Personal Computers and Mobile – Page 14

Will Attractive Profits in the Android Ecosystem Move to Component Makers?

In a previous post, I discussed that Clayton Christensen’s “Law of Conservation of Attractive Profits” predicts that attractive profits will move from the Android OEMs towards adjacent layers in the value change.

One possible layer is the SoC component manufacturers. I am very unfamiliar with this market, but I think that in this market, Qualcomm has historically been very strong with its Snapdragon series of chipsets. The new rising star is MediaTek which is very popular among the new OEMs like Xiaomi and MicroMax which sell their smartphones at very low costs. It seems like the rise of MediaTek is recently pressuring Qualcomm.

Unlike the Smartphone OEMs, many of which are having trouble generating profits, Qualcomm and MediaTek are quite profitable. Apparently due to its focus on emerging markets, MediaTek’s revenue growth is quite remarkable, up 62.7% year-on-year.

Whether or not the SoC component layer will earn attractive profits depends on the structure of the market, barrier to entry, capital intensity, commoditization or Android hardware, bargaining power relative to Android OEMs, bargaining power relative to Fabs, etc. It will be fascinating to watch how this market evolves. Unfortunately, I don’t have enough understanding of the market to make a reasonably informed prediction. My gut feeling however is that the situation may eventually resemble the PC market, where Intel owned a huge proportion of the attractive profits.

More on Attractive Profits in the Cloud

I’ve been touching on the subject of commoditization of the cloud a couple of times on this blog(1, 2.

Today, I’ll like to look at the current players and how a possible commoditization of the cloud will affect their businesses. That is to say, do the current players own an adjacent layer in the value chain that can reap the attractive profits.

Barb Darrow at GigaOM, citing Rick Sherlund from Nomura Securities, gave some estimates on which companies are are making money from their cloud business (below). It is clear that Amazon AWS is losing it’s position as the dominant cloud vendor. The other companies, Salesforce, Microsoft, IBM and Google are significantly narrowing the gap. Microsoft and IBM in particular have very high growth rates relative to AWS.

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Given that cloud services are in many ways similar to rental servers, and that it is probably difficult to maintain differentiation, it is likely that prices will drop and cloud services will commoditize. When commoditization happens, Christensen’s “law of conservation of attractive profits” predicts that the attractive profits will shift to an adjacent layer in the value chain. Here I would like to see if the current players in this market will be able to capture the profits as they shift.

Microsoft, IBM: Both of these companies are very strong in enterprise IT. As the cloud commoditize and enterprises move their data centers into the cloud, Microsoft and IBM could easily provide value through consultation and customized services. They are both well positioned to take advantage of cloud commoditization.
Salesforce: Similar to Microsoft and IBM, Salesforce will benefit through consultation and customization for the cloud services.
Amazon: I can’t see any of Amazon’s strengths in the layers adjacent to the cloud. I don’t see them benefiting at all from commoditization of the cloud.
Google: Google makes almost all of it’s money from advertising, and it doesn’t make much money (at least not directly) from other activities. Hence it is difficult to say whether they are capturing profit or not in any of their activities other than search. Likewise, it is difficult to discuss how the commoditization of the cloud will affect them.

Understanding Microsoft’s Business

Jan Dawson recently broke down Microsoft’s revenue and growth by business segments. This helped me to understand the significance of the enterprise segment and at least partially understand the direction in which it is moving.

Points that caught my eye;

Windows revenue is dominated by sales through OEMs. “Windows OEM revenue” is 15.5% of total whereas “Retail and other sales of Windows” is only 0.5%. This means that very few consumers upgrade Windows themselves, and continue to use the OS that shipped with their machine. This suggests consumers are indifferent about the new features provided with new Windows versions. When you think about the new features in Mac OS Yosemite, you realize that a lot of these are actually about integration with iOS devices and not about Mac OS X itself. It’s something worth thinking about.
Consumer Office revenue (3.0% of total) is puny compared to Commercial Office revenue (25.0% of total). Although this may suggest that Google Docs is dominating in the consumer space, I think this may also suggest that consumers don’t really use Office suites very much. I have seen very little data strongly supporting either possibility.
Server products are really quite strong. It’s amazing that sales continue to rise despite the rise of cloud computing. I would really like to understand what is happening here, and whether this strength will continue.

