App unbundling, search and discovery

"There’s only two ways I know of to make money: bundling and unbundling."

-Jim Barksdale

There’s been a pretty clear story for the past couple of years that the dynamics of smartphone interfaces drive unbundling of services. 

The main reason is that single-purpose applications have an advantage on smartphone interfaces. On a desktop website, you could always add a feature as a new tab on your site navigation, and clicking that was easier than going to another web site. But on mobile, all apps are just two taps away, while there is very little room for links to more features in any given app’s home screen - they quickly get shoved into the ‘hamburger’ menu, and soon after fall into the ‘hamburger basement’, down below the bottom of the screen. This gives startups scope to unbundle features from larger companies' products, and also means those companies themselves unbundle their apps into separate single-function apps. 

This effect is even stronger for social applications, where a lot of the unbundling conversation focuses, since the smartphone is itself a social platform quite unlike a desktop web browser. All apps can access the address book, giving them a ready-made social graph, and the photo library, reducing the hassle of uploading to different sites, and push notifications, removing the hassle of checking lots of different sites. This is why we have dozens of social apps that have passed the 1m, 10m or even 100m user milestone. 

Finally, of course, driven by all of these dynamics, all smartphone apps by their nature unbundle services from the web browser itself, 20 year after Netscape launched. 

All of this seems inevitable and inherent in the nature of the platform. It’s the reason why Facebook has moved from a de facto monopoly of social on the desktop to being merely the leader on mobile, buying the occasional breakout unbundler while experimenting with its own suite (‘constellation’) of different apps searching for new use cases

However, looking at the Chinese internet market is always a great way to challenge your belief in what’s inevitable, and in this case both Baidu Maps and WeChat, amongst others, are thriving on exactly the opposite approach - bundling multiple services into one app. (WeChat and Baidu Maps are a bit different, so I'll focus on Baidu)

Hence, in Baidu Maps you can not just find a restaurant but book a table or order home-delivery. You can find where a film is showing and choose a seat. You can order a cab, with cabs from all the services in your city shown together on the map and the order going to be best offer. You can book a hotel room or a cleaner. Most of of these services are provided through embedded third-parties - Baidu is doing deals with other Chinese internet companies to provide this. WeChat (which now has close to 400m MAUs), is doing much the same, but of course starting from a chat experience rather than a maps experience.

In both cases, the aggregations make a fair amount of sense on their own terms - finding a cinema, taxi or restaurant are location-based activities and they’re also social activities. But the functionality is being flipped upside-down: in the USA a taxi app or a restaurant app will have an embedded map, but in China the map has embedded restaurants and taxis - and lots of other things. Equally, on Yelp you can message friends, but in WeChat you’re already in the messaging app. 

This changes the layer of aggregation. By default, the iOS and Android interfaces aggregate at the app launcher level - you have a screen of different icons for different services, though to some extent notifications are becoming another OS-level aggregation. Anything that hasn't been unbundled from the web is in the browser, where it is in turn aggregated by Google. Apps like WeChat and Baidu Maps move the service aggregation layer up the stack from the home screen, bundling it within a single app. Conversely Siri and Google Now (and arguably Microsoft's Live tiles) are in different ways about moving it down the stack into an OS-level service. But the interesting thing is that changing the aggregation model also enables new types of discovery.

In the app launcher layer, any direct service discovery (as opposed to marketing, word of mouth etc) is limited to the app stores. When they launched this worked adequately, but with over 1m apps in each of the iOS and Android app stores this model is clearly now broken. Just as Yahoo’s hierarchical directory didn’t really scale after 1996 or so, so too app stores have not scaled as a discovery platform. Further, though there are lots of ways that the execution of the app stores could be improved, this still ultimately boils down to saying ‘Yahoo’s home page should be better’ back in 1996. Indeed it should have been, but the answer was still PageRank. And we have no analogue of PageRank for mobile apps. 

Google Now and Siri, moving down the stack, address discovery by removing the whole question of ‘which app/site/service addresses this need?’ Now tries to infer from your general activity what you might want to be told about, while Siri tries to use natural language to answer your question. Both are focused on an answer rather than a specific service - ‘sports scores’ rather than ‘ESPN’ (even if ESPN proves the actual answers). But the problem with both is that underlying answers are provisioned in an essentially manual process. Google Now, in particular, looks like Google’s most automatic and magical product, but in fact it's all editorial. Someone has to decide that Now will support cricket, and then someone has to sit down and code the cricket module. And If no-one has done rugby yet, you won’t get rugby - Now can't work out what rugby is from watching your web browsing. Siri has similar constraints: HAL 9000 didn’t have a list of things you could ask him. This does not scale to the whole internet. 

