YouTube and its alternatives

Eric Blattberg at Digiday has been doing some great work reporting on both some of the newer video initiatives at Facebook and Vessel as well as developments at the current industry powerhouse, YouTube. Eric’s latest piece today is about YouTube’s new effort to clamp down on sponsorships and advertising which bypasses its official ad products, and it’s this that I wanted to cover briefly today. I have two things I want to talk about: firstly, the potential of the newer video platforms; secondly, what Google’s YouTube moves suggest about the company as a whole.

Potential for newer platforms

I’ve been broadly skeptical of some of the newer video initiatives out there – YouTube’s lead has seemed so enormous, its position as the de facto standard for online video so entrenched, that it was hard to see how others could make a dent. Several things are starting to change my mind about this.

Firstly, Facebook’s embrace of video, and especially auto-playing video, has leveraged its massive audience into a very strong position as a video player. I’ve written elsewhere recently about the fact that every major sharing platform slowly migrates from text-based to photo-based to video sharing, but none has pursued this transformation quite as effectively as Facebook. From last month’s earnings call:

Five years ago, most of the content shared on Facebook was text and some photos. Today, it’s primarily photos with some text and video. Over the next five years, we want to keep developing new products and features to help people share the way they want.

Two things have allowed Facebook to make this leap to prominence as a video provider: the massive base of users, an the fact that Facebook is a destination, somewhere users go to spend time, rather than get something specific done. In the process, Facebook has become a massive destination for video, but almost all the video is actually hosted on other platforms. That obviously has cost advantages for Facebook, but it means that it doesn’t own the content, and therefore can’t monetize it effectively. It also means that engagement around videos on Facebook is fragmented, with popular YouTube videos attracting millions of comments scattered across hundreds of thousands of different user shares of the same video. This is starting to change, with ABC News, The Young Turks and others launching videos directly to Facebook rather than exlusively through YouTube. I think Facebook is finally in a position to be the first really large-scale platform to seriously challenge YouTube for dominance in video. The biggest challenge will be how to incorporate advertising into videos when they auto-play – pre-roll clearly isn’t the answer, but what is?

The other thing is that YouTube, with moves such as those Digiday covered today, is actually making it tougher for content creators to monetize on YouTube in the way they see fit. Videos on YouTube generate tiny amounts of money per view for content creators, and one of the ways they’ve overcome this challenge is through sponsorships. That’ll now be banned under YouTube’s new terms of service regarding advertising. At the same time, Vessel, AOL and others are targeting YouTube content creators with an emphasis on better monetization of their viewership. I’ve been skeptical of these efforts, but YouTube is playing right into their hands with some of these moves, which makes me more open to the idea that it might actually start to suffer as a result of competitive inroads from Facebook but also these smaller platforms.

What all this says about Google

Which brings us on to what this all says about Google. YouTube’s management must understand the risks associated with these moves, so why are they doing this? The only thing I can think of is that YouTube’s revenue growth has become so critical to Google’s overall performance that they have to keep squeezing harder and harder to get more money out, despite the longer-term strategic costs. Because Google doesn’t break out performance by business, we have essentially zero visibility into YouTube’s performance, but it’s been one of the strongest growth drivers for the company for years, and as the other parts of the business face increasing headwinds, it’s all the more important that YouTube continue to deliver strong growth.

On the positive side, YouTube’s management under Susan Wojicki is clearly thinking about how best to monetize much of the usage on the site that currently goes unmonetized or under-monetized. That includes YouTube Music Key and the work YouTube is apparently doing on building subscription models for content creators. The challenge is that almost all the moves YouTube is making are either content-creator-friendly at the cost of being user friendly (charging for content users have been receiving for free) or hostile to content creators. There’s very little that YouTube is doing which seems likely to please both users and content creators. I’m curious to see what else we see from YouTube in the coming months, but my worry is that Wojicki has been sent in to crank the handle on revenue in the short term and that this will have long-term strategic costs as other video platforms snatch away both viewership and content creators.

