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Asymmetric Intelligence

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  1. Why Eric Schmidt had to go: Google's innovation dilemma

    Research · 48 comments

    Charles Arthur provides a convincing back-story to the Google exec re-shuffle.

    Google shuffle: why Eric Schmidt had to be pushed from the top | Technology | guardian.co.uk.

    There is evidence of execution failure and indecision or muddled messages to stakeholders. Shared leadership arrangements never end well.

    But in this forum I've been critical of their strategy. Though I'll be the first to admit that such criticism is not founded on data but on intuition, strategy is always made in a vacuum of data. It is just an unfortunate fact of life that we don't have data about the future.

    But what data we do have is about the past and it shows the contrast between Apple and Google.

    As a sample, let's look at the performance in the last quarter:

    [nohang]

    GrowthGoogleApple
    Revenue26%70%
    Earnings29%75%
    P/E24.1318.57

    [/nohang]
    Apple grew about 2.5x faster. The companies are in very different businesses, but the money they make is the same color. The investors have been paying attention:

    Source: Google Finance.

    In 2005 and 2006, Apple and Google were neck-and-neck in terms of returns to shareholders. However, with the iPhone's arrival in 2007 the stocks diverged. Google gained 38% since January 2007 while Apple gained 300%.

    However, going forward, the market is kinder to Google than to Apple, punishing Apple's 75% growth with a P/E of 18 (ex-cash 15) and rewarding Google's 29% growth with a P/E of 24 (22.5 ex-cash) . Although Google's P/E is proportionate relative to its growth, Apple's P/E implies deep pessimism.

    But does Google's performance suggest management failure? Certainly not. It's been a great performance. Google is arguably at the top of its game. Market share of search has never been better.

    Cracks in strategy are hard to spot. One hint is that most of Google's R&D efforts are defensive. Building browsers and mobile operating systems are methods to ensure they have distribution of search to as many screens as possible. These are expensive means to ensure channels are available for distribution. Expensive not only in terms of engineering costs but also in terms of relationships and opportunity costs.

    But even a defensive posture is not sufficient for management change.  What I think is the most serious failure is that for the past five years Google has not addressed the possibility of search itself becoming commoditized. Social media and app economies are asymmetric to search. They make money in different ways and appear to be less efficient or effective means to reach users, but they are growing. Facebook has overtaken Google in terms of page views and apps are a new interaction model for cloud-based content that does away with the indexing model Google champions.

    The real condemnation of the leadership at Google is that there has been a failure to create entirely new disruptions. As the stock chart above confirms, Android and Chrome are, if successful, sustaining technologies for Google. That's not going to be enough.

  2. iOS users download about 5 apps every month

    Research · 9 comments

    Thanks to a reader for asking this question: "Wouldn’t it be more telling to look at the monthly rate of downloads / device at any given time?"

    Yes it would.

    Here's what can be derived based on download rates and installed base of devices.

    Please note that I am assuming that the number of devices put out of use is negligible. In defense of this, I would argue that the vast majority of iOS devices sold are still serviceable and are re-sold. However, the estimate should be rounded down.

    The data shows that there's been a slight trend upward in download rate/user but it's been fairly steady.

    The implications are interesting: if you know the number of iOS devices in use, you can determine the app economy turnover with reasonable accuracy. If you also know app ASP, you know sales, and even margin.

    Conversely, if you know the app download rate you can derive the device installed base.

    So in September I looked forward to an iOS user base of 500 million. It could be reached by 2013. Assuming each user downloads 5 apps per month that would mean 2.5 billion downloads per month.

    That's two years away.

  3. How long before apps overtake physical video game content sales?

    Research · 28 comments

    After reviewing the payments to suppliers, we can look at the store's revenue generation rate. With the same assumptions, we have the following chart:

    We will have to wait for another report to see whether the recent burst of volume from apps is sustained[1], but the trend shows income from apps narrowing the gap to music. In the last few months apps may have been generating $300 million/month[2].

    The blue line above can be interpreted as an arrow aimed at the music industry. We know how that turned out. The red line above can also be interpreted as an arrow aimed at the gaming industry. What are the chances it will play out the same way?

    According to NPD, U.S. retail sales of new physical video game content, which includes portable, console and PC game software, generated revenues of $10.1 billion in 2010. That's $840 million per month. A big number compared to the app business. The trouble is that the figure is going down (-5% from the year before).

