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@mastermmik: love how @asymco thinks of everything and everyone as being "hired" to do something. lol

via Twitter.

Hiring products to do jobs for us is not a difficult cognitive leap to make. But can we extend the metaphor to "everything and everyone?" Aren't there parts of the human experience that are outside the realm of the implied trade that hiring suggests?

Of course there are.

There is an implied rationality to the practice of hiring. Commerce itself is implicitly, at least partially if not totally, rational. Buying and selling depends on a mix of instinct and calculation. And yet much of what drives human activity is not motivated through the calculus of rational thought. It could even be argued that, as we are all gifted with emotions, instinct and passion, we are anything but rational beings.

The epitome of the triumph of the emotional over the rational is the practice of making art. Art is created to stimulate or cause appreciation. The appreciation is the reward. There is no calculation.

However, during the last century the arts have become industrialized. That is to say that works of art are produced for profit on a grand scale. The technologies of communication and media have meant that the appreciation of art has turned into the entertainment of the masses. And since these creations are made for commercial gain then it is not only fair but fitting that entertainment should be analyzed as product.

The industry resists analysis not just because it's difficult to define the product but because it's difficult to define why it's consumed. The 'job-to-be-done" framework that leads to insight about which products to build and how to design them seems to fail when we look at a product that seems to exist only to be appreciated.

To suggest that appreciation can be categorized sounds presumptuous. Human perception is infinitely nuanced and every person can perceive differently from another.

And yet, for resources to be allocated (aka. financing) or for development decisions (production) or promotion (marketing) a theory has to exist about who buys and why they do it.

The theory that seems to be in common use in the industry is that a few experts have the knack for knowing how to allocate the resources for what is created. These persons are entrusted with an increasingly large influence. There are only a few major studios for deciding what most of the world consumes in the form of either visual (cinematic) or audio (music) productions. The concentration of power is a result of the distribution model of physical media or broadcast networks. These are artifacts of a technological infrastructure that was built in the last century. An infrastructure whose replacement is unavoidable.

Its replacement will enable creation and distribuion of art to be democratized[1].

It's important to understand the jobs entertainment is hired to do. Not because the creative process can be synthesized. It's important because those creators need to learn how to allocate their own resources. A framework is needed to help dis-intermediate the resources allocators--the central planners, if you will.

In other words, learning how to create commercially valuable appreciable products should be a skill all creative people possess.

These are not complicated ideas. They don't require powers of deduction beyond the reach of the average person. What they require is perspective.

The dialogue on this topic will begin in Amsterdam on April 13th 2012, at Asymconf. I look forward to seeing you there.

—

Notes:

1. The proof of this is left to the reader.
2. This is the material accompanying the first case discussion at Asymconf. Participants are encouraged to read it before the show.

The phenomenon we call business disruption could benefit from a different name. Although it signifies a disturbance or an interruption in an industry, it's much more than that.

The nominal definition I work with is that disruption is the "transfer of wealth in an industry from dominant incumbents to disadvantaged entrants." It's a convenient definition because it's brief, it puts the emphasis on economic value and because it alludes to a reversal of fortune and the implied extraordinariness.

However, there are several nuances lost and contradictions ignored in this definition. I want to enumerate them here and now:

1. Although in a disruption there is a transfer of wealth, that wealth is not necessarily conserved. An industry that undergoes a disruption often emerges larger, more productive or more influential. Disruption typically creates net growth.
2. Although extraordinary and spectacular it is also very commonplace. Disruption is not rare. In fact, it rarely fails to happen. One could even say that if it does fail to happen, it's a symptom of an industry in crisis.
3. Being so common, it can be seen as a regular occurrence. But if the regularity of disruption can be considered to have a clock cycle, its frequency is increasing.
4. Disruption in the literal sense implies discomfort, displacement and even destruction. But it's necessary to the health of any economy. The analogy to biology is that death is the most important thing in life.
5. Although only recently characterized and studied in cases set in the past century, the pattern is evident throughout history.

I've offered examples of these consequences or side-effects of disruption but I'll emphasize once more the example I'm most familiar with. To illustrate the primary definition, the AMP index is a measure of the success of one company relative to a set of peers in the mobile phone industry. It's the average of four market shares: mobile phone units, smartphone units, revenues and operating profits.

