Nov 2014 – Naofumi Kagami

Overhyping the Revenue Potential of the Emerging Countries

A beautiful infographic on the state of App Stores by App Annie.

Unfortunately, I can’t agree with the title “Mobilizing the Next 5 Billion”. If anything, this infographic tells us how dominant the “app store superpowers”, Japan, South Korea and the United States are. These superpowers are not only dominant in current revenue, but also have revenue growth that is equal to the emerging countries. This means that the emerging countries are not catching up; instead the lead of the superpowers is widening.

The infographic tells us that the superpowers will remain dominant in revenue for the foreseeable future. The next 5 billion is unlikely to contribute significantly to total revenue from app stores for quite a while.

Material Design and Opaqueness

I’ve been playing around with Material Design for a few days, and the most striking thing for me is the opaqueness. This is in stark contrast to iOS 7 and iOS 8.

Since iOS 7, Apple has gone to significant lengths to make the toolbars at the top and bottom of the screen translucent. To do this without decreasing the legibility of the frontmost element, Apple uses a frosted glass effect which is apparently quite computationally expensive and is not used in less powerful devices (for example, the iPad 2 reverts to simple transparency for some elements). Apple has mentioned that the goal was to make the underlying content stand out and to minimize distraction from the control UI elements. You also see a lot of iOS apps using gray toolbars, which also helps to emphasize content instead of the app.

On Material Design however, they do not use translucency anywhere. Everything is an opaque surface, just as paper is opaque. Although Material Design emphasized depth and the z-axis, this is conveyed solely through the use of shadows.

The feeling of opaqueness is further fortified by the use of bold colors for UI controls. Whereas iOS apps often use only a humble gray color as the background for the UI controls, Material Design encourages bold colors. The effect is that the toolbar and buttons make a very strong impression and feel omnipresent, a sense of opaqueness.

The new iOS design and Material Design feel very different. iOS feels very light. Material Design looks a bit heavy on the top.

Although opaqueness itself is neither good nor bad, in terms of the history of computer UI design, it does feel a bit backward. It feels like going back to the Windows XP days since every PC-OS since then has used translucent elements. The bold colors of Material Design are also reminiscent of the vivid toolbars of that OS, which fell out of fashion since. Similarly, iOS moved from an opaque design to a translucent design. I am wondering if the absence of translucency in Material Design is a result of having to make it work well on cheap devices which don’t have good GPUs.

iOS WWDC 2014 app

Note the translucency on the leftmost image, on the bottom toolbar.

NewImage

Google I/O 2014 app

Running on KitKat but using Material Design.

NewImage

Ad Spend Versus Time Spent on Mobile

Flurry Analytics released a report titled “Apps Solidify Leadership Six Years into the Mobile Revolution” back in April 1st of this year which I hadn’t analyzed in detail. Looking back, I certainly should have; It is a trove of information.

Here, I would like to look at the final graph that they show.

Here the assumption is that “time-spent is the timeless currency”, an old saying in the world of advertising that means that advertising revenue distribution follows time-spent distributions. If this holds true, then the above graph suggests that ad revenue share for Google will trend downwards while ad revenue share for other apps will rise.

This is a bold suggestion and I would certainly like to see some more information related to this. The current study is still too crude to draw a definitive conclusion, some of the reasons for which I will outline below;

Of the 18% Time Spent on Google, 14% is actually the total of time spent inside a browser. Flurry is attributing 100% of the time spent in a browser (including Safari on iOS) to time spent on Google. This is an understandable approximation because a large proportion of ads on the web are from Google, but still quite extreme.
Of the 65% Time Spent on Other Apps, a large proportion will be showing apps from AdMob, Google’s mobile advertising network which they acquired in 2009. Hence much of this 65% could be attributed to Time Spent on Google.
Although Google has very strong market positions in both search ads (AdWords) and display ads (AdSense), search ad revenue is growing much faster. It is also the majority of their revenue. It is very possible that search-related ads can earn a disproportionate amount of money that cannot be inferred from time-spent alone.

On the desktop, Google worked hard to provide free solutions for the activities that people did on their PCs. They created Gmail and Google Docs because email and productivity applications were the activities that people did. They acquired Blogger because a lot of the content that people were reading on the web were blogs. They created their own RSS reader because that was how many people read content.

