Marketing – Naofumi Kagami

Sandwiched Products

I am going to touch on a theme that I have always sensed since I started to do marketing. That is the fate of “sandwiched products”, or products that are positioned in the middle of the market.

When Steve Jobs introduced the iPad, he was very careful and deliberate in describing the problems of a product in the middle.

Steve Jobs says, “Is there room for a third category of device in the middle? The bar’s pretty high. In order to create a new category of devices, those devices are going to have to be far better at some key tasks.”

He clearly acknowledges that creating a category of device in the middle is hard. Steve should know. He introduced the very simple product matrix, had great success, but subsequently succumbed to the temptation to put something in the middle; the ill-fated G4 Cube. Steve knew more than anyone else that products in the middle are hard.

Steve Jobs introduces the G4 Cube Macworld NY 2000 YouTube

In retrospect, when we look at the declining sales of the iPad, we can clearly see that the problem it is having is that there is no longer room in the middle. The iPad is being sandwiched by the smartphone on the one side and by the PC on the other. In particular, the improvements on smartphones are squeezing it out.

The interesting thing is that the Apple Watch is in a very different situation. Although one can draw parallels with the iPad, for example, the lack of carriers and a subsidy structure, that isn’t the most important difference. What is most important is that the Apple Watch is not sandwiched. It is totally free to explore a new dimension of computing without bumping into any significant competing category. Since it is exploring a new frontier, convincing customers of the benefits will be harder than the iPad. However, once it does convince customers, it will have the market totally to itself.

Simply put, the upside of the Apple Watch is much higher than the iPad. The iPad is now struggling to find a new niche that is not in the middle of the smartphone and PC. The Apple Watch will not have to do that. If it takes off, and data suggests that it already has, it has a broad frontier all to itself.

Sandwich products eventually get squeezed. Products at the frontiers do not.

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.

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.

Luxury versus Premium In Tech

Why aren’t iPhones being disrupted by low-end Androids?

Apple’s iPhones have retained their value (high selling price) and sales despite a large number of low-cost Android devices entering the market. The quality of these low-cost Android devices has also improved significantly, and as a result, many people have claimed that the performance difference between these and the iPhones no longer justify the premium prices. That is to say, low-cost Android phones are “good enough” in the terminology used in “The Innovators Dilemma” by Clayton Christensen.

If the low-cost Android phones are “good enough”, then Christensen’s theory suggests that the high-end iPhones could be disrupted. However, market performance of the iPhones suggest that this is not happening. New iPhones break sales records every year whilst the selling price has not come down appreciably. Interestingly, Samsung, which dominates high-end Android, has had a hard time selling its most recent flagship device this year compared to last year. If anything, what we are seeing is high-end Androids being disrupted by low-end ones, whereas the iPhone is somehow immune.

One big question is, why aren’t iPhones being disrupted by low-end Androids? Why isn’t Apple facing the same problems that Samsung is? Many people give many different explanations for this.

Differentiation alone is not the answer

A common theme is that Apple controls the whole experience while Samsung only controls the hardware. Hence Samsung has more difficulty differentiating itself from the cheap OEMs. While this is no doubt true, differentiation only matters if the unique features that you provide are useful. To illustrate this, imagine if iOS and Android were absolutely equal in utility. Then the differentiation that iOS provides would not provide a competitive advantage for Apple; it would only make them different. And being different alone will not increase your sales.

This becomes clearer if we go back to the mid 1990’s, when Apple was in dire straits. Even at that time, Apple had control of both software and hardware whereas DELL and Compaq did not. However, this did not help Apple at all. Because the classic Mac OS was no longer significantly better than the competition, differentiation was no longer positive; it was actually negative.

