Wearables Fever

 

While Google, Motorola, and Samsung seem eager to jump into the wearables market, Apple characteristically keeps its counsel – and wisely so: Smartwatches and other wearables produce more pageviews than profits.

Wearables are a danger to your health – your mental health, that is. Smartwatches and sensor-laden bracelets aren’t so new anymore — see Microsoft’s 2004 SPOT Watch — but the vernal equinox seems to have triggered a bout of Wearables Fever the likes of which we haven’t seen since the Tablet Fever of January, 2011, when 76 tablets were announced at the Consumer Electronic Show in Las Vegas. As so often happens with pandemics, there was a smaller outbreak, called the Dawn of the Tablet PC, days before the January 2010 iPad launch.

In this year’s derangement, we are witnessing the birth of another epoch-making class of product — the Wearable. As Wired sees it, for example, Jawbone Is Now the Startup Apple Should Fear Most.

In one respect, Jawbone’s devices are a lot like Apple’s. The company admires minimalism…[b]ut Apple’s minimalism is cold — all brushed metal and glass — while Jawbone’s is warm, squishy, and textured… There’s a chance Apple has designed itself into a corner. But for Jawbone, the future is full of possibility.

Then there’s this analysis, quoted and mocked by John Gruber [emphasis mine]:

Cadie Thompson, writing for CNBC, “Time Is Ticking for Apple to Announce an iWatch, Say Analysts”. Apple needs an iWatch sooner rather than later, or the company will risk losing its innovative edge to rivals, analysts say.

They only have 60 days left to either come up with something or they will disappear,” said Trip Chowdhry, managing director at Global Equities Research. “It will take years for Apple’s $130 billion in cash to vanish, but it will become an irrelevant company… it will become a zombie, if they don’t come up with an iWatch.

I’m guessing the ellipsis denotes when he paused for another line of coke.

Parenthetically, it would be wrong to imply that Mr. Chowdhry might be “incentivized” to shout from the rooftops by rewards more satisfying than pageviews — no allegations of stock manipulation complicity here — but I wonder about the games that he and other anal-ists play. As Philip Elmer-DeWitt pointedly noted in a CNN Money column last year, Mr. Chowdhry urged his clients to unload Apple stock for eight months and then blamed the CEO and CFO “for destroying Apple’s shareholder value”.

If you’re curious enough to look at Mr. Chowdhry’s spartan Global Equities Research site, you’ll see he claims to have Commission Sharing Agreements with Goldman Sachs, Merrill Lynch, Barclays, Jefferies, Morgan Stanley and JP Morgan. As the Wikipedia article points out, such agreements “ask that broker to allocate a portion of the commission directly to an independent research provider.” Here, one wonders what the word independent really means…

Back to Wearables: The announcements pile on.

Samsung tells us they’re moving their smartwatches away from Android to a version of Tizen, itself based on a version of the ubiquitous Linux.

Google announces Android Wear, a version of Android for smartwatches.

Motorola, soon to be a Lenovo brand, announces that its moto 360 smartwatch is “Coming Summer 2014 in a selection of styles” and provides these artful renderings:

Moto Wrist Edited

and…

Moto Modern

(I write renderings because, as the Android Wear intro video indicates, these are simulated pictures. This doesn’t mean that the final product won’t be better looking– but we’re clearly not there yet.)

Why the haste? Did Tim Cook succeed in misdirecting Apple’s competition when he pronounced wearables a “very key branch of the tree? Or is there a giant business to be had?

We have many unanswered questions.

First, paraphrasing Horace Dediu, there are the twin questions of For What and By Whom: For what job is a smartwatch “hired”, and by whom? If we look at phones as a model, we see two “employers”: Carriers hire smartphones to increase their ARPU; normal consumers use them as small, ubiquitous, always-connected personal computers.

Will this model work for smartwatches? We can almost certainly eliminate carriers from the equation: Subsidies are out of question because a watch is unlikely to generate carrier revenue.

For us users, a smartwatch collects sensor data, connects to our smartphone, displays alerts, responds to touch and voice commands… and even tells us the time. These are all worthwhile functions that make for neat promo videos, but to keep users interested after the novelty wears out, smartwatches will have to do more than log the miles we’ve run, give us weather updates, and show us the name of the person who’s ringing the smartphone in our pocket. Put another way: We’re willing to pay a premium for our smartphones (whether directly or by contract) because of the huge range of features they provide, the enormous number of apps in the app stores. Will we be as durably aroused – and willing to part with substantial amounts of money – by (yet another) pulse rate app?

