Unbundling innovation: Samsung, PCs and China

It seems pretty clear now that the Android OEM world is starting to play out pretty much like the PC world. The industry has become unbundled vertically between components, devices, operating system and application software & services. The components are commoditised and OEMs cannot differentiate on software, so they are entering a race to the bottom of cheaper and cheaper and more and more commoditised products, much like the PC industry. 

The funny thing about this is that part of the original promise of Android was that it would allow OEMs to avoid this. Part of the promise was that because Android was open, OEMs would be free to customise it to differentiate their products on top of a common platform. But of course, it hasn't really worked out like that. I think there are a couple of reasons why. 

The first is that 'a common platform that OEMs can differentiate on' is very close to a contradiction in terms. Microsoft never pretended to allow OEMs to change Windows in that sense, and it quickly emerged that if you did change Android in any really important way it was no longer part of the common platform, but a fork. This is what Amazon has done with the Kindle Fire, and Google's reaction (as the sole arbiter of what is nor is not a fork) is that if you do that, you lose access to all Google's own apps, tools and APIs for Android. It wasn't entirely clear 4 and 5 years ago how big a deal that would be - how much of the value of a smartphone operating system would be in those embedded meta-services and cloud services from the platform provider. But now it's apparent that if you don't have those then you're really only selling a featurephone, at least as far as a normal consumer is concerned, and the only companies that have the assets and resources to build those things themselves (outside China, which is another world for Android) are Amazon (perhaps) and Microsoft. 

So, as an Android OEM, you can't practically make fundamental changes to Android anymore than a Windows OEM can make them to Windows. What you can do is to try to add value on top. That hasn't worked either, for several reasons:

  • Most of these companies are simply not good at software and services: the operating structures and skills required are totally different and hard to build
  • Anything that they add, even if it's actually really good, is competing with everything on the app store and everything on the internet. So even if they're good at software and do make (or buy or partner with) something good, it's just another app amongst many. The whole point of open platforms and indeed the internet is permissionless innovation - you don't need the OEM's permission to innovate. Again, how can an OEM differentiate by adding things when a user can add anything they want themselves? 
  • If they do anything cool that requires any sort of third party support they probably won't get it, because the ecosystem effects are at the platform level, not the OEM level. Hardly anyone will support something cool that only works on Samsung Android phones (or only some Samsung phones). 

The general point here is that the differentiation moved from one part of the stack to another (or, perhaps, to a new layer). The OEMs' own software used to be a core part of the purchase decision - that was Nokia's advantage with Series 40. But now that way to differentiate has moved up the stack to a new layer that the OEMs struggle to access - it's controlled by Google.  

There's another parallel here, I think, with what happened to the mobile operators. If you go back to 2000, they were all intensely aware of all the cool stuff that was going to happen with mobile and the internet.  They predicted a great deal of it very accurately, but they thought that they would be doing all of it. And of course what happened was that again, that innovation and differentiation layer got unbundled - it moved up to a new layer at the top of the stack, and the handset OEMs and MNOs were equally unable to access those services. Just like the OEMs:

  • The MNOs were structurally bad at making services
  • Even if they were good those services were just one amongst many
  • The network effects for these services ran across the whole internet, not just their customers. 

That is, MNOs tend to be bad at innovation in internet services, but even if they aren't, it isn't their place to provide it. It isn't their place in the stack to make a great video sharing site or a cool photo messaging app, even if they could. The analogy I often use in this case is that for an MNO to get into apps and content is like a municipal water company deciding to get into the soda business - because it knows water, and has trucks, and customers trust its brand. Even if it managed to come up with a great soda, it would still be just another can of soda amongst many. (Continuing the analogy, of course, it also makes little sense for soda companies to think they can get into the municipal water business - nor for tech companies to think they're going to disrupt mobile operators). 

When you unbundle an industry, you get new and different types of innovation in different layers of the stack. The skills you had in the bundled world may well still apply in the layer you find yourself in. Hence Samsung carries on doing interesting and impressive things in components, and can innovate up to a point in handsets, with things like phablets, so long as they do not depend on concessions from other parts of the stack. Equally, for example, Dell created an entirely new type of PC company - the PC company as a highly specialised logistics business - without differentiating at the operating system layer at all. 

