This week’s Techpinions column – Apple and Mobile Payments

My column for Techpinions this week is about Apple and mobile payments, and was prompted by the current heightened interest in Apple’s plans in this area, driven both by the prospect of new iPhones and wearables. I quote survey results from my recent report on smartwatches, but also highlight the vicious circle that plagues the mobile payments space:

The mobile payments vicious circle

Aside from the overall challenges facing any company in the payments space, I talk about the major technologies Apple might choose to use, including both NFC and Bluetooth LE (Apple has so far favored the latter). You can read the whole thing on the Techpinions site. All my Techpinions columns can be seen here.

Communications and content drive consumer tech

I have a chart I often use in my presentations to clients, which encapsulates my perspective on the consumer technology market:

Comms and ContentThe point of the diagram is that, although much of the money and almost all the attention in consumer technology is centered on devices, devices are just a means to an end. What really drives consumer purchasing in this market isn’t hardware for its own sake but the ability to engage in communications and consume (and to a lesser extent create and share) content 1.

Comscore today released an in-depth report featuring many of its statistics on the mobile app market, and it’s full of interesting charts and data points. But given the framework I outlined above, I was particularly intrigued by the charts showing the most used apps by age group, based on share of time spent on mobile apps. ComScore presents this in four separate charts, but I’ve compiled that data into one chart for an easier overview:

Comscore app time spentWhat’s striking to me is that virtually all of these apps can be described as either content or communications (I see Facebook as a blend of the two categories, and it’s therefore interesting that it comes out on top by some margin). The only possible exception is Google Maps, which is arguably a form of content but sits outside my usual categories. The apps that make up the list vary considerably by age group, but the broad categories are similar. Among 18-24 year olds, messaging apps are disproportionately used, with Snapchat and Kik making their only appearances in the top 10 in this group, while with older age groups Gmail and Yahoo Mail creep in. Interestingly, games make an appearance in the top 10 among the two older age groups but not the two younger ones. Other than gaming, however, the top content apps are the same in all four age groups: Pandora on top, followed by YouTube and Netflix, in that order (Netflix drops out of the top 10 in the oldest age group):

Comscore three major content apps

Another fascinating feature of the data is somewhat counter-intuitive: the older you get, the less concentrated your app usage is in the top 10 apps. Comscore refers to this briefly in its report, characterizing it as a greater emphasis on fun and entertainment among younger users, while older users spend more time on productivity tasks as well, but I’m not sure it’s that simple. Still, it’s a very clear trend:

Comscore top 10 apps as share of time spent in apps

The other fascinating thing to think about is that very few of the apps in the top lists are monetized directly from users. Users spend hundreds of dollars on the devices they use these apps on, but very few of them spend money on these apps. Netflix is the highest-paid app/service on the list, but essentially all the others at least offer a free tier and many of them are entirely free to users, funded by advertising. As such, even though communications and content drive purchasing in consumer technology, they don’t drive much of the consumer revenue in this space.

Notes:

  1. To be clear, my definition of content includes video, music, gaming, news, weather, books and so on, and my definition of communications includes audio, text, video and other forms.

Twitter’s channel model is broken

Zach Seward has an interesting piece on Quartz today about how Twitter is like TV. Quoting from that piece:

What makes the service so compelling—and also, yes, maddening—is how linear it is. Twitter marches in a straight line with time, like a novel or cassette tape or, most similar of all, television. You can wade in and out of the stream as you might tune in and out of a TV channel. It’s always on and crackling with energy whether you are watching or not.

At a basic level, I agree that Twitter is like TV, but it’s not really like today’s TV at all. It’s like TV from forty years ago, but with a hundred million times as many channels. Think about all the advancements in TV since that time:

  • The rise of cable television, providing vastly more channels, many of them aligned to specific interests (sports, movies, home improvement, history etc.), and bundled into packages
  • VCRs, and then DVRs, allowing you to capture slices of linear television for replay later on and enabling the pausing, fast-forwarding and rewinding of content
  • Video on Demand, allowing you to select specific content aired earlier to watch after the fact.