This chart shows the shift in AMP index values for the competitors whose data is public and which make up the vast majority of units sold:

The reversal of fortunes, though not complete, is clearly evident. Motorola and Sony-Ericsson, two of the brands that were a significant part of the mobile phone landscape for more than a decade, have ceased to exist as independent companies. A third, LG, is likely to follow. Nokia, the most successful phone vendor for the decade of the 2000's is in severe distress at this time, valued barely above book. RIM, a pioneer, is priced below book value and HTC, another pioneer is also looking for a way to remain relevant.

But we have to appreciate that as these valuations evaporated, the market grew both in value and in volume. The overall spending on phones has never been higher. The total profits captured is also growing. By any standard, smartphones are a booming business. Queues form for the latest versions, there are supply constraints and media coverage is almost universal.

We also have to appreciate that the Nokia that is faltering today was itself disruptive when it gained its prominence. In the 1990s the mobile phone market was dominated by Motorola, then by Ericsson. Nokia was a relative latecomer and succeeded by being better in some regards (e.g. the ease of use of text messaging on its phones) but also by being asymmetric. Using logistics and a portfolio approach to the market allowed it to build scale while maintaining margins. Process innovation led to component shortages for competitors and allowed Nokia to build massive distribution. It also allowed it to invest in software which gave it a unique selling point for several years.

Looking into the even more distant past, the mobile phone market has seen several waves of disruption. Going from analog to digital was such a turnover. The companies which were successful with analog (mainly Motorola which supplied not just handsets but infrastructure) were sidelined when global digital standards took root. Integrated European vendors dominated a period when 2G GSM was becoming predominant. Isolated pockets of integrated innovation like iMode in Japan also had mini-booms but were swamped by standardization and the Galapagos syndrome.

And let's not forget that mobile itself has been disruptive to fixed line telephony. Looking at all telecom, the transitions from fixed to mobile, analog to digital and most recently feature-based to computing-based platforms have all been disruptive, bringing a new set of companies to lead while incumbents fretted.

It should also be noted that these changes are happening more rapidly. The chart above has a five year period. The change from analog to digital took longer. Over 10 years since its inception analog was still dominant. If we look how long it took for mobile to take consumption away from fixed, that process is still ongoing, several decades later. The speed is so slow that some countries have skipped over fixed networks altogether.

With software-defined devices and cloud-based distributed computing the changes will become even more rapid. Even though the user base is expanding to cover nearly the entire global population, the replacement rate of devices means that change in the tools and services people use are limited by supply rather than demand. Supply-based innovation or "the new manufacturing" will probably be the dominance-defining asymmetry of the next decade.

The disruption of mobile phones that Apple has foisted on the world through iOS has caused it to reach a point where it dwarves the values of other companies, not just in the sectors it competes, but in all sectors. Some suggest that Apple is an anomaly and does not reflect the economy. To truly understand the state of the economy, they say, means to subtract Apple from it. But I feel this is exactly wrong. Apple is, through the iPhone and iOS ecosystems, defining this era. Just like Microsoft defined an era of increased productivity through the creation of the "knowledge worker", or like GM re-defined transportation and the notion of the brand in the 50's, or like IBM re-defined business process efficiency with automation in the 60's and 70's, these companies were not anomalies of their era. They were the eras. They were the locomotives of growth that taught other companies how to operate and the contemporary managers how to manage.

Companies that study Apple today will benefit by understanding how it re-wrote the rules. The anomaly is the norm. The exception is the rule. The times they are indeed a-changin'.

Finally, to put disruption in a historical perspective. I wrote a retrospective on the history of the telegraph as a parable of how disruption could be interpreted to have happened even a century ago. What I hope to do now is to show how, given this set of spectacles, we can see how the fate of nations was determined, in part at least, by the ability of leadership to accommodate disruption.

The case of growth or limits to that growth, the question of integration vs. modularity and the evolution of value chains all have application for regulators, policy makers and political leaders.

The dialogue on this topic will begin in Amsterdam on April 13th 2012, at Asymconf. I look forward to seeing you there.

