Microsoft’s Build announcements: breaking the vicious circle

Microsoft’s first-day keynote at its Build developer conference today focused first on Azure and Office platform advancements, but finally moved on to Windows, where the real meat of the day was in my mind. When it comes to Windows, and Windows Phone in particular, one of the key challenges continues to be what I refer to as the user/app vicious circle. Simply put, in our post-iPhone world, when there are no users on a platform it’s tough to attract developers, and when there are few developers and hence few apps, it’s tough to attract users. Windows Phone suffers from a number of issues (see my free in-depth report on the platform), but one of the biggest continues to be the app gap and the app lag.

Attempts to break the vicious circle

The challenge for Microsoft is that’s really tough to break this vicious circle unless you can somehow goose either user numbers or the number of apps. What I saw in today’s keynote was an articulation of Microsoft’s strategy to do both, as shown below:
Screenshot 2015-04-29 13.37.38 Continue reading

Thoughts on Twitter’s Q1 2015 earnings

Twitter’s earnings last night were something of a mess. Revenue fell short of the company’s forecasts, user growth was nothing special, two previous metrics were retired and two new ones introduced which don’t look great right now, and to top it off, the earnings report was accidentally posted before the market closed. Last quarter, I said this about Twitter’s results:

…there are three main growth drivers for [companies like Twitter]: 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… User 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!

I’ve often used these three metrics – user growth, engagement, and monetization – as a framework for evaluating Twitter’s earnings, and in Q4, only one was moving in the right direction. In Q1, however, even monetization stumbled, leaving the company without a single improving metric among the three. Let’s quickly review the key metrics here. Continue reading

Thoughts on Apple’s Q1 2015 earnings

Apple’s earnings came out today, and as ever the total revenue, profit, and iPhone shipment numbers, as well as Apple’s enormous and growing pile of cash were major focus areas for people covering the company. However, I always like to look under the hood a little at some other numbers others might not be so focused on. So here, in no particular order, are a few of those second-tier numbers you might not have seen reported on elsewhere.

One quick note: here, as in all my analysis, I use calendar quarters rather than an individual company’s fiscal calendar in my charts and comments, so bear in mind that in what follows I’m talking about the first calendar quarter of 2015 when I say Q1 2015, and so on.

iPhone average selling prices

iPhone average selling prices have largely moved in one direction over the last several years, as Apple has kept older iPhones on the market longer: downwards. However, what we started to see last quarter was a reversal of this trend, and it continued this quarter. This chart shows a separate line for each year for the last five calendar years, which allows you to see how things have changed over time more easily, given the cyclical nature of this business:
Screenshot 2015-04-27 14.40.17 Continue reading

ESPN shows Verizon it wasn’t bluffing

When Verizon announced it would be launching Custom TV, its semi-a-la-carte FiOS offering, and news first broke that some of its content partners didn’t like it, I tweeted this:

My theory here was that Verizon clearly knew its contracts forbade such a move, but that it was banking on such strong consumer support for the idea that any content owner who publicly opposed it would immediately be seen as anti-consumer. I characterized that attitude as naive, but everything Verizon has said and done since then seems to bear out the theory. Firstly, Verizon went ahead and launched the service anyway over the following weekend, and in its marketing materials it clearly played up the pro-consumer angle:

Verizon Gives Customers an Unrivaled Level of Choice With the New FiOS ‘Custom TV’…

FiOS Custom TV is designed to give customers more freedom and flexibility to choose the perfect TV plan for their home…

FiOS Custom TV delivers consumers more choice and control over their TV…

On Verizon’s earnings call this past week, the company reiterated this approach, in response to a question from an analyst:

Look, this is a product that the consumer wants. It’s all about consumer choice. I mean, if you look at the TV bundles today, most people only on average watch 17 channels. So, this is a way to give consumers what they want on a choice basis. And we believe that we are allowed to offer these packages under our existing contracts.

Note that Verizon isn’t formally relying on the pro-consumer strategy – it still claims that it believes its contracts allow this unbundling of channels. But it’s very clear that it intends to lean heavily on the pro-consumer angle in its public communications, if not in court.

Now, of course, ESPN is suing Verizon over Custom TV, which is a pretty significant step when it comes to disputes between pay TV providers and content owners, which never usually get this far. ESPN (and its owner, Disney, referenced in my original tweet) clearly isn’t intimidated by Verizon’s strategy. It’s hard to see this as anything other than ESPN calling Verizon’s bluff in the strongest possible terms.

