mobile internet

What happened to the iPad?

 

On October 23rd, Apple announced the widely expected iPad mini. The company also surprised most by also introducing a faster “4th generation” iPad, swiftly replacing the one launched on March 7th this year, seven and a half months ago.
That same day, Tim Cook proudly proclaimed a an iPad milestone: 100 million shipped since its April 2010 debut. Impressive.
No less impressively, Wall Street analysts quickly did their subtractions and concluded Q4 iPad shipments — to be officially announced two days later — were going to miss expectations.
They were right.
Where seers expected somewhere between 15 and 16 million iPads, the actual Q4 number was 14 million. Using the Average Selling Price (ASP) we’ll discuss in a moment, a “miss” of 2 million units translates into more than $1B in missed revenue.

Compared to the 17 million iPads shipped in Q3 (ending in June), Q4′s 14 million units look like a steep decline. This isn’t in keeping with the fast growth the iPad had shown since its 2010 beginning. On a “Quarters After Launch” basis, the iPad used to grow faster than the iPhone. Now, we see a decline from the 15.4 million units shipped in Q1 (ending December 2011), and only a modest 26% increase from last year’s Q4. Where are the go-go days of 70% or even 100% year-to-year growth?
Two days later, at the October 25th Earnings Conference Call, Apple’s CEO tried to put a better face on that strangely anemic 26% growth. As noted by Horace Dediu, Tim Cook pointed to a different number: sell-thru, units actually delivered to customers, grew by 44%. Not great, but not as tepid as 26%.
(See Philip Ellmer-Dewitt’s detailed explanation here. In essence, when product ships, it “changes hands”: the channel partner “takes title”, meaning it moves from Apple’s books to the reseller’s. For Apple, the items thus shipped count as revenue, even if they’re not sold-thru, that is sold to end customers. When the volume of products Apple ships to retailers is less than the volume sold-thru, channel inventories decline, more sales out than shipments in. This is how Apple sees revenue go up by 26% while sell-thru increases by 44%. A likely explanation for last quarter’s depletion of channel inventory is making room for the two new iPad models.)
Resorting to sell-thru numbers as a way to put iPad numbers in a better light could be habit-forming, it could force Apple’s management to provide more detailed inventory numbers more regularly.
On the end-customer demand side, Apple execs attributed the low Q4 iPad number to several months of intense and detailed rumors ahead of the iPad mini launch.
So, the iPad story could look this: Last year, the yearly iPhone refresh moved from June to October; as a result, Q4 iPhone shipments disappointed; but fast growth resumed once the new model shipped; the pattern now applies to the iPad as well.

No, the iPhone and the iPad behave more differently than in the above scenario. I went back to SEC filings and extracted data for the following graph tracking iPhone and iPad ASP’s for the past eight quarters:

The iPhone ASP is stable. Carriers keep indulging in (wooden) saber-rattling, complaining about “excessive” iPhone subsidies. Here, subsidy means the difference between the price carriers pay for a handset and the typical end-user price: $199 for the phone with a two-year contract. In such a $199 arrangement, for the past five years, Apple has been able to extract more money from carriers than any of its competitors. Paraphrasing Horace Dediu, the explanation for such an enduring advantage is a simple one: For carriers, the iPhone is a better salesman, it generates more revenue, a higher ARPU (Average Revenue Per User). As a result, carriers pay the iPhone salesman a higher commission, meaning a higher handset price. (And they sound like the grouchy bosses who complain their star sales person makes too much money…)

For the iPad, there is no such arrangement, no two-year contract, no subsidy. For example, AT&T will sell an iPad with a no-commitment, month-to-month wireless data contract. Without a two-year commitment, carriers have no incentive to sell the iPad at a particularly attractive price, causing customers to face the price without a subsidy fig-leaf. (One might argue smartphone contracts lead customers to borrow money, the $400+ subsidy, at usurious rates, but such habits are hard to break. Rare is the carrier that will offer a cure, a lower monthly contract if you pay full price for the phone.)

How do iPad customers react to the cold price truth? All we know is the ASP has been falling for five quarters. And we can also surmise price figures more actively in competitive situations than it does with smartphones. Or, for that matter, with notebooks and desktop computers: ASP for Macs is stable or growing a little, from $1282 last year to $1344 last quarter. These prices don’t prevent Apple from being number one on desktops and notebooks in the US — as Tim Cook reminded everyone on October 23rd.

The surprise iPad refresh can be seen as a reaction to competitive pressures, existing or upcoming ones. And, for the iPad mini, we have an interesting combination: premium price and an avowed lower gross margin, ‘significantly below our cooperate average‘ says Apple’s CFO during the October 25th Earnings Conference Call.

The iPad definitely behaves differently, neither a bigger smartphone, nor a smaller PC, thus confirming it belongs to a new category whose rules are still being established. The next few quarters will be even more interesting than recent ones: Google, Amazon and Microsoft have new products worth watching, they all intend to fight for a dominant role in the new space.

JLG@mondaynote.com

Brand x Device = Reach

 

Combine the enduring strength of media brands with emerging mobility reading habits: the result could boost digital news.  

The equation in the headline is based on a simple, important fact: By and large, digital users still trust old news outlets. In the new world, media brands are far from dead, predictions of their extinction have been vastly exaggerated. In fact, we can see an opportunity for the new reading patterns seen in smartphone and tablet to provide welcome help to legacy media in their painful transition.

Last week, the Poynter Institute released interesting data Surveying Americans who define themselves as news consumers:
=> 53% get their primary digital news from web native outlets (Huffington Post, portals like Yahoo, AOL, or shallow verticals like Drudge or TMZ — the celebrity news-breaker).
=> 83% seek a secondary source for confirmation or amplification right after getting breaking news.
=> 60% do so by relying on established media brands such as the digital version of newspapers, TV networks, etc.

Let’s pause for a moment and reflect on the latest figure, the six-out-of-ten who go for the trusted brands.

Traditional media missed the train for digital breaking breaking news; this is barely a surprise. We know the factors only too well: newsrooms were too slow to catch the wave; publishers didn’t foresee the audience battle; they didn’t invest in relevant technologies, they got swamped in the battle of free vs. paid; they stayed fixated on avoiding cannibalization of the (dying) flagship product, newspapers, broadcast news, etc. In doing so, legacy outlets left an open field for more agile, less scrupulous, traffic-obsessed young ventures. The new entrants started with a blank slate which, indeed, cannibalized the old league thanks to their speed and ubiquity.

