Naofumi Kagami

Will Google Reduce Commission on Google Play Revenue?

Although unconfirmed, I think this report is potentially very interesting;

Google is also reportedly playing hardball with device manufacturers who previously got a cut of Google Play revenue from phones and tablets they sold. Some partners have seen their commission reduced from 25 percent to 15 percent, with one partner’s cut being eliminated entirely, apparently because “Google wasn’t generating enough money from Google Play.”

It suggests two things;

Google Play is not generating enough revenue.
Google is playing hardball with OEMs.

None of these is a surprise.

In this blog, I have constantly mentioned that Google Play revenue is actually having a hard time, despite favorable comments from both Google itself and App Annie. It is also very well known that Google is playing hardball with OEMs.

What I do find interesting is how this might adversely affect high-end Android OEMs but not affect the low-end. As I have mentioned in my past posts, Google Play revenue is highly skewed towards Japan, South Korea and the US. These are the same countries which mainly purchase high-end Android phones from Samsung, HTC and LG (and some local manufacturers in the case of Japan). This commission reduction is going to hurt these OEMs and these OEMs only.

If this report is true, this will only affect high-end manufacturers. None of the new cheap Android entrants like Micromax will be significantly affected, because owners of these devices don’t buy much from Google Play to begin with.

Google seems to be trying really hard to make Android unattractive to high-end smartphone manufacturers, while making it look better for low-end OEMs. I am baffled as to why they might want to do that.

Nokia HERE Maps for Android

Nokia has just announced a beta for their HERE Maps for Android. Interestingly, the beta is only available for Galaxy Phones and can only be downloaded from the Samsung Apps Store, but they will apparently target the general Android user base in a following release.

The main feature of this app seems to be offline capabilities. It also seems to be quite good with the basics;

Nokia has built up an extensive database of geographical information in 196 countries, including indoor maps for more than 90,000 buildings around the world. It supports turn-by-turn navigation for driving or walking as well. But the biggest advantage is the offline capabilities of HERE Maps. Google Maps has offline support as well, but it’s fairly limited by comparison: You get very little information about the points of interest and search functions won’t work.

The question is of course, will this be able to successfully compete against the pre-installed Google Maps that comes with Google Play Services licensed Android devices?

I would like to put down some notes related to this;

The Opera mini browser was quite popular in developing countries, apparently even on Android devices. This was because it used a technology that reduced data usage, making it very useful for people with very limited data plans.
Nokia HERE Maps will also appeal most to users who have limited data plans, many of whom are in developing countries.
For users with generous data plans, the appeal of Nokia HERE Maps will be limited.
Hence Nokia HERE Maps will probably see the greatest penetration in developing countries.

MS-Office in the Workplace

Just for the record.

I’m working with a company that made headlines in 2012 with the announcement that it will be moving close to a hundred thousand employees to Google Apps.

Guess what format they send stuff to me in now.

Pure MS-Word and MS-Excel.

It’s not even in .docx or .xlsx but in the classical .doc or .xls formats which Google Apps no longer supports.

I suppose that even as they moved to Google Apps, they kept MS-Office around to communicate with the outside world.

Making Office Dramatically Better: Bill Gates

In an interview with Erik Schatzker of Bloomberg TV, Bill Gates gave his idea of what Microsoft’s priorities should be;

Certainly, Microsoft should do as well or better, but of all the things Microsoft needs to do in terms of making people more productive in their work, helping them communicate in new ways. It’s a long list of opportunities Microsoft has to innovate, and taking Office and making it dramatically better would be really high on the list, that’s the kind of thing that I’m trying to make sure they move fast on. I’m very happy with what he’s doing. I see a new sense of energy. There’s a lot of opportunity there. Some things the company isn’t the leader on, and he sees he needs to change that.

So Bill Gates is prioritizing MS-Office.

Why?

Jan Dawson has been giving us quite a few good posts on Microsoft, and had this to say in his post on Techpinions.