    If you look at the red line above and its slope, it would indicate that, given time, the App store will overtake the entire physical media gaming industry. The time when that happens will depend a lot on the growth or decline of the physical game media business, but another four years seems a safe bet.

    Would this cause the same effect to the industry as digital music had when it replaced physical media? I would say yes. The main reason is that physical media has associated with it a different sales cycle and margin. These factors determine the processes and cost structures of incumbents. Such changes are very difficult to absorb and adapt to.

    ----

    Notes:

    1. App sales are highly seasonal as there is a burst of downloads post-holidays.
    2. Apple reports iTunes income in financial reports. In the third quarter it reported $1.2 billion in revenues. This is roughly consistent with the data above given that the analysis excludes iBooks, Movie and TV Show sales and rentals.
  4. iTunes has paid over $2 billion to app developers and $12 billion to record labels

    Research · 13 comments

    The last analysis of the iTunes content store showed amazing acceleration in download rates. Since we know something about the pricing of apps in aggregate, we can make some guesses about the income from apps for both Apple and suppliers.

    The key assumptions are:

    1. Average selling price per app $0.29 (as reported in June 2010 here).
    2. Price per song $.99 increasing to $1.05 over time
    3. Music gross margin 10%
    4. App gross margin 30%

    The first chart shows the accumulated payments made to suppliers of content to the iTunes store over time.

    Although the music suppliers received in aggregate much more than developers, the iTunes store has been open much longer. When comparing sales acceleration, the App store is ramping faster having paid out $2 billion in 31 months vs. 34 months for the first $2 billion paid out for music.

    My guess is that a follow-the-money analysis would show that apps as a medium will absorb talent and capital away from existing mediums and the industries they support.

  5. More than 60 apps have been downloaded for every iOS device sold

    Research · 33 comments

    The iTunes App Store is about to reach 10 billion downloads. That makes this a good time to revisit app growth metrics and compare them with the other digital media store that we have data for: the iTunes Music Store.

    First, the download totals as time series[1]:

    Assuming that 10 billion will be reached this month, we see how the steepness of the app curve implies that apps will overtake songs within a few months. I suspect by March.

    In September I made the prediction that total apps would overtake total songs sold by the end of 2010. That has not yet happened, but it's close.

    If we measure downloads as a function of the number of months since store launch, we can see that Apps reached 10 billion downloads in less than half the time it took songs (31 vs 67 months.)

    I used polynomial curve fitting to draw the lines.

    The other way to look at the data is by measuring the daily download rate. The data is more scattered, but the trend is still clear:

    (The solid lines are linear trendlines. I added the known data from Nokia's Ovi for comparison.)

    The amazing story of this chart is not that apps are running at above 30 million download per day, but that the figure is growing. Growth like this is hard to get one's mind around. Not only are downloads increasing, but the rate of increase is increasing.

    There is one final piece to put in place on this puzzle. Some might argue that the reason these download rates are increasing is because the installed base of devices is increasing at the same rate. In other words, app consumption could be steady on a per user basis.

    To answer this we need to divide the cumulative apps downloaded by the cumulative devices sold. Using a reliable estimate for iPod touch units sold, we can get a pretty clear picture:

    The number of apps downloaded for iPhone/iPad/iPod touch is running at more than 60[2].

    In the fall of 2008, there were about 10 apps downloaded for every iPhone/iPod touch. Two years later the rate was more than five times higher. There are significant implications for the network effects related to the iOS platform. End user investment in apps is even higher than end user investment in music which created a very tight lock for iPod users.

    I draw three conclusions:

    1. Apps overtaking digital music is a watershed event. Apps are a new medium: they will impact all other media.
    2. As the number of apps attached to any single device continues to increase, apps create increasingly higher switching costs for users.
    3. Apps consumption is increasing at a rate to overtake the PC software market.

    ---

    Notes:

    1. The total apps does not include updates.
    2. The attach rate is actually higher since the figures above assume all devices are still in use.
  6. How sticky is Android?

    Research · 204 comments

    There is an assumption floating around the debates in this and other forums that the "battle" between mobile platforms is a land grab. The unspoken implication of this assumption is that once a user is captured she is permanently locked into the chosen platform never to move to another again as long as she lives.