Not only this, but Twitter is effectively an a la carte TV service with hundreds of millions of channels on offer. The burden is on the user to choose individual accounts to follow, which can be an overwhelming experience.

Individual accounts as channels is a broken model

For a segment of Twitter users (myself among them), which I might describe as power users, the individual account model works perfectly. They have enough incentive, for personal or work reasons, to go through the effort of carefully selecting and curating a specific list of accounts to follow, and this relationship is sacrosanct. These are the very users who are now blowing up on Twitter about the change the service introduced this week. However, these users are a minority of Twitter’s current user base, and if the company is to grow from 271 million MAUs to Facebook or Google scale at over a billion, the new users it needs to gain look a lot more like the rest of Twitter’s current user base than its power users.

For those other users, though, the individual accounts as channel model is fundamentally broken. Most of them simply won’t go through the effort of selecting individual accounts to follow to the extent that they’ll end up having a satisfying experience. Twitter has now overlaid an interest-based filter on the onboarding experience, but it’s merely a step along the way to selecting individual accounts to follow, and the filters are too broad. What Twitter really needs to do is create channels at a higher level, and abstract them from individual user accounts.

For example, I might say that I’m interested in baseball at a high level. Twitter would then scan all baseball-related tweets at any given moment for all those that are most newsworthy, and curate these into a baseball-related channel which I can follow. Alternatively, I might go a level deeper and say I’m interested in the Yankees specifically, and Twitter would then curate tweets specifically related to that team. The other advantage with this model is that it doesn’t necessarily have to be based on following at all: I could simply dip into and out of topics as I’m interested in them. If I’m at work, I could focus on the topics that are relevant to that, and when I get home I could switch to my Yankees, current affairs or Modern Family channel. This would also avoid the frequent incongruity of seeing a tweet about a plane crash next to one about a celebrity breakup or iPhone rumors.

To go back to Seward’s TV analogy, live TV only works because you just have to turn on the TV and something is there. If you don’t like it, you change the channel. But on Twitter today, there’s literally nothing on until you explicitly tell the service what you’re interested in, and if you don’t like it, it’s a lot of work to change channels, because you effectively have to create each channel yourself in a very manual and labor-intensive fashion. It works fine once you’ve created a channel you’re happy with, but I suspect many users never reach this point and thus don’t use the service often or abandon it altogether.

Favorited tweets in the timeline is a bandaid

Twitter’s move to include non-followed but favorited tweets in timelines is a bandaid that doesn’t do anything to solve the fundamental problem of Twitter for the vast majority of users. But Twitter has the potential to change the model in a way that won’t break it for power users, while creating a new and different experience both for new users and existing users. This week’s change makes me worry even more about the problem I posited a couple of weeks ago ahead of Twitter’s earnings: that in the search for growth, Twitter will end up breaking the core experience for the very users to drive much of its value. It doesn’t have to be this way.

New report and post on smartwatches

My firm, Jackdaw Research, has just published a report for subscription clients on the topic of smartwatches, entitled Smartwatches: Market Prospects. It features several consumer surveys which gauge demand for current and future smartwatch features, and evaluates the current offerings in the smartwatch market. I’m bearish on smartwatches as they currently stand – demand for the features they offer is weak, and that demand is currently being met by weak supply too, as all of the current offerings are flawed by virtue of the compromises they make between battery life, displays, performance and usability. The market is likely to remain small unless something changes – one of those, of course, being a disruptive entry to the market by Apple.

My Techpinions post today summarizes some of the key findings of the report. Here’s a quote:

Measured against these criteria, the current crop of smartwatches on sale does very poorly. I did my own ratings as part of my report, and I ended up with scores which were barely above 50% across these seven categories. Unlike most reviewers, I don’t see the Pebble as the clear leader in this market – in fact, all the devices ended up clustered around a very small range of unimpressive scores. If we’re really honest with ourselves, we should expect much more of these devices before we embrace them, and unless they do more we’re not likely to see them sell above current levels.

The UK’s Guardian newspaper also did an extensive write-up on the report, which you can find here.

There’s more information about the report, and an opportunity to buy it directly, on the Jackdaw Research website. The report is available as part of our subscription research service for clients, and is $500 for non-clients.