But what's happened for PCs and smartphones and, to a large extent, mobile networks is that it's that top layer of the stack, that the PC and Android OEMs  and operators struggle to play in, that's where most of the differentiation happens. That's the stuff that makes the difference between a commodity and something unique. This is obviously something of a wrench. After all, especially for the phone companies and mobile operators, this is what they always felt they should be doing, and now other people are doing it instead, free-riding on top of their work and their investment. 

Samsung, Apple and Microsoft are all strong in two layers: Samsung in components and devices, Apple in devices and operating systems and Microsoft in operating systems and application software. Each of these companies has cross-leveraged these adjacent strengths to create better products and a stronger market position. Samsung has used the scale of the component business and access to those components to drive the devices business and vice versa, despite failing, mostly, to create compelling software differentiation. This leveraging of scale, combined with some great execution, has taken it to at least half of the total Android market. 

The problem is that Samsung is increasingly competing with another sort of scale effect - it is competing with the entire Shenzhen ecosystem. Before, it was competing with individual companies (many of which happened to use that ecosystem), and like Nokia before it was fortunate in the relative weakness of most of its competitors. As for Nokia, that luck was bound to run out. Now Samsung is starting to face competition with new companies who are finding ways to build new types of handset businesses on top of that ecosystem - taking that ecosystem and using it to unbundle Samsung.

The company that everyone talks about here is Xiaomi, which has created the skills to build both good services and software and good handsets. Xiaomi has faced the fork problem by working out how to dance right up to the edge without going over - Hugo Barra described it as a 'compatible fork'. Rather than turning Android into a fork, it has, so to speak, polished it, adding features and services without breaking anything. And so it has created real differentiation at the operating system layer without losing access to Google services, which its devices outside China all use. 

But there are lots and lots of other interesting Android companies unbundling, both within the price range, with some attacking the mid range and there the low end at under $100, and geographically, with companies like Micromax, Karbonn or Blu or Wiko peeling off particular geographies. In effect, this is the Dell innovation - not trying to get into the other parts of the stack (though Dell has moved into other businesses), but at being really really good at your own part. 

This also reminds me a little of Facebook. Facebook's integrated social platform model has been unbundled by mobile, with the social graph that it owns on the desktop being replaced by the smartphone itself as a social platform that all social apps can plug into. Hence, there have been dozens of new and interesting services peeling off parts of the use case or creating new ones. Making good services in this space does not require a totally different type of company, in the way that making good services and running a mobile network require different types of companies, and Facebook's 'constellation' approach to unbundling its apps has resulted in some perfectly good products, but so far none of them has risen above the status of 'just another social app' - they're all just another can of soda. 

The explosion of imaging

The film camera business peaked in 1999. In that year, consumers around the world took 80bn photos (according to Kodak's 2000 annual report), and bought around 70m cameras (on GfK's estimate). 

In 2014, perhaps 90m traditional cameras will be sold - and close to 2bn phones and tablets with cameras. There will be over 2bn iPhone and Android smartphones on earth by the end of this year: with perhaps 4bn people on earth with mobile phones, there are at least 3bn camera phones and probably over 3.5bn. 

A total of around 1.2bn digital cameras have been sold since 1999 - there are 1bn Google Android smartphones in use today. 

Over 1.5bn new photos are shared every day on Facebook, WhatsApp and Snapchat alone, which equates to about 550bn a year, and this is growing fast. Total sharing across all social networks, if we include Wechat and other platforms, is certain to be over 1 trillion this year - around 1.5 per smartphone per day. How many are taken in total? Several times that, certainly, but there's no real way to know - it could be 1tr, or 5tr, or 10tr. 

So:

  • More than 20 times more devices that can take pictures will be sold this year than in 1999 (>1.4bn versus 70m)
  • Any service doing more than 220m photos per day has higher volume than the global consumer camera industry in 1999 - there are probably half a dozen or more of these
  • More than 20x more photos will be taken this year than in 1999- possibly far more (2tr versus 80bn)
  • If you flex the assumptions, it is possible that more photos will be taken in the next year or two than were taken on film ever. 