As a result, a new vulgate emerged: newcomers would eat “old” brands alive. They would do this by capturing every segment of news:  the “commodity” format (near-live news, same everywhere for everyone, and free); the sophisticated treatments (long forms, in-depth reporting, profile…). Pundits speculated the Yahoos and the Googles of the new Digital World Order would soon hire talent and build newsrooms giants from scratch.

Fact is: it didn’t happen. Some internet brands did a great job addressing niches in politics, society or business. But, broadly speaking, once the predictions dust settled, ancestral brands seems to have been able to salvage the quality part of their franchise. Unfortunately, this one is the costliest and the less audience-driving segment. The HuffPo might have a huge audience, its readers are essentially looking for snapshots of news. For serious complement, they go for the New York Times or the trusted brand of their preference.

As for social media, the Poynter survey reframes the debate in a rather blunt way:

Despite all the social sharing buttons littering news sites, the study finds the top methods of sharing news are still word of mouth and email. (See earlier:Limited use of sharing buttons Sharing buttons look “a little desperate“.)

Having said that, for the younger generation, social networks are a key source of primary news: 35% of the Generation Y, 23% of the Gen X and 11% of the Boomers find their news there. As they get older and better educated, they could, supposedly, rely more on traditional media.

Let’s now talk about the Grand Disruption, namely how the rise of the smartphone and tablet impacts the news. According to the Poynter survey, established media benefit more from mobile devices than web native sources do. It goes like this:

The prime reason is reader engagement. The Pew Research Center for the People and the Press, exposes this in two 90-page surveys : The Future of Mobile News, produced in collaboration withe the Economist Group (PDF here), and the Trends in News Consumption 1991-2012 (PDF here).
First, the 11-years evolution of how people “got their news yesterday”:

The rise of the mobile is obvious (So is the free fall of the newspaper.) According to the Pew survey:
=> Among smartphone users (44% of the US adults) : 62% get their news weekly and 36% daily.
=> Among tablet users (22% of the US adults): 64% get their news weekly and 37% daily.

In addition, numbers reveal a high level of engagement among tablet users:
=> 78% read more than one in-depth article during a sitting (nine times out of ten for personal interest).

… and the tablet appears to be a remarkable vector for serendipitous use:
=>  72% of users end up reading in-depth articles they were not initially looking for.

More broadly, the tablet format induces further reading:
=> 69% end up reading a full article after checking headlines.

And more than one device equals more time with news:


To close the loop, the Pew survey confirms the Poynter’s findings on the preeminence of trusted brands on mobile — and more specifically on tablets as 60% of tablet users read long form journalism from publications they regularly keep up with.

The tablet is indeed the next bing thing for media. Apple is no longer the only one (I put my hand on the €200 Google Nexus 7 and it’s an excellent product). The market is now poised for a real takeoff. The tablet is the most favored vector for more in-depth news — which is legacy media’s core value proposition. And since device and media both address the most solvent segment of the population, a sustainable model is bound to emerge.

frederic.filloux@mondaynote.com

 

Quartz: Interesting… and uncertain

 

Atlantic’s new digital venture named Quartz is aimed at global business people. It innovates in many radical ways, but its business model remains dicey.

Two years ago, Atlantic Media’s president Justin Smith was interviewed by the New York Times. The piece focused on the digital strategy he successfully executed:

“We imagined ourselves as a Silicon Valley venture-backed startup whose mission was to attack and disrupt The Atlantic. In essence, we brainstormed the question: What would we do if the goal was to aggressively cannibalize ourselves?”

In most media companies, that kind of statement would have launched a volley of rotten tomatoes. Atlantic’s disruptive strategy gave birth to a new offspring: Quartz (URL: qz.com), launched a couple of weeks ago.

Quartz is a fairly light operation based in New York and headed by Kevin Delaney, a former managing editor at the WSJ.com. Its staff of 25 was pulled together from great brands in business journalism: Bloomberg, The Wall Street Journal, The Economist and the New York Times. According to the site’s official introduction, this is a team with a record of reporting in 119 countries and speaking 19 languages. Not exactly your regular gang of digital serfs or unpaid contributors that most digital pure players are built on.

This professional maturity, along with the backing of the Atlantic Media Company, a 155 years-old organization, might explain the set of rather radical options that makes Quartz so interesting.

Here are a few:

Priority on mobile use. Quartz is the first of its kind to deliberately reverse the old hierarchy: first, traditional web (for PC), and mobile interfaces, second. This is becoming a big digital publishing debate as many of us strongly believe we should go for mobile first and design our services accordingly (I fall in that category).

Quartz founders mentioned market research showing their main target — people on the road interested in global economy — uses 4.21 mobiles devices on average (I love those decimals…): one laptop, one iPad, and two (!) Blackberrys. (Based on multiple observations, I’d rather say, one BB and one iPhone.)

No native mobile app. Similarly, Quartz went for an open HTML5 design instead of apps. We went through this before in the Monday Note. Apps are mandatory for CPU intensive features such as heavy graphics, 3D rendering and games. For news, HTML5 — as messy as it is — does the job just fine. In addition, Quartz relies on “responsive design”, one that allows a web site to dynamically morph in response to the specific connected device (captures are not to scale):

Here is how it looks on a desktop screen:

… on an iPad in landscape mode:

 

…on an iPad in portrait mode:

on a small tablet:

..on an iPhone:

and on a small phone:

(I used Matt Kerlsey Responsive Design Test Site to capture Quartz renderings, it’s an excellent tool to see how your site will look like on various devices).

A river-like visual structure. Quartz is an endless flow of stories that automatically load one below the other as you scroll down. The layout is therefore pretty straightforward: no page-jumps, no complicated navigational tools, just a lateral column with the latest headlines and the main windows where articles concatenate. Again, the priority given to mobile use dictates design purity.

A lightweight technical setup. Quartz does not rely on a complex Content Management System for its production but on WordPress. In doing so, it shows the level of sophistication reached by what started as a simple blog platform. Undoubtedly, the Quartz design team invested significant resources in finding the best WP developers, and the result speaks for itself (despite a few bugs, sure to be short-lived…).

