Smartphones

Why care about customer validation, did Apple not launch the iPhone with no validation?

I’ve heard this a few times, and just recently at an incubator Lean Startup meeting. Entrepreneurs can be miffed by the Lean Startup requirements to spend so much time looking for customer validation. After all, Steve Jobs (as well as Akio Morita, Mr Sony) are known for rejecting customer research, stating that customers do not know what they want until you build it for them.

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It is a myth to believe that Steve Jobs built the iPhone in isolation of customer validation. Steve Jobs was very much aware of the needs and problems of mobile phone users. And he built the iPhone to respond to those needs. I was at MacWorld’s iPhone announcement and saw first hnd how Steve was in tune with that users wanted – from a phone, an iPod and a mobile internet device (the three pillars of the iPhone as he described it). He clearly spoke of the complexity of the UI of mobile phones, boasting a bunch of features like address books and cameras that no one knew how to turn on or use. He knew the need that people had to be able to do simple internet queries while away from their desk, to find the address of a restaurant, get a map of their location, or some quick fact-checking.

The foundation of the iPhone had strong customer validation. The reliance on touch however (and the lack of a physical keyboard) was a bet however, one that could not easily have gotten customer validation (besides internal beta users). Several tech CEOs saw that as a wild failing bet (Mr Ballmer’s for example), because they thought that they had sufficient customer validation that a physical keyboard was a requirement. Apple’s genius was in changing the conversation from “physical vs touch keyboard” (which they would likely have lost) and to “complete touch interface with intuitive powerful new gesture-based interactions (pinching, zooming, swiping, etc)” that was so compelling overall that people were willing to trade off the accuracy of the physical keyboard for the power and versatility of the all-touch interface.

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Customer validation and engineering creativity both have their place in great product development – external customer validation is needed to understand the problem area and need, from a customer perspective; internal engineering creativity is needed to deliver a unique innovative implementation of a solution to those needs.

Tim Cook should be losing sleep over lower priced iPhones if he cares about the iOS App ecosystem!

In this Bloomberg interview, Tim Cook explains (“I’m not going to lose sleep over that other market, because it’s just not who we are.”) how Apple’s phone strategy follows the traditional Apple “premium margin” strategy: focus on delighting the hog-end of the market with a superior product experience and cash in the fat margin that comes with it. Let your competition kill each other over the low-end, low-margin business where product differentiation is low.

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That works well for an Apple that sells high priced products and generates $100s of margin with each sale. As happened in the PC market, by taking that stance, by 2005, Apple was able to siphon the vast majority of the PC industry profits while enjoying very modest market share. And today Apple is on top of the industry with all others struggling or bailing out. With the iPhone, Apple has a similar profit engine, a combination of volume growth, margins and attach of “pure profit” accessories. Apple enjoys  high upgrade rates within its current user base (people that already have an iPhone buying a new model), so even if it does not expand its total user base as fast, it can generate large volume through repeat buyers.

But the smartphone market is different than the PC market of 2005. With the browser dominating the app scene on PCs, Apple could afford to have a limited portfolio of software for Macs. It covered the bases with the likes of Officer and Photoshop. It lacked enterprise software, games, and many vertical apps. But it had enough to meet the average needs of the premium consumer.

The smartphone market exploded when the App market took off, morphing a (smart) phone into a pocket computer. App developers have a very different model than Apple. They make $0.7 per user for each $0.99 sale, if they make anything at all when they adapt a freemium model. The growth engine of the App developer is volume-volume-volume. And to get more App volume, you want more phone volume, which means going after the more price sensitive phone customers (for whom a $0.99 App or a fermium app can still be a decent bargain). And those repeat iPhone buyers Apple has? They do nothing for App developers when their Apps are simply transferred over to the new iPhone as part of the migration process.

In the volume game, Android already leads the pack and will further consolidate its lead in the coming years as the market moves to more price sensitive audiences (in the US and abroad). Today Apple enjoys 43% share in the US, close enough to Android’s fragmented 51% share. Add to the superior Xcode development environment and Apple remains the # platform most App developer target today. But move to a world where Apple share drops to <25% (as is projected by IDC for 2017) and things may change. Where will App developers focus to gain that volume they need then?

Sooner or later, Tim is going to need to spend a few sleepless nights…

Smartphone sales – just how big is that market?

At Geekwire Summit last week, Rich Barton of Zillow and Bill Gurley of Benchmark spoke about the enormous opportunity that Mobile is. One comment was the sales volume of Smartphone activations each quarter being the size of the internet circa 2000.