    For example @dutchtender remarked:

    many people's first smart phone will be android. android can take them "cradle to grave." android will be there with a higher end solutions when they can afford it

    This is a strong but untested claim. It may be true but we owe it a bit of thought.

    A long time ago I tried to model platform growth is by using a version of Metcalfe's law. I suggested that the value of a network is proportional to n log (n) where n is number of nodes in that network[1]. This was somewhat based on common sense as it measures the possible links between n nodes with degradation due to the limits of social graphs.

    The value the network creates is what developers as well as all the other participants in the ecosystem are able to tap into. The platform vendor gets to capture a share as well of course. As the value grows it tends to create network effects or a self-reinforcing cycle.

    What I'm saying then is that we can treat a platform as a network, where each node is linked to another node by the commonality of experience.

    The proxy of the model was Windows. Twenty years ago, having Windows meant that you could exchange files with other Windows users simulating a sort of network protocol. You could also ask your peer group for help and get software tips and new consumption ideas. So the more people used Windows the more likely it was that you also had to use it. Avoiding Windows limited your ability to be part of productive society (this is no longer true by the way, which is one reason Microsoft is in trouble).

    If we fast forward to the mobile post-PC world, when it comes to platforms the shared experience is that of apps. People can communicate their app experiences and their usage better if they have the same platform. They can also learn from each other how to better use the products and how to solve problems. The more people that use a mobile platform, them more value it generates for platform participants.

    The other factor determining value is that a platform also creates sunk costs. Usually called "investments" by users these are costs that are incurred and have a potential for future value. This means that the apps purchased and time spent learning and adjusting to the platform are sunk costs which users are reluctant to abandon. (Notwithstanding the fact that as sunk, these costs should be ignored when comparing the value of another platform,--psychology is what keeps users loyal even if it's not in their best interest.) This "sunk" factor of value is not as powerful as the sharing of experiences value since it does not scale with the number of users. That cost is a constant multiplier on top of the n log (n).

    So the overall "value" of a platform is K n log(n). Where K is the stickiness of sunk costs.

    Can this be stated plainly without the math?

    When you compare two platforms you have to ask how contiguous users (n) grows and how stickiness (K) grows. The issue with fragmentation is that it actually cuts n. Many people won't be able to share experiences if their devices don't work the same way. Same with geographic density of a platform. If, as was the case with Symbian, there are few segments that became saturated with the platform then n is reduced.

    The issue with a lack of paid or compelling apps is that it cuts stickiness, so that you don't have any sunk costs. Similarly the presence of ported or common apps means that K is reduced for any single platform. Nokia's Symbian has a serious problem with both consistency and with commonality of experience. RIMM depends too much on the commonality of messaging which is quickly becoming a commodity due to portability of the experience.

    So in the end it's not just about how big the user base n is (which is the only thing that is measurable). It's how contiguous n is and how compelling the content.

    This is too sketchy a model to be practically applied but it offers a thought experiment: does any given platform have

    • A large, contiguous user base with strong concentrations of users in the same demographic or psychographic segments?
    • A significant set of unique content (apps) which require costs from the user (in terms of data, time or cash)

    It's not a clear cut case in my mind that Android benefits from these as much as iOS does. If that's the case, users are more likely to be moving on a one-way street between these two: from Android to iOS and not vice versa. The same thought experiment can be engaged in between any two platform contenders.

    ---

    [1] Metcalfe's law is actually an n*n growth curve but recent research indicates that social networks scale in value as n log (n).

  7. The parable of the the PDA: predicting the smartphone's future

    Research · 55 comments

    When reading the comments disputing the possible end of the voice-phone era I'm reminded of similar comments disputing the end of the PDA era.

    Although the Apple Newton pioneered the market in 1992 and John Sculley came up with the acronym, the Newton did not sell in significant volumes. It wasn't until 1997 with the Palm Pilot that the PDA market took off. Microsoft quickly followed with a licensed OS based on Windows CE. In 2001 Microsoft launched the Pocket PC brand to cement its attack on the PDA market. The first phones using a Microsoft OS were using something called Pocket PC Phone Edition. The first Nokia smartphones (Communicators) were built like mobile PDAs.

