I'll be presenting these slides (or something pretty close to them) on 29 May at BEA in New York. They give a pretty good overview of where the industry sits today.
I'm a big fan of Google Trends. It's partial, and you need to think carefully about what you're actually looking at, but used properly it can be very revealing of market trends.
So, caveats aside, this chart shows US search volume for Kindle, Kindle Fire and Nook. Three things stand out:
- A large and unsurprising spike at each Christmas
- A really substantial decline for 2012 versus 2011 - close to 50%
- The Kindle Fire, supposedly the future-proof successor to the Kindle, appears to be falling, not growing
Amazon, of course, tells us nothing tangible about how the Kindle is doing, but Nook's numbers (as reported by Barnes & Noble) are looking terrible, which is consistent with this.
It seems to me that several things may be going on here:
- General-purpose tablets (mainly the iPad) are more proving more compelling to consumers than special purpose tablets like the Nook and even the (rather more capable) Kindle Fire
- Cheap general purpose tablets (which are very hard to capture in Google Trends, as an aside) have removed or reduced the price advantage the Nook and Fire had last year
- These devices have quite long lives - especially ereaders (i.e. the Kindle). Maybe most of the addressable market bought one in 2010 and 2011 and those people didn't come back to the market in 2012
There's a broader story here, of course, in the way that the growth rate of ebooks seems to be slowing as they reach a third or so of the market.
The UK data shows a trend that's slightly different: Nook is MUCH weaker (reflecting the absence of real distribution or brand) and Kindle Christmas interest held up better in 2012, probably reflecting the later UK date - ebooks seems to be about 1 Christmas behind the USA. However, the drop-off seems to be sharper in the beginning of 2013 than in the beginning of 2012, just as in the USA.
The same point is even more clear if we look at search volume for 'ebooks'. The deceleration is clear.
From 2007 to 2012 annual mobile handset sales grew from 1.1bn units to 1.7bn units. This was, obviously enough, driven by an expansion in the number of ‘human’ mobile phone users from 2.1bn to 3.2bn (the number of total connections was much higher).
Almost all of the growth in subscribers and hence in handset volume growth came from the low end at low prices. So, one would have expected the average price of a phone to fall. It didn't.
ASPs (average selling prices) did indeed fall for a while, bottoming out in late 2010, but since then they've almost doubled, to a little over $180 per phone at the end of 2012.
The reason for this, of course, is the arrival of smartphones, which have persuaded people to pay more for a phone than they ever did before. The iPhone, most obviously, sells in a super-premium $600+ bracket that barely existed before, and parts of the Android market (and to some extent Nokia) have followed. At the end of 2012, top-end smartphones amounted to about 17% of total phone volumes, and about half the revenue. Meanwhile a quarter of phones sold were still plain old basic voice phones.
The interesting question, to me, is what the third and fourth smartphone bought by a given person will cost. When do people decide that a $150 smartphone is good enough that it's an acceptable replacement for a two-year-old smartphone that cost $300 new? Or, do they decide to upgrade - to buy an iPhone 6 or Samsung GS5? Or do they just wait - buy a phone every three years instead of every two?
Moore's Law is working away on phones, and a $150 phone is indeed as good as a $300-$400 phone from two years ago - but the new $300 phone is also a dramatic improvement. The perceptible improvement of new product categories follows a curve over time: 20 years ago a new PC was noticeably better than a 2 year old PC, but today the gap with even a 5 year old PC can be pretty hard to spot. Hence, the PC replacement cycle has lengthened to 5 years, and average selling prices have steadily fallen. Phones today are at the steep part of the curve: there are still compelling reasons to spend the extra money, and to upgrade relatively frequently (and of course a phone gets scuffed and scratched).
Also skewing the purchase decision, of course, is subsidy: a $150 saving is only the price of a coffee and pastry each month over a 24m contract. This applies especially in the USA, where even a $400+ iPhone 4 costs the same to consumers as a $150 Android - both phones are 'free' and there's no difference in the contact price based on which you choose.