Why I Think Zero Rating is Good

I have previously written about the rapid rise of “zero-rating”, that is the practice of carriers providing free access to specific web-sites or Internet services, but charging for access to other sites.

This is in direct conflict with the net neutrality ideology which argues that (citing wikipedia);

Internet service providers and governments should treat all data on the Internet equally, not discriminating or charging differentially by user, content, site, platform, application, type of attached equipment, and modes of communication.

Just recently, the Internet.org initiative sponsored by Facebook released an app for “zero-rating”. Through this app or the Facebook app, customers of Bharti Airtel’s Zambian subsidiary will be able to access the following services with free data charges.

Facebook and Messenger
Wikipedia
AccuWeather
Google Search (Search only. Data will be charged if you click a link to go to another site).
Local services such as job portals.
The women’s rights app WRAPP.
A basic library of Zambian laws.

I really like the selection. It is so noble.

If I was somebody like Nelson Mandela, someone who was working hard to bring democracy, freedom and equality to Africa, I would probably select the exact same services.

At least for our children, I’m sure most parents would choose something similar to the above selection over the commercialism driven “net-neutral” Internet.

As these “zero-rating” data plans become more popular, we can expect many more services coming on board. I hope that Facebook and the carriers will manage to resist the lure of commercialism, and continue to select the good ones and reject the bad ones based on a high ethical standard.

Amazon’s Hardware Strategy Mystery

Ben Bajarin recently tweeted a chart showing how tablet market shares have changed since 2011.

BenBajarin 2014 7月 25

In Ben’s tweet, he noted how Amazon’s market share has now become very small, and that is certainly true. Although Amazon’s share tends to rise sharply in the holiday season and we can still expect another bump in Q4 of this year, 14Q2 is seeing very very small sales for Amazon.

At this point in time, I think that it is worthwhile to review how Amazon started selling the Kindle Fire, and how its strategy has unfolded.

The Kindle Fire launched in 11Q4 at a very low price of $199 (compared to $499 for the iPad) which was only possible because Amazon subsidized the price.
The Kindle Fire was the catalyst that showed how Android tablets could take market share away from Apple. Up till then, companies like Dell and HP had tried to compete with Apple without any noticeable consequences. The extremely low cost of the Kindle Fire finally allowed Android tablets to start expanding market share, and it became obvious that Android tablets had to be priced in this domain if they were to ever sell well.
The Kindle Fire was a low-end device and omitted many features that were present in the competition.
The success of the Kindle Fire demonstrated for the fast time that Android tablets could compete against the iPad under the condition that the price was kept under 200 USDb (many Android tablets had previously tried to enter the market, but all had failed).
In particular, Google’s Nexus 7, which was released in July 2012, was obviously designed to match the successful formula that the Kindle Fire had pioneered; a 7-inch screen and a price below 200 USD. The Nexus 7 shows up in Asus sales in Ben’s chart, which was significantly elevated since 12Q3.
Amazon released the second generation of the Kindle Fire in 12Q4 with a price reduction to $159. They also released two higher-spec versions, the Kindle Fire HD priced at $199 and $299. With these updates, Amazon saw market share similar to what they saw with the first version.
Amazon released the third generation in 4Q13 for 139 USD, again together with two higher-spec models ($229 and $379). Amazon again saw good sales in the holiday season, but sales dramatically dropped in the next year according to Ben’s chart.
Importantly, the Nexus line of tablets (produced by Asus) also lost steam after the initial introduction.
The only branded tablet that saw an increase in market share during this period was Samsung. Although I cannot find pubic data that explains Samsung’s rise, it is likely that Samsung’s sales were the result of bundling with smartphones and possibly TVs; they weren’t selling by themselves and people got them even when they didn’t really want them.

We can clearly see that despite initial expectations, the Kindle Fire tablets have not really grown to be a strong contender in the tablet market. This is also true of the Nexus 7 lineup. The question is, could Amazon have done better?

We know that a large part of the “others” in Ben’s chart are non-branded tablets, which are generally very cheap, low quality and come out of the Chinese technology ecosystem. These have been selling mostly for watching video. Samsung’s sales also come from bundling which means that the cost to the consumer is very low or maybe even free. What this means is that although the Kindle Fire was just about the cheapest usable tablet when it debuted, that is no longer the case. Kindle Fire languished because it was no longer the cheapest tablet that was barely usable.

