Android in Pieces? Why Fragmentation WON'T Hurt Android

Apple’s weapon of choice

THAT'S a phone?

It was interesting that when Phil Schiller decided to start taking pot shots at Android he lighted on the same old argument.

Fragmentation

“We are hearing this week that the Samsung Galaxy S4 is being rumored to ship with an OS that is nearly a year old” he said (turned out that actually he was wrong – although the competing HTC One will be shipping on 4.1).

My suspicion, though, is that Samsung will be having the last laugh. While the Galaxy S IV is a pretty ugly, utilitarian chunk of plastic. Dieter Rams would, no doubt, be turning in his grave. But backed by a marketing budget the size of Wales, I would put good money on it being the bestselling phone this year full stop. If the 2013 iPhone is just a 5S, I think Apple’s market share is in for another spanking.

(With apologies to Crocodile Dundee)

Which, come to think of it, is a bit weird. Because if Phil was right wasn't fragmentation supposed to have killed Android?

Why fragmentation will (supposedly) kill Android

The bear case on Android fragmentation is one we've heard again and again. At its heart its very simple:

1. Android’s open hardware ecosystem and customisable source code would lead to fragmentation into an an unsupportable mishmash of OS versions, hardware vendors and screen sizes.
2. As Android sold all its units into mid/low end users spent far less money on Android than on iOS.
3. Faced with unaffordable app complexity and low revenue customers, developers would be unwilling / unable to build Android apps.

This all contrasts with Apple where there were only a handful of SKUs, almost all running the latest version of iOS (and owned by high-end, big-spending users). Faced with the need to support a plethora of OS versions, hardware vendors and form factors, Android developers would retreat to the comfort of Apple's walled garden.  And with Apps being, literally, the Killer App for smartphones, this would be a fatal blow to the success of the Android platform.

Except it hasn't quite happened like that:

And as Google Play store approaches the million-app mark, it starts to overtake the iTunes App Store in terms of size (yes I know appstore quantity is no guide to quality… but you get the point).

In short: The fragmentation threat has been consistently overstated by commentators and analysts. It hasn't held back Android growth. It hasn’t stopped big-name apps from being available on Google Play. And, in my experience, it hasn’t really affected the end user.

Three myths about Android fragmentation

Myth 1 - The Android base is hopelessly fragmented

• Remember the law of large numbers: The chart above left shows how Android version fragmentation is most frequently presented. It looks pretty bleak. Slow adoption of each successive Android version keeps the base in a state of continual fragmentation.  BUT, if you rebase it in absolute terms (chart above right) the picture is actually far less bleak. Six months in, Android 4.1 may still only be 10% of the market, but that represents 60m devices. In contrast at this stage in its cycle Android 2.0/2.1 30% market share… but that was only 4m devices. Remember - it isn’t the relative fragmentation which drives app developer economics – it’s the absolute size of the addressable market. While this market might not be as big as the iOS market (yet), its certainly more than worth the effort.

• As the platform matures, change (and fragmentation) slows: Also as Android matures the differences between different versions become less and less. While the UI skin changes and services get added on, the rate of fundamental change starts to slow down, lessening the burdens for developers. It’s interesting to note that people tend to lump ICS and Jelly Bean together when they talk about the Android installed base. It’s not just version number semantics – 4.2 was definitely more of an evolutionary change. 

Myth 2 - Developing on Android is an insurmountable technical challenge

Actually this is partially correct. Because you have to test against a number of different devices, Android is harder to develop for – even big mobile houses like as Gameloft will admit this. It’s no surprise that cool new apps such as Recce or Flipperdiet (a cute attempt by an ex- competitor of mine to gamify your snacking urges) come out first on iOS and often stay on iOS. Particularly given that iOS users spend so much more on apps per head. However once you start to get to larger scale apps that logic starts to fall apart:

• The Android burden becomes a hygiene factor for bigger devs: If you look at the top-ten lists on the iTunes and Google app stores they are dominated by the same old names. Zyngha, Gameloft, EA, Rovio et al. For these guys the hassle of developing Android isn’t really a barrier – given their resources its more of a hygiene factor. And it actually becomes a competitive advantage to develop on Android given smaller startup competitors will struggle to get their apps to work on the platform.
• Better tools help: As the Android development market matures we are also seeing increasingly better software tools. Cross-platform development tools will only get better, and more importantly we are seeing increasingly sophisticated testing tools to address the device compatibility issue. For example Keynote’s Deviceanywhere package gives you a virtual sandbox which allows you to test against virtual devices – its not as if you literally need to have dozens of handset lying around your office to do your testing.
• Samsung and Mediatek provide consistent platforms: As the Android market matures it is consolidating. This also helps fragmentation. At the high end the rise of Samsung means that its Galaxy phones are the dominant platform – ensure compatibility with Samsung’s top half-dozen platforms and you will have the vast majority of the wallet-share sewn up. At the low-end Mediatek solutions are powering hundreds of low end (and sometimes less low-end devices. Again while technically there is massive device proliferation – actually the guts of these will be increasingly similar and easier to test against.
• Screen size frag is overrated: Also note that concerns around screen size fragmentation have always been overblown. From the start Android has pushed developers towards resolution-independent scaling. I’ve used Android devices with screen sizes of 2.5”, 3.0”, 3.7” and 4.0” and you know what? Temple Run scales nicely across all of them. (Side note: iOS has also always had similar capabilities, but as iOS screen sizes much less fragmented the functionality was much less used by devs. I suspect this has been one of the factors holding them back from moving to larger portrait form-factors; the iPhone 5’s stretched widescreen on the iPhone 5 feels like a kludge designed to ensure backward compatibility with a non-scalable legacy apps base.)
• The move to webapps gets around many of these issues: I’m not going to labour this point – HTML5 webapps have so far flattered to deceive. But if webapps (or websites repackaged as apps) do ever up their game this circumvents much of the burden of native app development. 

Myth 3 - There is no money in the Android ecosystem

Again there is a lot of truth to this argument. Spending per user for Android remains stubbornly low. Can’t be much money to be made there.