    The logic was quite compelling. The original PDA was built to mobilize contacts, calendars and notes. They replaced bulky paper organizers and seamlessly synced to PC productivity software like Outlook. It was a compelling product in the US where small business customers needed to keep track of hundreds of contacts. Users could even 'beam' contacts to each other via infrared. The idea of adding a phone function to the device made sense insofar as contacts could be immediately dialed from the contact app rather than typed into another device's phone keypad.

    By the early 2000's PDAs were forecast to sell by the hundreds of millions. There were millions of dedicated users who downloaded apps and thousands of developers being courted by platform builders. Palm even invented the word "ecosystem" as it refers to mobile platforms.

    However, I remember reading sites dedicated to this community and there were many people who rejected the concept of a PDA with an integrated mobile phone. They liked the fact that the PDA was not bundled with a phone plan. They upgraded PDAs in a different cycle from phones and besides, phones are for talking and PDAs were for something else.  It was even more difficult to justify the conflation of the two products when considering the corporate purchasing of PDAs. PDAs were procured by IT departments and phones came with contracts that were managed by a different department.

    What's a device vendor to do? The most avid customers of PDAs did not like the idea of burdening the product with a phone. RIM was doing its thing with moving pagers to include voice, but that was a different job to be done. The story is picked up here by this comment:

    I was hired by RIM in 1999 just before they began work on their first phone .... Coming from a two-way pager background, RIM decided that phones should have two-way push synchronization of pretty much everything that Exchange provided along with a limited WML browser. The general thought was that phones would never have sufficient power density or radios sufficient bandwidth to allow anything more. That was incredibly predictably wrong, but it's how things went down.

    Along with RIM was Ericsson, Palm, Motorola, and Qualcomm. Motorola came from a similar background as RIM and went on to build very similar devices. Both Nokia and Ericsson had come from phones and had decided feature phones should have far more sophisticated PDA functions. Palm started with PDAs then moved to the phones, but adamantly dismissed ideas like wireless synchronization for years making their first attempts at smart phone far more like early Nokia Communicators than early Blackberrys...

    So the point is that all these companies were fighting over what amounts to overgrown PDAs with phones and wireless stacks strapped on. Everyone assumed power density was no where even close to what was needed for general computing, that a full featured browser and heavy duty Internet services were impossible due to bandwidth and latency. Take a look at how our Java expert groups named standards, how people at the time talked about what features smart phones should have, and its clear that no one thought an iPhone was possible. Even Danger, which eventually went on to work on to create Windows Phone 7 and Android, was just working on a better Blackberry.

    via: shacknews

    But what does this have to do with the future of voice-phones?

    The problem is that the vendors that lost this game failed because they listened to their customers. Like with PDAs or with the original mobile phones or first generation of PCs, early adopters are not the audience that should be consulted on how to improve the product.

    Early Windows Mobile users were ecstatic about the platform and rejected new UI metaphors because they wanted a "mobile Windows". Palm fans stuck with the PalmOS even though it was well past its shelf date in the Treo because they treasured the original PDA metaphors.

    Every company paying attention to the market in 2005 would have been eagerly pursuing corporate buyers of PDAs and aiming complex products at enthusiastic PDA users.

    And yet, non-consumers should also not be trusted with their opinions. Most early surveys would show that the vast majority of consumers found that mobile phones were not good value for the money. Later the same audience would declare that smartphones were not worth buying.

    There are many voice-only users in the world who are happy with their products and not interested in any new options.

    So what's a marketer to do?

    If you can't ask early adopters and you can't ask non-consumers for hints then where can clues be found?

    What history shows is that consumers have been happy to trade up to technology that offers more option value.

    • Television went from cheap/free over-the-air broadcast with limited channel options to expensive cable with large option value in channels. Even if most of those options went unused, they are still valued.
    • Telephony went from low cost reliable landlines to high cost, less reliable but with much more option valuable mobility. Having the option to call a person vs. calling a place (where a person might be) changed the calculation of whether you make the call. Calling became much more popular.
    • Data as well went from metered dialup to unmetered high option valued broadband. From a luxury, to the least likely service an unemployed user might give up.
    • Emerging market users hungered for mobile phones even though they cost more than several months' wages because they gave access to information and increased the option value of their labor.

    Each of these huge technology transitions came associated with increased costs for the consumer, but that cost went toward the purchase of a far larger option value.