I've not found any statistics for consumer video shot before digital, but it seems like a pretty safe bet that more consumer video will be shot this year than was ever shot before camera phones.

We can't yet see how much this will change things. The proliferation of imaging is a profound change that bears comparison with the way vinyl and especially the transistor took music everywhere two and three generations ago, or the way the steam press and railways took print everywhere in the 19th century. 

The difference with both of those, though, is that they were essentially top down: you still needed a factory, but this explosion of imaging is bottom up. Imaging becomes a universal form of conversation, rather than the freezing of a special moment or a piece of professional editorial content.

The transistor took music into the world, both spraying it everywhere and giving people  private bubbles of sound wherever they are. Imaging works the other way: soaking up everything around you for sharing and remembering later, and for taking ownership of what you've seen and done. Maybe it's that sense of ownership that makes Google Glass cause such visceral, inarticulate fury. 

The universal scope of the camera and the saturation of our lives with the photos we take also means that 'taking pictures' is now no more meaningful a term than 'writing'. Hence Snapchat, Instagram and Facebook or WhatsApp photo sharing are no more all 'photos' than Word, Indesign, Wordpress and twitter are all 'text'. Photos are no longer a category.  

Digesting WWDC: cloudy

I’ve spent the last couple of days sifting through the announcements at WWDC. Apple claims 4000 new APIs, and it certainly feels like it. Apple has been busy. But setting aside all the normal incremental improvements, there are a couple of interesting strands. 

First, Apple is continuing the steady process of removing restrictions on what developers can do - but doing so in a very specific way. Almost all of these restrictions are necessarily trade-offs - on a smartphone more flexibility is ipso facto less security and less battery life. So multi-tasking was permitted only once Apple had created a way to do it while preserving control. The same now comes with Extensions. Apple has a model to allow apps to connect to each other and add functionality to other apps - but with clearly defined attach points and a clear control model. Like multitasking, the idea is to gain most benefits of being open while preserving most benefits of being closed. Rather than giving any app system access, you open up specific use cases - a new keyboard, for example, while controlling it tightly (no network access for that keyboard without permission) and dismissing other use cases entirely (no third party SMS apps). The same applies to the fingerprint scanner - apps can now ask for authentication but don’t get the print data - they only get a ‘yes/no’ response back from the system. It’s sandboxes all the way down. In addition, Apple is backing off the ‘no documents’ rule, which seems to have been a vision of a simpler and easier to use approach that was just too forward-thinking. Hence Cloud Drive, which is amongst other things an argument that DropBox really is just a feature (and in the new MacOS there are APIs specifically for file syncing services, addressing some of the heavy lifting OS hacking that Dropbox or Box have had to build themselves). The practical effect of these moves is that a lot of the specific use cases that might draw high-end users to Android (custom keyboards, say) get sliced off. 

The second theme, and a very interesting one, is cloud, the big Apple weakness. The whole of WWDC is full of cloud. A very large proportion of the new user-facing features touch the cloud in some way, as a conduit or as storage. And the ones that don’t use what you might call the personal cloud - the Bluetooth LE/Wifi mesh around you (such as HealthKit or HomeKit). So edit a photo and the edits are on all your devices, run out of room and your photos stay on the cloud but all but the previews are cleared off your phone, tap a phone number on a web page on your Mac and your phone dials it. But none of this says ‘CLOUD™’ and none of it is done in a web browser. Web browsers are for web pages, not for apps. Hence one could suggest that Apple loves the cloud, just not the web (or, not URLs). This is obviously a contrast with Google, which has pretty much the opposite approach. For Google, devices are dumb glass and the intelligence is in the cloud, but for Apple the cloud is just dumb storage and the device is the place for intelligence. And it’s built a whole new set of APIs, CloudKit, to enable this for developers, which it is (for the first time, I believe) dogfooding, building the photos product on it. 