However if you believe that then I think you are wrong:

• The economics change for larger developers: Once you get to scale the arithmetic around Android users spending is less of a barrier. Remember the economics become different as you scale on a fixed cost base. Remember if you are a start-up developer then whether you’re 100 paying customers give you ten bucks or one buck matters. If you have a 100,000 users and you’ve covered your fixed cost base, then an additional Android users is equally as profitable as an additional iOS user; sure on a per-user basis they’re not as profitable but the marginal profitability is the same. Sure if the sales & marketing spend on Android and iOS users is segmented this would impact profitability, but my suspicion is at the mass-market level the S&M overhead blurs into one.
• The rise of freemium changes the game: Closely related to the large dev issue is the rise of the freemium model for apps, particularly games (most notably the recent Real Racing 3). Remember the freemium model works by blooting out the largest possible install base, and relying on a very small proportion of them to convert to paying customers. If its customer volume’s you are chasing, then the Android market is one you cannot ignore. Remember, in the freemium world every penny counts…



Vertu's Android launch shows iPhone users aren't the only
people with more money than sense...

• Barbell economics: For a start, mix ignores the profitable (and growing) high-end segment). Yes the average spend per Android user is low – this is due largely to the mix being skewed towards he low-end and emerging markets. However the success (and dare I say it, increasing dominance) of the Galaxy S devices means that there is also a significant – and growing – high end installed base who have just as much disposable income as an iPhone user. In short I suspect the Android installed base looks like a barbell in economic terms – on average the average spend looks bad but there’s actually a lot of wallet-share to go for in the top-20% (which are largely concentrated on a small number of devices – viz consolidation/testing point above).
• Profitability is a backward-looking indicator: The big-walleted iPhone/small walleted Android argument is also making an implicit point: That we should assess the future prospects of an ecosystem via its profitability (iOS 70% profit share good: Android (or shall we say Samsung) 30% profit share bad). In reality, profitability gives a good view of the current situation in the market but is a terrible guide to its future profitability. After all Nokia remained the dominant player by profit share for years after its decline was apparent.

To conclude, I’m not saying fragmentation doesn’t exist. And I’m not denying it’s a PITA for all those app devs out there. What I am saying is that, contrary to what the commentariat think, it hasn’t held back Android in the past, and I doubt it will in the future.

Postscript: Two (better) arguments why fragmentation will remain an issue

As I hope I’ve shown, the empirical evidence shows the fragmentation problem has been significantly overstated, and the situation is only likely to improve. Does this mean we stop talking about fragmentation? I suspect not, and think there are two (better) reasons why fragmentation will remain on people’s minds, even if it isn’t the killer issue:

Fragmentation is a weapon Google can use against Android forks

The biggest threat to the survival of Android isn’t actually iOS. Its Android itself. As vendors such as Amazon, Baidu (or maybe one day Samsung…) fork the OS, they can take advantage of the massive app ecosystem, but cut out Google’s online services (and ad dollars). One obvious tool to combat this is by adding new features to Android which break backward compatibility with older forked versions. This doesn’t kill the competition, but it slows it down (e.g. the Kindle Fire tends to be based on a version of Android which is roughly a year old).

Fragmentation means security holes remain unpatched

The biggest issue with fragmentation isn’t actually app compatibility, it’s system security. Outside of Google’s flagship Nexus devices, system updates tend to be relatively slow in coming which means critical security vulnerabilities remain unpatched. As more and more personal data is loaded onto mobile devices this is an increasing weakness versus iOS, where Apple can roll out patches across the majority of the installed base relatively quickly. Stuxnet for legacy Android devices anyone?

Disclaimer: The views, opinions, projections and / or forecasts expressed in this blog are personal to the author and do not necessarily represent the views, opinions, projections or forecasts of any organisation the author is working for or associated with.

iWatch - Magic Bullet or Red Herring?

Is it leaking outside?

It's started.

For those unfamiliar with Apple's media-seeding strategy, it goes something like this: Persons familiar with the situation (but who cannot be named) (but who know a bloke called Tim) (who's last name rhymes with Book) ring up selected journalists. Said journalists can be trusted (to know which way the bread is buttered) (and not to reveal their sources). Lo and behold stories appear in trusted East Coast broadsheets and the Google Trends start to spike.

Feel like you're being manipulated? Yeah, I know. But it allows Apple to build a bit of buzz, prep the market for the big reveal and (if it all goes tits up) kill the project and claim it was never there in the first place.

Anyhow here we go again. Those persons familiar with the situation have been out in force at the NY Times, WSJ and good old Bloomberg (who also were recently consecrated with a multi-page interview with a bloke called Tim who's name rhymes with Book. Coincidence?).

Why an iWatch is likely

So it sounds more likely than not we'll see an iWatch trot along, either this year or next. The alternative theory is that this is just an elaborate conspiracy to spike Samsung's wheels. Personally I've always been a fan of Occam's Razor and Sherlock Holmes. A few things occur to me:

1. 

   Creative Nomad Jukebox: What
   the iPod saved us from

   It's Apple's style to disrupt the pioneers: Its very much Apple's style to allow lesser powers (Pebble; Nike) to pioneer a new form factor before crashing the party with something altogether better. Before the iPod there was the Creative Nomad Jukebox. Before the iPhone there was the Sony Ericsson P800. Before the iPad there was the netbook (hey don't knock it; my Dell Mini 9 is still doing sterling service dual booting into Snow Leopard and Windows 7).
2. Carrying on where the Nano left off: As people noted last year, it was curious that they respun last year's Nano back towards a mini-iPhone form factor, just as the wearable Nano/smartwatch/Pebble hype was just taking off. In the same way Apple ran with it when jailbroken apps on the original iPhone took off, you'd have thought they'd run with obvious user interest in an iPod Watch. Either Apple had completely lost track of what people want (possible. 4.7 inch AMOLED anyone?) Or they had something better up their sleeve.
3. Plays to Apple' strengths in the war against Samsung: Finally I think an iWatch is a smart tactical move in the war against Samsung. This is because aesthetics matter a lot more for a watch than a phone. A smartphone spends most of the day either in your pocket or in use (where it looks like like every other rectangular screen). In contrast a watch actually has to hang out there on your wrist all day doing little else apart from looking cool and watch-like. That plays to Apple's strengths because Apple digs aesthetics (check out the jewel-like chamfering on the white iPhone 5 is you disagree) whilst Samsung's designs, frankly, suck.