The general issue here is that any aggregator of services that offers a set of essentially hand-crafted approaches will inevitably run out of room in the metaphorical hamburger menu, just as the app store home pages can only showcase a few dozen apps at once and Yahoo's home page could only showcase a few dozen services. Or, indeed, Apple's Sherlock ran out of tabs. This doesn't scale to the internet. PageRank did and indeed the web did. 

The Baidu Maps model addresses this problem by narrowing scope to a specific domain, location, such that the discovery (hopefully) flows out of a natural pre-existing context. You don’t need to know about restaurant booking services or download the app, but you also don't need to know if Baidu Maps has an AI that can do restaurant bookings (as you would need to know that Siri connects to OpenTable): bookings are an organic extension of the context you're already in. You'll already be searching for restaurants on the map, but now ‘make a booking’ will appear.

That is, searches within maps are naturally constrained - there are only so many use cases (a dozen? two dozen?) where a service integration might make sense. So Baidu can make a maps app that’s an order of magnitude better because it contains within itself every possible maps-based use case, and nothing more. And those use cases can be hidden until you search - you don't need to find space for a 'cleaners' button - you can just show that module when people do that search, as they will.

WeChat comes at this discovery issue from the other direction: the social foundation of the app means that services can come to you thRough friends or through subscriptions to channels, but the point is the same - you don't need to find space on the screen for every single service for people to find them. For Facebook, the model would be to drive traffic out into stand-alone apps (or a web view), with the partnership being only an advertising one - for WeChat the dynamic is perhaps closer to the original Facebook platform on the desktop. 

One way to look at this, I think, is that you trade app discovery challenges for feature discovery challenges. That is, in an app with only one or two features it's easy to see what you can do, but hard to discover that app in the first place. Conversely in an app with hundreds of millions of users but also lots of integrated features, feature discovery becomes the challenge, and the opportunity. 

Changing discovery is one thing, but the other interesting thing is how much happens inside the app. There are two structural things that the desktop web has that the mobile app ecosystem lacks. On the web:

  • You can link to any resource
  • That resource will be there - you don't need to install anything.

These aggregator apps are tackling both problems: they have discovery models to allow you to get to the resource (e.g. social or local context), and the resources are loaded within the app - no need for a new app install. This isn't happening on the web, as such, but it has some of the same dynamics - within, obviously, those limited domains. 

It's interesting to contrast this with the deep linking initiatives from Facebook and Google. Facebook offers a way to drive traffic to your app from social and Google from search, and Google is experimenting with, for example, a link to Uber from within Google Maps. The problem is that if the app isn't there then you fail back to HTML, and if HTML was good enough then you wouldn't have bothered deep linking in the first place. But on the other hand, you can't integrate everything  - we already have a way to do that. Hence, the Facebook and Google moves (and also Line's) disaggregate apps, but use identity, deep links and search as an aggregation layer that is closer to the web and might be more scalable. 

 

That is, you can bundle things into an app that has distribution, but there's a limit to how many both for practical and discovery reasons. If you use context (maps, social) you can address the discovery problem but this works best in constrained contexts. If you don't bundle, your features are easy to discover (because your app only has one feature) but you give up those opportunities for discovery and fall back on raw search, social sharing or the app stores. 

And for all that we talk about the problems with apps and the lack of PageRank, one cannot really describe the desktop web as a prelapsarian paradise of simple and easy discovery. The web is a neutral, transparent and unmediated platform, and smartphones are not, but neither are Google or Facebook. 

Hence, as Lenin put it, the question is 'Who, whom?' Who has the traffic, and to whom do they give it? Mobile shuffled the deck, but it doesn't alter the problem. 

The other interesting comparison here is with Yahoo and AOL. The portal model failed pretty comprehensively in the 2000s, with category killer sites springing up and AOL and Yahoo and the other would-be portals falling far behind. So when smartphone apps came along we already had a dominant unbounded model that transferred pretty directly: we unbundled services from the browser, but the services themselves were already unbundled from Yahoo.

In China, though, we see a model in which the portals didn't disappear. For a lot of different reasons, the Chinese internet is based on much more horizontal than vertical competition: where we have vertical category killers (Google, Amazon, eBay) China has giants that are each leading in one category but strong in others, and competing aggressively with each other across every category. On mobile, Baidu Maps and WeChat are showing a systematic concept of the app as, well, a portal. Is this what Yahoo might look like on mobile now if it hadn't spent a decade asleep? 