There’s a release cycle question in here. A phone that’s refreshed every year or replaced every two can iterate and innovate much faster than a TV, car (or fridge, or, perhaps thermostat) that may be replaced only every five or ten years. So it seems like the place for the intelligence should be in the phone rather than the TV. But the extension of this is that a cloud product can iterate every day. This is the killer advantage of enterprise SaaS over on-premises software - you can improve things all the time. And Apple updates its OS once a year and, so far, the same is true for the cloud products it builds for developers, where Google can update all of its products every week. 

You can see this dynamic clearly in smartphones: for the last couple of years, Apple has done an annual release (of both hardware and software) and taken the lead for 6-9m months, and then Android (Google and the OEMs collectively) catches up and overtakes for 3-6 months until the the next Apple release. It’s a game of leapfrog. Is this a disadvantage for Apple? Again, there’s a tradeoff, embodied in Facebook’s old internal slogan, ‘Move fast and break things”. If you’re Google and your products are mostly black boxes to the outside world then iterating fast is fine, but if you have millions of developers building on those APIs, changing things every week isn’t necessarily a great idea. That is, there’s an optimum API refresh frequency. (One could also point out that though Google refreshes Android frequently, the average Android user gets a new version of Android only every two years, when they replace their phone, where the average iOS user gets the new version once a year as it is released). 

Going back to this ‘Apple view of the cloud’, though, there’s a deeper and older dynamic starting to come into play now. Apple invented the smartphone as we know it 7 years ago and since then the concept has been built out. All the stuff that really should have been there has been added step by step by both Apple and Google, and the pace at which essential improvements are made is starting to flatten out. But as that happens, the two platforms start to converge. Copy & paste is copy & paste, but iBeacon is a very Apple sort of idea, just as Google Now is a very Google product. That is, as the core features are built out and commoditised, the changes are coming more and more in ways that reflect the very different characters of Apple and Google. I’ve described this before by saying that Apple is moving innovation down the stack into hardware/software integration, where it’s hard for Google to follow, and Google is moving innovation up the stack into cloud-based AI & machine learning services, where it's hard for Apple to follow. This isn’t a tactical ‘this’ll screw those guys’ approach - it reflects the fundamental characters of the two companies. Google thinks about improving UX by reducing page load times, Apple thinks about UX by making it easier to scroll that page. 

One effect of this is that it might get harder to make essentially the same app on both platforms. If a core, valuable thing you can do on one platform has no analogue at all on the other, what do you do? Ignore the stuff that isn’t on both, and get a lowest common denominator product? Or dive into those tools, but end up having quite different experiences on iOS and Android? Things like Metal and Swift only accelerate this issue. 

Another aspect of this issue is the stuff that Facebook announced at F8, especially deep linking. Facebook would clearly like, on some level, to put together a sort of meta-OS that sits on top of both iOS and Android, driving connections and engagement between apps and acting as a social plumbing layer. But it’s not clear that that’s its place in the stack. Apple’s Extensions offer another and very compelling way to drive people between iOS apps. And in addition, Apple has quietly announced, as part of Cloudkit, its own identity layer. You can sign a user into your app using their iCloud account, and (with permission) use iCloud to see which of their friends are using the same app. And that would use the fingerprint scanner.  Looking at the address book is a major driver of growth bethink many social apps on smartphones - Apple is trying to co-opt that, with less friction but also with total user privacy built in. And privacy was a very, very common theme throughout all the developer sessions. You could build an entire multi-player game in Cloudkit, and possibly even a social messaging app. So 'cloud' things become iOS things. But only for iOS. 

And yet, on the other hand, all of the new extensions give Google and Facebook new places to embed their services within iOS.  

This brings me to the macro point: Everything Apple does is about selling devices. Definitely iOS devices, and possibly an Apple TV or a wearable of its own. But for now, the device is the centre point. And that’s a $600 device. Apple has a lock on the majority of this super-premium segment, with Android’s attempts to break into it plateauing at about a third of the segment. This means that Apple sells about 10% of all the phones on earth and Android takes the next 50% or so, and that gives Apple perhaps a third of run-rate app downloads and the majority of the actual value. This is a now pretty stable situation, unless a premium alternative to Samsung emerges or the subsidy environment changes radically. But the only way for Apple to break out of that segment and sell 20% or 30% of the phones sold on earth is a cheaper phone.  Until then the annual leapfrogging with Android will continue. 