But even if (or when) the iWatch lands I'm not convinced its the answer to Apples woes (I say "woes" of course in a relative sense. $21bn of quarterly post-capex free cashflow generation is a problem I'd certainly like to have!). As I see it there are pack of challenges facing iWatch the device and Apple the stock which the laudatory blogistas haven't properly thought through.

I divide this challenges into two categories: the Ergonomic and the Economic.

The Ergonomic Hurdles: What do you do with a moving postage stamp?

1) Screen size is a real usability challenge
Screen real estate is an obvious challenge with a watch. One thing I've noticed - below a certain screen size touchscreen devices don't work properly. A good example is my Xperia x10 Mini. I bought it on a whim precisely because of the extreme cuteness of a fully fledged Android device with a teeny 2.5 inch screen (despite the fact it shipped on Android 1.6 ugh). But in practice that screen size just isn't practical to handle fat fingers and leave room to see what's going on. 3"+ was the way to go.

The Streetpilot i2 - where's that
turn meant to be again???

Similarly in the early days of the satnav revolution vendors played around with a bunch of different screensizes. One potential game-changer was the Garmin Streetpilot i2 which came in at the fabulously low MSRP of $321 (don't laugh. Satnavs were expensive in those days!). The catch was that it packed a minuscule 2.5 inch screen. But while satnavs with 3" screens went like hotcakes, the poor i2 just didn't sell. Of course a satnav isn't a watch, but the lesson was consumer had a very big usability issue once you went below the 3" form factor.

Going back to the 2010 iPod Nano (the one that looks like
 a postage stamp) you see that screen limits usability. After a promising start (fitness apps! cool watch faces!) little was heard of its potential since that. Sure Apple's energy was devoted on pushing the iOS platform, but you couldn't help but feel they sort of ran out of thinks to do with that 240x240 screen.

Now you could argue these devices are all slightly different form factors and use cases from an iWatch, but the fundamental issue that there is a massive limitation on utility when you get to what is basically a moving postage stamp.

2) Touch input is a bottleneck

This is compounded if you make it a touch screen. Stick a fat finger on top and the viewable space of the postage stamp is basically wiped out. Think about the geometry of the piece - Apple's standard UI guidelines defines a landing spot of 44 by 44 points - roughly 6.9mm square on a iPhone 5. But while you have over 84 possible points of interaction on an iPhone (and over 588 on an iPad) you only have 25 on an 1.5" square watch face.

The fundamental issue is that the screen becomes a bottleneck for both input and output.

3) And I'm not convinced voice (or its users) are ready to pick up the slack

Now you can try to address this with speech-based input but again I think you have a pretty fundamental barrier that people just do not feel comfortable with voice control. It may be a cultural thing but talk out loud to nothingness feels just… weird (how many times have you smirked at the guy in the suit having a concall via Blackberry in the middle of the street?). And that’s before you get into the raft of other issues around background noise, on-device voice processing, foreign languages, regional accents and suchlike.

I suspect – as with the Pebble – simple buttons are the correct input mechanism – but with a corresponding decrease in utility (unless Apple can convince everyone to learn Morse Code?).

4) Horsepower and battery life

With any device there is a trade-off between physical size, compute power and battery life. Normally you can have any one being great, any two being okay or all three being mediocre. The problem is a smartwatch needs both physical size (teeny) and battery life (how often are you used to changing your watch battery?) to be in the "Great" category. With the current state of technology its hard to fit all of that and decent horsepower into the iWatch form factor. Maybe this may change in the future when we get octo-core Cortex A-5s running on 10nm, but that's still some way off.

The likely solutions is that the iWatch will be tightly integrated into your existing iPhone or iPad (likely be low-power Bluetooth), so will shift a lot of the processing horsepower over to the paired device. But that still leaves you with something of a battery challenge if you're benchmarking against current watch tech, and it also opens up a pack of other issues around your addressible market (see Constrained Market chat below).

To sum up the ergonomic hurdles: If the iWatch is going to be anything more than a glorified Bluetooth headset, its facing some pretty fundamental physical constraints. Maybe the geniuses at Cupertino can invent their way round these ones, but it’s a tough ask.

The Economic Hurdles: The Law of Large Numbers

Then there are the economic considerations. In short – the iWatch is not going to save Apple’s share price.

Apple's share price vs. LTM EPS - the shares have been driven by earnings upgrades, not multiple expansion

Let’s rewind a bit. AAPL has always been driven earnings momentum. Even in its glory years it never traded on the heady earnings multiple of, say, a Salesforce.com. Low teens ex-cash P/E at best. What really drove the shares were constant earnings upgrades. The company sold more stuff than people thought it would; its shares became worth more than people thought they were. Not rocket science.

Revenue growth and the law of large numbers...

Of course now Apple is a victim of its own success. As the revenue line gets bigger and bigger,  Apple must find more and more new revenue to keep the growth rate standing still. Inevitably the law of large numbers starts to take hold, at the expense of the growth rate.

So as Apple gets bigger the next big product cycle needs to have a correspondingly greater revenue contribution to drive earnings (and the share price). Apple not only needs to find the next big thing every 2-3 years - the next big thing also needs to be bigger than the last big thing.

Astute and highly educated observers will note that none of this is rocket science. I'll tell you a secret - with these sort of stocks it rarely is.

1) An iWatch is Deflationary

The problem is that recent product launches have been deflationary, not inflationary.

An iPhone starts at $649 (lets not kid ourselves with the subsidies – you’re paying full whack for it either upfront or over the next twenty months).
An iPad starts at $399
An iPad Mini at $329

But how much would you pay for a watch?

My bet is it won’t be $649, or even $329 (not it you want it to sell in volumes). The sweet spot for something like a smartwatch is more like $99 or what Logitech used to call the “don’t need to ask your spouse price point”. Nike SportWatches go for $149 and Garmin's Forerunners for $130 - nothing like what you'd even get for an iPad Mini.

So an iWatch is likely to be deflationary. But there’s more.

2) An iWatch is selling into a Declining market

There's an App for that.

How many people actually use a watch nowadays? A lot less than a few years ago I think. Now there may be aesthetic reasons to buy a watch, particularly at the high end. But for the majority of use cases a watch feels like a classic case of an obsolete appliance.

