Monday, 25 February 2013

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).
    1. 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.
    2. 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 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.

    Sunday, 3 February 2013

    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 / 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.