Although I do not dispute the importance of differentiation, it is only positive if you have a superior product. If you have an equal or worse product, then differentiation is actually toxic. Differentiation can be positive or it can be negative. Hence the key attribute that we should be looking at is not differentiation, but whether or not the product is significantly superior or not.

iPhones as a luxury

Another common explanation is that the Apple brand has now attained luxury status, and that this has made iPhones immune from feature and price comparisons. This means that iPhones can command high prices despite features being on parity with cheaper Android phones.

It also suggests that iPhones will be immune from low-end disruption as described in “The Innovator’s Dilemma”. Low-end disruption happens when technology improves the functionality of a product up to the point where it overshoots the needs of the majority of the public. Therefore, for low-end disruption to happen at all, the product must improve over time. Since luxury status is often not a function of technical progress, this makes luxury immune to “The Innovator’s Dilemma”.

I have huge issues with how the word “luxury” is used in these contexts. The way many people use “luxury” is to explain a how a high-priced product sells well despite the absence of any perceivable (at least to them) desirable functionality. They are not saying that the iPhone is luxury because it shares certain attributes with other luxury products; instead they are calling it a luxury because all other explanations have failed.

Regardless of whether the iPhone is truly a luxury or not, this is not how we should be using this word if we are serious about understanding the truth. Instead, we should strive to understand consumer behavior towards luxury products and see how the iPhone fits in.

Luxury vs. Premium

If you look up “luxury vs premium” on Google, you can see that this topic is quite often discussed.

James D. Roumeliotis sums up a long blog post with the following;

Luxury is not premium – and premium is not luxury. They are two dissimilar categories catering to different market segments.

A luxury brand is more about prestige and appearance – it’s about pedigree and social stratification. As objects of desire, they stand out as aspirational to all but a few souls. These crucial elements keep these products exclusive on purpose. Premium, on the other hand, stands for performance, value added, state-of-the-art, craftsmanship, and timeless design.

Mark Whiting conducted a market research study on luxury brands which is summarized in a blog post;

The criteria used to classify Luxury brands

Although putting a brand in the luxury or premium category is the result of a personal opinion, our Luxury Detectives agreed on seven criteria defining luxury brands.

Uniqueness: Irreplaceable objects, produced in small quantities, handcrafted. Can only be made in a specific place or country. Exclusive distribution: strategy of rarity, waiting lists, few stores. For one of our Luxury Detectives based in Los Angeles, Villebrequin perfectly captured the spirit of Southern France.

Timelessness: Products that will last that will never go out of fashion and will be passed on to the next generation.
Excellence: They will be made by skilled artisans and the finest fabrics and fabrication will be used. Culture of connoisseurship. The best customer service will apply.

Iconic Communication: A very sophisticated and codified visual universe built on dreams, desires and fantasies .
Sensual Aesthetic: Refined aesthetic that conveys sensuality, indulgence with a hint of extravaganza and it appeals to the 5 senses.

Brand Soul: Builds its identity around a creator, the history of the house, and has its roots in history.

Innovation: Brands that dare to push boundaries and surprise. They stay faithful to their roots, but modernize and adapt style to present time to express coolness

And finally, Seth Godin says the following;

Luxury goods are needlessly expensive. By needlessly, I mean that the price is not related to performance. The price is related to scarcity, brand and storytelling. Luxury goods are organized waste. They say, “I can afford to spend money without regard for intrinsic value.”

That doesn’t mean they are senseless expenditures. Sending a signal is valuable if that signal is important to you.

Premium goods, on the other hand, are expensive variants of commodity goods. Pay more, get more. Figure skates made from kangaroo hide, for example, are premium. The spectators don’t know what they’re made out of, but some skaters believe they get better performance. They’re happy to pay more because they believe they get more.

The iPhone attributes which are related to premium are;

State-of-the-art performance: Despite having lower specs on paper, iPhones have had much smoother animations and scrolling than even the top Android devices. Benchmarks, particularly on web browsing performance have also consistently shown iPhones to be faster than Android.
Craftsmanship and timeless designs: It has been widely recognized that the craftsmanship and design of iPhones are superior to Androids.

