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 next phase of smartphones

It’s now 7 years since the iPhone reset the phone business, and indeed the entire computing and internet businesses. But it was pretty clear at the time that the first iPhone was an MVP, and Google’s first Android… homage, the HTC G1, was even more so. It feels rather like the last 7 years have been spent adding all the things that really needed to be there to start with, both in hardware and software. For iOS and Android these have come in different orders, since their opening assumptions were very different, but they’ve ended up at much the same place in terms of the user experience and interaction model. There are small differences in how you interact, and there are always things that are on one platform before the other, but the basic user flows are very similar, and almost all the obvious gaps have been filled. 

Along these lines, my colleague Steven Sinofsky makes the point that for any new ‘thing' in computing, at the beginning everyone is doing roughly the same stuff because the stuff you need to add is pretty obvious and undifferentiated - you might deliver different things in different orders but you’ve got basically the same wish list. It’s once you’ve finished building out that stuff that things start to diverge. 

This, I think, is what we started to see at this year’s WWDC and Google IO - the end of the first 7 years and the start of a new phase, with the fundamental characters of Apple and Google asserting themselves. As Jean-Louis Gassée put it, iOS 8 is really iOS 2.0

Hence, WWDC was all about cloud as an enabler of rich native apps, while the most interesting parts of IO were about eroding the difference between apps and websites. In future versions of Android, Chrome tabs and apps appear together in the task list, search results can link directly to content within apps and Chromebooks can run Android apps - it seems that Google is trying to make ‘app versus web’ an irrelevant discussion - all content will act like part of the web, searchable and linkable by Google. Conversely for Apple, a lot of iOS 8 is about removing reasons to use the web at all, pulling more and more of the cloud into apps, while extensions create a bigger rather than smaller gap between what ‘apps’ and ‘web sites’ are, allowing apps to talk to each other and access each others’ cloud services without ever touching the web. 

Unlike the previous differences in philosophy between the platforms, which were mostly (to generalise massively) about method rather than outcome, these, especially as they evolve further over time, point to basic differences in how you do things on the two platforms, and in what it would even mean to do specific tasks on each.The user flows become different. The interaction models become different. I’ve said before that Apple’s approach is about a dumb cloud enabling rich apps while Google’s is about devices as dumb glass that are endpoints of cloud services. That’s going to lead to rather different experiences, and to ever more complex discussions within companies as to what sort of features they create across the two platforms and where they place their priorities. It also changes somewhat the character of the narrative that the generic shift of computing from local devices to the cloud is a structural problem for Apple, since what we mean, exactly, when we say ‘cloud’ on smartphones needs to be unpicked rather more. That's a subject for my next post. 

Meanwhile, this sort of divergence is why I’m a little skeptical about the other two big reveals in the last couple of months: the Fire Phone and Facebook’s mobile announcements at F8. Facebook is trying to build essential plumbing to connect the web and apps together, in particular with its deep linking project. But this is like building the plumbing for a building that’s still going up, and where you don’t know what it's going to look like. Making tools to connect apps and the web together when Apple and Google are shifting the definitions of those terms is going to be challenging. 

Amazon has a bigger problem. Most obviously, more and more of what it means to be ‘Android’ will come from the closed Google services that aren't part of AOSP and that it doesn’t have access to. If Amazon wants to free-ride on the Android app ecosystem, it will need to spend more and more time replicating the Google Android APIs that the apps it wants are using, or the apps just won’t work - presuming that Amazon even has the sorts of search-led assets to do that. But more fundamentally, AOSP is being pulled along by Google’s aims, and will change in radical and unexpected ways. This isn’t like building on Linux - it could be more like taking a fork of DOS just before Windows 3.1 came out. Are we quite sure (to speculate wildly for rhetorical effect) that we won’t be running Android apps in a sandbox on our ChromeOS phones in 5 years? Where would that leave Amazon’s fork? AOSP is not necessarily a neutral, transparent platform for Amazon to build on. 

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.  

Phases in mobile

This was the launch ad for Orange, in 1994. Orange was one of the very first mobile operators to think that mobile could be a consumer product rather than a piece of technology sold to niches, and one of the first to think in terms of brand and brand values, and the products that might flow out of them. The founding CEO, Hans Snook, was crazy enough to suggest that pretty much everyone would have a mobile phone. 