Samsung’s Microsoft deal and Cyanogen

SamMobile reported last night that Samsung was planning to pre-install a number of Microsoft applications on the Galaxy S6, which is to be announced in a few weeks at Mobile World Congress. I think this is a huge boost for Microsoft’s Android apps and for the services behind them – far bigger than the applications that come pre-installed with Microsoft’s own devices, obviously. To get on Samsung’s flagship device (presumably others will follow) is a huge coup for Microsoft. But it’s also a big deal for Samsung, which has until now been pre-installing ersatz versions of Microsoft apps on its devices for productivity.

But what I really wanted to talk about here was what this says about Microsoft’s broader strategy, and what it might mean for the rumored investment Microsoft is making in Cyanogen. Nokia, of course, forked Android itself using AOSP when it created the Nokia X line of smartphones shortly before the Microsoft acquisition was announced, but it was killed off right after Microsoft took control. So rumors of an investment in yet another Android fork seem funny – was Microsoft hedging its bets on Windows Phone and preparing another Android-based device line?

I think the much more likely explanation is that Cyanogen and Microsoft are planning something rather different, something much more along the lines of that Samsung deal. Cyanogen’s biggest weakness is that it’s missing all the Google apps and services that you sacrifice when you use AOSP. The challenge for any company doing this outside of China has always been what to replace them with. Inside China, it’s simple, because Google’s own services are largely irrelevant and local alternatives are actually better. But outside China, Amazon and others have struggled to provide really compelling replacements. The two companies that have comprehensive sets of services and applications that can replace Google’s today are, of course, Apple and Microsoft. Apple’s are (today) unique to its own products and platforms, but Microsoft is increasingly pursuing a cross-device strategy. Hence its investment in Cyanogen.

I wouldn’t be at all surprised if at least some flavor of Cyanogen devices in future come with Microsoft apps and services where the Google ones would normally be. We won’t see Microsoft launching another Android-based line of devices, but rather an Android-based line of devices that puts Microsoft’s services and apps front and center. That, after all, is the real goal here: getting Microsoft’s services in front of as many customers as possible, integrated into the platform in a way that makes them the default options for key tasks, and which provides benefits across the platform. Windows Phone has been the only platform where that’s been true, but Cyanogen could easily become a second. Quite what Cyanogen’s current customer base would make of that is unclear, but then Cyanogen’s future depends on broadening its appeal way beyond the hackers and tinkerers who flash alternative ROMs on their Android devices, and Microsoft could be a great fit there.

Both these deals – Samsung and Cyanogen – are good for both parties. Samsung and Cyanogen both need compelling apps to set their platforms apart, while Microsoft badly needs the broader exposure it will get from being pre-installed on these devices.

Thoughts on Twitter’s Q4 2014 earnings

I’ve just sent my Twitter deck to subscribers (screenshot at the bottom of this post). This analysis picks a few of the key charts from that deck. As always, you may want to read my previous posts on Twitter, as a lot of the themes here are ones I’ve touched on before.

As I’ve talked about before in relation to both Twitter and Facebook, there are three main growth drivers for these companies: user growth, increased engagement, and better monetization of that engagement. Twitter’s problem continues to be that only one of these three is going in the right direction:

Twitter growth driversUser growth has been slowing significantly over the past two years, and especially over the last few quarters. This quarter the company added just 4 million MAUs (or 8 if you’re charitable and give them back the 4 million additional MAUs they claim they lost to an iOS 8 bug). Even at 8 million, that’s by far the slowest growth in several years. Engagement, meanwhile, as measured by timeline views per MAU, has also been stagnant or falling for several quarters. The only metric moving in the right direction is monetization, and boy is it moving in the right direction! Here’s that chart broken out by itself, with the numbers:

Twitter monetizationAs you can see, the number has risen from 60 cents to almost $2.40 in the last three years, and it’s rising rapidly. In the US, this number is now almost $6 on a quarterly basis. The challenge with this number, though is that it’s unique to Twitter and therefore not comparable to anyone else’s metrics. However, since we know total ad revenue and we also know the number of MAUs, we can do a rough calculation for ad revenue per MAU for Twitter, and then compare it with the equivalent figure for Facebook:Facebook and Twitter ARPUWhat you can see is that the two lines are following a very similar trajectory, with Facebook quite a bit ahead of Twitter. I think what investors were so heartened about today was that Twitter demonstrated this ability to grow revenues significantly without growing users much at all, which suggests there’s still significant headroom on this ARPU measure. That means that, even if the other two growth drivers are underperforming, Twitter can still get good growth through the one lever that’s performing well. If it can get MAU growth going again as it promised to on today’s call, that will simply have a multiplier effect on that ARPU number, which will be so much the better.