In mobile, everything is still wide open

The mobile platform horse race is very entertaining, and a very reliable way to get page views. But it’s also, increasingly, a second-order question. So far, Apple and Google are both winning, in different ways. That may change over time - Apple may make a substantially cheaper phone or developers may shift to making Android apps first. But that’s really not a very interesting topic anymore - everything that can be said has been said, and it wouldn't even necessarily change very much unless you're an Apple or Google shareholder.

To me, the first-order issue is the sheer scale of mobile. We’re going from 1.5bn PCs on earth, either corporate and locked down or consumer and shared and in neither case really mobile, to perhaps 3bn smartphones, that are completely mobile and personal. This means that the internet, by whatever metrics you want to use, gets two or three or four times bigger. It also means the internet can 'eat' a lot of new sectors, across things like, say, retail or payments.

Within this, complexity. I think there are three big differences between the desktop and mobile internet: 

  • ‘Pre-Netscape’ - the desktop internet resolved pretty quickly into ‘the web, and everything else’, and didn’t change much for 20 years. Mobile does not have that single unifying interaction model. We have apps and app stores and messaging systems and iBeacon and a lot more besides, and none of this is finished yet - we do not have resolution into one settled way to do things. Everything is still changing. 
  • ‘Pre-PageRank’ - as a consequence of this complexity the door is wide open for ways for people to find and discover services and ways for companies to reach those people. After the early chaos of the web Google’s PageRank gave a single unifying vector - we do not have such a vector for mobile services. Given the much greater complexity and sophistication of the smartphone platform versus the PC web browser, we may never even get that one unified tool. 
  • Identity -  a smartphone is a a social platform in a way that a PC never was - it has an address book and many other features that apps like WhatsApp can leverage. But it isn’t clear what the point of identity that ties all of these together would be - is it the PSTN number? Email address? Facebook ID? Or some shifting mess of all of these? We have Facebook and Gmail, but it's almost as though we're waiting for them to be invented again. 

As platform owners, Apple and Google will play roles in shaping some of these (or, at least, they will try to). But really, the platform wars are over and everything is wide open. What you look at and how you engage with it, share it, find and discover it are all wide open opportunities in a way that hasn’t been true on the web for a long time. That makes this a really exciting time to be talking to entrepreneurs at a16z

Notes on TV

One of the reasons it's difficult to talk about the future of TV is there are really several separate sets of issues that are in play, which are pretty much self-contained, and depend on quite different factors, and all of which need to move before things can change. 

The US problem

First, the USA is a massively over-served Pay TV market. Pay penetration is very high (90%+), ARPUs are very high by international standards, bundling is very rigid, and so there are lots of people who feel obliged to buy much more than they really want.

Hence, there is a lot of pent-up demand for some sort of unbundled approach - to be able to get just the channels that you want and pay less. But the bundling model is very deeply embedded in the structure of the US TV market, at multiple levels of the value chain, and there are some very strong incentives for a lot of industry participants to continue with the status quo. In other words, everyone hates the way the US TV industry works, except for the US TV industry. This makes the current model very rigid, but also of course potentially very brittle. 

Tech industry attacks on this model have tended to come from the distribution side - they put together a new distribution platform and then go and ask content owners to give them the content to offer an unbundled service. But they very quickly discover that coming to Hollywood with a distribution platform doesn't get you a cup of coffee - you need to propose a more profitable economic model, and back that up with cash on the nail. A physical distribution platform itself is not where the value is - it's the possession of a huge audience or valuable content that gives you power. And it's tough for a platform with no customers to offer better economics than a platform with tens of millions. 

More broadly (i.e. beyond just the US bundling issues) it's helpful to think about TV as a virtuous circle. Audience gives revenue, revenue lets you buy great content, and great content gets you more audience. This is self-sustaining at each level. A big TV channel is big because it's big, not because it has access to a linear distribution path. 