In short, if Microsoft is to compete effectively on a third party basis, its services on competing platforms have to be so good they can overcome the price/business model disadvantage, the lack of integration, and its far smaller mobile device installed base. As of right now, Microsoft simply doesn’t seem to have any products or services that can do that successfully and this should be a key area of investment. In the meantime, it’s being successful largely with products it’s unable to monetize from most users, such as OneNote and Skype.

Jan’s discussion is that Microsoft can no longer rely on it’s own platform (Windows), but must now win by providing software and services for third party platforms. That is iOS and Android. Whereas both Apple and Google can and do provide software and services for free due to their different business models, Microsoft’s business necessitates that they charge for MS-Office. Hence MS-Office must be well worth the price.

I think Jan Dawson and Bill Gates are in complete agreement here.

Chromebooks in Europe

Samsung recently announced that they will exit their laptop business in Europe. This includes both Chromebooks and PCs running Windows.

Of course, you don’t usually exit businesses that are doing well. Samsung gave the following reason in their statement;

We quickly adapt to market needs and demands. In Europe, we will be discontinuing sales of laptops including Chromebooks for now. This is specific to the region — and is not necessarily reflective of conditions in other markets. We will continue to thoroughly evaluate market conditions and will make further adjustments to maintain our competitiveness in emerging PC categories.

Essentially they are saying that their laptops are not selling well and Europe, and it doesn’t make sense for them to continue that business there.

This would be understandable if this was driven mainly by lackluster sales of Windows PCs. IDC has predicted that worldwide PC shipments will decrease by -3.7% in 2014. However, Samsung in not strong in this segment. The segment where Samsung is strong is in Chromebooks. Although Acer has recently been reported to have edged out Samsung, it is still a strong second with an estimated 24% market share of Chromebooks shipments. This segment, unlike the Windows PC segment, is predicted to show very strong growth in 2014. The fact that Samsung is exiting the European market not only for Windows PCs, but also for Chromebooks, suggests that at least in Europe, Chromebooks may be struggling.

Most news coverage on Chromebooks come from the US and as usual, both Google and Samsung are very quite about actual sales. Most analysts tell us that Chromebooks are selling well in a single niche market, that is US education, and hence it is not a surprise that Chromebooks do not yet have much traction in Europe. However, they seem to be a bit more optimistic on the prospects long term.

However, the news from Samsung suggest that they do not expect Chromebooks to catch on in Europe, at least not in the mid-term (3-5 years), which would be the minimal window for which such a drastic action would make sense.

Of course, this makes a lot of sense. Although I do not have any figures, I strongly suspect that the amount of money that US schools spend on technology vastly outweighs what other countries, even developed nations spend. Hence it is very unlikely that the single niche that Chromebooks has found success in (US K-12 education) even exists outside the US.

Windows is Cheaper Than Android

I have written quite a few posts on the topic of how Android hardware OEMs are losing their position inside the value chain.

What we are currently witnessing is a macroscopic trend that is working out almost exactly as Clayton Christensen’s disruption theory would predict. The way that Samsung is losing both market share and profits is typical disruption. However at this point, it is still not clear where the attractive profits will shift to.

As I discussed in the second article (What Happens When Hardware Makers Can Make No Profit), hardware OEMs tend to do funny things (crapware) when they can no longer make direct profits. You can’t blame them because they are fighting for their survival. What Google is doing with Android One is quite extreme because they are effectively preventing OEMs from doing crapware. They are basically saying that we’re not letting you pull the tricks that you need to survive.

What makes this situation even more convoluted is the fact that although Google does not make any direct profit from Android, Microsoft makes huge amounts of money. In fact, Samsung paid Microsoft 1 billion USD last year for using Microsoft’s patents in their Android phones (based on the number of Android devices sold). This amounts to 1% of total handset revenues. It is well known that Microsoft has similar patent agreements in place with many other major smartphone manufacturers. This is almost all pure profits and hence it is almost certain that Microsoft is making more profit from Android than Google itself.

Adding a further twist, Microsoft is now handing out Windows for free for devices with a display that is smaller than 9-inches. This will no doubt include the right to use Microsoft’s patents as they are included in Windows. Hence compared to Android, Windows will be 1 billion USD cheaper for Samsung. For OEMs, using Windows is much much cheaper than using Android.