It's probably one of the best ads ever made. 

Also, note the freephone number and the lack of any suggestion of data services. All about voice. 

This video was made by Orange in 2000, 6 years later, the year of Europe's €110bn 3G spectrum auctions. At this point there were no phones with colour screens on sale outside Japan, but they did a pretty good job of predicting the future - it's fun to try to spot how many of those services have now been launched. None by telecoms companies, of course. 

This, of course, is the first of the original launch ads for the iPhone, in 2007, 7 years later. The fascinating thing about this video, today, is how much that we now take for granted was then entirely new. And, of course, this changed the world again. 

Finally, another 7 years later, Apple's note to the developers for a platform that didn't exist before. By the end of this year around 2bn people will have a smartphone, spending around $20bn a year on apps. 

This, of course, begs the question of what extraordinary leap we'll have made in another 7 years. 

Amazon and Android forks

The general reaction to Amazon's Fire Phone has been a puzzled shrug. It's a good but unexceptional device with entirely conventional high-end and high-margin pricing - a move as out of character for Amazon as the purchase of Beats was for Apple (and probably driven in part by the way the US pricing structure makes even $400 phones ’free’). There's an interesting quasi-3D UI feature and a big flashing BUY button, in line with Amazon's role as the Sears Roebuck of the 21st century, but little that really changes anything or couldn’t be done on any other smartphone anyway. And that leaves people wondering why Amazon bothered. The most productive line of thought, I think, is to look at Prime, Amazon's whale service, and the role that the Fire Phone plays in securing that relationship. 

To me, though, the interesting thing is less the phone than the platform and what it it represents - that is to say, the first real attempt to sell phone that forks Android outside China*.  

Android itself is open source, and anyone is free to take the code (AOSP) and build whatever they want. Android is the new Linux, in this sense. But AOSP doesn't give you Google's own smartphone apps and it doesn’t give you all the system services Google has built. So if you make an Android device without reference to Google, and change a bunch of things ('fork Android') your device won’t have the app store and the maps, and it won’t have the Google services APIs that lots of third-party apps need, most obviously push notifications, in-app payments, location and embedded maps. There are lots of other things Google makes as well, but those are both the important and the hard parts. 

Without this Google layer you really only have a featurephone, and to get Google's layer you need to submit to Google's control over what you make, which amongst other things means that you have to use Google's interface and you have to take the whole package - whatever Google wants on the phone goes on the phone. (The core mechanic here is that you have to pass the compatibility test). Hence, Google uses access to its apps and services as a lever to control Android. This is pretty similar to the way that Microsoft used Office and Windows: selling an Android phone without Google's services is like selling a Windows PC that doesn't have Office and can't run it. 

In China all of this works differently. Google services are either blocked or weak or both (the Chinese unaccountably didn't let Google send its mapping cars down every road in the country), while the Chinese internet giants Baidu, Alibaba and Tencent ('BAT') and scores of others have built lots of great Android services of their own. So the vast majority of Android phones sold in China (even from Samsung or Motorola) come with no Google apps and integrate these instead. 

Outside China, though, if you want to use Android as a platform but do something different, you need to build or buy those core functions yourself, and that’s what Amazon has tried to do. It has licensed Nokia’s HERE mapping platform, it has built an app store for Android, and it has built its own versions of the key enabling APIS - location, push notifications etc. 

The problem is that the maps and the app store are not commodities. Adding them is not just a matter of spending the money. Google's Maps platform is very good and HERE, at least in western markets, is not as good. As with Apple Maps, it works, mostly, but the gap is clear and there is no roadmap that points to that gap closing. For apps, though an app store itself is perhaps a commodity, Amazon has only persuaded a minority of Android developers to load their apps into its store, partly since this means they have to swap out Google’s APIs (for maps etc) for Amazon’s, and that is not necessarily trivial. Amazon has done just about as good a job as one could expect anyone to do at this stage, and there are very few other companies that could get this far - perhaps only Microsoft. But it hasn’t, remotely, reached parity with Google. 

And so Amazon is testing the proposition that you have to have Play (or iTunes) and Google Maps to sell a smartphone outside China - or, rather, it is testing just how good the app store and maps have to be. How many of the latest cutting-edge apps do you have to have, if you cover the basics? How close do you have to get to Google Maps’ coverage? We know Windows Phone does not have enough apps, but can the Amazon store get there?