---

Notes:

1. This is the material accompanying the first case discussion at Asymconf. Participants are encouraged to read it before the show.

Regarding the recently proposed Reception and workshop at the Apple Investor Summit, registration is now open.

You can purchase tickets here: asymco-workshop

Details and venue:

Time: 6:30 PM Thursday, March 15th
Location: Room 511, Los Angeles Convention Center, West Hall (across from the Ballroom).

 

At last year's iPad 2 launch, I compared the specs of the newly announced iPad with those of a laptop and desktop from five years earlier. This year I am comparing the new iPad with Apple's computers from four years earlier:

The new iPad now exceeds the total display resolution, has similar speed and storage capacity while having twice the battery life of the thinnest laptop of four years ago. It also has very high quality cameras and GPS and cellular network connectivity which have yet to appear on mainstream PCs. It's still a lot smaller and half the price and has a larger selection of available software titles at prices a fraction of its elder cousin.

The only value that a desktop of 2008 has over a new iPad is the size of the screen and a larger hard drive.

The point is not so much that the usurper is a "better" computer but that it has come from non-existence to being a contender in two years. It is also narrowing the gap to its comparable ancestors by one year, every year. Arguably that gap now stands at four years.

The latest comScore US mobile subscriber monthly data is in: comScore Reports January 2012 U.S. Mobile Subscriber Market Share - comScore, Inc.

January saw a return to trend line growth in US smartphone add rates. The 767k/week rate is within the band after November's below- and December's above-the-line outliers. The weekly add rates are shown (with projection of trend) below:

The pattern shows a likely 1 million new smartphone users per week being added consistently by the fourth quarter of this year.

Overall, penetration of the sampled population (above age of 13, primary phone and excluding business purchases in the US) reached 43.3% in January. The increase was 1.45 points from December.

A significant 35 million US users  switched to smartphones in the last 12 months, equivalent to 15% of the user population. My current forecast is that 50% of the user base would be smartphone users by June 28th.

The platform data shows a continuing pattern. In terms of absolute users Android has reached nearly 50 million users, iPhone 30 million, BlackBerry 15 million and Microsoft (Windows Phone and Windows Mobile combined) 4.5 million.

In terms of market share of the smartphone population, the various platforms stack up as follows:

The net gains for each platform by month are shown in the following diagram:

RIM and Microsoft have continued to lose users while Google and Apple have continued to gain.

The two trends that continue are that overall penetration is nearing saturation and that two platforms seem to be increasing their share of that base. The "comeback story" for any of the hopefuls will depend either on switching users away from their current platforms of trying to engage with late adopters. The first option is daunting due to latent network effects related to platforms and the second sounds to be symmetric to existing incumbent strategies.

Without an asymmetric approach, the challengers are unlikely to succeed.

This is a reminder that I will be speaking at the Apple Investor Summit on March 15th at the Los Angeles Convention Center. My topic will be Apple's capital expenditure structure and how that foretells strategy. I will present previously unpublished data and review the likely scenarios for 2012 iOS device production. As I prepared it I realized that with only 45 minutes there is a limited amount of detail I can provide.

To remedy that and to offer an opportunity to have a detailed question and answer session on related topics, I decided to offer a workshop-like reception at the end of the day. The time would be around 6:30 PM on the 15th and last at most two hours. The location will be in the vicinity of the LA Convention Center.

If you are interested in participating, please let me know so I can decide the type of venue to rent. Please also note that there will be a cost involved and pricing will depend on the number of participants. My current estimate is that the price will be $150 per person.

We've been very, very focused on China. China, we've had incredible success with iPhone. Over the past few years, we've gone from a few hundred million dollars of revenue in greater China, to last year $13 billion. So we really've been focused on trying to understand the market there and then taking those learnings to other markets. As it turns out--and not very many people agree with me on this, probably--but what I see is that there's a lot of commonality in what people around the world want.

Transcript: Apple CEO Tim Cook at Goldman Sachs - Apple 2.0 - Fortune Tech

People do want the same things globally, but due to various constraints they typically don't get the same things at the same time.