Now let’s look at this from a hardware OEMs viewpoint.

They cannot make money through hardware differentiation and are now scrounging for pennies.
In the PC-era, they would have added crapware and bloatware because of the pennies that it would bring in. This was more important than any sales lost due to a worse customer experience (customer experience wasn’t the main concern).
In the smartphone-era, Google is stopping them from placing their crapware in prominent locations on Android. OEMs will be more desperate for pennies.
If OEMs decide to use Windows instead of Android, then they can save pennies. Microsoft might also be less strict with crapware. Windows might be significantly cheaper for OEMs compared to using Android.

The current situation is very complex, and it is hard to say whether Windows will manage to grow through its price benefit. It will no doubt be fascinating to watch as the knots get untied.

Some Apple Pay Notes

I’ve already written about Apple Pay (1, 2) and I’ve highlighted the fact that Apple does not store customer and transaction data. I also mentioned that this might be very attractive for merchants, banks and credit card companies.

As weeks pass from the big announcement on September 9th, more details about the system have been trickling out. An article by Yoni Heisler gives us a more in-depth look, and of particular interest to myself, it gives us the reason why credit card companies might be fully behind Apple Pay.

The credit card companies and other players in the transaction chain are a very important for the success of Apple Pay. Although a lot of attention focuses on the convenience of payments, the reality is that convenience itself is seldom a driver of adoption. In fact, I believe that looking at convenience alone is completely the wrong approach.

Instead, if there is a tangible cost saving associated with Apple Pay adoption, we can expect either merchants or credit card companies to aggressively entice customers to use Apple Pay. In addition to simply putting up notices in the store, this also may be via bonus loyalty points or discounts. Hence the financial benefits will be shared with customers, giving them a financial incentive to use Apple Pay. This will be a much stronger driver of adoption compared to convenience alone.

Yoni Heisler’s article clearly shows where the cost savings with Apple Pay are. Also if you consider the huge size of the savings that the article mentions, it is no wonder that merchants and credit card companies will be very eager to adopt it.

Noyes’ statement brings up an interesting point, namely that the fundamental aspects of Apple Pay weren’t concocted in Cupertino. Rather, Apple Pay was designed in accordance with an emerging token-based mobile payments standard which aims to increase security and reduce the incidence of fraud. To that end, Apple is getting into the mobile payments space at just the right time. So while Apple isn’t necessarily inventing the wheel here, Apple Pay again represents the first real implementation, on a massive scale no less, of the relatively fresh tokenization specification.

That said, it’s not as if Apple took the easy way out and simply developed Apple Pay to conform to the most general requirements for token-based transactions. On the contrary, sources at two top credit card companies who helped work on the implementation of Apple Pay told me that large technical teams from Apple, credit card companies, and banking institutions worked tirelessly over the past few months to implement additional layers of security into the Apple Pay platform.

What this says is that Apple Pay was developed in concert with credit-card companies. The credit-card companies have essentially invested as much in Apple Pay as Apple has. The reason for doing this is to reduce credit-card fraud which costs billions of USD to credit card issuers and merchants. The financial rationale for credit-card companies investing in the increased security is plainly obvious.

Token transactions as they have been implemented for Apple are a new and much higher standard of security for electronic payments. The amount of security built into provisioning tokens and supporting transactions is a new standard that I think will definitely shift fraud patterns going forward.

If it does indeed become the standard, then Google may have a problem as I mentioned in a previous post.

Chrome Browser Promotion Effectiveness

Chrome is definitely a popular browser for Windows (it is debatable how popular it actally is, because the web usage tracking reports tend to not agree with each other). However, it is not very clear why it is popular.

I have tried to explain part of the reason by showing a positive correlation between Windows XP usage and Chrome adoption. This correlation suggests that users with older and less powerful machines will tend to use Chrome, either because they use Windows XP which does not run IE9 and above, or because Chrome runs better on these machines. On newer and more powerful machines, you can use the latest versions of IE (on Windows 7 or 8), and the performance will be good enough for general use.