The problem is, of course, that there is a ceiling here at some point – we just don’t know how high it is yet. Google generates between $30 and $50 per user annually in ad revenue from its own properties, so that could be a ceiling. But that’s based largely on one very effective form of advertising: search. There’s no guarantee that Twitter will ever be able to achieve that level of spend. Which brings us back to the question of the logged-out user. What was heartening both on today’s earnings call and in the last couple of weeks of news is that Twitter is finally really making some progress in telling the story of how it will grow this number. Though it refused to spell out the details of the Google agreement, it’s clear that Twitter hopes to drive significantly more traffic to in this way, for example. And then there’s the logged-out homepage it demoed this past week.

Despite all this, my two big questions for Twitter remain the same:

  • How will it monetize all this activity from logged-out users? It’s said very little about this, even on today’s call, and all this usage has to be monetized for it ultimately to do Twitter any good.
  • What are the new metrics by which we should measure Twitter’s progress on its new goals? It hasn’t established a consistent metric for measuring logged-out user activity (the 500m visitor number mentioned on today’s call was unchanged from three months ago). It’s abandoning its timeline views metric for engagement but won’t give us a different one. And ad revenue per 1000 timeline views only measures monetization of logged-in users, so how should we measure progress on monetizing the logged-out user? Twitter continues to try to steer everyone away from the metrics it does provide, but won’t supply metrics that support the new story it’s trying to tell.

Here’s a screenshot of the Twitter deck that went to subscribers earlier this evening:

Twitter deck screenshot

Motorola’s impact on Lenovo

Note: this is part of a series on major tech companies’ earnings in Q4 2014 (click here for previous posts). In this post as elsewhere, I’m using calendar quarters (e.g. Q4 2014) to designate reporting periods, even though Lenovo and certain other companies have fiscal years which use different designations. Q4 2014 in this post and elsewhere refers to the quarter ending December 2014.

Lenovo reported its results yesterday, and although I have not traditionally covered Lenovo in depth here, I wanted to examine something specific: that is, the impact of the Motorola acquisition on Lenovo’s reported numbers. As such, I’m going to highlight a handful of charts here, but I’m also sending a deck on Lenovo with quite a few more charts to subscribers (if you’d like more information or to sign up, click here).

One quick note: the acquisition of Motorola closed in October, but Lenovo also acquired IBM’s server business around the same time. As such, not all the impacts described below are entirely due to the Motorola acquisition, though several are, and I’d estimate the Motorola acquisition had a significantly greater impact than the server business did. Lenovo reported a full quarter of System X (server) results in its reporting, and two months of Motorola results.

Smartphone shipments

The most obvious impact of the Motorola acquisition was a dramatic rise in smartphone shipments reported by Motorola. The chart below shows the trend line, with a very clear bump in Q4:

Lenovo smartphone shipmentsIt’s worth noting, however, that shipments have been growing at Lenovo even before the Motorola acquisition. In my mind, the company has been one of the more successful and stable players in this space over recent years. However, that success has come largely in China, which has dominated shipments in the past. So another impact from the Motorola acquisition is the change in that mix:

Lenovo smartphone shipments China and RoWHopefully you’ll notice two things here. First, and perhaps most obvious, is the spike in rest-of-world shipments in Q4, which rose from under 4 million a quarter to over 14 million. Motorola shipped 10.6 million devices in Q4 alone, so it accounts for the majority of those rest of world shipments. Secondly, you may notice that China shipments actually fell year on year and quarter on quarter. Shipments rose from Q3 to Q4 in 2013, and this dip is fairly significant. It’s quite likely that Lenovo, like Xiaomi, suffered from the impact of Apple’s new iPhones in China in Q4. What’s worth watching is whether this recovers in Q1.