Another batch of questions: Since we no longer need a dedicated timepiece to tell us the time — our smartphone does that — Who wears a (dumb) watch these days, How, When, and Why?

Simplifying a bit, younger people don’t wear watches at all and older generations use them as jewelry — and gender-specific jewelry, at that. Furthermore, how many veteran watch-wearers wear the same watch all the time? Many of us own more than one watch, and select the appropriate timepiece (or two — or none at all) for the occasion. These aren’t trivial issues, they’re uncharted territory for mobile device makers and marketers.

Next question: How will smartwatch makers handle the delicate equilibrium between computing power and battery power? As smartwatches evolve and offer more features, a better display, and a more responsive user interface, they’ll need more computing power — and more computing power means a quicker battery drain. Will we put up with watches that run out of power at the end of the day? Will designers retard functionality in order to extend battery life to 24 hours and beyond… or make a smartwatch so big it’ll look like a miniature phone?

The power equilibrium question is why Samsung moved to a dedicated (and pared down) version of Tizen, and why Google did the same for Android Wear. All without giving much information of battery life.

Finally: Is there a business, there? Here in the Valley, Pebble CEO Eric Migicovsky claims to have sold 400,000 watches since January, 2013. At around $150 each, that’s $60M in revenue — a real tribute to Eric’s long-standing belief in wearables (he’s been working at it for six years).

But even if you multiplied this number by 10, it would barely nudge the needle for a large companies such as Samsung, Motorola/Lenovo, or Apple, which means these devices will be confined to the role of smartphone companion. They’ll help make money by enhancing the main product; they’re not going to be a $10B business in themselves.

As Charles Arthur writes in The Guardian, there are fewer than half a million smartwatches in use in the UK: “Wearable computing faces an uphill battle breaking through to the mainstream…”. Similarly, the Register doesn’t see any good, large-scale answers to the question. It calls Google wearables “A solution looking for a rich nerd”.

These challenges might explain why Apple doesn’t seem to have caught this Spring’s Wearables Fever. Smartwatches are destined to be ecosystem extensions, not The Next Big Thing.

JLG@mondaynote.com

One last thought before we close: Not all Ecosystem Extensions are equal. The no-longer-a-hobby Apple TV now brings substantial revenue and growth:

“Sales of the Apple TV are estimated to have grown by 80 percent in 2013, reaching around 10 million units for the calendar year, or some $1 billion worth of set-top boxes sold to end users.”

Horace Dediu puts a “Fortune 130” label on iTunes. By itself, with yearly gross revenue of $23.5B and growing 34%, iTunes is large enough to rank #130 in the Fortune list of the 500 largest US companies:

On a yearly basis iTunes/Software/Services is nearly half of Google’s core business and growing slightly faster.”

While music sales are on the wane, apps and video (mostly Apple TV) show healthy growth. Compared to an Apple TV, how much would an iWatch add to the iTunes business? Apps? Content?

Apple seems wise to stay out of the game until it can make something more lasting than a novelty.

CarPlay Thoughts

 

Who wouldn’t want an iPhone- or Android-like experience in their car instead of today’s misbegotten navigation and entertainment systems? CarPlay’s answer looks nice – until one looks at the details.

Apple’s CarPlay has an air of inevitability. Previously dubbed “iOS in the Car”, CarPlay brings the iPhone’s aesthetics, ease of use, consistency, and universe of apps to the ugly and dumbfounding world of car navigation and entertainment systems.

Seven years after the iPhone launched the Smartphone 2.0 wave, Apple kickstarts another mobile revolution…

It’s an enticing, simple vision. Instead of today’s disjointed systems — which often cost in the $1,000 range, plus $249 for a DVD of updated maps — you get a screen the size of a small tablet running iOS apps with voice and touch control (on-screen and armrest), off-air map updates, open-ended flexibility… We have arrived.

I’ve struggled with dashboard electronics from German, Japanese, and French car makers (no electronics on the old family Chevrolets), and I’ve seen what happened to Ford when it tried to use Microsoft software for its Sync system. Replacing these hairballs with an iOS system only makes sense.

But sense and reality are still living apart.

carplay2

To start, the “iOS in the Car” phrase is misleading. The iOS device “in your car” is the iPhone or iPad that you’ve brought with you — Apple isn’t about to license iOS to automakers (which may be part of the reason why Apple changed the name to “CarPlay”).