The iPhone attributes which are related to luxury are;

Brand Soul: The history of the Apple brand and the association with innovation and the life of Steve Jobs is very strong and unique.
Innovation: The history of the Apple brand has been around innovation. Many people perceive Apple to be the most innovative smartphone manufacturer.

On the other hand, some attributes that are important for luxury products, but are lacking on the iPhone;

Uniqueness: Even in unsubsidized countries, iPhones have a least double digit sales share. This easily disqualifies iPhones from being unique in developed countries.
Needlessly expensiveness: Although iPhones are more expensive then their Android counterparts, the price is not too different from Android flagships. You cannot say iPhones are needlessly expensive.
Iconic communication: Commercials for iPhones always feature ordinary looking people doing ordinary things. They do not use iconic figures going to an extravagant location in a luxury car. Apple is not sending a luxury marketing message.

We can see that although Apple does have luxury brand appeal, their product, marketing and pricing strategies are very strongly non-luxury. Instead they are squarely aimed at the premium market.

It would be very wrong to classify iPhones as luxury.

Consequences

Premium means being a high-quality product with superior performance and design/craftsmanship. Advances in technology will allow new market entrants to easily attain a premium position in the performance aspect. Also, since manufacturing of Apple products is outsourced to China, design and craftsmanship are not too difficult to copy either (as proven by Xiaomi). Hence being a mainly premium supplier means that you will feel the forces of low-end disruption, and you are in no way immune.

Premium suppliers have to make sure that their products are always state-of-the-art with the best designs and craftsmanship. In the tech world where innovation (driven by Moore’s law) is so fast that any technology risks being overridden by “The Innovator’s Dilemma” in a matter of years (witness the flat-panel TV story), this is extremely difficult. What happens is that you may be state-of-the-art, but your technical expertise overshoots customer needs and becomes irrelevant very rapidly.

It is not constructive and even misleading to categorize iPhone as luxury. As with Samsung, Apple is subject to the forces of low-end disruption and has to ensure that the iPhone is premium by making sure that it is significantly better than cheaper Androids in both performance and design/craftsmanship.

Apple has been better at making their products premium. Samsung has failed. It’s that simple.

My Thoughts on Uber

Tim Bajarin wrote a post on Techpinions about some problems with Uber from an ethical point of view towards their workers and customers.

I wrote the following comment on that article which sums up my position on Uber. I’ll put it in here also for the record.

I have always felt that Uber was not a product but a feature. Sooner or later, cab companies will adopt the cab hailing technology that makes Uber so convenient. Even regarding rates, electronic payment technologies will make variable pricing easier for traditional cabs.

For example, LINE (the extremely popular messaging service) has just introduced LINE Taxi, a Uber-like taxi hailing service. The interesting thing is that LINE will team up with Nihon Kotsu, the largest taxi company in Japan (3,300 taxis in Tokyo). This is an example of local taxi companies incorporating Uber-like hailing as a feature.

The reason why taxi companies could not create this technology themselves is rather evident, at least in Japan. Simply, the taxi industry is fragmented and is not profitable enough to develop, introduce and market the technology (the bottleneck is probably marketing). They don’t have access to the huge venture capital that Uber was able to obtain. Teaming up with LINE solves this problem.

As for the variable pricing that Uber offers, we have seen some of this happen in Japan in highway tolls and railway fares. It is reasonable to assume that as the technology becomes available to traditional taxis, they will also introduce similar flexible pricing schemes.

We also have to remember the effect the economy has on the taxi business. At least in Japan, the number of applicants for taxi drivers increase when the economy is bad and they have been laid-off from their previous job. My feeling is that the global recession was a large reason why Uber was able expand rapidly, and that if the economy recovers (maybe it won’t), they will have significant difficulty hiring drivers.

In fact, if you look beyond taxis and into other sharing apps, the sluggish economy is very likely a major driver of their popularity.

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.

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.