This correlation however was not enough in magnitude to explain the popularity of Chrome.

Here I would like to note some tactics that Google is using, which have probably been very effective (Windows users at least will be quite familiar with them).

Google Home Page

The top page for Google Search displays a banner that invites you to install Google Chrome. Since Google Search has dominant market share, this is obviously a very powerful way to promote Chrome. The problem is, most modern browsers have a search field somewhere in the UI controls which takes you directly to the search results. Hence most people will only rarely visit Google’s top page.

Adobe PDF Reader Download Page

If my memory serves my right, Microsoft was banned from bundling a PDF-viewer into Windows due to antitrust issues. As a result, users are generally required to separately install the Adobe PDF Reader to view PDF documents on the web.

When you go the Adobe’s web site to install the Adobe PDF Reader, this it the page you get.

Adobe does not simply show you a banner to install Google Chrome. It bundles Google Chrome (and the Google Toolbar) so that they are automatically installed together with the PDF Reader, unless you explicitly opt-out. This is tens or maybe hundreds of times more effective than a banner.

And in case if you’re wondering whether Adobe makes Chrome your default browser or not, well why not? It is the default browser unless you access a hidden screen and opt-out.

So to summarize, when normal users install Adobe PDF Reader onto their PCs, their default browser will now be Google Chrome, without their knowing it.

This is generally known as bundling, but in this case, it’s closer to a trojan horse.

Google has used this tactic with other browser plug-ins before, in particular to get users to install Google Toolbar. It is nothing new.

How much does this cost Google?

I have no information on how much Google might be paying Adobe to bundle Chrome with their PDF Viewer. We do know however how much Google is paying Mozilla to use Google as the default search engine. Google paid $300 million per year. The vast majority of Mozilla’s revenue is actually from this deal.

I wouldn’t be surprised at all if Google was paying Adobe in the tens of millions or even in the hundreds. It is not impossible that payments to Adobe exceed those to Mozilla. Keep in mind that Adobe’s PDF viewer has much higher market share than Firefox ever did.

Only Google

Google is the only browser manufacturer that is using these kinds of promotions. If fact, it is likely that Google is the only third-party browser vendor which has deep enough pockets to do this kind of thing. Mozilla is a non-profit organization, which relies on Google for most of its revenue. Opera is developed by a company that generated total revenue of 300 million USD in 2014. While this is a respectable amount of revenue, it is similar to the money that Google gives Mozilla. There is no way either Mozilla or Opera could fund promotion campaigns that would require bidding against Google. As expected, Google has a monopoly on these promotions. I have never seen similar ones from either Mozilla or Opera.

How effective are these promotions?

Without any data to go by, we can only speculate on the effectiveness of these promotions. However evidence suggests that at least the Adobe bundling promotion would be quite effective.

We know that Adobe PDF viewer is the defacto standard for viewing PDFs on Windows, and few people would not install it. We can also safely assume that most people would just use the default settings (install Chrome and make it your default browser) when downloading PDF viewer.

This is huge by any measure.

What can Microsoft do about this?

To prevent plug-in vendors from being a launchpad for bundled Chrome installs, Microsoft could rely on integrating plugins into IE itself. There may be problems related to antitrust however. It is interesting to note that Windows 8 does have a Metro-style Reader app that can display PDF files. There might be parts of the antitrust ruling which Microsoft could work around. However in general, I guess that it would be difficult for Microsoft to do enough integration to stop the leaks.

They could also make it more difficult for Chrome to be set up as the default browser behind your back. Adobe’s web site hides this setting so users won’t know that they are actually letting this happen. This however might also have antitrust issues.

I tend to think that it will be very difficult for Microsoft to stop this. Improving the performance of IE alone will not help. They have to include their own PDF plugin.

What does this mean?

As Chrome’s popularity has risen, many people have assumed that it was due to Chrome’s performance advantages. Although this may have been a factor, knowing that most users do not actively change default settings, I was doubtful if this could have been the most significant reason.