King’s downfall in charts

King Digital, maker of Candy Crush, reported its earnings for Q2 2014 on Tuesday, and they weren’t pretty. The market acted as if its results had suddenly soured from one quarter to another, but the reality is that most of the underlying trends have been worsening for about a year now, since well before its March IPO. See the charts below.

As a primer, two things to know about King and its financials. One is that Candy Crush, easily its most popular game, dominates its results. The other is that its main business model is in-app purchases, and that this model works on the basis that a small percentage of its users make them, but those that do make them spend enormous amounts of money on them. So bear those two facts in mind as you proceed.

First, gross average bookings per user, which King reports on a daily basis. You can see that these peaked a year ago, in Q2 2013, and have been falling since:

Gross bookings per userSo why is this number falling? Well, almost every component which goes to make up that number is in decline or at least slowing down. First, overall user numbers, which King measures three different ways (daily active users, monthly active users, and monthly unique users, all in millions): Continue reading

Analysis of Q2 2014 US wireless market

Last quarter, I provided an overview of trends among the major US wireless providers in Q1 2014, and I’m repeating that analysis here for Q2 2014. A short preview including some analysis has been available on FierceWireless for the past week. I’m now providing additional analysis (below) and a detailed set of slides on Slideshare (also embedded below). Last quarter’s analysis is here, and a recent post on Sprint and T-Mobile, which provides further analysis is here.


This analysis covers five providers: AT&T, Sprint, T-Mobile, Tracfone and Verizon Wireless. Four of these are the largest carriers in the US market, and Tracfone is the fifth-largest provider, though not a carrier but an MVNO. There are other MVNOs in the US market, but none of them comes close to Tracfone in scale, and that’s why it’s included in this analysis. It’s also the largest prepaid provider in the US by some margin. These five providers between them make up the vast majority of the US market, especially since the acquisitions of Leap Wireless and MetroPCS in the last couple of years by AT&T and T-Mobile.

A tale of two markets

In many ways, the US wireless market is in fact still two separate markets, with AT&T and Verizon in one half, and the other players operating in the other. This is evident in total subscribers and revenues, margins, churn rates and other metrics, with AT&T and Verizon either larger or performing significantly better than the rest of the players. Here, for example, is a chart showing total subscribers for the five players:Total wireless subscribersAnd here is a chart showing EBITDA margins:

Wireless EBITDA marginsThese carriers’ relative scale and profitability are related, as I’ve discussed previously, and most recently in last week’s post on Sprint and T-Mobile. This is perhaps the most important fact to understand about the US market, and one that isn’t likely to change anytime soon, as the gulf between the two largest players is far too great for any of the smaller players to bridge in the near future, at least organically. Continue reading

Where do Sprint and T-Mobile go from here?

After a couple of days of talking to various reporters about the Sprint and T-Mobile news from this week, I thought I’d take some time to write up my thoughts on the situation. I already posted some thoughts on Dan Hesse’s tenure at Sprint here. This has turned into a longish post, so here are some signposts for you: the first section deals with why the Sprint-T-Mobile merger made sense, the second deals with where Sprint goes from here, the third deals with where T-Mobile goes from here, and at the end I talk about other issues relating to T-Mobile, namely the other potential merger offers, T-Mobile’s claim to be the largest prepaid carrier in the US, and its goal of catching Sprint by the end of the year (each of those hyperlinks will take you to the relevant part of the post).

Why the merger made sense

I did a long post previously about why the Sprint-T-Mobile merger made sense. If you haven’t read that, I suggest you do, because I won’t cover the same ground in detail again here and the basic arguments haven’t changed even if some of the numbers have. In brief, Sprint and T-Mobile both suffer from their small scale relative to Verizon and AT&T, which manifests itself especially in advertising spend, network costs, retail distribution and purchasing power. Sprint and T-Mobile have attempted to overcome their ad spend disadvantage through various means, Sprint with its Framily plans, which create a viral effect as people try to sign up friends, family and apparently complete strangers; and T-Mobile with its heavy use of social media for marketing. And SoftBank’s acquisition of Sprint and Brightstar has allowed the combined company to generate greater purchasing power in devices and accessories. But a fundamental and significant gap remains.