Editorial choices. Instead of the traditional news “beats” (national, foreign, economy, science…), Quartz went boldly for what it calls “obsessions”. This triggered a heated debate among media pundits: among others, read C.W. Anderson piece What happens when news organizations move from “beats” to “obsessions”? on the Nieman Journalism Lab.  Admittedly, the notion of “beats” sounds a bit old-fashioned. Those who have managed newsrooms know beats encourages fiefdoms, fence-building and bureaucracy… Editors love them because they’re much simpler to manage on a day-to-day basis; editorial meetings can therefore be conducted on the basis of a rigid organizational chart; it’s much easier to deal with a beat reporter or his/her desk chief than with some fuzzy “obsession” leader. At Quartz, current “Obsessions” appear in a discreet toolbar. They includes China Slowdown, The Next Crisis, Modern States, Digital, Money, Consumer Class, Startups, etc.

To me, this “obsessive” way of approaching news is way more modern than the traditional “beat” mode. First, it conveys the notion of adjustability to news cycles as “obsessions” can — should — vary. Second, it breeds creativity and transversal treatments among writers (most business publications are quite boring precisely due to their “silo culture”.) Third, digital journalism is intrinsically prone to “obsession”, i.e. strong choices, angles, decisions. For sure, facts are sacred, but they are everywhere: when reporting about the last alarming report from the World Bank, there is no need to repeat what lies just one click away — just sum up the main facts, and link back to the original source! Still, this shouldn’t preclude balanced treatment, fairness and everything in the basic ethics formulary. (Having said that, let’s be realistic: managing a news flow through “obsessions” is fine for  an editorial staff of 20, certainly not so for hundreds of writers.)

Quartz business side. Quartz is a free publication. No paywall, no subscription, nothing. Very few ads either. Again, it opted for a decisive model by getting rid of the dumb banner. And it’s a good thing: traditional display advertising kills designs, crappy targeting practices irritate readers and bring less and less money. (Most news sites are now down to single digital digits in CPM [Cost Per Thousand page views], and it will get worse as ad exchanges keep gaining power, buying remnant inventories by the bulk and reselling those for nothing.) Instead, Quartz started with four sponsors:  Chevron, Boeing, Credit Suisse and Cadillac, all showing quality brand contents. It’s obviously too early to assess this strategy. But Quartz business people opted for being extremely selective in their choice of sponsors (one car-maker, one bank, etc.), with rates negotiated accordingly.

Two, brands are displayed prominently with embedded contents instead of usual formats. Quartz is obviously shooting for very high CPMs. At the very least, they are right to try. I recently meet a European newspaper that extracts €60 to €100 CPMs by tailoring ads and making special ads placements for a small list of advertisers.

Again: such strategy is fine for a relatively small operation: as it is now, Quartz should not burn more than $3-4M a year. Betting on high CPMs is way more difficult for large websites — but niches can be extremely profitable. (For more on Quartz economics, read Ken Doctor’s piece also on Nieman.)

To sum up, three elements will be key to Quartz’ success. 

1 . Quickly build a large audience. Selected advertisers are not philanthropists; they want eyeballs, too. Because of its editorial choices, Quartz will never attract HuffPo-like audiences. To put things in perspective, the Economist gets about 7M uniques browsers a month (much less unique visitors) and has 632,000 readers on its app.

2 . Quartz bets on foreign audiences (already 60% of the total). Fine. But doing so is extremely challenging. Take The Guardian: 60 million uniques visitors per month — one third in the UK, another in the US, and the rest abroad — a formidable journalistic firepower, and a mere £40m in revenue (versus $160m in advertising alone for the NYTimes.com with half of the Guardian’s audience, that’s a 5 to 1 ratio per reader.)

3 . Practically, it means Quartz will have to deploy the most advanced techniques to qualify its audience: it will be doomed if it is unable to tell its advertisers (more than four we hope) it can identify a cluster of readers traveling to Dubai more than twice a year, or another high income group living in London and primarily interested in luxury goods and services (see a previous Monday Note on extracting reader’s value through Big Data)

4 . In the end, Quartz is likely to face a growth question: staying in a niche or broadening its reach (and its content, and increasing its staff) to satisfy the ad market. Once its audience levels off, it might have no other choice than finding a way to make its readers pay. It should not be a problem as it focuses on a rather solvent segment.

frederic.filloux@mondaynote.com

Apple’s $30B Maps

 

A short week after releasing the iPhone 5, Apple’s CEO publicly apologizes for the Maps fiasco and the company’s website updates its description of the new service. As the digital inspirations blog found out, the unfortunately emphatic description that once read:

Designed by Apple from the ground up, Maps gives you turn-by-turn spoken directions, interactive 3D views, and the stunning Flyover feature. All of which may just make this app the most beautiful, powerful mapping service ever.

becomes more modest:

Designed by Apple from the ground up, Maps gives you turn-by-turn spoken directions, interactive 3D views, and the stunning Flyover feature. All in a beautiful vector-based interface that scales and zooms with ease.

In his letter of apology, Tim Cook also reminds everyone of alternatives to his company’s product, and of easy ways to access Google and Nokia maps:

While we’re improving Maps, you can try alternatives by downloading map apps from the App Store like Bing, MapQuest and Waze, or use Google or Nokia maps by going to their websites and creating an icon on your home screen to their web app.

And Consumer Reports, after trying the new Maps found that, warts and all, they weren’t too terrible:

Apple uses maps from TomTom, a leading navigation company. We suspect many criticisms pointing to the map quality are misguided, as we have found TomTom to provide quality maps and guidance across multiple platforms. Instead, the fault may be Apple’s software applied to the TomTom data. […] Either way, in our experience thus far, this is a minor concern.
Bottom line:
Both the free Apple and Google navigation apps provide clear routing directions. Apple feels like a less-mature product. But as seen with the initial competing applications for the iPhone, we would expect updates to this new app over time–and Apple has promised as much. When getting down to the nitty gritty, Google provides a better overall package, but we feel that both provide a good solution for standard software. We expect the competition between the companies will benefit customers with ongoing improvements.

So… Normal teething problems, forgivable excess of enthusiasm from proud Apple execs, the whole media fireworks will blow over and everything will be soon forgotten — remember Antennagate?

One would hope so, especially if Apple’s Maps keep improving at a good pace.