These same questions apply to any Android OEM that might be thinking of asserting greater independence from Google (such as Samsung), with a further complication. Google’s agreements with OEMs have been leaked several times, and they include clauses that prevent you from having a foot in both camps: you cannot sell a forked device and carry on selling official Google Android devices. So you can’t experiment on the margins (Samsung can't sell a phone running Amazon's Fire software) - you have to walk away from Google entirely, or not at all. That's really no choice at all at the moment. 

All of this takes us to the elemental question - why, exactly, are you forking Android? What important problem do you solve that’s worth reinventing the wheel, while taking on the risk of building on someone else’s platform, open-source or not? Why are you asking people to buy a phone with second-rate maps and a second-rate app store? Are you offering them something you couldn’t otherwise do in return, or just addressing your own strategic concerns? Are you solving a user problem or your own problem?

Both Xiaomi and Cyanogenmod (an a16z portfolio company) have built their own very custom versions of Android that do none the less pass the compatibility test. And though Xiaomi differentiates on software, Xiaomi phones outside of China ship with Google Apps. Hugo Barra called it 'a compatible fork'. After all, it’s not as though you’re not allowed to change Android at all. Google describes the compatibility test as follows: 

"Enable device manufacturers to differentiate while being compatible. The Android compatibility program focuses on the aspects of Android relevant to running third-party applications, which allows device manufacturers the flexibility to create unique devices that are nonetheless compatible."

Generally, Android OEMs have been no better at differentiating on software than were PC OEMs, even though Google allows you to change more than Microsoft did. But it doesn’t follow that you can’t make Android visibly better without forking it if you bring the right skills and culture - Xiaomi and Cyanogenmod (and a number of other Chinese companies) show that. 

Hence, it seems to me that the forking question really flows not from a specific feature that you want to implement but the fundamental principle of controlling your destiny - you want a platform that’s 'yours'. 

That is, a central strategic problem for both Amazon and Facebook, amongst others, is that their businesses have moved from the essentially neutral platform of the web browser, where there has been no real change in the user interaction model in 20 years, to the much messier, mediated and fast-changing platform of smartphones, where the web is just one icon and platform owners are continually adding new ways for users to discover and engage with content, such as iBeacon or Google Now. They didn’t need to make browsers because browsers had become transparent commodities, but smartphones aren’t. This of course is why Google itself made (or rather bought) Android - to make sure that it would not be shut out in this new environment. Making an entire new OS is not an sensible option for Amazon or Facebook at this stage, but building on top of a free, open-source one is worth at least thinking about. But, again, in doing that you need to solve the users' problems, not just your own. 

Facebook is also poking away at this issue (such as with the abortive Home), but as Mark Zuckerberg pointed out, even a really successful Facebook Phone would only be used by 5% or 10% of Facebook’s users, so would really just be a distraction. Instead, faced with a very different set of competitive dynamics on mobile, Facebook is exploring the unbundling of its product with a 'constellation' of different apps. That is, Facebook is embracing this new and more complex environment. With the Fire Phone Amazon is going the other way - greater bundling rather than less.

I do wonder what might appear if Facebook's strategy was applied to Amazon's product - if there were half-a-dozen different interesting and useful Amazon apps for finding and buying products. But Amazon has never been a user experience company in that sense - it thinks about user experience the way Fedex does, as something to focus on ruthlessly, but not as a playground for new experiences. That means it's going to be very interesting to see how it can enchant and delight people who buy its phone. 

 

*Note: when I wrote this on a Sunday evening the fact that Nokia (and hence now Microsoft) has been selling a forked Android phone for the last 6 months passed completely out of my mind, even though I played with one at MWC and rather liked it. It's done rather well in emerging markets, apparently, and is on sale in parts of  Europe) but isn't even for sale in the USA. The main driver is that Windows Phone doesn't fit well into the hardware required of that price. The points in the blog post all remain, though. 

Digital News

The Reuters Institute for the Study of Journalism has a fascinating report out looking into how people consume news on digital devices. Lots of data to ponder, but I posted these charts as the most immediately interesting. Click to zoom.