Latest podcast for a16z: thoughts on app stores, tablets, IBM and the scale of mobile.
App store revenue is not an ideal way to scope the value of an ecosystem to developers. The majority of the revenue comes from games, mostly freemium using IAP, while a large proportion of the most valuable apps are offered for free and generate revenue through other means (Facebook or Amazon, for example).
However, it does give a pretty good proxy for the broader behavior of the users, and it also of course is very relevant for developers who do want to to charge.
For the first time, Google gave numbers for app store developer revenue at IO this year, and in the latest quarterly results Apple gave (almost) like-for-like numbers:
- Google said it paid out $5bn to developers from Google IO in 2013 to Google IO in 2014 (a little over 13 months)
- Apple said it has paid out $20bn to developers in total by the end of the June 2014 quarter, and at WWDC June 2013 it gave a figure of $10bn paid to developers (at the June 2013 earnings call a month later it then said it had paid out $11bn). So in the last 12 months, it paid out roughly $10bn.
- Google also said at IO that it has 1bn 30-day active Android users - the degree of precision is not clear. The iOS number is fuzzier: trailing 24 months' sales would be a little under 500m, but extending that to a three year lifespan would take it to over 600m.
Obviously all of these numbers are rounded and were given at scheduled events, so need to be taken as imprecise. The fact that four different growth rates are involved also makes calculating ARPUs a little tricky.
- In the last 12 months, on public numbers, Google has paid out roughly half of Apple - $5bn versus $10bn, on roughly double the number of devices.
- On a run-rate basis, annual gross app store revenue across iOS and Android is now $21bn.
The chart below shows the public data points.
The problem with this, of course, is that with only two data points from Google, we don't know the trajectory - if this is a steep curve the recent period might be pointing more sharply upwards.
A further observation: if the current market dynamics remain, Google Android's user base will at least double in the next few years - the iPhone base is still growing, but it will probably not double. However, those users will be gained at progressively lower (much lower) device price points, and with significantly lower spending profiles.
For more discussion of why the two platforms look different, see this post.
Finally, just to make life easier, Play is not the only payment system you can use on Android, even Google Android. A material number of apps, mainly games and mainly in emerging markets, use other payment methods. So that number might really be somewhat higher.
There are around 1.6-1.7bn* PCs in use today, and there are already perhaps 2bn iOS and Android devices**. Over the next few years the great majority of the mobile base will convert to these devices: there will be 3-4bn smartphones in use*** and hundreds of millions more tablets.
So, mobile means there will be two to three times more personal computing devices connected to the internet. But actually, that understates the change massively. The difference in how those smartphones are used is actually just as important as the raw numbers.
First, they are not shared and they are personal. Of those 1.6-1.7 bn PCs, a little over half are consumer devices, and a large proportion of those are shared. The others are owned by companies, and at the very least they're restricted in what you can do with them for personal uses, and many of them are actually single-purpose devices. So it's helpful to think about somehow discounting that PC base to reflect actually personal personal computers - by half, or more. Just as there's a 'full-time equivalent', what's the 'personal computer equivalent'? It's not 1.6bn - it's probably more like half that.
Then, these new devices go everywhere. The British term 'mobile' is rather more helpful than the American 'cell phone' (or the German 'handy'). They take the internet to wherever you may be, so they're available across the whole day, and they're available in different contexts: 5 minutes using Amazon in a store may be worth more than an hour on the Amazon website at home (this alone significantly broadens the scope of industries affected by the internet).
Next, these devices are much more sophisticated than the 'web browser + mouse & keyboard' paradigm that's been the desktop internet for the past 20 years. The camera is arguably the one of the most important input methods, with perhaps 2bn photos shared every day already, and location, push notifications, motion sensors and everything else keeps accelerating the sophistication and richness of what's possible well beyond the desktop web.
Finally, the step change in ease of use provided by the new generation of operating systems changes what it means for someone to have such a device. A very large proportion of PC users would describe themselves as 'not computer literate', or at best getting by following 'recipes' within a narrow set of tasks, but far fewer say they're not phone literate or even smartphone literate (though a curve obviously remains). The usability of this new class of devices of itself multiplies the reach of the internet.
When you pull these strands together, smartphones don't just increase the size of the internet by 2x or 3x, but more like 5x or 10x. It's not just how many devices, but how different those devices are, that has the multiplier effect
To put this another way, if you were to go from 50m text-based mainframe terminals to 100m PCs, you could say you've doubled the market, but that would miss the point - you've improved things by 10x, not 2x. The same applies to smartphones.
Finally, this change in scale is multiplied further by the general collapse in the costs of building a product and taking it to market over the past decade or so. Regardless of what you think of Yo as a product, one programmer got to 1m pretty active users in a month with no funding. How much would it have cost to support 1m active users of anything in 2000?
That is, mobile will expand the scale of the opportunity by 10x, while the cost to reach that opportunity, at least in theory, has decreased by at least 10x as well.
** Google reported "1bn" Android users at Google IO (so perhaps 1.1bn over the summer). Chinese Android is at least 400m and not included in Google's number. Trailing 24m iOS device sales are a little under 470m: taking a slightly longer life-span (which is certainly the case for iPads and very probably for iPhones given the second-hand market) would go to 600m, perhaps more.
*** There are over 6bn mobile connections, but this includes a very large amount of multiple SIM ownership and dormant connections. The GSMA estimated 3.4bn human users at the end of 2013, and that's at the low end of estimates.
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.
This seems pretty accurate. Lots of good startup ideas here, indeed.
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.
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.
- 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.
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.
A quick discussion of the key themes at Google IO and how they might relate to WWDC