But look at this graph:

Since the iPhone 5 release, and the Maps fracas, Apple shares lost about 4.5% of their value, that’s about $30B in market cap.

Fair or not, it’s hard not to fantasize about another course of events where, in advance, a less apologetic Tim Cook letter would have told Apple customers of the “aspiring” state of Apple Maps and encouraged them to keep alternatives and workarounds in mind. And where Apple’s website would have been modest from day one.

We’ll never know how Apple shares would have behaved, but they certainly wouldn’t have gone lower than they stand now — and Apple’s reputation as a forthright, thoughtful company would have been greatly enhanced.

This is more than piling on, or crying over spilled maps. We might want to think what this whole doing the right thing — only when caught — says about Apple’s senior management.

First, the technical side. Software always ships with fresh bugs, some known, some not. In this case, it’s hard to believe the Maps team didn’t know about some of the most annoying warts. Did someone or some ones deliberately underplay known problems? Or did the team not know. And if so, why? Too broad a net to cast and catch the bugs? Too much secrecy before the launch? (But Maps were demoed at the June WWDC.)

Second, the marketing organization. This is where messages are crafted, products are positioned, claims are wordsmithed. Just like engineers are leery of marketeers manhandling their precious creations, marketing people tend to take engineers’ claims of crystalline purity with, at best, polite cynicism. One is left to wonder how such a hot issue, Apple Maps vs. Google Maps, wasn’t handled with more care — before the blowup. And why, with inevitable comparisons between an infant product and a mature, world-class one, the marketing message was so lackadaisically bombastic.

And last, the CEO. Was trust in his team misplaced, abused? Were the kind of checks that make Apple’s supply chain work so well also applied to the Maps product, or was some ill side-effect of team spirit at play, preventing the much-needed bad news to reach the top?

We don’t need to know. But Apple execs do if they want the difficult birth of Apple Maps to be written in history as a wake-up call that put the top team back on track. I don’t want to think about the alternative.

JLG@mondaynote.com

Apple Maps: Damned If You Do, Googled If You Don’t

While still a teenager, my youngest daughter was determined to take on the role of used car salesperson when we sold our old Chevy Tahoe. Her approach was impeccable: Before letting the prospective buyer so much as touch the car, she gave him a tour of its defects, the dent in the rear left fender, the slight tear in the passenger seat, the fussy rear window control. Only then did she lift the hood to reveal the pristine engine bay. She knew the old rule: Don’t let the customer discover the defects.

Pointing out the limitations of your product is a sign of strength, not weakness. I can’t fathom why Apple execs keep ignoring this simple prescription for a healthy relationship with their customers. Instead, we get tiresome boasting: …Apple designs Macs, the best personal computers in the worldwe [make] the best products on earth. This self-promotion violates another rule: Don’t go around telling everyone how good you are in the, uhm…kitchen; let those who have experienced your cookmanship do the bragging for you.

The ridicule that Apple has suffered following the introduction of the Maps application in iOS 6 is largely self-inflicted. The demo was flawless, 2D and 3D maps, turn-by-turn navigation, spectacular flyovers…but not a word from the stage about the app’s limitations, no self-deprecating wink, no admission that iOS Maps is an infant that needs to learn to crawl before walking, running, and ultimately lapping the frontrunner, Google Maps. Instead, we’re told that Apple’s Maps may be  “the most beautiful, powerful mapping service ever.

After the polished demo, the released product gets a good drubbing: the Falkland Islands are stripped of roads and towns, bridges and façades are bizarrely rendered, an imaginary airport is discovered in a field near Dublin.

Pageview-driven commenters do the expected. After having slammed the “boring” iPhone 5, they reversed course when preorders exceed previous records, and now they reverse course again when Maps shows a few warts.

Even Joe Nocera, an illustrious NYT writer, joins the chorus with a piece titled Has Apple Peaked? Note the question mark, a tired churnalistic device, the author hedging his bet in case the peak is higher still, lost in the clouds. The piece is worth reading for its clichés, hyperbole, and statements of the obvious: “unmitigated disaster”, “the canary in the coal mine”, and “Jobs isn’t there anymore”, tropes that appear in many Maps reviews.

(The implication that Jobs would have squelched Maps is misguided. I greatly miss Dear Leader but my admiration for his unsurpassed successes doesn’t obscure my recollection of his mistakes. The Cube, antennagate, Exchange For The Rest of Us [a.k.a MobileMe], the capricious skeuomorphic shelves and leather stitches… Both Siri — still far from reliable — and Maps were decisions Jobs made or endorsed.)

The hue and cry moved me to give iOS 6 Maps a try. Mercifully, my iPad updated by itself (or very nearly so) while I was busy untangling family affairs in Palma de Mallorca. A break in the action, I opened the Maps app and found old searches already in memory. The area around my Palma hotel was clean and detailed:

Similarly for my old Paris haunts:

The directions for my trip from the D10 Conference to my home in Palo Alto were accurate, and offered a choice of routes:

Yes, there are flaws. Deep inside rural France, iOS Maps is clearly lacking. Here’s Apple’s impression of the countryside:

…and Google’s:

Still, the problems didn’t seem that bad. Of course, the old YMMV saying applies: Your experience might be much worse than mine.

Re-reading Joe Nocera’s piece, I get the impression that he hasn’t actually tried Maps himself. Nor does he point out that you can still use Google Maps on an iPhone or iPad:

The process is dead-simple: Add maps.google.com as a Web App on your Home Screen and voilà, Google Maps without waiting for Google to come up with a native iOS app, or for Apple to approve it. Or you can try other mapping apps such as Navigon. Actually, I’m surprised to see so few people rejoice at the prospect of a challenger to Google’s de facto maps monopoly.

Not all bloggers have fallen for the “disaster” hysteria. In this Counternotions blog post,”Kontra”, who is also a learned and sardonic Twitterer, sees a measure of common sense and strategy on Apple’s part:

Q: Then why did Apple kick Google Maps off the iOS platform? Wouldn’t Apple have been better off offering Google Maps even while it was building its own map app? Shouldn’t Apple have waited?