700m smartphones & tablets in China

Umeng's 2013 report has just come out, and it's full of fascinating data. (Umeng is an app analytics firm, much like Flurry, and has its code in a very large share of apps in use in China.)

Striking data points: 

  • There were 700m active smartphones and tablets in China at the end of 2013, and this almost doubled from 380m in Q1
  • High-end phones are a big market: 27% of the total active base, and 80% of those are iPhones
  • 55% of the top 1000 apps include links to the major Chinese social platforms
  • 20% of the top games use licensed third-party IP
  • App use and game use varies by how expense the phone is (unsurprising, but some good data on the details)
  • The Android market remains fragmented: Samsung has 24% (much lower than globally), Xiaomi is in 4th place and 'other' is a third of the market
  • And finally, pretty much every app category has at least doubled its active users in the year. 

Note: A few people have suggested that the implied number of iPhones seems high as a percentage of total iPhone sales. (Umeng hasn't given a smartphone number to apply 80% of 27% to, but other estimates are about 500m = 108m). However, if you take imports of second-hand iPhones into account the percentage looks much more reasonable.  

China scale

A pretty simple but striking juxtaposition: the size of the Chinese mobile internet market versus the US smartphone market. There are over 1.2bn mobile subscriptions in China, and though China is still a much less prosperous place than the USA, even the top half - the half that's using the mobile internet and buying 3G phones (almost exclusively smartphones at this stage) - is more than double the size of the US smartphone base. 

(Strictly speaking, I should put the Chinese smartphone install base on this too, but that data is rather less solid, and the point remains.)

The meaning of really cheap Android

One of the big puzzles in trying to understand the tablet market is data. Apple is pretty much the only large manufacturer giving unit sales, and not only are Samsung and Amazon saying nothing, but there are hundred of Chinese companies making Android tablets, and few if any say anything publicly. In the phone business the story is rather easier, since Google says roughly how many Android devices are being activated outside China, and give a screen size breakdown, and the Chinese mobile operators have a good sense of smartphone sales inside China. But in tablets there is no-one with an overall view of sales. 

This means that analysts have to fall back on component makers. Though there are hundreds of companies making tablets, they almost all use more or less off-the-shelf chipsets from a handful of companies. These companies have a good sense of the overall number of tablet chips that are being sold into the manufacturers. So too do the screen markers - they have a good sense how many 7” panels are being sold. So you take an estimate of tablet chip sales and an estimate of tablet screen sales (and take into account people using ‘phone’ chips in tablets) and you estimate tablet sales, both inside and outside China.

The obvious problem with this is that these devices are being used in very different ways. It seems clear that most of the huge numbers of sub-$150 Android tablets now being sold do not have anything like the web or app usage that is seen on an iPad, Nexus or Galaxy Tab, and that many are mainly used as substitutes for TV sets, with maybe some gaming on the side. 

The deeper issue, though, is that estimating tablet sales in this way is a little like trying to estimate global car sales by working out how many internal combustion engines are being made, and how many tyres, but not adjusting for motorbikes, cranes, outdoor generators or 18 wheelers. Lots of ‘tablet' chips and ‘tablet' screens do not actually end up in tablets.

Consider this device, one of thousands of similar products on offer on Alibaba - an in-car video player running Android, complete (if the screenshot is to be believed) with the phone app. This probably doesn’t activate with Google, but it certainly looks like a ‘tablet’ to LG or Rockchip.


Then there’s this TV dongle - no screen, but does it have a ‘tablet’ chip? A ‘phone’ chip? If you used it to watch Youtube, what would Google think it was? (Note also the memory card slot, used for side-loading pirate movies.)

Now what about this, from Steelcase? An meeting room door with a 7” capacitive touch screen. To a component maker, this is also a tablet. I have no idea if it runs Android today, but if it doesn’t, it probably should. And if Nest doesn’t, the copies of it will. 

The important dynamic here is that a combination of very cheap off-the-shelf chips and free off-the-shelf software means that Android/ARM has become a new de facto platform for any piece of smart connected electronics. It might have a screen and it might connect to the internet, but it’s really a little computer doing something useful and specialised, and it probably has nothing to do with Google.

As should be obvious, this makes counting total ‘Android' devices as though they tell you something about Google or Apple’s competitive position increasingly problematic. But to me, pointing out that ‘Android’ doesn’t necessarily competed with iPad is rather boring - what’s really interesting are the possibilities that these new economics might unlock. 

A good example is this - a 2G Android phone wholesaling for $35 (just one of hundreds). 

