Saturday, March 31, 2012

March 2012 Early Indications II: The new tech landscape

First things first: I'm pleased to announce that John Wiley has just published my book, Information, Technology, and Innovation.

The topics will be familiar to readers of this newsletter as many chapters began life here. It's available in hardcover and e-book formats at Amazon and Barnes & Noble.

Now to the new tech landscape:

Who's winning in the current consumer technology market, and why? Who's best positioned going forward? A disclaimer: some names that used to figure in this discussion are missing. Dell (which last week dropped the smartphones that no one knew they sold), HP, IBM, Oracle, and SAP compete on different capabilities and attributes in the enterprise market, which I'll leave for another day.

Let's take a quick look at 1) macro trends, 2) levels of engagement between vendors and customers, 3) competitive dynamics, and 4) looking ahead to some factors that could determine future success. The main focus here will be on eight companies (rough revenue estimates in parentheses):

Amazon ($48 billion)
Apple ($110 billion)
AT&T ($125 billion)
Facebook ($4 billion)
Google ($37 billion)
Microsoft ($75 billion)
Samsung Electronics ($135 billion)
Verizon ($110 billion)

1) Three macro trends are in play to shape the environment, and they overlap.

*First, at the content layer, the document Internet or the World Wide Web is being joined by both the "Internet of things" (sensors and such) and the social Internet: Facebook, Twitter, LinkedIn, Quora, Tumblr, YouTube, Blogger, and so forth.

*Second, Steve Jobs' vision of a "post-PC world" is coming to fruition at the hardware level: in the US, smartphone sales of roughly 95 million in 2011 are growing, while PC purchases were down 5%, to 71 million. Tablet sales are growing even faster, at roughly 20 million units.

*Finally, networking is changing as the fixed Internet is being replaced, especially outside the US, by mobile broadband.

Thus, an increasingly pervasive computing scenario involves a person using a mobile device to interact with or through a social network, rather than looking up information, and definitely not using a "productivity" application in Microsoft Office. In addition, the future of the mobile web is still being fought out: will an open standard (some version of HTML) or a closed but optimized app catalog dominate?

2) As computing grows increasingly personalized in this world, knowing what your customers are doing becomes highly advantageous. Not only can that knowledge increase engagement but it also helps pre-empt competition. In the same alphabetical order, here are rough and entirely subjective "engagement" scores for the eight companies:

Amazon (9 out of 10) holds browsing and purchase history, physical address, credit card data, reviews and wish list, and the address book of gift purchases

Apple (9) owns music and entertainment transaction data in great detail, physical location, and credit card info, and serves customers through both physical and virtual storefronts

AT&T (6) has an advantage in that it has customers' credit ratings, but addresses little mine-able behavioral data: even though the company knows my movements and important pieces of my family/friend/colleague network, the business model does little with this data -- except protect privacy better than other companies, which may be important going forward

Facebook (8) scores highest on deep social network understanding and ad reactions, but to date collects little financial data

At Google (7), while search is not always intent, it does provide key signals, and Android is serving up location and app data. Still, the company has no financial relationship with much of the consumer base.

Microsoft (5) collects software license data, has a weak mobile presence to date, but does gather gaming data on the Xbox segment

Samsung scores a 0: once devices enter the channel (Best Buy or Verizon stores), Samsung loses visibility. This structural distance could be risky, for Nokia as well.

Verizon: see AT&T

3) If we look at the big four players that dictate the state of play (Amazon, Apple, Facebook, and Google), the competitive dynamics are fascinating:

-Both Apple and Amazon move physical stuff, and use truly excellent supply chain management both to achieve their market leadership and to pre-empt competition. In contrast, Best Buy's store closures and other moves this week highlight the price of slow inventory turns and underutilized real estate.

-Amazon, Apple, Facebook, and Google are all building gargantuan data centers to support a cloud-based model of the future, a future that has few "best practices" thus far. Each is no doubt excelling at some facets while lagging in others, but such details are closely held.

-Because they are funded by direct customer revenue rather than ads, Amazon and Apple appear to raise fewer privacy concerns than Facebook and Google, whose businesses lose substantial value without their masses of personal data. Here's a great story on how creepy things can get in an app called Girls Around Me.

-The U.S. wireless carriers are former monopolies, now playing second fiddle to the smartphone operating system duopoly. AT&T is making a major push to get Windows 7 established among its employees (who have to trade in their current iPhone or Android device to get the Nokiasoft device) because it cannot thrive as "the iPhone company." It seems impossible that the former bully boys from Redmond are now looked on as the savior of carrier profitability, but such is Apple's current leverage.

-Google faces substantial competitive pressures: in an app-centric, social environment, crawling and organizing the document web does not confer the same advantage it did 5 years ago. Thus Google is apparently trying to crawl people's personal data to build the same kind of algorithmic model of reality that it can sell to advertisers. This of course raises privacy issues, which the company is encountering on a regular basis. Google+ is not taking off, it doesn't appear, while Google Play represents an attempt to catch up in the acquisition of credit card and personal purchase data.

-Even when they do view document links (an article, for example), people who get there via Facebook or Twitter might bypass Google entirely. Search still matters, of course, but it is no longer a navigational monopoly.