Google was not content with simply supplying ads to websites and webapps; they created or helped create the websites/webapps themselves, or they tried to provide tools to read the content more effectively. They tried to be much more involved than a simple advertising agency.

On mobile, it does seem that Google is struggling to do this. They have failed to create an engaging social network, and they aren’t involved in the creation of games. YouTube, although significant at 4% of total time, is still quite small compared to games and Facebook. They don’t have a direct presence inside the dominant mobile activities.

It will be interesting to see whether Google will push harder to be more than an advertising agency on mobile, or whether it will be content with pushing ads through search and AdMob.

Will High-End Android be a Samsung Exclusive?

I have been very wary of Google’s efforts to build in the tools that Android requires to compete with Apple in the high-end smartphone market. My feeling has been that Google is no longer interested in the high-end smartphone market and is satisfied to let Apple have it. Instead, Google is focusing on the low-end market and on bringing low-cost smartphones to the emerging markets.

Recent announcements reinforce my thinking.

On Nov 13, 2014, Samsung and BlackBerry announced a partnership to build and market a tightly integrated, end-to-end secure solution aimed for enterprises. It is well known that Apple dominates corporate market share in smartphones and tablets, and security is one of the reasons why Android is struggling. The interesting thing is that Google seems very uninterested in developing a solution of their own for this quite lucrative market.

At the keynote of Samsung Developer Conference 2014, Samsung introduced Samsung Flow, which is basically their version of Apple’s Continuity features. The important thing to note is that Continuity is a feature that is only valuable for customers who can afford multiple devices. Again, why did Samsung and not Google develop this? Is it because Google is relatively uninterested in the customers who are wealthy enough?

Samsung recently announced its answer to Apple’s iBeacon feature, Proximity. This is a technology to enhance customer experience at stores, mall, stadiums, museums, etc. and also push you special offers and stuff. As stores embrace iBeacons, there was the possibility that some of the offers would end up being exclusive for iPhone users. Now it will be exclusive to iPhone and Samsung users. Why wasn’t Google interested?

If this continues, Samsung might create a rather formidable barrier-to-entry for the high-end Android market, blocking HTC, LG, Lenovo and others from competing.

Although I do suspect that the overall market for high-end Android devices might shrink, I do not doubt that Samsung will continue to dominate for the foreseeable future.

How Apple Has Actually Introduced New Category Products Every Few Years

There are several people who seem to have had difficulty applying Clayton Christensen’s Disruption Theory to the tech world, and have proposed that this theory itself does not apply to either the tech market or consumer goods. However Horace Dediu, who is now working for the Clayton Christensen Institute specifically for the task of applying Disruption Theory-based analysis to the tech market, has argued in a podcast with Ben Bajarin, that there is no reason why it cannot be done. Horace argues that the challenge lies in defining what constitutes the “jobs-to-be-done”, and a failure to do this successfully is why Disruption Theory sometimes seems to fail.

This point is very important and is worth reiterating. The reason why Disruption Theory occasionally fails to explain a certain situation is not because the theory itself is limited in its scope; it is because identifying the jobs-to-be-done is extremely difficult. In fact in the typical example of the jobs-to-be-done, the milkshake example, the jobs-to-be-done is so unintuitive that its unlikely that even an industry expert would have accurately predicted it. It is no wonder that Clayton Christensen himself failed to predict how Disruption Theory would affect Apple.

More often then not, the people who attempt to expand, supplant or even discredit Disruption Theory have simply neglected to carefully analyze the jobs-to-be-done.

To further complicate things, if you look at the brief history of personal computing, which has only been with us for four decades at most, you can also observe that the jobs-to-be-done has shifted extremely rapidly. At most, a certain jobs-to-be-done will be mainstream for only five years.

For example, the PC started out in the Apple I era as a hardware hobbyist’s kit. With the Apple II, the PC was now a platform for a hobbyist software programmer. Then with the advent of packaged software like VisiCalc, the PC became a business tool for performing large numbers of calculations. With the arrival of the Macintosh and the Laser Writer, the PC now became a tool for creative professionals, and then with the Internet, it became a tool for communication and collaboration. After the year 2000, the PC became a tool to manage digital photos, music and video.