And Apple isn’t going to try to take the place of suppliers such as Delphi, VDO, and Aisin by making subsystems for carmakers — it’s not in Apple’s DNA. Not that it would matter if they tried: Automakers have made an art of pinching fractions of cents from their suppliers’ prices; they’d never tolerate Apple’s margins.

CarPlay replicates your iDevice’s screen as H.264 video spewed through an intelligent Lightning cable connected to your car’s USB port. The video format is widely accepted, so the in-car device either understands it already, or can be updated to do so.

So far, so good. As many observers have pointed out, the idea is a wired echo of Apple’s AirPlay, the technology that connects your iDevices (and other compliant products) to your television via the Apple TV black puck. Complications may arise when you consider the various in-dash screen sizes, resolution, actual uses of USB connections (my car’s USB connector is useless for anything other than charging my smartphone), and other mysterious incompatibilities that are beyond Apple’s control. Still, in general, screen replication demands little from the car maker. As with Airplay and a dumb TV set, the intelligence stays inside the smartphone.

The CarPlay proposal is much more limited than the Open Automotive Alliance, a Google initiative that implants a customized version of Android into a car’s electronics. (“Audi connect” is available today; we can expect similar collaborations with Honda, GM and Hyundai.) But if the in-car system runs Android (or QNX, as is often the case today), so much the better, from the carmaker’s point of view: Let Google or one of its partner do all the work to create an Android-based all-in-one car system and let Apple hitch a ride after the work is done. Serving both Android and iOS users is a no-brainer.

It sounds good… but I can’t help but harbor uneasy feelings about this whole “scene”.

To begin with, we have a clash of cultures. To be sure, Eddy Cue, Apple’s Senior VP of Internet Software and Services, is a dealmaking expert and, as a member of the Board of Ferrari, he has serious automotive industry connections. But the spirit that drives Apple is far from that which motivates automakers.

The automotive industry expects to be in control of everything that gets into their cars. The coup that Apple pulled off with the iPhone and AT&T — taking full control of the content, no crapware, iTunes only for media — isn’t going to happen with Mercedes-Benz, or BMW, or even Hyundai. Cars aren’t phones. We’re not going to see aftermarket Toyota CarPlay kits (let alone entire cars) in Apple Stores. Apple won’t get what it always strives for: Controlled Distribution.

Then there’s the F-word: Fragmentation. In-car electronics are a mess, a new culture grafted onto an old one, Silicon Valley and Detroit in a loveless marriage. Actually, that’s  unfair: Under the hood, embedded electronics do wonders to improve the reliability, safety, and economy of our cars. But where the union breaks down is in the User Experience domain. Competent combustion management engineers and the accountants watching over their shoulders have no empathy for smartphone-loving drivers.

The meanderings get more twisted when we consider a key difference between Google and Apple. Google could tell Audi that they’ll pay, in some form, for the user data collected by Audi connect— but Audi already makes a lot of money, they don’t want to open that can of worms. As they say in their privacy agreement:

“We will not share information about you or your Audi vehicle that is connected with your use of Audi connect’s in-car features with third parties for their own purposes without your consent.”

But what would a legally-troubled, profit-starved automaker such as GM say in response to Google’s offer to subsidize the in-car system?

Apple hasn’t played that game.

An all-in-one navigation/communications/entertainment system is a pleasant dream, it feels “right”. But the technical, business model, and cultural obstacles could make for a long, arduous march.

CarPlay could be a very smart way to hitch a ride on many in-car systems without having to struggle with their design and cost challenges, yet another ecosystem extension play.

JLG@mondaynote.com

 

On Marc Andreessen’s optimistic view of news

 

A strongly-worded column by venture capitalist Marc Andreessen triggered an intense debate on the future of news. Andreessen might be right places, but his views can also be dangerously simplistic. 

For starters, it is always great to have an outsider’s view. Marc Andreessen’s witty, and fast-paced dithyramb on the future of news is undoubtedly welcome. But, as always, regardless of the depth and breath of the big picture he paints, the devil lies in the details. In no particular order, here are my thoughts on his manifesto.

As a European, I found his piece extraordinary US-centric or, slightly more broadly, Anglophone-centric.

Andreessen wrote :

[T]he market size is dramatically expanding—many more people consume news now vs. 10 or 20 years ago. Many more still will consume news in the next 10 to 20 years. Volume is being driven up, and that is a big, big deal.
Right now everyone is obsessed with slumping prices, but ultimately, the most important dynamic is No. 3 – increasing volume. Here’s why: Market size equals destiny. The big opportunity for the news industry in the next five to 10 years is to increase its market size 100x AND drop prices 10X. Become larger and much more important in the process.