    The problem is that users cannot calculate option value in their minds when faced with a market research questionnaire. How can they envision all the ways they would use a new product they've never used before? How can they "get it" without observing it in use or spending time thinking of "how they would use it" or asking someone who tried it? In a nutshell, users are willing to pay for option value but can't envision or quantify this value without observing a finished, polished product in use.

    This is the problem faced today by branded phone vendors. Asking or observing current users of smartphones does not provide any incentive to sell low end versions. Asking or observing non-consumers seems to indicate no interest in newfangled complex or costly products.

    But the calculus that must be made is one of option value. Does the new product offer significant option value? Will this option value be easily realized? This is not easy to determine, but it's a method that is far more promising than asking users their opinion.

    The PDA was not a product that was introduced by the incumbent computer vendors because their customers did not ask for it. Once established, the PDA was not replaced by a product that PDA users asked for either.

    Smartphones are following this well trodden path. The high end devices are evolving into computer replacements nobody asked for (but everybody will use). The low end products are adding data option value to voice-oriented users who never asked for anything more.

  8. Apple has accepted nearly 400,000 apps in 2.5 years

    Research · 12 comments

    There are now well over 390,366 apps in the app store[1]

    via 10,000 Apps! - Presented by 148Apps.com :: 10,000 iPhone and iPod Touch applications in the iTunes App Store.

    Since launch, December has been the month with the most apps added. In December 2008 3,800 apps were added, in 2009 25,517 and in 2010 it looks like we might get nearly 30k new apps.

    That amounts to nearly 1000 new apps per day.

    It also seems that 500k apps will have arrived by mid-2011. As the production of apps continues to grow one wonders if this new medium will turn out to become more popular than recorded music in terms of creative output.

    [1] That includes about 65,000 inactive apps.

  9. Microsoft's mobile effort: back to the future?

    Research · 41 comments

    Windows Phone 7 launched on 10 devices over 60 carriers in over 30 countries with 1.5 million of channel inventory in 6 weeks. Given the breadth of distribution, that number is not huge, amounting to less than 10k phones per operator.

    Curiously, Windows Mobile was still selling in significant volumes last quarter. Maybe even higher than WP7 is selling now. In Q3 2009 Canalys reported 3.6 million WinMo units sold. In Q3 2010  Gartner estimated 2.3 million were sold through to end users. Even nine months ago Windows Mobile was running at 3.7 million units or over 1.8 million every six weeks.

    Microsoft also announced they have 18,000 developers with 4,000 apps on the WP7 marketplace. That's one developer for every 83 devices in inventory.

    Microsoft's Achim Berg:

    our numbers are similar to the performance of other first generation mobile platforms...

    We're comfortable with where we are, and we are here for the long run; Windows Phone 7 is just the beginning.

    In terms of first generation platforms, I assume he is referring to Android and iPhone. That claim of similar volume growth is perhaps a bit too optimistic. However, he's very wrong about WP7 being the beginning for Microsoft's efforts in mobile. Not even close.

    Microsoft has had mobile software products in the market for over a decade. In 2003 Gartner declared that Microsoft would sweep Symbian aside. In 2006 they were the odds-on favorites to win the mobile platform game on the basis of developer support.

    Microsoft's Windows Mobile was selling more in 2003 than Microsoft's Windows Phone is selling in 2010. At the time, Microsoft also boasted of having a huge developer base (larger, in fact, than the number of users of the product; their .NET developer base being counted as mobile developers.)

    Furthermore, prior to the launch of iPhone's App Store, Microsoft spokespersons scoffed at the idea that Apple could field a catalog larger than Windows Mobile which led with over 13,000 apps in August of 2008.

    Dragging out these old figures isn't meant to deride Microsoft. They were not alone in failing to capitalize on early leads in mobile. Palm, Nokia, DoCoMo and Qualcomm all failed. RIM is arguably failing as we speak. Some have argued that Apple is also about to be undone by Android.

    The point is that dramatic, violent change was possible even five years after foothold markets were established.

    The question for today is: Is it still possible? Can a new platform still gain traction?

    Microsoft is clearly betting that it can. Their seemingly quixotic attack on the market can only be justified on the basis that it's still early days. They must reason that un-penetrated markets are huge and that the existing platforms are not sticky enough to prevent switching.