Things could still go one of two ways here:

  • Verizon ultimately prevails in court and gets to keep its Custom TV offering. This outcome would be groundbreaking for the industry as a whole, and not just for Verizon – it would potentially open the door for more experimentation by pay TV providers along similar lines.
  • Verizon loses in court and is forced to withdraw the service, including canceling service for whichever customers have taken up the option. This would be embarrassing, to say the least.

However, the problem with the whole approach is that it sets Verizon at odds with the content owners, and especially the most powerful, Disney, in a far greater way than any simple carriage dispute does. Verizon has set itself up in opposition to the content owners on this question, not just in a matter of dollars and cents, but on the whole central question of how content gets packaged and delivered to customers. Even if Verizon wins the case (which seems like a stretch), it seems likely to damage Verizon’s relationships with these critical partners in the TV business irreparably, which could well have nasty longer-term effects too.

Comparing Microsoft and Amazon’s cloud businesses

Amazon finally provided the first direct visibility over the finances associated with its AWS business today, and it provides an opportunity to compare them with one of the other two big enterprise cloud businesses which compete with it, Microsoft’s. Microsoft doesn’t explicitly report its cloud revenues, but “Commercial Cloud” is one of a number of revenue categories it provides enough detail around in its 10-Q to allow us to calculate it with some accuracy. Here, then, is a comparison of Amazon’s AWS revenues and Microsoft’s Commercial Cloud revenues over the same five quarters:

Screenshot 2015-04-23 18.09.34As you can see, the two are almost neck and neck at this point, with Microsoft’s cloud revenues catching up to Amazon’s over time. It seems likely that they will pass AWS revenues in the next couple of quarters. But the obvious problem with this chart is that they’re not measuring the same thing: AWS is a discrete business, largely focused on public cloud services, whereas Microsoft’s revenues reflect several quite different businesses that it’s lumped together under this heading. However, this reflects something I wrote about last quarter, which is that Amazon would actually quite like to have a cloud business that looks more like Microsoft’s:

It continues to be critical for both companies (and Google) to migrate their way up the cloud stack to the higher-layer services (as both I and Nadella called them), but Microsoft is already there, while Amazon continues to try to compete in a space I’m really not sure they can.

Where the two businesses overlap, Amazon’s is certainly quite a bit larger, but Microsoft’s cloud business looks a lot like the kind of business Amazon is trying to build, and quite rightly. The kind of business Amazon is in today is rapidly commoditizing, and its chances of moving up the stack are much slimmer than Microsoft’s, which has a much longer history in this space and a massive legacy customer base to migrate over to it.

One other thing we don’t know about Microsoft’s cloud business is its profitability. It sits within the Commercial Other category at Microsoft, which reports gross margins of 41% last quarter, but those margins have been rising rapidly as Microsoft builds scale in this business. Amazon’s operating margins on AWS, meanwhile, are far higher than in its core e-commerce business, but they appear to have fallen quite a bit year on year, likely reflecting that commoditization and the increasing competition in this space. I’m not sure Amazon will be able to turn those margins around in the near future unless it is able to execute that transition to higher-stack services and therefore better differentiate its offerings. Microsoft’s trend currently looks healthier on both the revenue growth and margin side. And of course Microsoft has quite a few other more profitable segments to lean on while it builds this business, whereas Amazon continues to struggle to break even in its core business.


Yahoo’s tiny, slow-growing mobile business

We’ll have to wait for the transcript to be sure, but Marissa Mayer must have described Yahoo as a mobile-first business a dozen times or so on the earnings call this afternoon. However, as Yahoo has also been quantifying its mobile business lately, we have some hard numbers to evaluate this claim by, and they’re not all that good at backing up her repeated claim.

First, here’s mobile as a share of revenues for Yahoo, as compared with Facebook and Twitter. Yahoo’s number is expressed as a percentage of what it calls “traffic-driven revenue”, while Facebook and Twitter’s are as a percentage of ad revenue, which likely means much the same thing:

Yahoo mobile ad percentagesYahoo’s percentage is clearly growing somewhat, but not very fast, and it’s clearly light years behind Facebook, which began life as very much a desktop business, or Twitter, which has arguably always had a mobile-centric approach, especially to advertising. Those are mobile-first businesses: it’s hard to argue on this basis that Yahoo is.