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But just how big is the Smarphone market? Well…big…very big…by comparison the number of smartphones sold, every quarter, is now as big as all internet domains names, or an entire 5-7 years gaming console generation!

IDC expects WW smartphone sales to reach 1 Billion units in 2013 with a whopping 40% growth rate. That would place smartphone sales at 1.7 Billion in 5 years when smartphones are expected to be 95%+ of Mobile phone sales (from >55% of total today). Apple has ~17% of the WW smartphone sales, Android ~75%. In the US, Apple has ~43% share and Android ~51% share.

Quick back of the envelope calculations shows that WW smartphone unit sales are (rounded)…

250 million per quarter
80 million per month
20 million per week
3 million per day
100 thousand per hour
2 thousand per minute
33 every second

Let’s drill down on one quarter of smartphone sales being an incredible 250 million/qtr

– that is an entire console gaming generation (i.e.. 250 million consoles sold WW in 5-7 yrs), every quarter.

– it is more than a whole year of Desktop (134 million) or Laptop (181 million) PC sales! By 2015 (ie. tomorrow) each quarter the smartphone market will be as big as the whole yearly WW PC market! (IDC, Sep 2013)

– it is the entire internet registered domain names, world-wide!! (there were 246 million registered domain names end of 2012, growing ~12%/yr) (Verisign, Dec 2012)

– it is an entire Facebook circa July 2009 (remember how hot Facebook was then and how people blogged about its unstoppable global conquest?). On a yearly basis, smartphone sales equals (and will surpass) one entire Facebook.

Microsoft swallows Nokia…an energy boost or an indigestion?

For a behemoth seemingly stuck in its Windows PC roots, Microsoft is sure moving a lot these last few weeks. The purchase of Nokia’s device unit is another big move for the company set on reinventing itself after years of sluggish growth. Here is my take on the purchase of Nokia:

What is good about it?

– Microsoft is taking action to be much more serious about Mobile. To date the company has seemed to be a reluctant follower in the Mobile space, continuing to privilege businesses closer to its Windows PC and traditional console empires. For Msft Mobile was a business unit, not a fundamental pillar. The July reorg memo from Steve Ballmer was alarmingly not enough mobile-focused (in my opinion). Now the pendulum may have shifted towards Mobile, with an enormous influx of Mobile product, talent and thinking coming from Nokia, as well as a full bench of management executives. Microsoft may become a Mobile company after all.

– Nokia gets to survive by getting direct access to the Msft cash reserves.

What’s so-so about it?

– it may be a purchase made out of defensive necessity rather than pure business value-add. Nokia is the Windows Phone champion for Msft. Nokia’s finances and low market share put it its business at risk, with Android being a possible market share solution for Nokia (as I have written about in a previous post). Obviously Msft could not see its main smartphone delivery engine go down in bankruptcy or secede to Android.

– the deal fundamentally does nothing in the short-term to improve Nokia’s smartphones low market share. The marketing challenges remain the same, there is no brand/design/technology/distribution/marketing synergy gained by the purchase (except the opportunity cost for Msft to have Nokia adopt Android). Time will tell how Nokia’s Mobile culture is able to permeate and refresh the development of the Redmond fortress.

– Msft recovers Elop, a contender for Ballmer’s CEO job. It is true that he never strayed too far from the mothership (given that Nokia and Msft were joined at the hip as soon as Elop became Nokia’s CEO) and was not truly successful in building market share for Nokia. But Elop was recognized for his business acumen at Msft, and now has the CEO experience of running a large global tech company, with more deep Mobile management experience than most internal CEO contenders.

What’s bad about it?

– 32,000 employees more. Wow. We must be talking massive redundancies in product development, marketing, sales, support, world-wide. Expect thousands of layoffs where the two businesses overlap.

– it makes it a difficult business proposition for other manufacturers to invest in Windows Phone. As seen with Surface, and reinforced by the July Ballmer Strategic reorg, Msft priorities are clear – to be the uncontested best possible provider of device-driven experiences. That will come first and foremost before the well-being of HW partners and their interest to license technology from Msft. Partners will still be welcome in the many areas where Msft is only the provider of the software piece of the user experience (traditional PCs, servers, etc).But iIn the critical areas of Smartphones and Tablets, Msft should focus on being number one at the expense of all others device manufacturers.