Mobile as a contribution to revenues

Until Q3 2014, Lenovo’s business was dominated by revenues from PCs. PCs contributed nearly 90% of Lenovo’s revenues two years ago, and it’s always stayed above 75%. That business, too, has performed well over recent years, despite the difficulties in the overall market, and so this dominance happened despite the growth in Lenovo’s smartphone and tablet businesses. But with the acquisition of Motorola, Mobile Devices suddenly went from around 15% of its revenues to almost a quarter:Lenovo mobile as percent of revenueThis is helpful for Lenovo particularly because of the overall headwinds in the PC space. PCs have continued to grow for Lenovo, but lessening its dependence on this business while exposing itself to the upside in smartphones is critical for Lenovo’s future growth, and the Motorola acquisition helps significantly with the balance of these two businesses.

Regional impact

We’ve already looked at the impact of Motorola on smartphone shipments outside the US, but the other big impact from this is the share of revenues from different regions. Motorola’s revenue contribution is essentially recorded in the Americas segment, and you can see the impact in this next chart:

Lenovo revenue by regionNote the dramatic growth in the size of that Americas block in Q4 2014 (again, the Motorola acquisition wasn’t the only contributor, as the IBM server business is also US-based). EMEA also grew a little, while China and AP remained fairly steady.

Margin impact

The impact of the two acquisitions can perhaps be most clearly seen in the regional segment margins Lenovo reports. The chart below shows these:

Lenovo margins by regionMargins in China and AP were essentially unaffected by the acquisitions, with AP rapidly catching up with China’s margin levels. But Americas margins dipped into the red for the first time in a long time in Q4, and EMEA margins also dipped somewhat. This is the downside to adding both the new businesses: neither was profitable under its previous owner. With the significant growth in smartphones year on year at Motorola, and efforts to get the Motorola brand back into China, together with various synergies, Lenovo expects Motorola to become profitable within about 18 months of the close of the deal. But in the meantime, Motorola’s results will be something of a drag on overall results.

I’m generally very bullish on Lenovo and the Motorola acquisition. I wrote more about it on Techpinions recently.

Below, I’ve pasted a screenshot of the Lenovo deck which will be going to subscribers shortly.

Lenovo deck overview

Twitter’s new ad product won’t help

I’m making this part of by earnings series, even though Twitter hasn’t actually reported yet, because it hits one of the key points I expect to come up in Twitter’s earnings this week and gets at one of the fundamental concerns I have about Twitter’s growth going forward.

Today, Twitter announced that it would start offering advertisers the ability to serve their promoted tweets off the Twitter platform itself. This is an important step for Twitter because its key growth challenge has been that the number of monthly active users on the platform itself isn’t growing rapidly, and it sees its biggest opportunity in serving what it terms “logged out users,” or those who see tweets without being explicitly logged in to Twitter or one of its apps. This is something I’ve talked about quite a bit here over the last few months, notably here and here. The challenge as I’ve seen it has been that (a) Twitter hadn’t articulated how exactly it would monetize that usage and (b) Twitter can’t use any of the data it has about its users in these third-party contexts, so the advertising would be only minimally targeted.

Today’s announcement gets at the first of these problems, in that it’s the first meaningful articulation of how Twitter can play outside of the core Twitter experience. But it doesn’t solve the second problem. In fact, the way Twitter has chosen to implement the promoted tweet product is a great illustration of how steep a hill Twitter has to climb here. I’m reposting below a chart I’ve used several times here in relation to the effectiveness of advertising:

Advertising relevance vs timelinessWhat this chart attempts to demonstrate is that there are two characteristics to effective advertising: relevance and timeliness. What makes search advertising so effective is that it hits both of these – i.e. an ad next to search results is relevant now to that user. Most other forms of advertising can at best produce relevance without timeliness, and in some cases neither. The problem with Twitter’s new ad product is that it looks an awful lot like a classic display ad, with little or no connection to the context and with no use of Twitter’s demographic data about the user. It’s likely that these ads will use some targeting from the property on which they appear, assuming those properties have that information, but Twitter itself brings nothing to the table here but the format.

