Google

App store revenue

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.

That said:

  • 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. 

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. 

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. 

Android fragmentation and the cloud

Game Oven's post on Android gyroscope support is a nice illustration of a general issue (another good illustration here): Android fragmentation is both massively overstated and massively understated, depending on what you want to do. 

On one hand, Google has been quite successful in reducing the impact of Android version fragmentation. Around three quarters of the Android devices that hit Google Play are running 4.X, but more importantly, Google has moved its own key services (maps, payment, notifications etc) out of the OS itself and into a software layer, 'Google Play Services'. By putting key platform APIs into a software layer that can be updated in that background over the air, Google has reduced its dependance on OEMs to produce firmware updates - it can update its own tools any time it wants, across the great majority of phones. When Google announces new APIs for Maps or notifications at this year's IO, they'll be available on devices running year-old and two-year-old versions of Android. There is no more fragmentation if you're using Google's cloud.

On the other hand, hardware fragmentation is if anything accelerating. This chart from OpenSignal, from last summer, is a nice visualization of the market dynamic. 

Android fragmentation isn't of itself a bad thing - it's inherent in the choices that Google made. This is what 'open' and 'choice' look like. And I doubt if it's possible to have an 'un-fragmented' device landscape that includes both $600 devices and $50 devices: some scattering in capability is part of the deal. If you want to have thousands (literally) of OEMs, and a huge range of choice and price points, well, you're going to have different devices with different capabilities. 

This is only interesting, then, to the degree that it has broader consequences. The consequence of Apple's approach is that pretty much everything behaves in predictable ways, but you have a very narrow range of devices at a narrow range of prices (and screen sizes), and that severely restricts the addressable market. More people can afford $50 phones than can afford $600 phones. The consequence of the Android approach is that you have a much wide range of devices and prices, and a much larger market, but anything on the bleeding edge doesn't work predictably at all. This doesn't just apply to the gyroscope - it also applies to varying degrees to almost anything trying to do clever things with the hardware. This is also true even if the API does actually work as advertised - there's not much point trying to do a mass-market Android NFC deployment when you have no idea how many of your users even have NFC Androids (and the users themselves don't know).

One result of this, as I've said before, is that Apple and Google are focusing their innovation in different areas. Apple is moving down the stack with integrated hardware/software experiences (iBeacon, fingerprints, M7 etc) that are hard for Android to match, and Google is moving Android up the stack with Google Play Services, the cloud and machine learning, which is hard for Apple to match. 

The paradox for developers, meanwhile is that the more open and extensible platform can actually be harder to hack on. When you buy two Samsung phones of the same model and brand in two different countries and find they have different camera drivers and your app will crash on one or the other (or both), where do you focus your seed funding? You have limited resources and limited time and you need to hit milestones to get your next round, after all. Plus, the users who want to install your cool new apps are still concentrated on the iPhone. Again, this is a paradox: Android is the platform best for early adopters and iOS the one best for late adopters who just want something that works, but the market adoption is the other way around. That's one of the reasons this chart is both unfair but relevant.

Which type of innovation is crucial to a platform? With the current dynamics, people like Game Oven are going to keep doing iOS first and Android second (if at all), and that keeps the majority of the best users on iOS and Apple's machine turning over - the classic ecosystem virtuous cycle. But if, as many people suggest (Fred Wilson most recently) the most interesting and important innovation will happen in the cloud, then Google's tradeoff might win over Apple's trade-off - Google's comfort zone beats Apple's.

There's another paradox here, though: if all the best stuff is happening in the cloud, then you'll buy the device based not on apps and developer support but on design, quality, fit and finish... that is, all the things Apple always leads on. The web saved Apple 20 years ago, because with the web you could choose the best hardware and UX regardless of the ecosystem - you could buy an iMac and not worry about the software. So if everything goes to the cloud again, is that really an existential problem for Apple?

(As an aside, note this post I wrote a year ago about the different issues facing iPhone and Android.)

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'?