All in all, this deal may be more the result of defensive business necessity rather than a pro-active growth investment. And as such there are lots of unwanted complexities that will have to be resolved to free up the value-add potential of the acquisition.

Did HTC and Windows Phone just shoot themselves in the foot?

Earlier this week HTC announced its Windows Phone 8 line-up, and with the official support of Steve Ballmer unveiled the Windows Phone 8 “Signature” device, the Windows Phone 8X. Nokia’s reaction to HTC claiming “favored child” status was immediate and epidermic, with Nokia’s Marketing Head Chris Weber dissing HTC’s effort as a “tactical rebranding”.

All this is misplaced energy and poor marketing execution for the Windows Phone ecosystem, which really needs all partners to put aside their differences and work shoulder to shoulder to build a bigger opportunity for all of them, rather than fight one another before entering the ring to see who will get the bigger crumbles from a still tiny market.

Clearly the new WP8X is a nice looking device, with a design reminiscent of Nokia’s Lumia 900 and 920, which is probably not a coincidence but rather a planned move from Microsoft’s design leadership working with handset manufacturers to establish a common and recognizable upscale design across all handsets (in a similar vein as the Windows Vista Design Language and Design Kit for PC manufacturers which I worked on in 2005 in the Msft Hardware Innovation Group). The specs are very solid and the WP8X easily qualifies for Superphone status with a large 1280×720 screen, a 2MP wide angle front camera clearly built for a great Skype video conferencing experience, and an 8MP camera, Beats Audio sound, dual core CPU, etc.

Great phone…but frankly poor marketing coordination and execution to introduce a new entrant in a predatory manner, with an exclusionary positioning of “we are the one…” and putting down the other Windows Phone handsets from Nokia (and Samsung).

To survive and succeed, Windows Phone needs a family of handsets that build on one another to generate buzz, momentum, carrier and store presence. Microsoft must act in a fatherly figure and keep all its children in line, working as a team to push their way into a market held by Apple and Android/Samsung. The Windows Phone playground is too small to be viable – for handset OEMs, for carriers, for apps and accessories developers, for consumers. Microsoft must manage its Windows Phone ecosystem to all march forward in a coordinated front to expand their playground, and win market share over Android and Apple. Any share gain by Windows Phone as a whole benefits all of its players. And conversely, any loss hurts all of them equally.

This is not an easy market, and Nokia and HTC both have a lot at stake this fall. There might be good reasons why Microsoft chose to endorse HTC’s positioning of the Windows Phone 8X. Given its past history and relationship with Microsoft, HTC may prove to be a much more flexible and amenable partner than Nokia, willing to follow Microsoft’s Smartphone design ambitions much more closely, whereas Nokia wants to maintain control of its own design and brand identity. HTC seems to have more success than Nokia in securing much needed carrier support (some of which I venture is related to Nokia’s lacking Android handsets to make it a more attractive handset OEM for carriers – see my previous post on the topic).

Unfortunately, and whatever the underlying reasoning may be, the outside view is one of a Windows Phone strategy that lacks unity, with ecosystem partners fighting one another and Microsoft either playing them against one another or not being in control of the ecosystem marketing strategy at a most critical time for the Windows Phone evolution.

The big winners in all of this? Apple and Samsung, sitting on the sidelines and comforting their leading positions.

Smartphones – winning is no longer about handset features

As we near the availability of the iPhone 5, the Smartphone competition is displaying frustration with the apparent unstoppable consumer desire for the Apple handsets (ands the preorders that go with it), even though many perceive the iPhone 5 to be a small improvement to the iPhone 4S, and lagging behind the latest offerings from Android or Windows Phone. The Facebook pages of many Microsoftees point to the innovative features of the Nokia handsets with wireless charging and NFC, and Samsung makes things official by releasing online ads that directly make fun of the Apple loyalsrefusing to see the superiority of the Samsung Galaxy.

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The fact that “superior” handset specs can’t convince iPhone buyers to switch should be taken as an indication that the Smartphone market has matured to a point where the size and momentum of brands and their ecosystem has become too important to be overcome by a handset product launch. Microsoft knows this situation very well, it mastered and perfected this market position with Windows PCs for almost two decades – by building an amazing network of software and hardware developers and service partners that all worked in unison to build, grow, support, and profit from hundreds of millions of users using and relying on Windows as their computing platform.

