Apple surprises. The big hurdles are yet to come.

Last week Apple released their results and outperformed expectations. Revenue for the quarter was a mere $45.4bn up 7% and so everyone was very happy but should they be?

Mobile is not what it used to be.

The quarter just gone is typically a quiet one as sales start to slow as expectations for the new iPhone release rise. After the previous quarter slowdown in iPhone sales there was some expectation of a further slowdown. It didn’t happen and instead iPhone sales grew 2% and revenue rose 3%.

This is a surprise because smartphone growth has slowed down to around 3% overall so a big win for the iPhone in the marketplace. It may have started slow but the lack of any big innovation this year amongst the competition seems to have allowed the new iPhone grow.

With the iPhone’s 10th anniversary this year though, all the eyes are on the iPhone 8. The leaks are mostly making it sound disappointing with several big ideas for it being delayed.

I would be surprised if there isn’t some theatre and surprise come the launch though.

Services? Apple does services. Really.

Apple can’t rely on the iPhone to grow its revenues, instead the major growth opportunity is coming from what Apple calls services, which includes iTunes, Apple Pay, Apple Music and iCloud storage. A broad mix if ever there was one.

Up 22% this quarter and now 16% of all revenue, the services group has delivered so far on Tim Cook’s promise to double the services revenue by 2020.

The behemoth is obviously iTunes, which includes the App Store but I wonder how much growth is coming from Apple Pay? Difficult to tell as it is not broken down.

Peak App Store?

The concept of the App Store has been a major earner for both Apple and Google and transformed the way we use a mobile. Yes we can still go to any website we like using the mobile browser, but apps took advantage of a smartphone’s powerful graphics and processor capabilities that the browser just could not do.

That has created a very different internet on the mobile.

Something as innocuous as an app completely defeated Google’s stronghold on the desktop. No longer did you go to Google to find something you needed online, you went to the App Store and downloaded an app. Apple is clearly in control.

It also placed a limit on the number of apps that you actually use. Apps get lost in groups or on secondary pages and rarely get used.
There is a change to way we interact with our phones though.

The smart assistants on the phone are slowly becoming more and more powerful and are increasing the “apps” you use by integrating them directly into the assistant.

Apple is obviously not allowing anyone to replace Siri as the default assistant just as there is only the Apple App Store, but Apple remains behind with the capabilities of Siri and could fall behind if it doesn’t upgrade it significantly.

Tablets are not a PC killer after all

The tablet market overall is declining. It is no longer the device to kill off the desktop or laptop and rather something else.

Apple though owns this market with 85% market share in the US for tablets above $200. Despite the overall declining market, iPad sales rose 15%. But with revenue flat, people are really only buying the cheap iPads.

The iPad Pro, the most expensive iPad was always going to be niche and was really launched I think to offset the success of the Microsoft Surface. Hell?—?it even had a pen. Sorry a pencil, but I think the operating system and its business capabilities need an upgrade before it is really any real competition. I’d still go for the Surface over the iPad Pro.

What next?

Speculation on Apple’s next breakthrough product is endless.

The watch came and stumbled.

The Apple TV screen was whispered of but instead the focused is back on the Apple TV box. Even then it remains a side project.

The autonomous car is seemingly coming. There has been plenty of money spent and patents filed but there is no timeline for its arrival. Can they really take on both Tesla and the other slowly catching up car titans?

One possibility is for a tech vendor to partner with a car manufacturer. This is not an Apple approach though as they like to control both the hardware and software. Maybe that means they will buy Tesla. They have the cash but until the White House changed the rules, most of the money they could do this with is sitting outside the country. The investment so far suggests this is not the preferred route.

Whether Tesla will continue to own and build the software is itself a question. Amazon has been quick to build partnerships for its Alexa smart assistant and this interface seems a natural one for the car. Will we see a Tesla assistant? It would seem to be a better approach to integrate an existing one. It would be even better for the consumer if it supported them all.

One thing we do know is coming this year is augmented reality. We knew it was being integrated into the phone but it seems there are glasses on the horizon. Similar in approach to Google and Snap albeit integrated rightly into the iPhone, can they really persuade non-geeks to wear them? It will need a killer use case..

The big five report. Amazon in depth. The differing paths to success.

The big four (Facebook, Google, Amazon and Apple) as the media refer to them, or big five as Microsoft should really be included have all released their numbers in the last week or so bar Apple, who release this week.

I spoke briefly on the BBC (video below) on the Amazon results but with so much happening at Amazon I’ve expanded on it further.
No one expected the disappointment in the results (which showed Amazon beat revenues but miss earnings).

In the lead up to Amazon’s results, the analysts were super positive. But like Google, Amazon has never really respected the stock market’s quarterly results cycle and this quarter’s results was a reminder of this. The investment over the quarter meant that earnings were 0.40c per share, instead of an average $1.41 per share. They didn’t just miss expectations, they completely ignored them. Why were we surprised?

The money is being invested predominantly in three major areas – expansion into Asia, delivery and their video service in advance of the key Christmas period. This was Amazon for the most part making a bet on their next quarter’s numbers and beyond.

Warp speed

In the US, maintaining Amazon Prime membership is now a critical way of shutting out the competition. More than 50% of US households are a member and Amazon’s competitors do not have their heads in the sand and are trying to compete.. slowly. Amazon though is not stopping at next day or even some same day delivery. It is pushing for broader and faster capabilities.