A: Waited for what? For Google to strengthen its chokehold on a key iOS service? Apple has recognized the significance of mobile mapping and acquired several mapping companies, IP assets and talent in the last few years. Mapping is indeed one of the hardest of mobile services, involving physical terrestrial and aerial surveying, data acquisition, correction, tile making and layer upon layer of contextual info married to underlying data, all optimized to serve often under trying network conditions. Unfortunately, like dialect recognition or speech synthesis (think Siri), mapping is one of those technologies that can’t be fully incubated in a lab for a few years and unleashed on several hundred million users in more than a 100 countries in a “mature” state. Thousands of reports from individuals around the world, for example, have helped Google correct countless mapping failures over the last half decade. Without this public exposure and help in the field, a mobile mapping solution like Apple’s stands no chance.

And he makes a swipe at the handwringers:

Q: Does Apple have nothing but contempt for its users?

A: Yes, Apple’s evil. When Apple barred Flash from iOS, Flash was the best and only way to play .swf files. Apple’s video alternative, H.264, wasn’t nearly as widely used. Thus Apple’s solution was “inferior” and appeared to be against its own users’ interests. Sheer corporate greed! Trillion words have been written about just how misguided Apple was in denying its users the glory of Flash on iOS. Well, Flash is now dead on mobile. And yet the Earth’s obliquity of the ecliptic is still about 23.4°. We seemed to have survived that one.

For Apple, Maps is a strategic move. The Cupertino company doesn’t want to depend on a competitor for something as important as maps. The road (pardon the pun) will be long and tortuous, and it’s unfortunate that Apple has made the chase that much harder by failing to modulate its self-praise. but think of the number of times the company has been told You Have No Right To Do This…think smartphones, stores, processors, refusing to depend on Adobe’s Flash…

(As I finished writing this note, I found out Philip Ellmer-DeWitt also takes issue with Joe Nocera’s position and bromides in his Apple 2.0 post. And Brian Hall, in his trademark colorful style, also strongly disagrees with the NYT writer.)

Let’s just hope a fully mature Maps won’t take as long as it took to transform MobileMe into iCloud.

JLG@mondaynote.com

 

The Silly Web vs. Native Apps Debate

 

Mark Zuckerberg admits Facebook was wrong to bet on HTML5 for its mobile app. Indeed, while the previous version was a mere wrapper around HTML code, the latest iOS app is much improved, faster, nimbler. Facebook’s CEO courageously admits the error, changes course, and promises to ship an equally native Android app in the near future.

A fresh set of broadsides from the usual suspects predict, with equal fervor, the ultimate success/failure of HTML5/native apps. See, for example, Why Web Apps Will Crush Native Apps.

This is bizarre.

We don’t know what Zuckerberg and the Facebook technical team were thinking, exactly, when they chose to take the HTML5 route, but the decision was most likely guided by forces of culture and economy.

Perhaps more than any other company in the HTTP age, Facebook is a product of the Web. The company’s engineers spent days and nights in front of big screen monitors writing javascript, PHP, and HTML code for PC users. And no Website has been so richly and promptly rewarded: Facebook is now the #1 or #2 most-visited site (depending on whether you count pageviews or unique visitors).

Even as the Smartphone 2.0 era dawned in late 2007, there was no reason to jump the Web app ship: Smartphone numbers were low compared to PCs. And I’m guessing that when Facebook first looked at smartphones they saw “PCs, only smaller”. They were not alone.

Then we have the good old Write Once Run Anywhere (WORA) refrain. Developing and maintaining native apps for different devices is time-consuming and expensive. You need to hire separate teams of engineers/designers/QA, experts at squeezing the best performance from their respective devices, educing the most usable and intuitive UI, deftly tracking down elusive bugs. And even then, your product will suffer from “feature drift”: The ostensibly separate-but-equal native apps will differ in subtle and annoying ways.

HTML5 solves these problems. In theory.

In practice, two even more vexing dilemmas emerge: Performance and The Lowest Common Denominator.

Mobile users react poorly to sluggish performance. Native apps have more direct access to optimized OS modules and hardware features…which means better performance, faster, more immediate interaction. That’s why games, always looking for speed, are almost universally native apps, and it’s why all smartphone vendors promote native apps, their app stores sport hundreds of thousands of titles.

For the Lowest Common Denominator, consider a player piano that can read a scroll of eight parallel punched hole tracks, a maximum of eight simultaneous notes. You want to create richer music, perhaps on an organ that has multiple ranks, pedals, and stops? Sorry, we need your music to play everywhere, so we’ll need to enforce the eight note standard.

In the world of smartphones, sticking with the Lowest Common Denominator means trouble for new platform features, both hardware or software, that aren’t available everywhere. A second camera, a new sensor, extended graphic primitives? Tough luck, the Web apps can’t support them. The WORA approach stands in the way of creativity and innovation by demanding uniformity. This is especially wrong in a world as new, as fast-changing as the Smartphone 2.0 universe.

Pointing to the performance and lowest common denominator problems with the WORA gospel shouldn’t be viewed as a criticism of HTML5. This new (and still evolving) version of the Web’s content language provides much improved expressive power and cleans up many past sins.

Also, there are usage scenarios where Web apps makes sense and run well across several platforms. Gmail and Google Docs are prime examples, they work well on all types of PCs and laptops… But Google took pains to write native Android and iOS apps to provide better access to Google Docs on leading smartphones.

Forget facts and nuance. “It Depends” isn’t as enticing a headline as the fight between Right and Wrong.

JLG@mondaynote.com

Mobile Advertising:
The $20B Opportunity Mirage

There are a lot of questions left to be answered about Facebook’s IPO fiasco, but one thing we know is this: As consumers shift their use of Facebook from PCs to smartphones, investors worry about lower mobile advertising revenues. Is this a temporary situation that will be remedied when usage patterns settle, or do investors have a right to be concerned? Must the advertising industry learn to adapt to a permanently leaner income stream from smartphones?

Let’s start by taking another look at Mary Meeker’s latest Internet Trends presentation from last week’s All Things Digital conference. On slide 17, she projects a $20B opportunity for Mobile Advertising in the US:

When Meeker uses the word “opportunity”, she means “unfulfilled potential”: Mobile Ad Spend in the US alone should be $20B larger than it is. For reference, Google’s latest quarterly revenue was about $10B worldwide.

$20B is a big number, and it got me thinking. How is it possible that the industry’s richest and most sophisticated players are unable to grab such a big pile of money? They have the brains and the computers, they’re aware of the situation…Is there a deeper problem?