Now, stop thinking about it as a phone. How do the economics of product design and consumer electronics change when you can deliver a real computer running a real Unix operating system with an internet connection and a colour touch screen for $35? How about when that price falls further? Today, anyone who can make a pocket calculator can make something like this, and for not far off the same cost. The cost of putting a real computer with an internet connection into a product is collapsing. What does that set of economics enable? 

There are other interesting hardware trends that overlap with this as well. Bluetooth LE is the obvious one - you can make a widget that broadcasts a location ID for $50 or less, stick it on a wall, and the battery will last for years. EInk is also interesting here: it needs no power to show something, only to change, and you can pass enough power over an induction touch point to cycle the screen. The problem here is cost, but why doesn’t my Oyster card show the remaining balance? Why wouldn't Coin (a product I'm rather skeptical of, mind) show the cards loaded onto it on one side with an eink display? How do these trends interact with cheap Android computing?

Marc Andreessen famously coined the phrase 'software is eating the world’ to describe the way that functions that used to be served by dedicated hardware are now being subsumed by general purpose devices - mostly smartphones. But there’s also the beginnings of a trend in the other direction - devices that weren’t smart and didn’t get merged into the phone gaining a digital presence of their own, and creating a new set of opportunities. 

iPads, price and self-selection

Apple's iPad event was pretty unsurprising. It was obvious that the large one would be speed-bumped and get lighter. It was also obvious that the Mini would get retina at some point - the  only question was whether the supply chain could deliver enough panels now (with some well-informed people suggesting it could not), and the late-November ship date and $400 price point to how close it was. 

The lack of fingerprint scanning in both the new models was a surprise - it may again be a supply problem, but it means that any platform play Apple has in mind (ie payment) will have a smaller install base to launch onto. 

However, the big puzzle is the price the now old Mini is discounted to: $300. This compares poorly to a new Nexus 7, with comparable resolution to the retina Mini, at $230. The Nexus 7 is of course being sold at very low margin by Google, but does the old Mini really need to be $300 rather than, say, $275 or $250? What is Apple thinking?

On a simplistic level, Apple's tablet market share is clearly shrinking. The chart below, taken from a presentation I've been giving in the Bay Area this week, shows my estimates of tablet unit sales. (They're in increasing order of certainty as you go from top to bottom. Kindle Fire is not included, since I lack the grounds to do quarterly estimates, but obviously it is not relevant outside the USA and a few other markets).

Screen Shot 2013-10-23 at 10.42.10 pm.png

Apple's recent sales decline is largely a product cycle issue, but clearly, sales of other tablets are growing fast. And yet Apple is allowing the price window underneath the iPad to become meaningful. Why?

To me, the really interesting thing about this chart is how small Nexus sales are. Here is a good device with a nice clean Android install, sold at a very aggressive price. On Google's own numbers, almost no-one buys it. Why? Why do sales of the Nexus 10 appear to be under 1m units?

Meanwhile, every single data set shows iPad with at least three quarters of tablet use, be it app installs, web use or any other third-party engagement metric you want. Where are all those other, non-Nexus Android tablets? What's being done with them?

What seems to be happening is that if you want the post-PC vision that Apple and Steve Jobs created, you probably buy an iPad, and Apple has a large majority of that market, and hence of the use of devices for that purpose. This isn’t very surprising: the Android tablet app offer remains far behind the iPad in a way that the Android phone app offer does not. 

But there's also another proposition, a $75-$150 black generic Chinese Android tablet, half the price of a Nexus 7. That proposition is also selling in huge numbers, but it appears to come with a very different type of use. 

Why are people buying these? What are they being used for? They're mostly in China (that’s the pink bar above) and emerging markets and in lower income groups in the west. And it seems that they're being used for a little bit of web, and a  bit of free gaming. Perhaps some book reading. And a LOT of video consumption. In fact, one might argue that for many buyers, these compete with TVs, not iPads, Nexuses and Tabs. But regardless of what they’re being used for, they’re not being used the way iPads are used. In effect, they are the featurephones of tablets. 

If this theory is correct, it suggests that Apple's $300 Mini really isn't a competitive problem, because the iPad doesn't yet face a strong competitive threat (quite unlike the iPhone). Rather, there are actually two quite different markets: the post-PC vision, where Apple is dominant, and a ultra-low margin product that’s also called a tablet but which is really a totally different product. 

Chinese app platforms

Looking at the Chinese mobile market today reminds me a lot of looking at the Japanese model in 2000 or 2001 - lots of very interesting stuff is going on, but getting reliable data is very tough.  