Today, Apple has the leading ecosystem. With 750,000 active applications in its App Store, and close to two hundred thousand iOS developers, and tens of thousands of references of i-accessories, Apple dominates all other players. Android follows closely with over 500,000 apps in the Google Play store, and thousands of accessories (though the number of accessories compatible with a given handset model will be less due to the more diverse (fragmented) types of Android handsets). Windows Phone and Blackberry World have each North of 100,000 apps.

More telling than the sheer size of the content supply available in these stores is the volume of content (apps, music, movies) that has been downloaded from these stores to become the property of consumers. Apple crossed the 25 Billion total apps downloaded in February of 2012, with an estimated 50 million apps downloaded daily, or a trend of 1.5 Billion apps/month. So by now there would be 34 Billion apps downloaded, with 400 million iOS devices, or over 80 apps downloaded per iOS device (as a quick reality check, I have accumulated 310 apps in my iTunes library since 2008). Add to that >15 Billion song downloads to the equation, growing at 10 million songs per day and you have a content accumulation that will make you think twice about switching platform and starting over.

Launching a great handset with innovative features is a necessary, but not sufficient, criteria for success in Smartphones. Handset OEMs must account for the user investment in apps, content and accessories and be able to attract users with a low switching cost (for porting content from the old platform to the new one), or a very high value for making the switch (something “priceless” that is worth losing all the previous investment), which must go beyond a handful of innovative handset features.

Can Nokia’s Windows Phone bet succeed without Android?

Nokia introduced its new Windows Phone 8 models last week. The phones look good (design and feature-wise), and the Lumia 920 seems poised for that Superphone status I believe Nokia needs to be a credible player (but we won’t really know until we see the final pricing on the devices).

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That may not be enough though, and the success of Nokia’s Windows Phone lineup may lie in “sleeping with the enemy” and adding Android phones in the lineup.

Could Nokia succeed with only Windows Phones?

Nokia is in the difficult position of convincing carriers that they should dedicate time, effort and shelf space to carrying its products. But with a small and fragmented Windows Phone product lineup (2 Windows Phone 8 models and 2 Windows Phone 7.5 models which may or may not stay in market), all fighting with models from Samsung and HTC for what is currently a meager 3% total Windows Phone market share, Nokia’s ROI for wireless carriers is not looking so great (Nokia and Microsoft marketing budgets help but are not infinite).

The situation is different for Samsung and HTC.

They have a relationship with carriers that rests on a complete portfolio of products, with multiple handsets at multiple prices. They don’t have to make a case for being an OEM partner, their sheer market share puts them as a top-tier partner for most if not all the carriers. They can flex their large muscles to get the attention of carriers, negotiate prime promotional space and air time. They are at the front of the line, in the VIP section.

For Carriers, selling a Samsung Windows Phone is largely an extension of doing business with Samsung. If the handset fails to perform, it will be a disappointment for both parties, but the success of the other handsets will compensate for that loss and will not jeopardize the position of Samsung as an OEM provider.

Nokia is the challenger.

To get attention it has to scream louder, be bolder. To be heard and given a chance as an established OEM provider, it has to have the promise of significant growth opportunity and market share. And right now, with only two Windows Phone 8 models, it is not easy for Nokia to do so. There is no strong past sales history, no product hit that could carry other handsets, and offering only two handsets leaves no room for negotiation or optimization of a carrier portfolio.

Could a few Nokia Android models make a difference?

Is the Android Smartphone market not already saturated by the other OEMs? Yes, it is, but in Nokia’s case it may well work to their advantage. Nokia would not seek to become the leading Android smartphone provider. It would leverage Android’s popularity to prop up its market share and provide a sales cushion to its Windows Phone products. Nokia would have a larger line-up to get carriers excited about, a larger palette for them to make choices. Today, if a carrier does not like the 820 or the 920, that is half of the Nokia line-up that goes out the window. Having 2-4 additional Android handsets would allow Nokia and carriers to optimize their choices while keeping a reasonable number of handsets alive to build a relationship on. It would be a relatively safe bet to make. Nokia can ride the Android wave and benefit from the marketing and momentum of all Android handsets.

Carriers would likely embrace having a new challenger brand in their portfolio.

That may be the most important part of all. Samsung and Apple have too much power. HTC and LG long-term futures in Smartphones is uncertain, so is Blackberry. Huawei, ZTE, Pantech are here to stay but they have nowhere the brand value or marketing power that Nokia and Microsoft have. Nokia, with Microsoft, could build a strong enough position to help carriers push back on Samsung and Apple. But for that to happen they have to maintain their seat at the carrier bargaining table. And Android may be the necessary evil Nokia needs to get there.