Its original purpose in life was to be a device you kept on you all the time which could tell you the time and had an alarm on. Well that’s pretty much covered by any dumbphone you care to mention. Okay you can’t attach your phone to your wrist, but I’ve gotten by without a watch for a decade and a half now, and it doesn’t seem to have done me any harm.

It strikes me that if you’re going to launch a new product, you launch it into a market that’s growing, not one that’s structurally declining. Again note Apple need to sell a lot of these (especially given the lower price point) to fill the growth hole left by the maturing iPhone/iPad cycle. (Side note: Perhaps I am making a category error here as an iWatch isn’t a classic watch as in “wrist-mounted time and alarm appliance”).

3) An iWatch is selling into a Constrained market

The last problem is that if feels like to get the most from an iWatch it would need to be closely paired with a corresponding iOS device (see commentary about ergonomics above). That’s all well and good, apart from the fact that the majority of smartphone users aren’t on iOS devices - they’re on Android. And that gap will only widen going forward.

Anyone who's tried to use the train-wreck that is the iTunes Windows client will know that if there's one thing Apple hate's its playing ball with rival ecosystems! Chances of you accessing the full functionality of an iWatch from a Nexus device? Somewhere between zero and nil.

But the flip-side of this is that Apple is likely to be constrained its target market to existing iOS users. In itself that’s fine. I’m sure they will get a great product and a great services (and iOS users have big wallest). But again, remember the law of large numbers and the need to fill that revenue hole - limiting your target market really doesn't help.

To sum up the economic hurdles: If you’re selling a deflationary device in a declining category into an externally-constrained target market, that’s going to be a tough ask.

What Apple really needs

Of course as I mentioned above, much of this is something of a red herring. The issue isn’t whether Apple can do a watch per se (it could as easily be a Smart Glasses, Smart Sweatband or Smart Bumbag, so long as you can get the screen bendy enough).

The issue is whether Apple can/should do a wearable computing device, and whether they can succeed.

That is much more interesting debate

I was having a conversation this week about what the USP of wearable computing really is. To me it comes down to one thing: Context.

• Walking into a meeting room and meeting a strange new client isn’t useful. Walking into a meeting room and seeing his Linkedin profile along with college and job history pop up on your smartwatch/glass/sweatband is.
• Walking past a shop and seeing it sells stuff isn’t useful. Walking past a shop and seeing a wiki pop up saying it has a world class reputation for crispy cooked pork products is (to me) massively enticing.
• Checking out the bus stop across the street and seeing no buses isn’t useful. Checking out the bus-stop and hearing a voice in your ear that a bus which takes you home will pop up in two minutes is.

For more its worth checking out the hands-on with Google Glass which The Verge put up last week. Google have clearly been grappling with many of the ergonomic issues I've touched on is this post, but come to a radically better (and better-designed) solution.

To me the value of any wearable compute device isn’t the device itself, it’s the ability to supply context to the physical world around you – this is the true value-add of wearable compute. As a professional analyst, data on its own is meaningless. But data with context is valuable beyond price.

To me Google Now feels like the service making the most (baby) steps in that direction. Given Apple’s lamentable record in connected services I think they still have plenty of catching up to do. As I highlighted in my last post, they are really suffering from relying on third parties for connected services rather than doing this in-house. To me an iWatch will do nothing to plug the gaping hole in Apple's arsenal. They can do better than this.


Disclaimer: The views, opinions, projections and / or forecasts expressed in this blog are personal to the author and do not necessarily represent the views, opinions, projections or forecasts of any organisation the author is working for or associated with.

Opening new Windows: Revisiting the Consumer Stack Wars

Opening new windows

I took the plunge last weekend, and upgraded my two home machines (homebrew desktop and Alienware m11x to Windows 8). They've had three months now to iron out driver support and the imminent expiry of the £25 upgrade offer was a great incentive to take the plunge.

Very impressive.

Once you get your head round the idea that "Start Menu" has become "Start Screen", the big change in UI isn't that big a deal. Okay the parallel worlds of Desktop and Metro are a bit jarring, but given I flit daily between Android phone, iPad*, Windoze Desktop and Sony PS3 (and its BBC iPlayer client), I doubt one more UX paradigm will make my head explode. And yes irony of an OS called Windows doing its best to do away with windows hasn't been lost on me.

To me the biggest change though was Microsoft move from being a software vendor to a service provider.

What I mean is this: In the past Windows was what you called a "hygiene factor". You had to endure it to get anything done (Warren Buffet called it a “royalty on communication”) but once you'd fired up Word/Quark/Photoshop it did the best to get out of the way (save for a few cruddy DDE/OLE links). Most people used Windows in spite of the OS, not because of it.

In contrast while Windows 8 still does all that, what really stands out is the deep integration with Microsoft's array of online services... from Dropbox to Hotmail/Outlook to Bing Search and Bing Maps. And while these don't Google's level of pervasive awesomeness, you know what? They ain't bad.

What the OS becomes is a platform which helps plug these services into your day-to-day workflow. This means you use Windows because of the services.

Now that's not new. As I said, Google have long pioneered online services, and Apple has been increasingly weaving services like iCloud (and Facebook) into iOS and OSX. But I don't think anyone's managed to combine the two in a consistent desktop (and don't forget mobile) experience like Windows 8 does. Take the guy behind it and give him a medal folks.

Ulp, that would be Steve Sinofsky then. Oh well! :-x

Stack Wars - Consumer Edition

Now that all got me thinking about the current state of the consumer ecosystems. One thing that's struck me over the last year or so is how much the big consumer giants - Apple, Google, Microsoft, Facebook and Amazon are converging from different directions. They each aspire to offer a consistent stack of applications and services which we use to run (or as a cynic say, which run) our lives. They are coming at it from different directions - Apple from a hardware world, Google by way of online services, Amazon from online retailing for example. But they are all getting to much the same place.

This reminds me a lot of how enterprise IT has evolved over the past ten years, with a fragmented landscape coalescing into a series of Oracle/ SAP / IBM -owned vertical stacks. Something I highlighted in this chart:

I wondered if you couldn't do the same exercise for consumer-land. Now as I’ve written about in the past, there are many differences between enterprise and consumer IT. The product offerings are far more fluid - whole categories can vanish overnight (HELLO FLIP VIDEO), something unlikely to happen in the hidebound world of the enterprise stack. Nonetheless I thought it would be a fun exercise.