With each shift in the jobs-to-be-done, the required hardware specifications to sufficiently perform the task increased. At the same time, the customer base continuously expanded to less tech-savvy users which required the user interface to improve. This meant that the PC rarely reached the good-enough threshold because the bar was constantly being raised.

The exact same thing can be said for smartphones. The original iPhone started out as a phone, an iPod and an Internet communicator. In a short amount of time, it quickly became your main camera, your gaming console, your map, your photo album, your fitness tracker, your newsreader, the pacifier for your kids, your TV and so much more. And now with Touch ID and Apple Pay, Apple is making your iPhone your ID and credit card. From its initial humble jobs-to-be-done, the smartphone is now the center of a huge portion of your life. The jobs-to-be-done of smartphones has exploded.

And as with PCs, each shift in the jobs-to-be-done has required new and better hardware. Being your main camera has demanded better optical and image processing hardware and software. Being your gaming console has demanded better 3D graphics performance which technologies like Metal and better embedded GPUs can provide. Being you fitness tracker has resulted in technologies like the M7 motion co-processor which can constantly track your movements with minimal battery drain. And of course Touch ID and Apple Pay required new biometric hardware.

By now it should be plainly obvious why Apple has avoided being disrupted; Apple has consistently been at the forefront of the shifts in the jobs-to-be-done in personal computing (except for the years when Apple was run by John Sculley and R&D was run by Jean-Louis Gassée). That is why new Apple hardware has constantly been in high demand and can still command a high premium.

On the other hand, the reason why Samsung is being disrupted at the low-end is because Android is not expanding the frontiers of smartphone jobs-to-be-done. Other than UI tweaks that work equally well on less capable devices, Android has recently failed to introduce compelling features that require new or better hardware. In fact, this might have been intentional on Google’s part as an initiative to reduce fragmentation. As a result, Android phones have become as good-enough as they can be, even on the hardware that can be bought for $200-300. The Android OS is holding Samsung back.

This also means that Apple products will be disrupted if they start failing to create new jobs-to-be-done. It also means that the resurgence of the Mac could be attributed to a new jobs-to-be-done that the Mac can uniquely satisfy. Strong integration with iPhones could obviously be one of these jobs-to-be-done which is not available on Windows PCs.

Actually, if you look at computing from a jobs-to-be-done standpoint, the idea of a “new category” device starts to look rather ridiculous. It becomes clear that the emphasis should be on whether or not a new jobs-to-be-done has emerged. Sometimes this might require a new device, but oftentimes, it simply requires new hardware on top of a preexisting device. This in itself is sufficient to transform the previous hardware into a new category device. For example, Touch ID has transformed the iPhone into a digital ID and wallet with unprecedented security and convenience, something that was hitherto impossible with a smartphone. Focussing solely on new category devices is completely missing the point.

In fact you could even argue that every few years, Apple has introduced a new category product in the guise of the iPhone or a new iOS version; a product that enables new jobs-to-be-done to emerge.

Who Is To Blame For Samsung’s Bad Fortune?

As the profits plunged on Samsung’s smartphone business, the web has been awash with reasons.

Ben Bajarin has shown very nicely that the largest problem that Samsung faces is the decline of the high-end business, which is also mentioned by a Samsung executive in the Guardian article.

The high-end of the business has been dominated by Samsung and Apple and still is. This means that there are two possibilities.

Apple took away Samsung’s sales in the high-end. That is to say, users of high-end Android phones (who were mostly using Samsung devices) switched to the iPhone.
The high-end market for Android smartphones saw a sudden shrinking. That is to say, mid-range smartphones were perceived as good enough and hence there was no need for customers to purchase high-end Galaxy devices anymore.

I suspect that both of these happened but I want to analyze them in isolation because it makes the situation easier to understand. Although these two look similar, they are actually very different. The first means that Apple was able to steal market share away from Samsung. The second means that vendors of mid-range smartphones (including Samsung of course) captured the customers who previously bought high-end phones. We will look at each separately.

Apple is stealing away the high-end

This is obviously happening. All reports point to Apple selling huge numbers of iPhones and it has been suggested that a lot of these are switchers who have abandoned Android phones.