This is evident nowhere so much as in the various companies’ margins, as shown below (this chart is an excerpt from the deep dive on US wireless operators’ Q2 performance which I’ll be publishing early next week. A preview is available on FierceWireless now):

Screenshot 2014-08-07 09.57.12As you can see, both T-Mobile and Sprint are languishing in the single digits, while AT&T and Verizon were at around 25% and over 30% respectively last quarter. This is a direct result of their lack of scale, and slow organic increases in subscribers won’t solve this problem anytime soon. This is the single greatest argument for a merger between the two, and nothing else can solve this fundamental problem. The fifth company in the mix there is Tracfone, which is a mobile virtual network operator (MVNO), which piggybacks off the carriers’ networks. Most of its costs are variable rather than fixed, and as such it doesn’t have the same scale disadvantages, but it has to pay wholesale rates to the carriers, which doesn’t allow it to be as profitable as AT&T and Verizon either.

Ultimately, though, the merger faced enormous regulatory opposition, and it was by no means a certainty that it would go through. US regulators would apparently rather see a short-term continuation of the current market structure than a more sustainable long-term competitive environment. I suspect that will come back to bite them a year or two from now. The challenge is that neither Sprint nor T-Mobile is exactly on the brink of collapse today, and so it’s easy to argue the situation isn’t urgent. However, each company faces fundamental challenges beyond those related to scale, and I’ll address those below. Continue reading

Today’s Techpinions post: What does cloud-first, mobile-first mean for Microsoft?

I do a weekly column for Techpinions in addition to my regular stream of posts here on Beyond Devices. Today’s post is about what cloud-first, mobile-first – one of Satya Nadella’s mantras – means for Microsoft. Here’s an excerpt:

The bigger challenge, though, is Microsoft will increasingly be competing against the owners of the two major platforms even as they seek to broaden their offerings onto these platforms. Apple and Google both have their own offerings which compete with Microsoft’s Office, Skype, OneDrive and Outlook.com products. Their competing products are in most cases free to the user, bundled into a broader suite of online services or into a hardware purchase. How will Microsoft compete against these two companies on their own platforms in a way that both adds enough value to justify charging money and overcomes the disadvantages of being a second class citizen? Other commentators are saying Microsoft should abandon both its devices and platforms businesses and focus on cross-platform services, but the fact Microsoft’s two major competitors own those platforms should be cause for reflection.

You can read the full post here.

Evaluating Hesse’s tenure at Sprint

With news today that Dan Hesse is being replaced as CEO of Sprint by Marcelo Claure , I thought it would be worth looking back at Hesse’s tenure as CEO.

An early opinion, from 2008

I dug out an old blog post from 2008 from a now-defunct blog I used to maintain, and it’s worth revisiting. This was just a few months into Hesse’s time as CEO of Sprint, and probably my first close-up encounter with him 1. I quote from that post:

Just got back from [a group] dinner with Dan Hesse, Sprint CEO, at CTIA here in Vegas… My first question was what he had learned about what had gone wrong at Sprint which had led it to the predicament it’s in today.

His main answer was that it ultimately all comes down to the merger with Nextel… The main issues stemmed from the fact that the merger was ultimately billed as, and contracted as, a “merger of equals” because the market valuations of the two companies were similar. This created huge problems, both in terms of the price paid and in terms of the structures and policies which flowed from that decision.

Firstly, in terms of the price paid, this led to massive synergy requirements to provide a return on investment. These synergy targets were overly ambitious and became the driving force for all the other targets at the company. The focus was therefore on massive cost-cutting, was very internal, and ignored external considerations, and especially considerations of customer care, churn and customer service, all of which suffered as a direct result.

The second problem was that the “merger of equals” narrative required an equitable distribution of various goodies after the merger concluded. This included seats on the board and in the senior management roles at the company, which were distributed equally between Sprint and Nextel. The split headquarters between Reston and Overland Park also resulted from this mentality. And it meant that no single unifying strategy led the company during that time, but rather it was constantly torn between the competing visions and philosophies of the people who had brought the two companies together.