-Why was Samsung on the list? As the biggest company (by revenues) on the list, it is in some ways in the toughest situation. Amazon can beat Samsung up on TV pricing and grows stronger as physical retailers (Best Buy) are retrenching. At the same time, Google's pending acquisition of Motorola threatens Samsung's smartphone business. Even with the current Android arrangement, Samsung cannot capitalize on customer engagement. Should Google/Motorola become the "reference platform" for Android, Samsung could be the #1 mover of units but lag in operating system quality and features. Building an OS from scratch is both hard and risky (ask Nokia), so maybe Samsung will revisit HP's Palm webOS. AT&T and Verizon would be thrilled to have a third or maybe fourth viable OS, meanwhile, given that Research in Motion -- which, let us recall, invented the modern smartphone -- seems to be slipping beneath the waves before our very eyes.

4) What might we look forward to?

-Microsoft really needs to get traction in mobility, or it could be marginalized for a long time, so this week's mega-launch of the Lumia 900 on AT&T ("bigger than the iPhone") will bear watching. Tablets will be a similarly high priority.

-Will Facebook align with any carrier, OS, or device-maker more strongly than the others, or does it play Switzerland?

-Will regulators in the US and/or the EU constrain Google's crawling and organizing of personal data? Will a meaningful number of consumers rebel by defecting to Bing, other mail providers, and maybe iOS?

-Tech ecosystems can make for odd revenue flows. Just as Microsoft made lots of money off of Apple back in the day with Office for Mac, Google now makes more off Apple's iOS than Android even though the latter leads in market share. How long will that hold true?

-What will happen to the smartphone business model? Nobody bought a $500 PC from AT&T for $49, with the remainder of the purchase price covered by the monthly subscription revenue. Why should consumers buy smartphones differently? Today's mobile devices, tablets even more so, are closer to PCs than cell phones, the name notwithstanding.

-While 2 years seemed like a logical time frame for replacing a relatively cheap mobile phone, will people learn to hang onto today's more capable, more expensive smartphones longer? If so, what would this mean for handset manufacturers, app sales, and carriers? Will the secondary market for cellular-network devices become more visible? For understandable reasons, the carriers did little to encourage the purchase of used phones, but that could change.

If one takes price/earning ratio as a rough indicator of market confidence in a company's future prospects, it's currently a weird story (data from 30 March):

Amazon 148
Apple 17
AT&T 47
Facebook n/a
Google 22
Microsoft 12
Samsung 14
Verizon 45

Given that the smartphone market will eventually saturate in many countries when most everyone who wants one will have one, as we saw with cell phones, where will revenue growth come from after device sales slow in a few years?

Amazon will likely have success selling more stuff to more people, but the macro-level economic dynamics are worrisome here: with middle-class wage growth so flat, with student loan debt at record levels and getting higher every year, and with an aging Western population having many years to live after retirement, will consumption patterns shift? That said, Prime is a powerful tool for locking in buyers and driving instinctual purchase activity; no other company on the list has anything similarly powerful at the behavioral level.

How long can Apple retail the Midas touch with device design and marketing? Just this week a CNBC survey found that 51% of U.S. households owned at least one Apple device, with the average total being three. 10% of the non-owning households plan to buy an Apple device this year.

Network providers (AT&T and Verizon) can count on annuity revenue streams, but raising ARPU (average revenue per user) can be difficult, especially when the effort is coupled with expensive infrastructure build-outs: bandwidth costs money. Still, the market's future assessment as measured by P/E is far rosier for the carriers than for Apple.

Will personal stalking and invidious comparisons ever go out of fashion at Facebook? Many stories support people being happier after they quit feeling inferior to the site's glut of manicured on-line personas.

How long can Google ride the advertising train, particularly as the post-PC world reduces the impact of document search? What happens to the company's profitability once Motorola is folded in, given that Moto's revenues per employee are less than one third of Google's?

Investors apparently see little to inspire confidence in Microsoft's future, given such a low P/E ratio in the face of robust cash flows (recall from the list above that its revenues are twice Google's).

In addition to being vulnerable to a Google-Moto Android smartphone offering, Samsung's tablets are not positioned to grow fast enough to replace televisions' contribution to the overall revenue picture as global TV purchases are down for the first time in recent memory.

What's the biggest question mark for the future of the smartphone? It might be mobile payments. What is necessary for success in that market? Ease of use and trust, among other factors. Who's best positioned to lead on these dimensions? In a recent study by Entrepreneur magazine, Amazon and Apple both scored well on trust, and both companies have demonstrated outstanding achievements in usability. Google has been highly admired in the past but perceptions might be shifting. While their track records of protecting privacy might be relatively strong, meanwhile, wireless carriers have public perceptions still informed by decades of monopoly behavior. Perceptions can be changed, however, and here might be an opportunity for the carriers to claw back some ground from the handset companies.

Overall, all I can see are questions, with few answers. It would appear that privacy and trust will become more important as the intimacy of a really personal computer becomes more and more commonplace. Capitalizing on trust will be an exercise in paradoxes, one made more visible by the same social media environment that can spread bad news, proven or merely rumored, phenomenally quickly (cf. slime, pink, or Martin, Trayvon). Latitude for corporate screw-ups might be narrower than ever before, even as the stakes -- personal identity, not just a parcel or a transaction -- are higher.