My suspicion is that we'll see a polarisation in the market. There is a portion of the market that will pay a premium price for the best phone possible - and for these people $600 (however manifested) is not actually that much money every two years. But the $300 segment may well get squeezed, between people trading up, paying the price of a coffee and croissant and getting an iPhone, and people trading down to a perfectly good $150 phone.
It is also, of course, entirely possible that the phone they trade down to is a $200 iPhone, a $150 Google 'Chrome' phone or a $100 Kindle Fire phone. At that point everything changes again.
Yet another building block for a Kindle Fire phone. Retail and maps are the only real barriers left, and they've licensed Nokia Maps...
Amazon explicitly states that we should focus on trailing 12m free cash flow, not net income, as the key performance metric. (The thing about FCF, of course, is that it's hugely positive in the Christmas quarter as all the cash comes in, and then hugely negative in the March quarter as Amazon pays all the suppliers: using trailing 12m smooths this out.)
This, therefore, is a chart of Amazon's preferred profitability metric.
It seems pretty clear that Amazon is optimising its cashflow to zero: pushing it as low as it is possible to go and still run the business. This is rather like Tim Cook at Apple managing inventory to zero: Amazon manages cashflow and profits to zero.
The really striking thing is if you compare this to revenue, in this indexed chart.
Over the last 3 years, Amazon revenue is up 130% and it's chosen profitability metric is down by two thirds. This is not a coincidence.
Jeff Bezos says that "your margin is my opportunity": this is what that means.
This chart, rather neatly, encapsulates both the bull and the bear cases for Amazon. On one hand, the revenue growth is dramatic. Amazon is taking an ever larger share of US retail revenue - but is still only about 2% of US non-food retail revenue. Yet... where are the profits?
There's always been a suspicion that Amazon is managing earnings to zero - deliberately hitting zero at the bottom line both to drive share and to conceal the operating dynamics of the business. But on the other hand, this might just be the world's biggest lifestyle business, run for the entertainment of Jeff Bezos rather than the enrichment of shareholders. And of course, what sort of profits should a volume retailer ever expect to achieve, realistically? Walmart gets 3-4% at best.
To put this another way, Amazon appears to treat FCF the way Apple treats inventory: as something evil to optimise down.
And so it begins. Amazon is taking advantage of years of poor Google execution and moving to fill the void. It is finally deploying the pieces it has put in place over the past few years to start moving its purchasing and content ecosystem into phones at the OS level. Content first. Apps, photo sharing, contacts etc soon. And some time in the future, perhaps, a Fire Phone.
This sort of pre-load / embed solution is lower-risk and easier to execute than a full-on 'Fire Phone', with a completely forked Android and custom hardware: phones are harder than tablets in all sorts of ways. HTC makes it and (with VZW) distributes it, Amazon adds the sizzle.
I saw a job ad that's almost certainly for Amazon the other day: "Head of Strategic Mobile App Partnerships", in Luxembourg, working on "a groundbreaking new mobile platform". More to come, I suspect. This certainly won't be confined to Verizon Wireless in the USA.
I also wonder how long this will be an HTC exclusive. HTC could certainly use the help, but I'd expect all the Android OEMs to be interested: all of them except Samsung are struggling and they have no love for Google. But of course if all Android phones have this then they're back to selling commodities.
And how does Google react? It has the power to withhold access to Google Apps (GMail, Google play, maps etc) for devices that fork Android, but additional preloaded services are hard to fit into that category. Moreover, how soon will Amazon be able to offer all of that functionality itself? Maps are probably the biggest hurdle - but now we have Nokia offering its own (equally good) maps in an iOS and HTML5 solution on all mobile devices...
What is Amazon's strategic objective? This isn't really about selling content and apps on mobile - even Apple makes no money doing that. Rather, as with the Kindle Fire, Amazon is trying to create buying devices. Mobile devices sit next to Vogue and How To Spend It, and on the coffee table in front of the TV. They are ready and waiting for a call to action, to capture purchase intent. Amazon is a leveraged play on the conversion of physical retail to ecommerce, and mobile is the means of acquisition.