This is a little like orbital mechanics: if you want to go to orbit you need to burn a lot of fuel, and the higher you want to go the more you need to burn - and having a better-looking rocket doesn't make much difference. Money for content is the fuel of the TV business. 

Hence, the interesting thing about Netflix is not so much the physical distribution platform as the use of data to attack the cost of content - if you can make hits more reliably you can get the same audience for less money spent, since you waste less of it. To the TV industry Netflix would look like just another TV channel without the use of data.  

Finally, if the US TV market is over-served, most others are not. The UK is arguably a 'goldilocks' market - half of households have pay TV and are broadly happy with it, and half don't and are broadly happy with that. Meanwhile some European markets are probably underserved for pay TV - more people might like a pay TV product than are currently being given one. So the whole US 'cord cutting is the future' discussion is not necessarily broadly applicable. But the size of the US market (and the physical location of most of the tech industry) tends to shape the debate. It may also focus attention on the wrong problems.

The user experience problem

Next, there is the user experience. It seems pretty clear we're in a 'pre-iPod' phase at the moment. That is, all of the technology is in place, more or less, but no-one has quite managed to package it up in the right way to give the right user experience. There isn't yet a totally fluid way to browse, choose and display what you want on your TV. Lots of people are poking around it (including Apple and Google) but it doesn't seem like we have that magical 'aha' moment just yet.

There are also a bunch of route-to-market problems here. Integration inside a TV is great but TVs are only replaced every 5+ years. Pay TV tech, unlike mobile, is a balkanized mess of standards, with no GSM/UMTS that you can implement and sell globally. Pay TV operators are the gatekeeper to any other equipment in the living room (at least in markets where pay has a large share) unless you can make it really cheap - a couple of weeks before the Chromecast launched I suggested that the next Apple TV should be a $50 HDMI dongle, and the tech for that is moving forward in interesting ways. And of course we also have tablets themselves, which are certainly replacing second TV sets and may take a real share of primary set viewing too.

At the moment there are a lot of rumours that Apple has a new product - but the rumours mainly focus on how it would deal with the unique US content ownership and distribution structures, not the user experience, which is actually the real question. That is, in the US a big part of the user experience gap is the simple availability of content per se, but elsewhere that is much less of an issue. In the UK, for example, all the main broadcasters put the last 7 or 30 days of content online for free, on any device, with no restrictions or messing around. iPad, iPhone, Android, Smart TV, games console - anywhere, any device, any time. And yet peak streams on the BBC's iPlayer service are 600k or so, where peak linear TV viewing is over 20m, and linear TV viewing shows no sign at all of declining. 

How do people really want to watch?

This in turn points to another question, and perhaps a slightly subversive one: how do people actually want to watch 'TV' (or whatever we call it)? Hundreds of millions of normal people really do just come home, turn on the TV and watch whatever's on - if you offered something less passive, do we really know how many would do it? That is, the idea that no-one would watch linear broadcast TV if on-demand worked 'properly' (whatever that might mean) is really just an assumption. 

The really big question here is how TV viewing would change if you did move from the current model of TV as a largely undirected, passive experience, to one that required (/'allowed') you to make choices. If you come home and turn on a random piece of generic light entertainment you'll watch it, but you might never choose to watch it, much less search for it. So is that a bundling problem or a recommendation problem? Should we think of TV viewing hours as propped up by filler shows in the same way that CD albums were full of filler tracks, and that if we go to a fluid on-demand environment people might just stop watching that filler? Or would the right passive programming system - 'Pandora for TV' replace one passive experience with another, more tailored and targeted one, with the greater accessibility of long-tail content taking up the slack? Of course, a lot of TV channel branding and programming is about just this - in effect a lot of TV is 'Pandora for TV'. Either way, this is really about unbundling shows from TV channels, not unbundling channels (or on-demand channel brands) from cable TV subscriptions. And (looking back to Netflix) how would that cascade back though the TV production system? How many fewer shows might be made? How would they be funded? And what would happen to the 'golden age of TV'?