Here's what I came up with (click on chart to zoom in):

This chart shows the consumer offerings of the big tech giants side-by-side:

• Blue shows products developed in-house by the big guys.
• Red are independently-owned solutions (in a separate bucket to the side, or  in the stack if a vendor has co-opted them into their ecosystem.
• Darker shading show what I consider are the stronger or market-leading products (let's be clear this is a subjective ranking!). Lighter shading denotes weaker or nascent products.
• I only use existing product categories (no social-media-enabled-context-aware-internet-fridges for example!), preferably ones where at least two of the stack giants have credible offerings.
• I've probably missed out a bunch of stuff. And it'll be outdated by tomorrow I have no doubt.
• One fault - gives equal weighting to all categories (for the truly nerdy there’s an even more comprehensive version here which lists some of the more obscure categories like RSS readers and ticketing apps). Underlying file is at this link.

How the Chips Fall

Anyhow despite the obvious deficiencies I think it’s quite a fun analysis (and one I haven’t seen in this form elsewhere). Here’s a few thoughts on how the biggies stack up.

APPLE have the strongest basic hardware/OS stack and only Amazon can match them in the range of Content Consumption offers they provide. However if you look at the middle category – mobile services – there is a yawning gap. Again and again they are depending on partners (TomTom, Facebook, Twitter, Wolfram Alpha) to fill gaps in their portfolio. In-house offerings like iMessage, Facetime and iAds suffer from being tied to Apple’s walled garden (the point of a mobile service is that you can access it anywhere, not just on a certain brand of silvery aluminium boxes).

Apple’s greatest Achilles heel, in my mind, is its reliance on the sale of hardware to monitise its products. This is particularly apparent now as its core hardware business comes under threat from fast-followers such as Samsung. As this revenue stream comes under threat it needs to up its game in services. But being reliant on partners restricts its ability to integrate and its flexibility to bring news offerings to market.

PS for a quick anecdote on how sucky Apple's cloud services really are see the footnote at the end of this article.

MICROSOFT in contrast surprised me by how strong they are in the online services layer. As I mentioned at the beginning the greatest strength of Windows 8 is how well it integrates online services throughout the OS (as opposed to Apple kludging Twitter and Facebook into ?Mountain Lion). For sure the hardware (at least on the mobile side) is incredibly weak (convertible-back-flipping-Windows-8-multi-touch detachable tablet anyone?) and the Content Consumption offerings remain underdeveloped (their Xbox Music Spotify clone is interesting though).

But the point is that for the last few years Microsoft have quietly been getting everything right in online services. If you want any more evidence of this, then Google’s recent (dare I say it, Slightly Evil) attempts to kill ActiveSync support and lack of Metro apps show how seriously they are taking this threat. Make no mistake, MSFT’s moves to herd Windows 8 / Office 2013 users into a Live.com / Skydrive driven online garden is the biggest challenge out there to Google’s online bear-hug.

GOOGLE still remain, of course, the one to beat in online services. I’ve writing this on Blogger having drafted early versions on my Android phone (a keyboard-equipped Xperia Mini Pro, thank goodness) and shuffled the Consumer Stack Chart in and out Google Drive and Google Docs for several weeks. Android is now the dominant hardware platform (as I wrote last year, Google are winning the battle for installed base war by a country mile).

However where they falter is in the Content Consumption market. Youtube is an everyday essential but other than that their music and video offerings come a poor third to the juggernauts of iTunes and Amazon. Their heart just doesn’t feel in it.

Not a charge that could be levelled at AMAZON of course. Jeff Bezos’ incredibly focus on Selling You Stuff shows in their incredibly strong position with music, video and e-books. But look further down the chart and you see there is a gaping hole on the online services side. Sure the whole point of the Kindle Fire is not to distract users from the essential job of Buying Stuff From Jeff, but my suspicion is that as the e-reader/media device evolves from an Appliance to a General Compute Device, this gap will become more and more evident.

FACEBOOK is the mirror image of Amazon (Hey! Let’s play Fantasy M&A! Wouldn’t it be a good idea of FB and AMZN merged? :-p). They are excellent at online services (as long as it’s within their walled garden) but sorely lacking must-buy content and utterly dependent any everyone else’s hardware platforms. Despite their much-hyped ventures into Graph Search and Open Graph, their app platform remains sorely underdeveloped.

To finish up a few more general/random points:

• The basic app platform is the most competitive area: The area where most vendors have (or at least try to have) competitive offerings is the basic app platform – the OS and the shared services and APIs around them. Remember – the holy grail of any technology vendor is to own the platform; the current state of affairs reflects that. Of course, that’s bad news for anyone trying to break into the platform game – particularly if you don’t have the other bits of the ecosystem. Blackberry 10 springs to mind.
• Disruptions – new categories: As I said I only use existing categories, so the current state of play is vulnerable to a new game-changing category (or one of the minor categories suddenly exploding). Obvious Smart TVs and Wearable Computing are the examples which fall into the latter bucket.
• Disruptions – taking over existing categories: The other way the chart could be extended is if these stacks branch out into adjacent categories (as opposed to creating new, high growth ones). The area that obviously springs to mind is infrastructure – either data networks (Google Fiber) or physical fulfilment/logistics. They day any of these guys figure out same-day fulfilment of online orders is going to be a black day for the High Street.
• M&A: The other thing this chart highlights is where are the gaps that need to be filled. Looking at the original enterprise stack the startling thing is the number of independent vendors who got bought out over the years. Looking at the consumer stack several areas stand out. Online movies is an area where Netflix looks like a valuable asset to anyone but Amazon (give or take whether studios will still licence content to it under new ownership). Mapping and location-based services are where Apple and to a lesser degree Amazon and Facebook need to up their game – I’ve already highlighted TomTom as a potential target. Location-based content – either imagery or listings – is another area where everyone apart from Google is playing catch-up. Part of Apple’s Maps problem is that they are relying on (unreliable) third parties for data.

Footnote: #Applecloudfail

My jailbroken, subtly reskinned and
crapware free iPad desktop...

* For anyone like me still stuck on the original iPad (or with a depreciated one lying around), I thoroughly recommend you take the plunge and jailbreak it. Given it no longer gets new versions of iOS there will no longer be an OS update which cuts off the jailbreak, and the ability to get rid of Apple's homescreen crapware (errr, empty Magazines folder anyone?) is worth the price of admission alone.