Another way to look at things is revenue:

Yahoo mobile ad revenuesHere, fledgling Twitter, which had just $20 million in revenue in Q1 2011, has already passed Yahoo and seems to be lengthening its lead. Facebook, meanwhile, is in a whole different league, and also growing much more rapidly. Again, Yahoo is clearly no mobile powerhouse just yet, and at these growth rates it’s just going to get left further and further behind.

If Yahoo is taking a mobile-first approach to product development, that’s clearly a good thing, and it certainly seems to be the case. But a company that has over 80% of its business tied to the legacy desktop world has a long way to go before it can call itself a mobile-first company.

Thoughts on Verizon’s Q1 2015 earnings

Verizon reported results this morning. In listening to the call and reviewing some of my numbers, I was struck my the fact that Verizon is in the midst of several important transitions. I’ll highlight three here today:

  • Converting the phone base to smartphones
  • Converting the phone base to installment billing
  • Converting broadband subs to FiOS

Each of these three transitions is largely about moving a portion of Verizon’s base from one thing to another, rather than about growth per se, but each has a financial impact, and two of the three are accompanied by new growth opportunities.

Converting the phone base to smartphones

The first transition is converting the phone base to smartphones, and specifically to 4G LTE smartphones. Here’s what that process looks like at Verizon Wireless:

Converting base to smartphonesAs you can see, the total number of phones isn’t really growing much (in fact, Verizon lost phone customers in Q1). But smartphones within the base, and especially 4G smartphones, are growing very rapidly. The financial impact here is that smartphone owners, and 4G smartphone owners in particular, consume lots more data. In a world where almost every plan includes unlimited text and voice, the path to growth from these customers is increasing data usage, and getting them on a 4G smartphone is the best way to do that. This growth opportunity will last for another couple of years at least – there are still 11 million 3G smartphones and 17 million basic phones in the base to convert. But at some point it will come to an end. Continue reading

Thoughts on Neflix’s Q1 2015 earnings

I’m kicking off the Q1 2015 earnings season (past earnings posts here) with a post on Netflix, just as I did last quarter. I’ll also be doing an updated deck for subscribers to the Jackdaw Research Quarterly Decks service. Having done a pretty broad run-down last time around, I’m going to focus on three things this time around:

  • Subscriber growth, especially in the domestic streaming business
  • Profitability of the US streaming business
  • Profitability of the other two businesses.

Subscriber growth in the US becomes ever more cyclical

As I said last time around, subscriber growth in the US is likely to slow down over time as the service reaches later adopters and much of the lower-hanging fruit is already harvested. However, Netflix had a really good quarter for net additions in Q1, and year on year additions were flattish compared to last quarter rather than down dramatically too:

Quarterly net addsYear on year sub growthSo what happened? Was I wrong about the long-term trend? Actually, no. What’s happening is that Netflix’s domestic subscriber growth in particular is becoming increasingly cyclical, driven heavily by new series launches in Q1 and lower in every other quarter. This is easier to see in this quarterly chart showing just US streaming subscriber growth: Continue reading

Contrasting iOS and Android adoption patterns

I’ve done two previous posts (here and here) on Google’s Android developer dashboard stats, and I was surprised to find it’s been just over a year since my last one. I may still do a deeper dive revisiting some of the points from those previous posts, but this time around I wanted to do something different – contrast Android and iOS adoption patterns. Google has published data on Android version adoption for quite some time now, but Apple’s only been doing it for the last couple of years, so we have less data. But we still have enough from both platforms that we can draw some interesting conclusions.

iOS adoption – huge initial ramp plus slow conversion

The pattern for iOS adoption is very clear – a massive initial ramp in adoption in the first few days and weeks, followed by a steady conversion over time. The chart below shows the share of the base on each version in the first 24 months from launch:

iOS adoptionAs you can see, by the time the first month is over, more than 50% of the base is already on the new version, and it ramps to around 90-95% by a year later, just before the next version launches. At that point, it immediately drops to 25-30% as the new version takes over, and slowly dwindles from there down to under 10% after two years. There are differences in adoption rates for the various versions shown – as has been reported, iOS 8 has seen a slower initial adoption rate than iOS 7, though it’s now over 75%. Correspondingly, the share of iOS 7 has fallen slightly more slowly than iOS 6 did, though the gap in both cases has closed a bit recently. Continue reading

What to look for in the Apple Watch reviews

With the Apple Watch becoming available for pre-order on Friday, it’s likely that we’ll see reviews of the device from a handful of people who’ve been given early access to the Watch at some point this week. I am not among them, but I wanted to share what I’m looking out for in these reviews when they do land, and which I think will make a big difference in how the Watch sells.