One triangulation point comes from app analytics platforms. You need to have some caution as to how representative they are, but the big ones give a good directional steer. Umeng (think Flurry for China) is one of the biggest. It puts out statistical reports every quarter or so - these are some of the key charts in the latest. 

First, platform size - this is their estimate of active devices that are using apps (not total devices), including tablets.  

Screen Shot 2013-10-08 at 15.33.55.png

Both iOS and Android are growing fast, and Android faster, as one would expect given the range of prices that Android devices are offered at. However, on this data there are probably more iOS devices in China than smartphones in the USA. 

Second, handset brands. Apple is the largest single brand in this data set, but shrinking. This of course is users, not ongoing sales, so some recent suggestions that (for example) Xiaomi outsold iPhone in the run-up to the iPhone launch may be compatible with this. 

Screen Shot 2013-10-08 at 15.33.43.png

Finally, and perhaps most interestingly, a window into the state of Android in China. As most people know, the great majority of Android devices sold in China are built on AOSP and have no Android services pre-installed (indeed, I've used a Motorola phone with no Google services present) - instead they have a range of apps from the local internet giants. 

This means that most Android phones have no Gmail, Google Now, Google Maps or, of course, Google Play, and most apps are installed form third party app stores or side loaded, either pirated or downloaded directly from publishers' sites. Some handsets do have these, either because people added them afterwards (which is not easy) or because they're using grey market imports. Estimates of the total with Google apps on them are mostly in the 20-30% range. However, on Umeng's data, Google Play amounts to just 5.6% of Android app installs in China. OEM app stores are 8.5%. This, for example, is why Baidu paid $1.8bn to buy a couple of app stores earlier this year. 

Screen Shot 2013-10-08 at 15.33.36.png

The price of the 5C

 At this stage it looks as though everything about Apple's 'cheaper phone' has been leaked - plastic casing, choice of colours, '5C' name, same screen as the current iPhone 5, and a transparent box to help retail sales. Everything, of course, except the price - which is all that really matters.

What price would Apple choose for a genuinely cheaper phone? There are four brackets worth looking at:

  1. $100-$150 – this is where budget Chinese manufacturers are starting to deliver  usable dual-core 3G Android phones
  2. $150-$200 – the upper end of what is possible to sell to the unsubsidised prepay market - which is half the planet
  3. $200-$400 – almost certainly out of reach without subsidies but a solid mid-range smartphone price range
  4. Over $400 – similar price to the existing discounted two-year-old model, but with more up-to-date technology, possibly higher margins and probably an easier marketing sell than the ‘old’ phone 

The first of these price points requires too many product experience compromises from Apple, while the leaks we've seen so far seem to show a device that would not be priced $200 or under, ruling out most prepay.

So, the decision is where to sit in the mid-range. The interesting dynamic in this is the tension between the USA and China.  

The US contract phone pricing structure today effectively puts a lower limit on the viable price for a contract smartphone. The ($450) iPhone 4 and similar high-mid range Android phones are sold as 'free' on contract'; phones whose list price is actually much lower are sold at the same price. A $200 phone is sold to consumers at the same price as a $400 phone - and hence is very uncompetitive. 

One effect of this is that the iPhone 4 and 4S made up a quarter of Verizon Wireless contract smartphone sales in Q4 2012 and Q1 2013, a much higher share than they appear to have elsewhere. In the USA they're as cheap as any contract phone on the market - everywhere else they're cheaper than the iPhone 5 but still relatively expensive. The Android ASP, after all, is $250-300. Everywhere else $200 and $300 Android massively outsells $400-$600 iPhone: in the USA much of that price advantage is removed. 

So, a $300 or $250 iPhone is a tough sell in the USA. But a $450 iPhone is a tough sell in China. Xiaomi, after all, just announced a very compelling new phone, the M3, at $330, and that may not be staying in China

Screen Shot 2013-09-05 at 10.45.39.png

Hence the tension: which is more important to Apple? It already has 40-45% share of smart sales in the USA, which was just 12% of the global smartphone market in Q2. But it can't launch a phone that doesn't work at all in the USA (nor is it likely to persuade the US operators to drop their pricing to remove this distortion) - which points to a higher price, higher spec model. The further you go below $400 the more you get a phone that's tough to sell in the USA. 

But too high, and the current dynamic may not change - Apple remains camped out in the top 10% of the global handset market while all the rest converts to Android - and this is a problem

The true unknown in this, of course, is that while we know that any $300 iPhone would sell very well, we don't know how much better a new $400 or $450 iPhone would sell than the current "two year old" $450 iPhone. How much difference would the screen, coloured plastic casing and 'newness' make?