Interesting getting this screenshot off of my iPad onto my PC/Blogger was an epic in itself:

1. Take screengrab.
2. Go to iOS Photos App.
3. Try to share via email. Email client doesn't load. Maybe this is cos I don't have my email set up on the (crappy) iOS Mail app and prefer to use the (excellent) GMail app instead.
4. Try to copy and paste photo from iOS Photo App to iOS GMail app to email it. Email comes through blank.
5. Try to sync to Photostream - go to PC. Run iCloud client. Wait for photo to sync to PC Photostream folder. Nothing happens.
6. After a quick bit of Google realise that iCloud does not let you access photos on your photostream via the iCloud (or any other) website.
7. After about twenty minutes of fruitless mucking around I resorted to Tweeting a (lower res) version of the screenshot and picking it up from the Twitter website at the other end.

Sorry, what sort of "cloud" service doesn't allow for web access??? Overall a massive #applecloudservicesfail and a great example of why Google are spanking them in the critical middle area of the stack.

(Now I appreciate there is probably a perfectly easy solution that I've missed, but the whole point is a good consumer offering should be so intuitive you don't "miss" the obvious steps. I thought that making things stupidly easy to work was supposed to be one of Apple's fortes?)

Maybe they should hire Steve Sinofsky! :-p

Disclaimer: The views, opinions, projections and / or forecasts expressed in this blog are personal to the author and do not necessarily represent the views, opinions, projections or forecasts of any organisation the author is working for or associated with.

My Christmas Reading List (Tech, Politics, Conmen, Foodies...)

Amazon & Me

The Big Short

Let's not delude ourselves: Physical bookshops (and libraries) are toast. Now I love print books (I currently have 972 volumes, including 272 cookbooks) but the entire commercial structure of the print industry is going the way of the dodo. We can argue the toss about how e-books can't be fondled/are a licence not an heirloom/don't work on the beach, but the vast majority of industry profits come from the sort of low-brow high-volume SKUs which work great on e-book reader. Without them to prop up industry profits the rest of the ediface comes crashing down.

And if you want a great trade find a way to short Aussie booksellers. This is a highly-connected, English-speaking market with large urban concentrations where Amazon doesn't offer local distribution. When they finally get round to addressing this omission, Dymocks is going to get vapourised.

Stop, Look, Save For Later...

Of course smartphones only exacerbate the problem. When I see an interesting volume in a bookshop the first thing I do is flip up Amazon, check the price (its always cheaper) and Save For Later. Occasionally I might buy if its a small local bookshop (there used to be a great one in Islington, til it was slaughtered by Borders opening across the road. When Borders went bust I considered it poetic justice), but generally I see little point in conducting a Roger & Me style crusade to prop them up. The world is changing. Live with it.

Two big take-aways from this: 1) Enjoy your local bookstore while it lasts, 2) I get lots of random crap clogging up my Amazon Save For Later list.

I can't do much about #1, but I thought I'd share the love with #2:

For your consideration...

So here's a few suggestions that might appeal to readers of this blog. They mainly focus on interesting Tech, Business Models or good old fashioned Analysis.

I make no claims to originality (I reckon a third of my books are sourced from reviews in the FT or Economist) so some I'm sure crop up elsewhere. But if you are remotely curious about how the world works, I think you'll find something worth reading.

Note: I also thrown in a bunch of relevant reviews; for WSJ ones if you hit the firewall just re-Google the article title and you'll get a link which clicks through to the full review.

Makers: The New Industrial Revolution (Chris Anderson): I'm a sucker for 3D printing (sorry, additive manufacturing). As a school-kid I tinkered with freeware modelling programs like POVRay and Moray (IRTC RIP) and recently used Google Sketchup to model my new flat. I'm still waiting for the MakerBot to come down in price a bit, but I'm sure it'll get there. Unsurprisingly when Wired editor and Long Tail guru Chris Anderson came out with his take on the topic it went straight onto the list.

Nonetheless I feel I do need to offer a bullshit alert. Please note that this topic is now wildly overexposed (basically 3D Printing is this year's Big Data, which was last year's Cloud Computing). Also like all so-called "gurus", Anderson has a vested interest in selling you something; remember his Long-Tail schtick actually turned out to be complete BS. Enjoy, but with a pinch of salt. Reviews: Guarniad, Washington Post, Forbes.

What Money Can't Buy: The Moral Limits of Markets (Michael J. Sandel): I've been a fan of Michael Sandel since his Reith Lecture series back in 2009. Sandel is a Harvard-based political philosopher with a brilliant gift for public debate. His definitive lecture series Justice (now available online) takes what should be a pretty dry Ethics 101 course and turns it into a tour de force of public engagement. If you don't believe me hit the first episode, which introduces classic Utilitarianism by shoving fat men off bridges.

Which is a long way of saying that if you are remotely involved in the markets (and who isn't nowadays?), then you should read this book. His main aim is to address the misconception that in the modern world any good is a fungible, tradeable commodity (e.g. would allowing rich people to bid for liver transplants ensure an efficient market for resources??). So sort of a response to the Credit Crisis, but one which (thankfully) is never preachy or smug. His most telling insight is this: The act of buying or selling a good sometimes change the nature of the thing itself. If you bought yourself a Nobel Prize, it wouldn't be a Nobel Prize at all... Reviews: WSJ, Guarniad, NY Times.

The Art of the Sale: Learning From Masters About the Business of life (Philip Delves Broughton): I admit, this is the sort of book which looks like it should be confined to the "Self Help for Morons" section of the bookstore. Writer interviews lots of "great" salesmen (from a hedge fund titan to a Moroccan carpet seller), writes a recap and says "you too can unleash your inner salesman". I call it the Millionaire Mind School of Writing.

Except Philip Delves Broughton is an author who deserves more respect than that. He is an incisive right-wing commentator who wrote an excellent (first-hand) expose of Harvard Business School that attracted delightfully sniffy response from the Deputy Dean. So I'm very much inclined to give him the benefit of the doubt.

And anyhow his basic point is right - having worked with some great (and not so great) salespeople during my career I definitely agree that an ace seller is one of the best assets any business can have. Read and learn. Reviews: WSJ, Bloomberg, Economist.