Slides to illustrate a presentation on the mobile platform wars, given at the Frankfurt Book Fair on 8 October. Only moderately comprehensible without hearing me talk, but the charts are pretty none-the-less.
Another day, another number for tablet market share. Pew has released its latest survey for the US market, suggesting (amongst many other things) that Apple now has ‘just’ 52% share of the US tablet install base.
So, do we believe this? And what might it mean?
The tablet market is problematic to analyse because there is an almost complete absence of real data. Apple gives global quarterly unit shipments (indeed, it is by far the most open company in this market), as does RIM (but its numbers are too small to be meaningful) and Motorola used to, but otherwise we’re groping in the dark. Google gives data for the share of the devices connecting to Google Play that have large screens, but this is global, may not be a good sample and is contaminated by poor reporting (for example, at least one Samsung device changed the screen size it reported after a software update). Then there are the industry data firms, which generally base their pitch on aggregating data from the manufacturers, but I rather doubt Amazon is telling them anything. That leaves surveys (if you believe them) and triangulation: in other words, analysis.
We know from the Apple/Samsung patent lawsuit disclosures that Samsung sold just 1.4m Android tablets in the US through June 2012 (excluding the 5″ ‘phablet’ models and some newer models that weren’t subject to the lawsuit, though) where Apple sold 34m – 20m in the last 12 months.
Then, Amazon says the Fire has ’22% share in the USA’, but gives no indication of how it calculated this, or even if it is cumulative or for the most recent quarter (and it has been suggested it comes from… an industry data firm). Meanwhile Nook business unit revenue was $200m in Q2 (including tablets, ebooks and ereaders), so B&N must be selling well under 500k Nook units a quarter. For context, B&N claims 25% or so ebook market share versus over 60% for Amazon.
It looks like there are 30m iPads in the USA (depending on how many you think have been replaced by newer models but not handed on). If one assumes 10m Fires, 2.5m Nooks and 5m ‘Pure Android’ tablets (i.e. excluding the Android-based Fire and Nook), that gets 47.5m total, Amazon to 21%, Apple to 63% and gives Samsung, say, 30% of those pure tablets, all of which is internally consistent. However,the Fire number seems a little high and it also leaves ‘Pure Android’ looking rather small compared to the Pew number. Indeed, the only way to match Pew’s number (while keeping the other numbers the same) is to assume that there are fewer iPads (say 25m) and at least 10m ‘Pure Android’ tablets. I’m not sure I believe that. Incidentally, this would also imply that Samsung has well under 20% share.
Of course, only Google knows the answer to this one, and with customary opacity they’re not saying. But whether Android has 5 or 10m tablets in the USA is relatively uninteresting – the important question is what those tablets really look like and how they’re used. How many are the Nexus 7? How many are cheap generic plastic Chinese units at $150 or below? And with Amazon ramping up its Fire proposition and going down to $160, will people keep buying those generic units or even the Nexus or will they turn to a brand with a clear content proposition? Which devices are likely to sell themselves best as an impulse purchase in a supermarket bay in early December?
I suspect Android tablets face an even bigger self-selection issue than Android phones. Given you can get a great app and content experience from Apple for $400 (or lower if the iPad Mini exists) and a great content experience from Amazon for $160, what sort of person with what sort of use case will buy the pure Android tablet, and will they be the kind of person that would install cool new apps and buy stuff? Or are they buying a ‘web tablet’ at Walgreens? Certainly, UK retailers are ramping up for a ‘cheap Android tablet Christmas’.
That doesn’t really matter to Google, of course – all of these devices, even the iPad, are expanding the inventory for Adsense. But they’re probably not a great target market for anything other than generic web use – even less than Android phones have proven to be.
(Cross posted from my Forbes.com blog)
Thinking that the yellow line is more interesting than the red one. Why isn’t it dipping down? (This is clearly period sales, not cumulative).
Also worth noting: Amazon has only about 20-30% of the US print books market. After 15 years.