own brands in India. It might come as a surprise to find that even companies which are no way related to cellphone industry, nor have the experience have begun to buy from OEMs and sell them under their own brands. Even a water heater & wet grinder company like Kailash is selling Android phones under it’s brand. Television companies like Videocon & Onida also do not want to miss the race and have introduced several phones under their brand.

This is quite extreme but is not without precedent. Basically, any company in any industry that has brand recognition or direct contact with customers, can now extract profits by selling smartphones through their own brand.

It reminds me of the PC industry in the 1990s. In Japan, there was a cult religion called Aum Shinrikyo which decided to enter the PC business. They assembled PCs and sold them through their own shops. And they were quite successful.