The Mark Inside: A Perfect Swindle, A Cunning Revenge, And a Small History of the Big Con (Amy Reading): I've always had a soft spot for the long con. Partly due to watching too many box sets of Hustle, but partly because a lot of the psychological tricks employed by con artists are equal pitfalls for the investor (the polite term for this is "behavioural finance").

The book opens in 1919 with the story of Frank Norfleet, a Texan Rancher who was swindled out of $45,000 by a gang of conmen. However instead of crawling away to cry he begins a four-year crusade to pursue the gang across the nation. Into this, Reading interweaves the story of his quest with a history of con artists, and America's shifting attitudes towards speculation.

NB for more on behavioural finance I recommend James Montier's Little Book of Behavioural Investing. For more on the art of the con (and how it affects ComSec) check out Kevin Mitnick's The Art of Deception. Reviews: Businessweek, Fortune, USA Today.

Moneyball for Politicos/Foodies

One trend I've noticed in recent years is that Engineers are Taking Over the World (I should know. I'm married to one). By this I mean that a variety of industries previously run on a seat-of-pants basis have been transformed by the appliance of science.

You only have to look at how cooking has been transformed by "molecular gastronomy" as chefs stopped trusting in received wisdom and started analysing why food works and how they could do to push the boundaries. In sports the rise of Moneyball (somewhat over-hyped IMHO... did the Oakland A's ever win anything?) has gripped the public imagination. And in politics Nate Silver (who started off as a sports statistician) caused a massive stir in the recently election.

What ties these together is the application of solid analysis backed up by empirical data. This is used to overturn entrenched orthodoxies based on received wisdom and instinctive decision-making (in behavioural finance speak: they have been calling out heuristic fallacies). As a professional analyst, I approve:

The Signal and the Noise: The Art and Science of Prediction (Nate Silver): Like most intelligent observers, I got moderately addicted to Nate Silver's FiveThirtyEight blog during the Presidential Election. And as a career analyst I've always been fascinated by the unconscious biases which creep into our forecasts (analysts always extrapolate a smooth continuing trend, ironic as that's the one thing guaranteed not to happen!). Silver's book lays out philosophical approach to prediction, with math and juicy anecdotes. Black Swan with less poultry. Reviews: Economist, Washington Post, NY Times, WSJ.

Victory Lab: The Secret Science of Winning Campaigns (Sasha Issenberg): The recent Presidential election has been portrayed as the first "big data" election, but as Issenberg's book shows this was only the culmination of a century's quantifying how and what makes people vote. In effect he charts the history of data-mining in politics and how people developed the tools which allowed Obama to so precisely micro-target voters on Nov 6th.

Note it isn't only Dems who practice these arts. As Issenberg points out it was the Republicans who were buying ads on the Golf Channel in 2004 because Karl Rove's data told them golfers were more likely to support Bush than Kerry. This is a story of the small things which, put together make a big difference. In a nutshell, Moneyball for Wonks. Reviews: Washington Post, Fortune, New Yorker.

An Economist Get's Lunch: New Rules for Everyday Foodies (Tyler Cowen): If my penultimate book was Moneyball for Wonks, my last one is Freakonomics for Foodies. Cowen is an economist, junior chess-champion and food blogger - not surprisingly the book is a bit of a grab-bag of analysis and aphorism. Part of it is a potted history of how food in America got so bad (historical accidents, rather than commercialism actually). Part of it is an iconoclastic guide to where to find good food.

This bit of the book sounds the most fun. Apparently Pakistani restaurants with pictures of Mecca are a good bet as they are more likely to cater to natives (is this like not eating in Chinese restaurants full of gwailo?). American ;Cue is best enjoyed in small towns. Thai restaurants attached to motels are preferred. Locavores are also sharply  punctured (hear hear). Reviews: Spectator, WSJ, NY Times.

Full disclosure: I've chucked Amazon affiliate tags onto all the links above. Not because I am trying to make money (lifetime earnings from this blog are £3.30, but my wife wants £2.40 of that for her coffee budget), but because I'm curious about understanding how their monitisation engine works. But I thought I'd mention it.

A bunch of interesting Nasdaq companies (and a free lunch)

Where to find free food in the London's West End

For London-based investors the Nasdaq conference is a bi-annual ritual. Every six months the US exchange buses a clutch of its companies to London to hawk their wares to European investors. Morgan Stanley sponsor the event (usually in a swanky West-End hotel), and unlike the typical closed-door conference, its open to all.

The roster is a fascinating bunch. Its a slightly random grab-bag of small growthy names (often sending CEO or CFO) and grizzled old corporates (Microsoft are a long-standing fixture - thankfully they don't send the CEO!). It's a good intro to bigger names you always wanted to know more about, and mid-cap diamonds who rarely get airtime this side of the pond.

Anyhow, in aid of hunting down interesting companies and obtaining a free lunch (even twelve years after undergrad, there's still a dirty little part of me that believe "free food cannot be a bad thing"), I rocked along.

In no apparent order, some of the names:

The Good, the Bad and the Ugly *

Cadence

Cadence: Like playing Nethack with micron-scale transistors

A $1bn revenue software company operating in a fascinating little niche - software for designing silicon chips (with Ivy Bridge topping 1.4bn transistors, the taping out is all automated nowadays). One of those vertical app markets which gets lost in the noise around the ERP giants and cloud monsters. Two things which stood out:

1. The sector is now a quasi-duopoly with Synopsis (which one for the team by buying out erstwhile competitor Magma). Duopoly/oligopolies are great for pricing - doubly so in a high margin industry like software.
2. Licences are recognised ratably over the life of the a contract rather than being bunged through the P&L upfront (viz Autonomy and the wider issue of software companies pump licence numbers). This is highly unusual in an industry where high upfront licence growth = higher P/E rating = more valuable stock options. Investors benefit though as it means more visibility on sales (although the risk is people then start to ignore sales and trade the stock on bookings numbers). Apparently the reason they moved to this revenue recognition was that they got fed up with being tainted by the horrific volatility of semi industry spending (the only bit of tech where revenues can halve in a year and a company's share price can still go up!).