Ways of thinking about Google

There's a fairly obvious and straightforward way to think about Google - it's an ad company and a search company, and it cares about reach. The purpose of all its web projects is reach, and the purpose of Android and any other mobile projects is the same - more reach, more search, more advertising. 

This is certainly true up to a point, but it doesn't seem to capture all of the things that Google does and all the plans it might have. Now, for example, is not really search or advertising (arguably it might become both, but it doesn't really need to). It seems to me that a better model is to see Google as a vast machine learning project, that's been fed with information for a decade or so. The text box that you enter a search into, that we're all familiar with, is really just an output (and of course input) for this underlying project, as is advertising. Now, Maps and Books are others, Glass and many future projects are others. It's all about ingesting the world's information and learning from it.

Hence, one could suggest that plain old web search is just the first expression of the Google vision in the same way that books were just the first expression of Jeff Bezos's vision for Amazon (which at one point he planned to call 'Relentless.com'). 

This may also be a good lens for looking at the countless abandoned Google projects. Some types of sharks apparently bite things to see if they're edible - they bite surfers to see if they're actually seals. If not, you get spat out (this may not be much comfort for the surfer). In the same way, Google tests segments to see if they fit the automation + machine learning implementation model. The dMarc acquisition is a good case study - once Google worked out that making local radio advertising work would require lots of local sales forces, and would change the character and operating model of Google, it got out out of the space. 

Nest, though, is a puzzle. One could see it (and indeed self-driving cars) as a data collection story - reach, in other words. But there isn't really a very strong information story here. There's nothing here that you could eventually search for, or to help understand what a search might mean. 

Hence, an interesting parallel pointed out by Michael Mace here after the Nest deal and John Gapper at the FT (account required) here last summer is with GE.  As John put it: 

"The best comparison for Google seems to me not Microsoft in the 1980s but General Electric in the late 19th century – the age of electrification. Like GE, Google is a multifaceted industrial enterprise riding a wave of technology with an uncanny ability not only to invent far-reaching products but also to produce them commercially.

Hence, one could argue that Nest or self-driving cars (and the next big hardware move that Google does) are not really about understanding 'information' in any sense, and certainly not about advertising, but about finding ways to deploy being very good at machine learning and, say, connected systems, just as GE's business is to be very good at making big complicated precision-engineered pieces of capital equipment. In that sense, Tony Fadell's vision is very apt - to 'take unloved things' and connect them to the software revolution than my new boss Marc Andreessen talks about. If software is eating the world, then much of what is eaten is probably running software that's at least partly in the cloud (especially if it doesn't really have a screen), and that can benefit from machine intelligence and big data, and isn't that what Google does? 

Android instability

If you were a PC OEM from, say, 1990 to 2010, you operated in a very clear ecosystem. You outsourced much of the innovation to Microsoft and Intel. You knew exactly what WinTel were doing, both because their roadmaps for the next few years were actually public and because Microsoft and Intel had very clear and widely understood strategies. Moreover, the core, fundamental strategies of OEMs, Intel and Microsoft were pretty much aligned. Everyone wanted more PCs to be bought, and preferably a good number that were high-end and high-margin. Intel, Microsoft and CloneCo all lived for the same things. CloneCo didn't necessarily make great margins (and eventually got killed by Dell, perhaps), but it knew what the game was. 

The Android ecosystem today is superficially similar to the PC ecosystem, but I'd suggest that the clarity and alignment of interests of the PC ecosystem isn't present in anything like the same way. As an Android OEM you have very little idea what Android will be in 3 years - partly because Google itself may not have a fully-formed idea. There certainly aren't public roadmaps stretching out years in advance. 

It's also questionable how much alignment of interest there is. Google certainly wants Webkit everywhere, and arguable Android everywhere (or, more precisely, Google Plus everywhere). But that doesn't translate to a burning hunger for an aggressive phone replacement rate at high prices. Indeed, Google Play Services reduces Google's interest in device replacement as a way to drive service penetration. As an Android OEM, your ecosystem creator doesn't benefit directly from the health of your industry. A healthy PC market was Microsoft's driving objective - 'A computer on every desk and in every home'. That's not quite the case for Google and the sales of Android smartphones - they're reach, and a means to an end, but not the reason why Google exists. 