One of the most important constraints on the purchase of iPhones is the state of 3G (or, more broadly, mobile broadband) networks. An iPhone is a mobile computer whose primary value is derived from high bandwidth data communication. Because this bandwidth is not universally available, the iPhone faces a restricted addressable market.

The good news is that 3G networks are being adopted very quickly. The International Telecommunications Union reports that 20% of mobile users have "active subscriptions to mobile broadband" (1.2 billion out of 6 billion). That's encouraging but the subscription rate varies widely by country. Ideally we should look at the data on a country-by-country basis.

To start, I took a look at two countries which may form an interesting sample: the US and China. The following chart shows the subscriber structure in the two countries grouped by 2G/3G subscription and by operator.

The two left-most columns represent nominally addressable iPhone markets. The two right-most columns represent currently unaddressable markets. Note that

although China is a far bigger market, the lower 3G penetration means that the theoretically "addressable" market for the iPhone is smaller in China than in the US (136 million vs. 183 million respectively).

However, there are further restrictions. Apple does not have distribution agreements with many (most?) of the world's operators. In these particular countries, China Mobile, T-Mobile and "Other" US operators do not distribute the iPhone. We should subtract those operator customer bases out of the addressable market. But those conditions are variable: operators may sign up for future versions of the phone and 3G subscription rates are increasing. That means we can segment the market as follows:

1. Currently addressable operators and 3G subscribers
2. Potentially near term addressable users if all operators agree to distribute the iPhone in these countries
3. Potentially longer term addressable users if all users switch to 3G and all operators distribute the iPhone.

This segmentation leads to the following diagram.

I also added the current users given comScore data for the US (29 million) and an estimate of 8 million Chinese users. Here are some observations:

1. 10% of China's currently addressable market is penetrated while the US penetration is 18%.
2. If all operators would agree to distribute the iPhone (i.e. including "Near Term" in the addressable total), the Chinese penetration would be 6% and the US 16%.
3. If we include all users as addressable, China is about 0.8% and the US is at 8.5%.
4. The penetration of the iPhone in the US and China combined therefore stands at about 3% today.

The question that comes next is what is a reasonable limit to total penetration? What can we reasonably expect or what could Apple reasonably target?

I've been using a global share of 20% as a reasonable target to test growth assumptions. Assuming no significant growth in user bases, 20% share in the long term (>5 years) yields a total of about 258 million users. That's equivalent to a 7x increase. Put another way, a 5x increase yields a market share of 14%.

Note that these are "penetration" figures or share of available users. This is in contrast to share of units sold in a given quarter. Apple has maintained 20% share of smartphones fairly consistently. If share of units sold in any given time period remains at or above 20% and if smartphones and 3G networks become ubiquitous then reasonable men might consider these targets obtainable.

I truly believe, and many others in the company believe, that there will come a day that the tablet market in units is larger than the PC market.

Tim Cook Discusses Q1 2012 Results - Earnings Call Transcript - Seeking Alpha

Question is when?

I began by projecting growth rates of various market participants including the leading Windows PC makers (HP, Acer, Dell, Lenovo and Asus), the combined "others" and the Mac. I also added the iPad, Samsung's tablets, other Google sanctioned Android tablets and Amazon. I also projected a split between traditional and tablet Windows shipments.

The underlying assumptions are:

1. Mac growth continues at 25% as it has on average for a few years
2. Windows grows slightly in 2012 with the introduction of Windows 8 late in the year. However I anticipate Windows 8, including tablet versions, to mostly be upgrades with slow enterprise take-up within this time frame.
3. The tablet versions of Windows begin shipping in Q4 2012 with 7% of total Windows shipped. The ratio reaches 20% by end of 2013.
4. iPad growth will flatten for '12 and '13 at 100%, similar to iPhone's historic performance.
5. Android tablet growth will be significant in the current year and follow iPad growth pattern though settling at 80% during '13.
6. Amazon growth will be approximately 80%.

Building the platforms combined growth bottom-up gives the following forecast for the next two years (and historic growth shown for perspective.)

[FF = form factor]

Given these assumptions, the day when the tablet market (by units) will exceed that of traditional PCs will come sometime in the fall of 2013.