From all this flowed the lack of focus on the important things, the over-focus on secondary considerations, and the mess Sprint is in today. Hesse is quickly changing all of this – one of his first moves was instituting greater accountability throughout the business (Gary Forsee had been the only person in the company with P&L responsibility before he left). And he has also made customer care, churn and other external metrics key to incentive structures and reporting throughout the business.

There is still a massive mountain to climb at Sprint, but Hesse certainly seems to have grasped the essential issues and made quick changes which should lead to the kind of turnaround that’s required. It remains to be seen whether the rest of the company can execute on his vision, but it certainly appears to be the right vision in many respects.

Consistent strategic priorities

To an extent that would become even clearer during the course of 2008, Hesse’s hands were tied to a great extent by the mistakes made by his predecessor. But he did the best he could with what he had to work with, and did an amazing job of turning the company around over the next few months and years. He established three key priorities for the company in those first few months, which he outlined at an analyst event I attended in May 2008 (again, quoting from that earlier blog):

Sprint has three clear strategic priorities: fixing the customer experience, establishing a clear brand in the market, and focusing on profitability. This clarity of purpose and focus on fundamentals is a good thing, and the key will be to execute on it without adding a raft of additional initiatives and programs over the coming months. Sprint needs to get the basics right before it gets distracted again.

One of the most impressive things about Hesse’s tenure is that he stuck to these three strategic priorities throughout it, and he reiterated these at the analyst event Sprint held in June this year. Fixing the customer experience, which had become so broken in the time after the Nextel merger, was priority number one, and Hesse made very rapid progress here, by looking at root causes of dissatisfaction and solving those one by one, leading both to increased satisfaction and a smaller call center footprint and staff. By October that year, Sprint was coming first in customer service surveys, a huge turnaround from last place two and a half years earlier. Under Hesse, Sprint transformed its customer experience and customer service, and this helped hugely in returning the company to growth and repairing a damaged brand.

Hesse also worked to personally fix the brand, appearing in commercials for the company to personalize his message of fixing the company and making Sprint great again. I’d argue that advertising was some of the most effective of any ads run by major US wireless companies over the last several years, and certainly Sprint’s most effective ad campaign of Hesse’s tenure. It led with Sprint’s new Simply Everything plan, which offered unlimited voice and data for $99.99, and was emblematic of a theme of simplification across Sprint’s business. Many calls to care involved questions about bills and overages, so Sprint simply moved to plans that were priced simply and didn’t incur overages. This built on Hesse’s history with price plan innovation, which he liked to point out started much earlier at AT&T, with the first 800 numbers, and later with the Digital One Rate plan at AT&T Wireless.

WiMAX – another albatross around Hesse’s neck

Continue reading

Notes:

  1. Throughout his tenure, and throughout my time as an industry analyst, Hesse has been and remains one of the most accessible CEOs in the business, something I’ve been grateful for.

Thoughts on Samsung’s Q2 2014 earnings (and its future)

This is, and isn’t, part of my series on tech companies’ Q2 2014 earnings. It is, because it uses Samsung’s Q2 earnings as a jumping off point, but it isn’t because it’s more of a think piece about where Samsung goes from here than being specifically about one quarter’s earnings.

The importance of Samsung’s mobile business

Having said that, let’s start with those Q2 earnings. Here’s the growth rate in mobile sales specifically (this is part of Samsung’s IT & Mobile (IM) business unit):

Mobile revenue year on year growthAs you can see, growth has slowed dramatically over the last few quarters and dipped into the red in the last two. That trajectory isn’t looking good at all. Now, here’s the operating margin for the IM business unit as a whole (this includes Samsung’s much smaller PC business as well as tablets and smartphones):

IM profit marginThe margin is bouncing around a bit but definitely dropped in the last quarter or so. Longer term, it was somewhat consistently between about 17-20%, but this quarter it dropped to just over 15%. Let’s now put this in the context of Samsung Electronics overall: the two charts below show that IM business unit as a percentage of revenues and operating profits: Continue reading