Next, it's not clear what a sustainable position for an Android OEM looks like. All the brands except Samsung are sub-scale and failing, and while Samsung looks dominant it is clearly feeling paranoid: the growth of the Chinese Android OEMs outside China is a huge question. Lenovo has made its first move by buying Motorola but the real story is whether 2, 10 or 100 others follow it, and if so how. 

Finally, Google's control of Android itself is a question. Amazon forked it, but with limited broader effects. Almost all Android in China lacks Google services but then Google is largely absent from China anyway. The ways that forks of Android might become relevant outside China (and Google's tools for preventing this) are complex and a topic for another post, but we can't rule this out. Indeed, a lot of the most interesting ecosystem innovation is being done on top of Android rather than as a would-be competitor to it. 

On one level, then, the smartphone platforms wars are over - iOS and Android both won. But actually, nothing is finished - we just move onto new questions. 

Interaction, canvases and ecosystems

Suppose that in 5 years or so I send you a Yelp review of a restaurant, from my phone to yours. What will that mean? 

  1. First, I might well use something like Airdrop, or touch my phone to yours to pass it across, or tell Now to give it to you, or indeed Now might decide to give it to you without my even explicitly asking. Or the review might be invoked by a Bluetooth LE beacon as you hold your phone next to the menu on display by the door
  2. But for the sake of simplicity, suppose I send it to you using an internet messaging app - either one built into the OS or a third-party one - Facebook, Whatsapp or more probably one that doesn't exist yet but by then has 15 engineers and 1bn MAUs. 
  3. It seems pretty unlikely that you'll see a dumb URL string on your screen. Rather, you'll get something rich and interactive, within the message.
  4. And you'll be able to go into that experience and tap the number to call the restaurant, or make a live booking, or swipe through photos.
  5. And if you tap 'book', it'll pass them a $10 booking fee in bitcoin, authorised with a fingerprint swipe. 
  6. Now suppose you decide to save this item, as an icon on your home screen, or some other yet-to-be created place. 

Now, what were you using? An app? a widget? Native code? What programming language? Did you install an app or surf the web? I'd suggest that none of those questions would really mean anything, at least not as we think of them right now. The programming language matters much less than the user flow. And some of this example sounds 'webby', but Google is the first to advance interaction models that are not remotely webby (such as Now). 

This is a pretty simple illustration (an expansion of the super-hot card metaphor) of a broader point I've made before: on the desktop internet, the web was by far the dominant model and that didn't actually change very much for well over a decade (before that, the interfaces of Windows and Mac were also very stable for a long time). But on mobile, not only are other models just as important as the web, but they're not remotely stable, settled or mature. The platform war may be over but that doesn't mean things are settling down. 

So I have very little idea what precisely I would mean if, in 5 years, I were to say 'I installed an app on my smartphone'. Further, I'm pretty sure that if it's an Apple smartphone it will run an iteration of iOS but I'm rather less sure what Google will have done with Android and Chrome by then. And of course I might be running a fork of Android from Amazon or, perhaps, Microsoft. 

This is the key reason why the new social messaging apps are so interesting - not because they have users and inventory now, but because they can be vectors for some of this sort of behaviour - a third acquisition, discovery and distribution channel besides Facebook and Google.

This may also have implications for any discussion about what it means for Apple that its ecosystem will have a minority of mobile users. We need to think about what it means to call a ecosystem that might have 800m-900m live devices 'minority', but we also need to think about what 'ecosystem' might mean. What, if any, 'winner takes all' dynamics operate in this environment? One reason the Mac didn't die was because the web changed what it mean to be a computer ecosystem: the mobile ecosystem has lots of changes to come too.