A too-easy answer is the market’s age: Mobile advertising is still in its infancy. But that’s an indefensible excuse: The first iPhones shipped in late June 2007, the Smartphone 2.0 era is now five years old. Both Android and iOS are prosperous platforms with bulging App Stores, they sell tens of millions of devices every month, close to half a billion this calendar year. Brand managers, advertising agencies, search engines, social networks, a myriad of vibrant startups keep trying, but mobile advertising barely moves the needle.

We get closer to the heart of the matter when we look at a common thought pattern, an age-old and dangerously misleading algorithm:

The [new thing] is like the [old thing] only [smaller | bigger]

We’ve seen this formula, and its abuse, before. Decades ago, incumbents had to finally admit that minicomputers weren’t simply small mainframes. Manufacturers, vendors, software makers had to adapt to the constraints and benefits of a new, different environment. A semi-generation later, we saw it again: Microcomputers weren’t diminutive minicomputers but truly personal machines that consumers could lift with their arms, minds, and credit cards.

The “Tech-savvy We” should know better by now; We should have learned, but the temptation — and the lazy easiness — of the “X=Y but for the form factor” algorithm continues to derail even Our most “different thinkers”. When the iPad was introduced, a former Apple Director described the offering thus: “It’s just a big iPod Touch” (which proves nothing more than that Steve Jobs didn’t burden his Board of Directors with loads of information).

At the D8 conference in 2010, in front of an iPad-toting audience, a bellowing CEO dismissed Apple’s tablet as just a PC, minus the keyboard and mouse. (And I’ll share the shame: On April 3rd 2010, I looked at my new iPad through PC goggles and lamented the Mac features that were “missing” from my new tablet.)

Now we have advertising on smartphones, and we’ve fallen into a comfortable, predictable rut: “It’s just like Web advertising on the PC, shrunk to fit.” We see the same methods, the same designs, the same business models, wedged onto a smaller screen.

PC advertising has successfully navigated different screen sizes. On a large screen you might see something like this:

Plenty of space for both advertising and content. Even on a smaller screen, the ads are unobtrusive:

But on a smartphone, this is the advertising that’s supposed to entice us:

…and this is the NY Times, one of the better mobile apps.

Mobile ads aren’t merely smaller, they have less expressive power, they don’t seduce…and they’re annoying.

Of course, there’s more to the smartphone misunderstanding than the fairly obvious screen size problem. There’s also a matter of how we use our computing devices.

When we sit down in front of a laptop or desktop screen, our attention is (somewhat) focused and our time is (reasonably) committed. We know where we are and what we’re doing.

With smartphones, we’re on the move, we’re surrounded by people, activities, real-world attractions and diversions. As yet another Mary Meeker presentation suggests, time spent on mobile devices is fragmented:

We’re not paying (a loaded word) the same type of attention as we do on a PC.

Business Insider features an InMobi report on mobile ads, with the following comment [emphasis mine]:

Those ads were served across 6 billion mobile devices. That’s less than $1 per device, per year—a tiny sum. That tells you how far mobile advertising has to go, and how massive it will become in the next five years.

The dollar-per-device statement is a fact, the assumption of “massive” growth is wishful thinking.

When I hear that there’s a mother lode of advertising revenue in location-based ads that are pushed to my mobile phone as I stroll down Main Street (with my permission…I hope), ads that offer succulent deals in the stores and restaurants I’m about to pass, I wonder: Do we want barkers on our devices? Is this the game changer for mobile advertising, yet another kind of spam? LBA may be a hot topic among marketers but the public is dubious, as this MobileMarketer article soberly explains:

The reality is that this scares consumers, rather than excites them. Mobile marketers need to realize that what gets them and their peers fired up does not necessarily move consumers in the same way.

And this…

According to [Rip Gerber, CEO of Locaid Technologies, San Francisco], marketers create their own privacy obstacles when they forget relationship, relevance and preferences in favor of short-sighted metrics.

If the industry hasn’t cracked the mobile advertising code after five years of energetic and skillful work it’s because there is no code to crack. Together, the small screen, the different attention modes, the growing concerns about privacy create an insurmountable obstacle.

The “$20B Opportunity” is a mirage.

JLG@mondaynote.com

Apps Features: Social vs. “Related”

Mobile application design is hard. For websites, we have well-established graphic rules. For PC screens, the tolerance for interface mishaps is fairly broad. Mobile apps are the  opposite: space is much scarcer, every pixel counts. Try shrinking a tablet app screen down an to a smartphone size: homothecy (linear reduction) rarely works. This is the reason why we often see fine iPad applications turn into flunked smartphone ones. It sometimes takes a while for a successful iPad app turn in to a well-adapted iPhone one: Flipboard, Zite and Bloomberg BusinessWeek were wise enough to take as much time as needed to roll-out great apps for the small screen.

When designers (and marketeers) perform user tests for a small screen app, they realize their design will have to adjust to many new circumstances and constraints. Reading time and general use conditions change substantially from a tablet to a smartphone: while the former is definitely a lean-back device, the latter will be used in many different ways, often including uncomfortable settings — I glance at my phone in a lobby, a waiting line, in the subway, etc. All this deserves thoughtful consideration when designing an application. The same applies to advertisers: they can’t expect to capture the same level of attention when moving from tablets to the smartphones.

With this in mind, I made a quick list of mandatory features for mobile applications.

Social vs. “Related”. Today’s hype leaves no other option but making an application as “social” as possible. This being the certitude du jour, allow me to think differently.

True, some apps are inherently social: when it comes to rating a product or a service, the “crowd factor” is critical. Beyond that, it should be a matter of personal choice — an antinomic notion to today’s the “Social” diktat. When you enroll into Spotify, the default setting is to share your musical taste with your Facebook friends and to suffer theirs in return. I personally can’t stand such obligation: I quickly dumped the application and cancelled my account.

The social idea’s biggest mistake is the belief in a universal and monolithic concept everyone is supposed to be willing to embrace with a similar degree of scope and enthusiasm. That’s a geeky, super-cartesian, Zuckerberg-esque view of society. Among my friends, some like opera (the singing, not the browser), others prefer heavy metal and I’m more into jazz tunes; some are tech-minded like me, others are more inclined towards literature. When it comes to sharing news, I tend to be naturally selective about the people I send a link to: I don’t want to swamp everyone with stuff they don’t care about. I might be wrong, but this is the way I see the social cyberspace: segmented and respectful of each other.