    At least one analyst agrees. IDC made the forecast that 32 million “Windows Mobile/Phone” devices will sell during all of 2011. I took issue with those forecasts at the time but if they deliver that volume they will get around 10% share, enough to stay on the map. If they don't then Microsoft will look more like Mobile Zune than Mobile Windows. The stakes are high.

    So even though they may have airbrushed Windows Mobile from history, Microsoft's current strategy is a direct consequence of them having failed with a seemingly strong platform.

  10. Is HTML5 a Flash in the pan?

    Research · 31 comments

    When Apple promoted HTML5 as an alternative to Flash, the value was said to be in being an open standard, and in having better efficiency for device-based execution.

    The problem is that there are no authoring tools for HTML5. Flash is popular because it's fairly easy to kick start the creative process. You buy the tools from Adobe for a few hundred dollars and begin to tinker. With HTML5 you need to be a programmer, read arcane documentation, search for sample code and manually integrate results into publishing systems. That's bush league.

    iAd Producer narrows the gap a bit.

    The bigger question that I struggled with is whether web apps are competitive enough. The absence of tools is a damning accusation that they aren't. Note that Apple is first introducing production tools for iAd, not for web apps in general nor web content in particular.

    So why isn't there an iWeb-like tool to allow consumers to design web sites (for MobileMe Galleries for example) which benefit from HTML5? At the other end of the spectrum, where are the Apple equivalents to Adobe's Flash Professional (with CS5 integration)?

    The tools for HTML5 are just not there. Tools are the first things needed to build an ecosystem. Is their absence due to a lack of demand or are there no skilled toolmakers outside of Adobe?

    When the market is failing to deliver a solution, I question the need for the solution in the first place. It's also worth while to follow the money: Adobe makes money only on the tools for Flash, not on distribution of content. For anyone to disturb Adobe's franchise, it's tools that need to be put forward as alternatives. Tools are not easy to build. Are the incentives simply not there?

    I hope iAd producer is the first in a series of tools from Apple to build an HTML5 ecosystem. Whatever the future of web apps is, it's coming very slowly. No wonder Flash is still a viable business for Adobe.

  11. [Updated] RIM's sales down 15% in the US, up 112% outside the US

    Research · 41 comments

    First, a round-up of the quarter's numbers:

    • 14.2 million devices shipped, sell-through: 12.3 million
    • expect to ship 14.5 to 15 million units in the next quarter
    • ASP of approximately $315
    • US, UK and Canada are 56% of sales
    • US represented 34% of the total revenue
    • Last year US represented 57% of revenue
    • BlackBerry Torch launched in over 75 new markets, Torch launched with the $99 pricing from AT&T
    • BlackBerry Curve 3G launched with 118 carriers in 48 countries
    • China Mobile introduced BIS for small-to-medium sized businesses. The service starts at $14 per month
    • App World applications grew 60%
    • More than 16,000 applications available
    • 2 million downloads daily
    • 1,000 vendors registered for PlayBook apps
    • Revenue: $5.5 billion
    • Net subscriber additions: 5.1 million
    • Top three customers: 12%, 9%, and 9% of revenue
    • The same quarter a year ago: 25%, 13% and 10% of revenue
    • Service revenue in Q3: $835 million
    • Software revenue: $78 million
    • Gross margin in the quarter was 43.6%
    • Cash: $2.5 billion

    For comparison, here are a select few vendors' smartphone reported shipments. RIM is the first to report and we'll be hearing the the rest by the end of January.

    The number most RIM "bears" focus on is the new subscriber additions. At 5.1 million out of 14.2 million units sold implying that the new subscribers added per unit sold is 0.34, a new low.

    The bulls will argue that the gross margin is healthy and slightly higher than anticipated.

    My observation is that the company is finding growth outside its traditional markets. Given the figures above, the US went from $1.65b in revenue to $1.87b; a mere 13% growth while the company experienced 89% overall growth in revenues.

    The following chart illustrates the situation:

    Of the total increase in sales ($1.6 billion), the US contributed -15% while the rest of the world accounted for 112%.

    This can be seen as positive news since RIM has been weak internationally for many years and they really need to penetrate world markets. However, a -15% growth in the US is implies significant share loss in a rapidly growing and traditional stronghold.