Windstream

Right. About ten minutes into this company's spiel alarm bells were going off BIG TIME. This company is a regional broadband provider which has gone on an M&A binge, done nine deals in since 2006 and taken revenues from $3.0bn to $6.2bn. All well and good. But over the same period cashflow per share has only gone from $1.45 to 1.48.

That screams "value destroying M&A" to me (not helped by their insistence "out acquisition strategy has not been random it's connected". Should this sort of be taken as read?). In their defence they claim cashflow has been chewed up by additional investment in Fiber-To-The-Tower but I'm not convinced. Funny how company's always insist next year's going to be better than this one.

A quick squiz at the annual report (key financials from F-33) tells me that last year this thing generated $526m of FCF and $968m of operating profit (please don't mention EBITDA. Unless you think cash for capex grows on trees). But remember that $558m of that operating profit was then chewed up by interest costs financing their M&A binge. And that's in a zero-rate environment - costs of financing can only go up from here.

Definitely got a bad feeling about this one.

Interdigital

My first real patent troll! Somewhat surprisingly CEO William Merritt didn't breath fire and brimstone across the stage or spend his time on the phone to his battery of attorneys.

To be fair I don't think these guys are a patent troll (polite term: Non-Practicing Entity) in the sense of an outfit which does no R&D, buys up patents and runs around suing people. They do conduct real R&D, but at the same time clearly do their damnedest to get it embedded into wireless standards so they can reap the benefits later (sometimes via litigation).

Taking a step back, its actually a beautiful business model. You've create a pot of past R&D and just sit back as the stupidities of the US patent system lets you run around collecting cash for doing absolutely nothing. I call it "End of Rainbow/Pot of Gold" business model. For example French TV-conglomerate (and perpetual restructurer) Technicolor has an aweseme video-patent business which mints an 80% operating margin and frequently accounts for over 100% of group profit.

The one catch is to make is sustainable you have to keep generating new patents. One funny at Interdigital - they claim they are filing 1,000 new patents a year, but only seem to have 200 engineers in the  "Innovation Lab". That sounds suspiciously low to me - the good thing is that patents take 3-5 years til they start contributing to revenue so if there's a revenue cliff it might be some time off.

Paychex

I think this picture sums up Paychex business model nicely...

On the subject of beautiful business models, I want to have this company's children. The model is really that great.

I've written before about the beauty of the software business model. Payment processing comes a close second - build a big data centre (fixed cost), throw millions of transactions through it (variable revenue), once you get to breakeven its a licence to print money. The trick Paychex have is to make the transactions they do something incredibly sticky which you have to do to pay the bills. That's exactly what they do - SME payroll.

The end result is an incredibly resilient 40%+ margin business which returns 80% of cash to shareholders and has not debt. I don't quite understand the no-debt thing as normally this sort of business (strong recurring cashflows) leverages its balance sheet to buggery in order to pump up the bottom line.

High returns often come from strong competitive moats - for Paychex they've been building the franchise for forty years, and specialising in the SME sector is a smart move because with customers only averaging $2000 /year takes longer for new entrants to gain scale and make money. This also works against them when trying to expand into new markets e.g. Germany.

You also have to pay for the quality. A back of fag packet calc puts the company on 18x FCF. But if (like me) you have a fascinating with great business models this is one.

NB ADP, their evil twin, were also presenting. Similar model, not quite as stellar margins. Interesting car dealership business on the side.

Stratasys

You say affordable... I say "heck you
you could fifty Nexus 7s for the cash!"

I saw my first running Makerbot last weekend, at the Wired pop-up store on Regent Street. It's a surprisingly slick device (especially given the original model looked like a kindergarten DIY project). I've wanted one for years - but am still waiting for the price/innovation curve to flatten out (translation: you can buy one if you want, but in 12 months there'll be another one twice as good for half the price. Why not wait). But hey, this thing can print an army of mecha dreadnoughts overnight. What's not to like about 3D printing?

Stratasys are the grungier end of 3D printing. With 40% market share they are the incumbent in a hot growth market. Guys like Makerbot grab the headlines but in real-world 3D printing these guys are the market leader - nice problem to have.

Of course the risk is that their patents have now expired, and they will need to be pretty quick on their feet to exploit new markets. I note the tagline when you search their website is "FDM, Fused Deposit Modelling, 3D Prototyping". They could clearly do with a bit of sexing-up! Also the cheapest box currently costs $9000 - they need to bring this down if they don't want to be disrupted. They claim their reseller channel is a competitive moat; I'm not sure. Also they don't seem to have a proprietary lock on consumables - that's a risk.

Other thoughts

• EVERYONE is banging on about big data (QlikTech, Informatica, NICE, Progress, even the uber-grungy ADP). Everyone's logic runs something like 1) As a software company we deal with data (duh). 2) If we're sneaky enough about definitions we can claim any data-set is "big". 3) Therefore we are a "Big Data Play" - can we have a bigger P/E multiple please? Free apple pie if you can spot the truism...
• Equinix still say they make 30-40% IRRs on investment. Quite quite amazing... While it lasts.
• Guerrino De Luca the Logitech CEO is still good value entertainment. Not sure if his core PC market is though...
• Micron were incredibly chirpy given they operate in a horrible commodity industry with no competitive moats or pricing power. Being a memory vendor is like having a job where you need to run in circles while being chased by an extremely hungry grizzly bear, hoping the time it takes dismember one of your competitors buys you some breathing space. Then again, as an extremely smart acquaintance pointed out, running a memory company also involves running in circles and pitching for balance sheet repair/refinancing every few years. So I guess they have to sound happy...

And as for that lunch...

Nice for the price...

Oh and the catering its a standard corporate hotplate buffet. Not bad actually - non-overcooked roast beef yesterday. Quite delicious herb-crusted cod today. Okay not a most egregious piece of corporate entertaining I've ever seen (I fondly remember a three hour client lunch at Nobu once which involved a brace of truffled lobsters), but perfectly adequate given the price point.

So yes there is such a thing as a free lunch.

Anyhow its always worth coming along next time the show's in town. Its always insanely difficult to hunt down the website but keep an eye on this website for next June.

* Note that along with "Acquisitions on the Agenda" (translation: "I think this company might buy something which makes the EPS go up"), "The Good, the Bad and the Ugly" is probably the most overused title for a research note. I make no claim to originality, so I make no apologies.