I wrote a piece about Apple Watch and notifications a few weeks ago, and I think how the Watch handles notifications is critical, both because I think it’s an essential part of Apple’s position around intimate computing, but also because other smartwatches have handled notifications so badly. There are two ways to solve this notification problem:

  • Pass fewer notifications to the wrist – i.e., allow users to filter those notifications they want to receive on their Watch compared with their phone, either by app or ideally even more granularly
  • Deal with notifications better – allow users to manage these notifications more effectively when they do arrive. For example, notifications might arrive more discreetly, the user can dismiss them more easily, and/or the user can act on them effectively on the device. There are early indications that the Watch checks at least two of these boxes.

Battery life

I was tempted to put this first, because I think battery life on the Watch could put a huge damper on the success of the device if it’s not adequate. Given the reports we saw earlier this year, and Apple’s own public statements at the recent event about battery life, it’s still somewhat up in the air whether the broader group of users who now have their hands on the device will find it adequate. It’s clear it won’t last more than a single day for most users, but the question is whether it can effectively get through a whole day, especially for users with lots of notifications and other usage on the device. Related to all this is the experience of having to remove the Watch for charging nightly – does this end up being annoying, or is it something the user quickly gets used to?

Complexity / richness

These are two sides of the same coin. Following the Spring Forward event, a number of reporters worried that the Apple Watch was overly complex. That wasn’t my own experience, but I do think that the Apple Watch does far more at inception than the iPhone did, because it’s launching into a very different world. That could come across in two ways, however: as complexity, or simply as a rich experience. Complexity would manifest itself in user confusion, frustration, a sense of not being able to get things done. Richness would manifest itself in a sense of ease of use paired with a sense that there’s more to be discovered – in other words, the basic experiences work well and intuitively, but there’s more to the device than just those. It’s a tricky balance to strike, and so I’ll be looking out for how the early reviewers evaluate the Watch’s performance on this axis. The how-to videos on Apple’s Watch site suggest that there is a learning curve, but none of the interactions there look overly complex.

New interaction models

Closely tied to that, but also broader, is the introduction of new interaction models, both between the user and the Watch and between users wearing the Watch. The Digital Crown, Force Touch, and Digital Touch are all new on the Watch, and they need to work really well for users to embrace them and for interaction with the Watch to be both pleasant and engaging. But Force Touch is particularly interesting because it’s the only one of these three that’s likely to have applicability beyond the Watch. The new MacBook has a new touchpad which uses a similar concept and haptic feedback to simulate a click, which I found amazingly convincing. But there are also rumors (including new ones today) about future iPhones incorporating similar technology. If Force Touch works well on the Watch, it could be critical to future interactions on the iPhone and iPad as well, so it’s important that it works well.

Third-party Apps

It seems like every time I update my iPhone apps recently there’s a new update for an app that I use which adds Apple Watch compatibility. That’s a good sign, and suggests that there should be a pretty robust group of third-party apps available for the Watch both while reviews are happening and especially at launch. But it’s impossible for me to judge whether any of these apps are any good, and whether they add significantly to the experience I already enjoy with these apps on my phone. I’m curious to see whether there are enough of these apps, and whether they’re good enough to really give reviewers a sense of how much value they’ll add to the Watch. I think third-party apps will be a big part of what makes the Watch compelling, just as they have been for the iPhone and iPad, and so this is another key thing to look out for.

When the novelty wears off

The hardest thing for reviewers to gauge will likely be one of the most important factors in its ultimate success or failure – whether the Watch is compelling enough as an addition to the iPhone that its appeal lasts beyond the initial period when the novelty wears off. I don’t know how long reviewers will have had the Watch by the time they do their reviews, but it may well not be long enough to draw a conclusion on this. The Watch, like the iPad, lacks a single compelling selling point. Rather, I think each user will have to discover their own reasons why wearing one makes sense. I believe that the Watch’s success in the first year will depend heavily on the experience early adopters have with it, and how they communicate about this experience with their friends and family. If they find it compelling, they’ll be able to articulate the value proposition far better (and more convincingly) than any Apple ad or store associate could. And that will be key to Apple’s ability to go beyond the early adopters into the mainstream base of iPhone users.