Where am I getting with this: When I read news online, I care about what is related (i.e. recommended by editors) as much as what is social (recommended by the crowd). Of course, Trending, is a good indicator of what’s hot. Here is a good example on TechCrunch iPad app, by any measure a thoughtfully designed one. Its Trending sidebar cleverly displays what’s hot and how it evolves:

Even better: when you dive into a story, the app will give you a better-focused “Trending” indicator on a particular company, in this example Buddy Media….

… will send you to the Crunch Base repository of people and companies:

TechCrunch’s social treatment is mostly Twitter-based. Subjects are connected to relevant tweets with the underlying story shown in a web view:

Related contents come in different flavors. Take the Bloomberg way shown in its remarkable BusinessWeek application. Companies mentioned in a stories can pop-up in a black sidebar drawn from the Bloomberg financial app.

Similarly, ProPublica’s application uses a lateral “drawer” to display related contents in an efficient way:

These features are by no means secondary. Providing related contents or a supplement of data, such as financial of biographical information, is the best proven way to retain users.

Finally, a word about graphics. Apple and the iPad have set the bar pretty high and very few apps takes fully advantage of their graphics power. One company rises way above the crowd: Roambi, in a class in itself when it comes to visualizing information. My take is, someday, most business sites will borrow from Roambi’s spectacular way of displaying graphics (part explanation of its design sophistication: the core of Roambi’s designers comes from the video game industry).

One last world about the ongoing debate between open web-apps and proprietary ones such as iOS or Android: The gap is narrowing. The FT.com, which pioneered the genre two years ago, made tremendous progress in its app. Periodically, a new release comes up with slight improvements in fluidity and ease of use. The iOS system and its software development kit remain a must for games and 3D intensive applications, but for news and data apps, HTML5 is getting closer.

One feature, though, is missing in most of these apps: the ability to use them offline. 3G coverage and cellular data transfers are more unstable than developers tend to believe; users should have more leeway in configuring their apps to download content in the background, ready for later offline use.

frederic.filloux@mondaynote.com

Facebook: The Collective Hallucination

Facebook’s bumpy IPO debut could signal the end of a collective hallucination. Most of it pertains to the company’s ability to deliver an effective advertising machine.

Pre-IPO numbers looked nice, especially when compared to Google at this critical stage of their respective business lives:

Based on such numbers, and on the prospect for a billion users by the end of 2012, everyone began to extrapolate and predict Facebook’s dominance of the global advertising market.

Until some cracks began to appear.

The first one was General Motors’ decision to pull its ads off Facebook. This was due to poor click-through performance compared to other ads vectors such as Google. No big deal in terms of revenue: according to Advertising Age, GM had spent a mere $10 million in FB ads and a total $30 million maintaining its presence on the social network. But Facebook watchers saw it a major red flag.

The next bad signal came during the roadshow, when Facebook issued a rather stern warning about its advertising performance among mobile users.

“We believe this increased usage of Facebook on mobile devices has contributed to the recent trend of our daily active users (DAUs) increasing more rapidly than the increase in the number of ads delivered.”

If Facebook can’t effectively monetize its mobile users, it is in serious trouble. Numbers compiled by ComScore are staggering: last March, the average American user spent 7hrs 21 minutes on mobile versions of Facebook (80% on applications, 20% on the mobile site). This represents a reach of more than 80% of mobile users and three times that of the next social media competitor (Twitter), see below:

(source : ComScore)

More broadly, Facebook experiences the unlimited supply of the internet in which users create inventory much faster than advertising can fill it. This trend is known to push ads prices further down as scarcity no longer contains them. The reason why the TV ad market is holding pretty well is its lasting ability to create a tension on prices thanks to the fixed numbers of ad slots available over a given period of time.

Unfortunately for its investors, in many ways, Facebook is not Google. First of all, it has no advertising “killer format ” comparable to Google’s AdWords. The search engine text ads check all the boxes that make a success: they are ultra-simple, efficient, supported by a scalable technology that makes them well-suited for the smallest advertisers as well as for the biggest ones; the system is almost friction-free thanks to an automated market place; and its efficiency doesn’t depend on the quality of creation (there is no room for that). One cent a time, Google churns its enormous revenue stream, without any competition in its field.

By contrast, Facebook’s ad system looks more traditional. For instance, it relies more on creativity than Google does. Although the term sounds a bit overstated considering the level of tactics Facebook uses to collect fans and raise “engagement” of any kind. For example, Tums, the anti-acid drug, developed a game encouraging users to throw virtual tomatoes at pictures of their friends. On a similar level of sophistication, while doing research for this column, I landed on the Facebook Studio Awards site showcasing the best ads and promotional campaigns. My vote goes to the French chicken producer Saint Sever, whose agency devised this elegantly uncomplicated concept: “1 ami = 1poulet” (one friend, one chicken):

If this is the kind of concept Facebook is proud to promote, it becomes a matter of concern for the company’s ARPU.

Speaking of Average Revenue Per User, last year, Facebook made $4.34 per user in overall advertising revenue. A closer look shows differences from one market to another: North America, the most valuable market, yielded $9.51 per user vs. $4.86 for the European market, $1.79 in Asia and only $1.42 for the rest of the world. Facebook’s problem lies exactly there: the most profitable markets are the most saturated ones while the potential for growth resides mostly in the low-yield tier. In the meantime, infrastructure costs are roughly identical: it costs the same to serve a page, or to synchronize a photo album located in Pennsylvania or in Kazakhstan (it could even cost more per user in remote countries, and some say that FB’s infrastructure running costs are likely to grow exponentially as more users generate more interactions between themselves).

Facebook might be tempted to mimic a rather questionable Google trait, that is “The Theory Of Everything”. Over the last years, we’ve seen Google jumping on almost everything (including Motorola’s mobile business), trying a large, confusing array of products and services in order to see what sticks on the wall. The end result is an impressive list of services that became very valuable to users (mail, maps, docs). But more than 90% of Google revenue still come from a single stream of business, search ads.