Twitter makes the argument with regard to Flipboard specifically that the app already shows normal (non-promoted) tweets, so these promoted tweets won’t seem too out of place, but it’s a far cry from seeing a promoted tweet in the midst of a stream of regular tweets in the Twitter app or on This is at best very loosely native advertising. And very few other properties show enough tweets in native format that these ads won’t look just like another sort of banner ad.

It seems investors don’t mind, at least in the early reactions: the stock is up 6% today. But to my mind nothing about today’s announcement really gets at solving the fundamental problems solving Twitter. We’ll see how this is presented on the earnings call this week, but given this and recent comments from Twitter founders Ev Williams and Jack Dorsey (ironically, in a tweet storm I can’t easily link to because he didn’t post it right), I’m wondering whether this is a pre-emptive strike ahead of another set of poor user growth numbers. Both Williams and Dorsey seem to be saying that we need to be looking beyond Twitter’s actual numbers at the societal impact it has, which seems like a strange thing to say if the numbers are actually going to be any good.

Quick thoughts: Another way to think about Nest

A couple of good blog posts from other analysts this morning triggered a thought in my mind about Nest.

The first of the two blog posts is from my fellow Techpinions contributor Ben Bajarin. I recommend reading the whole thing, but here’s the key thought:

Apple’s customers are higher value customers and their growing installed base means they are amassing one of the largest, if not the largest, installed base of premium customers on the planet. This observation has some striking implications…

He goes on to talk about two of the implications, and I think the insight there in  particular is great. One of them is the impact this has on the competition, among which of course we find Google, which owns the mobile operating system that’s mopping up the vast majority of the non-Apple customers.

Something else I read this morning (a post from Benedict Evans that’s really about something completely different) prompted me to think about this in the context of Google’s Nest acquisition. I’ve been thinking about Nest primarily as Google’s strategic play in the smart home space, and as the hub and vehicle for the rest of what Google will do in the home. And I think that may well be in large part what that Nest acquisition is about.

But thinking about Nest in the context of Ben Bajarin’s piece made me see Nest in a different way. Think about Nest for a minute: its characteristics as a product, the people it’s likely to attract, even the people who work there. This is a very Apple-like product, made by a former Apple executive, and I’ve always said that Nest was a much better fit at Apple than at Google. It’s even sold in Apple stores.

What if Nest is at least in part about capturing those very lucrative and attractive Apple customers without having to convert them to Android? What if what Google is building with Nest is at least in part a concession that Android and phones based on Android aren’t likely to attract these customers, but by playing in a completely different space – the smart home – Google can in fact attract those customers? And once it has them there, perhaps convert them to other aspects of the Google ecosystem, which after all is where Google really makes its money? There’s no particular reason why Google needs to have all its customers on Android anymore – it’s served its function of preventing Microsoft and Apple from dominating the mobile world. And of course, there’s been lots of talk about even Google’s services making more money on iPhones than on Android. What if Google could establish a different beachhead in devices that’s not dependent on first converting people to Android? What’s fascinating about Nest is that it’s about the only recent Google initiative that’s not about reinforcing Android as a platform – Android Wear, Android Auto and Android TV are all about extending Android specifically into new domains rather than simply spreading Google services into new domains.

I’ve no idea if this was actually part of the thinking behind the acquisition of Nest – most likely, like other acquisitions, it wasn’t about a single strategic objective but rather several. But it would certainly be an interesting response to the emerging reality that Apple has captured the vast majority of the most valuable customers within its ecosystem, and trying to win them back through phones seems to be a losing strategy.

The big downside to this, of course, is that Google has very deliberately kept Nest somewhat at arm’s length from the rest of the company (a point Benedict raised in his post). But this strategy only works if Google continues to build links between the two, as it’s already begun to do with Google Now integration. With Tony Fadell now overseeing Glass as well, there’s obviously even more linkage between Google proper and the Nest team, and it’s another sign that Fadell might be asked to oversee more Google devices and pursue the same strategy.