By saying this, Andreessen makes two good faith mistakes.

First, he mixes up global reach and monetizable audience. Evidently, a growing number of people will enjoy access to news (maybe not all the 5 billion cellphone users he mentions), but the proportion of those able to generate a measurable ARPU is likely to be very small.

The Scalability that works for Google Maps or WhatsApp doesn’t work as well for the notion of relevant information, one that is more tightly connected to language, proximity and culture.

Second, he overestimates the addressable news market’s fragmentation. I live in France, a 66 million people country with a high standard of living and good fixed and mobile internet access. In spite of these factors, it remains a small market for the super-low-yield digital news business that brings few euros per year and per user (except for a minuscule subscriber base.) I remained stunned by the inability of good journalistic products, created by smart people, to find a sustainable business models after years of trying.

And the huge, globalized English speaking market does not warrant financial success. The Guardian is one such example. It operates one of the finest digital news system in the world but keeps bleeding money. The Guardian brings a mere $60m in digital ad revenue per year — to be compared to a kitten-rigged, listicles-saturated aggregator generating a multiple of this amount. Journalism has become almost impossible to monetize by itself (I’ll come back to that topic).

Andreessen also vastly underestimates the cost of good journalism when he writes:

[T]he total global expense budget of all investigative journalism is tiny —  in the neighborhood of tens of millions of dollars annually.”

Fact is, journalism is inherently expensive because it is by laborious and unpredictable: An investigation can take months, and yield nothing; or the journalistic outcome can be great, lifting the reputation of the media, but with zero impact on the revenue side (no identifiable growth in subscriptions or advertising). The same goes for ambitious coverage of people or events. No one has ever translated a Pulitzer Prize in hard dollars.

This is also the case for what Andreessen calls the “Baghdad Bureau problem”. It was said to cost $3m/year for the New York Times. In fact, on an annual basis, the Times spends about $200m for its news operations, including $70m for foreign coverage alone. The NYT is likely to stay afloat when it goes entirely digital (which might happen before the end of the decade), but one of the nastiest features of digital news is the unforgiving Winner Takes All mechanism.

As far as philanthropy is considered, I won’t spend too much time on the issue except to say this: Relying on philanthropy to cure malaria or to support ill-understood artists bears witness to an absence of sustainable economic system. (Until, perhaps, the artist dies; as for malaria, there is indeed a very long term benefit for society, but not for those who supply the treatment, hence the mandatory call to generosity.) Saying investigative or public-interest journalism could/should rely on philanthropy is the same as admitting it’s economically unsustainable. Luckily, American society has produced scores of philanthropists free from any agenda (political, ideological, religious) — such as the Sandler Foundation with ProPublica. That’s not the case in France — not to mention Russia and many other countries.

There are plenty of areas in which I completely support Marc Andreessen’s view. For example: A media company “should be run like a business“, i.e. seek the profitability that will warrant its independence (from every economic agent: shareholders, advertisers, political pressure, etc.) This brings us to the size and shape of a modern news factory (I use the term on purpose). We have to deal with an unpleasant reality: Good journalism is no longer sustainable as a standalone activity. But — and that’s the good news — it remains the best and indispensable core around which to develop multiple activities (see my recent column about The News Media Revenue Matrix).You can’t develop services, conferences, publishing, etc. around a depreciated journalistic asset. On the other hand, this asset has to be drastically streamlined: In many cases, less people, better-paid (simply for the ability to retain talent) and with sufficient means to do their job (don’t go for the press junkets because the travel budget has been slashed, you’ll lose on three counts: credibility of your brand, self-esteem of your team, quality of the reporting.)

Unfortunately, as Andreessen noted, there are plenty of hurdles to overcome. In fact, most existing news companies do not fathom the depth of the transformation required to survive and thrive. Nor do they understand the urgency to set this massive overhaul in motion. Such moves require strength, strong leadership, creativity, a fresh approach, unabated confidence, and a systemic vision — all of the above in short supply at legacy media. Note that when Marc Andreessen prides himself to be an investor in media ventures (for instance Business Insider– no conflict of interest), all are digital natives and bear none of the burdens of traditional media. His bullishness on news is selective, personal.

frederic.filloux@mondaynote.com