As yesterday's post noted, the tablet market will be additive. This can be seen in the vendor shipments forecast that accompanies the model:

When cellular phones emerged in the 1980’s wireline phone service was excellent. Penetration was at 99 percent in the United States and prices had never been cheaper. The industry was deregulated and phone companies were competing fiercely over long distance calling plans. In contrast, the new cellular phones were not “good enough” on the basis of what was considered necessary for making critically important phone calls.

Sound quality was poor, coverage was spotty and battery life measured in minutes. But they allowed a whole new consumption model of communication to emerge. They allowed a caller to call a person not just a place. Over time, this simple value proposition caused a powerful profit formula to emerge. That formula led to extremely rapid improvement in the quality of the network and devices that connected to it.

It caused such a cataclysmic change that twenty years hence it became possible (even natural) for consumers to “cut the cord” and abandon wireline communications altogether. The “excellent quality” wireline industry was dead to be replaced by the "good enough" wireless industry.

One consequence of mobile telephony was increased consumption. Voice call minutes increased dramatically because calling could happen anytime from any place. While overall consumption increased, landline use decreased. Then came messaging of various types. Forms of communication enabled by cellular networks that simply did not exist before with landlines.

As a result there were vast pools of profits available to telcos that seemed to appear out of nowhere. SMS and data plan income was beyond anyone's ability to forecast in the 1980s.

The same phenomenon is happening with smartphones. Consider a proxy measure: operating profits from mobile phones since the iPhone launched, illustrated below.

Although Apple went on to capture 75% of the profits, it did so from a vastly expanded profit pool. A similar picture emerges from an illustration of revenues:

Another way to visualize the evolution of the market is to look at the combined price, profit margin and volume areas for the fourth quarters of 2009, 2010 and 2011.

Scanning from top to bottom, you can see how volumes grew, revenues grew and profits both grew and were re-allocated among participants (each colored pixel in the charts above is equal to about $1 million.)

These charts illustrate that there is no "law of conservation of profits" in any market as long as there is sufficient innovation. This is because the there is no "law of conservation of value created". If value is presented, buyers will gladly trade cash for it. Conversely, if there is no value-generating innovation, growth stops and competition reduces to a zero-sum game.

One of the most exciting aspects of disruptive growth is that although it tends to transfer profits from incumbents to entrants, it also grows the size of the overall market. Sometimes the growth is significant.

The most challenging part is how you're going to tell a story with just images and no words.

Words are very efficient but my belief is that to say the important things you don't use words.

Knowing that when you do your visuals you have to be very careful with every thing that is in the frame.

Because every thing tells a story.

And sometimes you have just a small detail, but it looks too important. So you have to put it outside the frame because it tells another story.

With apologies to Michel Hazanavicius, director, The Artist

The Artist - Michel Hazanavicius on Vimeo

The latest data from Google shows that the Android activation rate is increasing at a relatively steady rate (i.e. acceleration is constant). The data provided so far is in the blue circles below. The green line is the interpolation and extrapolation of that data.

As the graph is projected forward we get an activation rate of one million per day by mid August of this year. If it continues then we could see 1.5 million per day by end of 2013.

The corresponding number of cumulative activations is shown on the following log chart (with blue circles showing the actual data and the green estimates.)

The forecast is therefore that Android activations will cross one billion by November 2013.

The following chart compares the growth ramps of the various mobile operating systems indexed from the same starting points (measured in quarters after launch).

If Android does keep accelerating at the same rate then it will reach a billion users in five years. Of course, this total will not be a unified ecosystem in that many versions of Android will be co-existing. There will also be additional variants of Android which will not include Google services (these are not included in the totals above) which will compete to some degree with this platform.

However, it's still an amazing story. The crucial question is whether the billion Android phones will have an effect on the opportunity for new entrants like Windows Phone and future BlackBerry variants as well as Bada and other Linux-based platforms.

The answer is that there will be well over 6 billion mobile "connections" by the end of 2013. ITU reports that "By the end of 2010, there will be an estimated 5.3 billion mobile cellular subscriptions worldwide, including 940 million subscriptions to 3G services." It follows then that if this forecast is correct then by the end of 2013, Android will have about 17% penetration of the connections market.