In my previous post, I had postulated that maybe Windows XP (which only runs up to IE8) was the reason. However the statistics, although inconclusive, suggested that it was not the major factor.

In this post, I looked at the promotions that Google was doing. Although the amount that Google is actually spending has not been disclosed, it is likely that they are spending very large amounts of money which none of their competitors could afford. Given the breadth and stealthiness of these promotions, I think it is safe to assume that these have contributed significantly. These promotions might even have been more important than any real performance improvements.

If this is the case, then no amount of performance improvements on the IE side will help IE’s market share. Chrome will continue to gain regardless.

The one bright side is that Microsoft might be able to include a simple PDF viewer plugin. A further understanding of the antitrust issues is required to see if this will be possible or not.

Update

After a bit of research on the web, it seems that Adobe was threatening Microsoft with an antitrust lawsuit over the inclusion of PDF-export features in MS-Office. I could not find any articles that suggested that this expanded to a Microsoft-developed PDF-viewer plugin in IE (it could be a confidential agreement between the two parties), but it is not unreasonable to guess that it was.

Are Chromebooks Losing Market Share in the Sub-$300 Notebook Segment?

Yesterday I wrote about an NPD report that came out for back-to-school PC sales in 2014.

In that report, Chromebook sales were reported to account for 18 percent of all sales of notebooks under $300.

This sounds like good news if you don’t remember what NPD was telling us a year ago. Stephen Baker, NPD’s Vice President of Industry Analysis for Consumer Technology, said the following;

In the last eight months Chromebooks have snagged 20 percent to 25 percent of the U.S. market for laptops that cost less than $300.

If Chromebooks sales have truly fallen from 20-25% market share to 18% market share in the sub-$300 laptop segment, that’s pretty bad news for them. Not that it’s particularly good news for Microsoft either.

Back-to-School PC Sales 2014

NPD published their report for US consumer retail PC sales during the 10 week back-to-school period yesterday.

スクリーンショット 2014 09 25 8 07 49

U.S. consumer retail PC sales grew almost 3 percent during the 10 week Back-to-School period (week of July 4th through Labor Day week) after declining by 2.5 percent in the previous year.

So it seems like PC sales aren’t falling too badly and have actually risen a bit. Mac sales are continuing to be quite strong. Chrome OS has made some gains but not nearly as impressive as compared to 2012-13.

As I have repeatedly said in this blog, what I find interesting is how Microsoft is retaliating to Chromebooks.

Chromebook sales were up 32 percent in 2014 and accounted for more than 5 percent of notebook sales, and 18 percent of all sales of notebooks under $300. Windows notebook ASPs fell over the last three weeks to just $441, which was 8 percent lower than last year, but the price cuts lifted units by 4 percent. Entry-level Windows Notebooks priced under $300 increased by 37 percent as prices dropped from $271 to $242. 2-in-One Windows devices accounted for 13 percent of Windows sales as volume increased 6x over 2013.

What we see is that low-cost Windows notebooks that are price-competitive with Chromebooks are increasing sales in line with the rise in Chromebook sales (37 percent vs. 32 percent). Hence it appears that although Chromebooks sales are up 32 percent, the market share of Chromebooks within the notebooks-under-$300 segment is not increasing. What is happening is that the notebooks-under-$300 segment expanded 30%, and both Chrome OS and Windows machines increased their sales at the same rate within this segment.

Simply put, Chromebooks are not gaining market share relative to Windows notebooks in the sub-$300 segment. What’s happening is that the sub-$300 segment is rising 30%.

Within this segment, Chromebooks have 18% market share whereas Windows has the remainder. To eventually win over Windows, Chromebooks has to be growing much more rapidly. The possibility that Chromebook share is not rising at all in this segment is a huge red flag.

Looking at the big picture, Microsoft has simply made the typical response that an incumbent would make when faced with low-end disruption. Microsoft’s software business is very much fixed-cost, and hence they tend to fiercely guard market share at the expense of margins. They have also made similar responses in the past.

Nothing new here, but still interesting to see this play out according to theory.