As for Facebook, we had a glimpse already with the Instagram acquisition (see a recent Monday Note), which looked more like a decision triggered by short-term agitation than by long-term strategic thought. We might see other moves like this as Mark Zuckerberg retains 57% of the voting shares and as the company sits on a big (more than $6 billion) pile of cash. Each month brings up a new business Facebook might be tempted to enter, from mobile phones, to search.

All ideas that fit Facebook’s vital need for growth.

frederic.filloux@mondaynote.com

Nokia: Three Big Problems

Nokia’s results for Q1 2012 are in: They’re not good. (See the earnings release here, Management’s Conference Call presentation here.)

Compared to the same quarter last year, Nokia overall revenue is down 29%, to $9.7B. And the company is now losing money, $1.8B, 18.5% of revenue. [Nokia’s official numbers are stated in euros, I convert them at today’s rate of $1.32 for 1€.]

One year after Nokia’s decision to jump of its “burning platform”, this yet another bad quarter and leaves one to wonder about the company’s future. Many, like Forbes’ Erik Savitz, think The Worst Is Still To Come.

I see three life-threatening problems for the deposed king of mobile phones.

First and potentially most lethal: Nokia is burning cash. As the chart above documents, Nokia’s Net Cash went down 24% in one year. From page 5 of the Earnings Release: “Year-on-year, net cash and other liquid assets decreased by $2B…. Sequentially [emphasis added], net cash and other liquid assets decreased by $.9B”. Here, the word sequentially means compared to the immediately preceding quarter, as opposed to the same quarter last year.
Elsewhere in the document, on page 6, we learn Microsoft provided $250M in “platform support payments”. If you back this amount out, you see Nokia’s operations have in fact consumed $1.15B, a significant fraction of the company’s $6.4B Net Cash. This cannot continue for very long and leads Henry Blodget to worry Nokia could go bankrupt in two years or less.
Henry’s view might be a bit extreme; Nokia has assets they could convert to cash, thus giving itself more runway for its recovery efforts. But, as we’ll see below, the company’s prospects in both phone categories don’t look stellar. And bad things happen to cash when the market loses confidence in a company’s future: vendors want to be paid more quickly, customers become more hesitant, all precipitating a crisis.

Second, the dumbphone (a.k.a. “Mobile Phones”) business, still Nokia’s largest, is now in a race to the bottom:

Volume is huge, 70.8M units; it dipped 16%, not a good sign. Worse, the ASP (Average Selling Price) went down 18% to $44 (33€). Mostly in developing countries, Nokia is now losing ground to the likes of Huawei and ZTE selling feature phones and smartphones, both very inexpensive. Unsurprisingly, Nokia claims they’ll counterattack with their Asha family of mobile phones. Few, outside of Nokia, or even inside, believe they can win a brutal price cutting fight against those adversaries.

Last, Nokia’s last hope: Their new Windows Phone “Smart Devices”.

As the chart above shows, Nokia’s smartphone business keeps sinking: -51% in volume compared to the same quarter last year. And, with a $189 (143€) ASP, it can’t make any significant money as $189 is about what it costs to build one.

As for the latest Lumia smartphones, the reviews have been mixed. So are sales, according to Stephen Elop, Nokia’s CEO. Going to the earnings release, I searched for the word “Lumia” in the document. It appears 29 times. — without any number attached to it, just words like “encouraging awards and popular acclaim”. Which can only mean one thing: Actual numbers better left unsaid.

Things don’t get better when, according to Reuters, mobile carriers in Europe pronounced themselves ‘‘unconvinced”, finding the new Lumia smartphones “not good enough”. It is worth noting things could be better in the US where AT&T appears to make a real effort selling Lumias, and where Verizon recently stated its interest in fostering a third ecosystem with Windows Phone devices.

Unfortunately, we also hear a puzzling rumor: Existing Lumia phones wouldn’t be upgradable to the next OS version, Windows Phone 8, code-named Apollo. Both Mary Jo Foley, a recognized authority on things Microsoft, and The Verge, an aggressive and often well-sourced blog, support that theory.

So far, in spite of the potential damage to their business, neither Microsoft nor Nokia have seen fit to comment. Should it be true, should current Lumia buyers find themselves unable to upgrade their software, Microsoft would be about to commit a massive blunder.

But why would they do this? Apparently, the current Windows Phone OS is built on the venerable Windows CE kernel. Setting veneration aside, Microsoft would have decided to use a more modern foundation for Windows Phone 8. And said modern foundation would not run on today’s hardware. For Nokia’s sake, I hope this is incorrect. The company already convinced its customer Symbian-based phones had no future. Sales plunged as a result. Doing the same thing for today’s Lumia devices would be even more dangerous.

A little over a year ago, in February 2011, Nokia’s brand-new CEO, Stephen Elop issued his ‘‘memorable” Burning Platform memo. In it, the ex-Microsoft executive made an excellent point: Having no doubt observed the rise of Google’s Android and of Apple’s iOS, he concluded Nokia was no longer in a fight of devices but in a war of ecosystems. Elop next drew an analogy between Nokia’s jumbled smartphone product line and a burning North Sea oil-drilling rig. To him, the company had no choice: instead of staying on the platform and dying in the blaze, he suggested plunging in freezing waters — with a chance of staying alive. Which, as he soon revealed, meant jumping off Nokia’s Symbian and Meego software platforms and joining the Microsoft Windows Phone ecosystem.

Today, Nokia bleeds cash, its dumbphone business in a race to the bottom, and its plunge into the Microsoft ecosystem isn’t off to a good start. What’s next for the company? Can it turn itself around, and how?

With hindsight, it appears the premature announcement of the jump to Windows Phone osborned Nokia’s existing smartphones. Their sales dropped while the market waited for the new devices running Windows Phone. Some, like Tomi Ahonen, an unusually vocal — and voluminous — blogger, think Elop should be fired, and Symbian and Meego restored to their just place in Nokia’s product line. This isn’t very realistic.

Closer to reality is Microsoft’s determination to get back in the smartphone race, almost at any cost. (For reference look at the billions the company keeps losing in its online business. $449M this past quarter.)

At some point in time, if Lumia sales still barely move the needle, Microsoft would have to either drop Nokia and look for another vehicle for Windows Phone. Or it will have to assume full control of Nokia, pare down what it doesn’t need, and do what it does for the Xbox, that is be in charge of everything: hardware, software, applications.

JLG@mondaynote.com