The important thing is why. Of course the triggering event is the increased screen size of the iPhone 6. However, what is more important is why couldn’t Samsung match the iPhone 6 before Apple threw down the gauntlet. Why was Samsung left clinging to screen size as the only feature that could keep it competitive in the high-end.

Although design and/or Apple’s brand could well be a factor, it is also as likely that iOS and its app ecosystem could have been perceived to be superior than Android. If this was the case, then the blame would have to be put onto Google. Google failed to create an operating system and ecosystem that was competitive against iOS. The only reason that the high-end Android market existed at all was because Samsung had large screens while Apple did not.

If it was design or branding, then it would be harder to place the blame on either Samsung and Google simply because Apple is so good at these. Either way though, the result is that the high-end Android market cannot exist anymore.

The high-end Android market is shrinking

This is a completely different dynamic. If this were the case, then we should be seeing customers who previously owned the flagship Galaxy devices either downgrade to mid-range Android devices or to extend their replacement cycle. I have not yet seen a statistic that suggests that this is happening, but it is plausible.

This can only happen if Android smartphone hardware is starting to be considered as good enough, even by previous high-end purchasers. This also has to happen while at the same time, on the Apple side of the fence, Apple customers are not considering iOS hardware to be good enough. There must be something very different happening to Android customers and iOS customers.

The good enough of hardware is determined by software. If the software can take advantage of new hardware and create a true benefit for the customer, then old hardware will not be good enough. On the other hand, if the software does not have any compelling features that require new hardware, then old hardware will be good enough. No matter how much the hardware improves, whether customers will demand it depends on software.

In the case of iOS, the OS made full use of the 64-bit hardware to enable much faster processing of photos and movies. The OS made use of the TouchID sensor, which is also now being used by the Apple Pay service. Apple has given each piece of new hardware a significant reason for existing, and that is why customers want new devices.

On the Android side, that has not been the case. Google has not moved quickly to 64-bit, it has not worked hard on corporate level security, and it has not introduced software support for biometric sensor technology. Instead, Google has introduced a lot of software technologies that enable low-powered devices to smoothly run the latest operating system. Instead of adding new features that would take advantage of new high-end hardware, they focused on making sure that the mid-range and low-end hardware would be able to run the latest operating system and to take advantage of all of its features. In summary, Google actively designed their new operating system so that Samsung would have a hard time differentiating itself.

Although I’m not sure whether Google did this intentionally, it has made it very difficult for high-end Android smartphones to compete with mid-range ones. This is not only a challenge for Samsung, but it will also be a challenge for any OEM that plans to move upmarket. It will mean that companies like Huawei, Lenovo and Xiaomi will not be able to move up-market unless they gain significant control of the OS.

So what should we blame?

I think that Google was targeting the low-end from the start, but Andy Rubin was not. I genuinely think that Andy Rubin was much more focused on the high-end and he didn’t seriously consider making Android work better on low-end devices. I think he wanted to make Android as good as or even better than iOS. The fact that his reign coincided with when Samsung was strongest is no coincidence.

When Andy Rubin was removed and Sundar Pichai took over, it became rather clear that instead of fighting with iOS, Android would focus on the low-end. In fact, most products that Google creates (many of which were under the supervision of Sundar) aim at the very low-end where prices are normally zero. Google Docs is a prime example of this, as is Chrome OS. Google’s strategy is to commoditize all markets except for search and advertising, by providing a good enough product for free.

Samsung could have tried harder to take control of Android so that they could create software that took advantage of high-end software. In fact, they tried. Considering that Samsung was mainly a hardware company, I don’t think that they ever misunderstood that they needed good software; it was just that they didn’t have the resources or the culture to create great software. It’s hard to blame their strategic thinking for this.

Google could have tried harder to preserve the high-end. However, it’s priorities were clearly in the low-end. It’s hard to focus on both.

I would say that the only strategy that we could actually blame was Samsung’s decision to team up with Android. Samsung should have seen that Google would ultimately aim to commoditize their own OS and all hardware vendors using their platform. Samsung should not have helped Android to gain market share, and instead waited for a contender whose priorities aligned better with Samsung’s goals. Of course, that is what Nokia did.