This suggests that Amazon could have done better with the Kindle Fire if they had continued to pursue their low-end strategy. Instead of moving up-market with the Kindle Fire HD and HDX, they could have instead gone lower into possibly sub-100 USD price points. They could have even provided the Kindle Fire for free with an Amazon Prime membership subscription. In fact, this is exactly the strategy I had expected Amazon would pursue. I actually wrote a blog post back in October 2011 (in Japanese).

In my old blog post, I expected Amazon to focus on creating a tablet that was so limited in features that the only thing you could do with it was to consume content. I expected that Amazon would continue to omit the camera, mike, gyroscope, and cellular connectivity, because these were not essential for reading books or watching videos. They could even have continued to use Android 2.3 as the base for their OS.

This is not the strategy they pursued. Instead of staying at the bottom, they moved up to the mid-market segment. Even though Amazon’s prices decreased, competitor prices dropped even faster. The Kindle Fire is no longer a product that stands out in price, and as such, it has lost its unique appeal. No wonder that sales are not expanding.

It’s a mystery to me why Amazon is pursuing the mid-market in hardware. If you look at the recently announced Fire phone, they are even trying to sell a high-end phone with a significant profit. My opinion is that aiming for the mid- to high-end does not make any strategic sense for Amazon. I am totally bewildered and I’m suspecting that Jeff Bezos is starting to get confused.

China Telecom Exclusive Partnership to Sell XBox One in China

As I have written before, I am suspecting that the commoditization of smartphone hardware is shifting power to carriers.

Recently we have learned that China Telecom has formed an exclusive partnership with Microsoft to sell the Xbox One in China from September 2014.

I do not have enough knowledge of the market to make any conclusions, but I sense that this is a part of a general trend towards carriers exercising more power over hardware vendors. It will be interesting to see how this story unfolds.

Mobile Payments in Africa

Steven Sinofsky wrote a great post on Re/code describing mobile payments in Africa. There is so much important information in here and I’ll probably have to read it several times to fully appreciate it.

Here, I just want to mention one thing.

That is, “Necessity is the mother of invention”.

Importantly, necessity is very different depending on where you live. If science & technology were essential for invention, then the U.S. would dominate globally. That is not the reality.

Innovation happens everywhere, in places where you least expect it, regardless of technical prowess.

Innovation does not necessarily “trickle-down” from the U.S. In fact, it could trickle-up if we gave it a chance.

Priorities

Recently we saw two reports about bugs in the Chrome browser on Windows.

One bug was about font rendering. It turns out that fonts on Chrome looked bad because Google neglected to update Chrome so that it would take advantage of the new font rendering technology provided by Windows.
Importantly, both Internet Explorer and Firefox had been using this technology for ages, and Chrome was the only major browser that was still using the old, outdated font rendering API.

The other bug is related to battery consumption. Apparently Chrome fails to throttle down its power consumption even when the browser is just running in the background. This bug can be traced back to 2010, which means that Google has knowingly neglected this bug for 4 years.

This eloquently tells us what Chrome’s priorities are not. Chrome does not prioritize beautiful font rendering and it doesn’t prioritize low power consumption.

Interestingly, this is in direct contrast with Apple. Apple prioritized typography and has very good font rendering. The quality of the fonts are also very high. In power consumption, Apple has emphasized this on their mobile devices, their laptops, their operating system, and even specifically on Safari for quite a while.

Chromebooks in Schools

It seems that Chromebooks are quite popular with schools.

I’ve covered this topic before and the story hasn’t changed from then.

What continues to be interesting is that Chromebooks appeal is not necessarily to the end-users, but to the “orifices”. The TechCrunch article explains;

A lot of schools were sold on iPads right after those became available and students probably still prefer them over Chromebooks, but they are relatively expensive compared to Chromebooks and harder to manage. Google also offers admins easy ways to manage large Chromebook deployments from a single console while Apple is still catching up when it comes to this.

Basically, Chromebooks are sometimes preferred over iPads because the hardware costs and the school IT administration costs are cheaper. And the reason they are easy to administer is because there is less that you can do with them.

I see Chromebooks as the equivalent of cash-registers.

Not a very sexy topic.