In the same way as Google changed the game with Gmail’s vast amount of storage, Amazon has done the same with Prime. Even more impressively they have done so for a fee. Amazon clearly believes that delivery speed will continue to be a key differentiator. Their recent Prime Day sale, exclusive to members was their biggest to date.

Behind the scenes
The margins at Amazon are thin but when you look underneath the covers, Amazon Web Services, their cloud server platform used by companies globally to host apps, websites etc. are performing extremely well and are increasingly profitable. It is a $10bn business and grew a healthy 42%. They completely disrupted the provision of servers to businesses and are continuing to lead the market. Microsoft’s presence here is starting to be felt now – they previously grew over 50% and whilst they are still far and away the leader, Microsoft has the arsenal to go toe to toe with Amazon.

Calling Alexa

The most exciting opportunity amongst Amazon’s portfolio is the Alexa ecosystem. This is not an area that Amazon has typically succeeded in. Their previous foray into hardware was their Fire phone which flopped. Alexa though is the clear leader in the smart virtual assistant space right now.

This gives it a unique opportunity to change the way we interact with technology in a similar way to how Microsoft did the same with the launch of Windows 3 and the adoption of the mouse. Back then, Microsoft used the success of Windows to build multi-billion dollar businesses in office and server software. Alexa could allow Amazon to do the same.

Amazon is placing communication as its bet on the key feature alongside the assistant itself. It launched the Echo Show in the US recently which disrupts the videophone.

The rumour is they are also going to launch a messaging platform to compete with Facebook and WhatsApp. This will work on the desktop and phone but if it isn’t tied directly into Alexa it will be a missed opportunity in my view. Even then, I am not convinced we need yet another messaging platform. Google has tried to compete in this space for years with little success. Whilst Excel truly transformed the way you used a spreadsheet vs Lotus 1-2-3, I am not seeing anything different about Amazon’s messenger vs Facebook’s.

Maybe Facebook will misstep when they monetise their messaging platform later this year. I wouldn’t bet on it.

The righteous path

What interests me the most is how, despite the very differing cores of each company, we are seeing the big five attack the same opportunity from their home turf.

In the short term, the bet is on smart virtual assistants. All of the five except Facebook has one.

Amazon being the most open (and Microsoft-like in strategy) by opening up the platform and building strong partnerships to extend the ecosystem. Their approach tightly integrates with its ecommerce engine of course. As previously mentioned, social is the piece it also wants to own itself.

Apple is focusing on music, which given the strength of iTunes should be of no surprise, though I suspect it will overhaul Siri every year until it is a really strong competitor again albeit within its closed Apple ecosystem. One for the fanboys 😉

Google is focused on its assistant being the best at providing information, building on its historic search capabilities. This should mean that it has the most helpful assistant over time but can it provide the breadth of services that the others are building?

Finally there is Microsoft, which under Nadella has the clearest vision it has had for a long time. They are focused on productivity. This potentially makes it a strong player in the business space but the consumer space is where the growth is today. Can it succeed here? I’m sure it will find a dozen or so hardware partners and flood the market but it needs to deliver on partnerships like Amazon has done to succeed. It could equally succeed as a business though without the hardware piece and just deliver its productivity capabilities through the other platforms.

What about Facebook? Well I am sure there will be addons across all the platforms for Facebook and WhatsApp. That is one reason I don’t believe Amazon’s messaging platform can succeed without more significant capabilities.

The smart assistant devices are also just a version one technology. They’ll integrate into everything and be everywhere. In your car, phone, TV and laptop. Probably even your fridge. To truly work though, they need to not just wait for our question but need to understand what is happening around us. The research Facebook is doing into augmented and virtual reality will deliver the next leap in smart assistant technology. The market may have passed Facebook by then though.

(This post originally featured in the Connected Paths newsletter, which you can sign up for here.)

Walled gardens or the open countryside? The net neutrality debate.

Net neutrality is back on the agenda. This is the idea that all Internet users should have equal access to all Internet services. Or to put it another way, users should not be prevented (or slowed down) from accessing a website because this particular website did not pay the ISP enough money.

Co-founder of Radiate B2B, Mike Weston went onto the BBC to talk on the topic and the action being taken by companies to highlight the issue?—?see the video here.

People care passionately about the topic?—?some 6.8m comments were filed with the Federal Communications Commission (FCC).

Rather comically, Comcast, a US ISP has promised not to charge fees or throttle access for users. That is like a fox promising not to eat a hen if they unlock the coop.

ISPs argue this will drive innovation (as they can charge websites for access), whilst large websites say the Internet should be open for all (which in turn will also drive innovation).

It is not as black and white as all the rhetoric makes out. Whilst the larger players (Facebook, Google et al) are pro net-neutrality, it is hard to see ISPs being able to charge them for access to their user base. Would you use an ISP that didn’t let you access Facebook or Google? The companies that will get penalised are the successful companies who are not yet mainstream.

When it comes to innovation, the argument that losing net neutrality rules will drive greater innovation is like saying if you build it they will come. Let me explain.

ISPs suggest that by dropping net neutrality rules, they will be able to invest more in their networks leading to better and faster access. This will therefore drive innovation as companies take advantage of the new capability. The only problem with this is that companies do not invest extra unless there is a competitive advantage to doing so. The new company requiring more speed needs to already exist.

The money for this extra investment of course has to come from the websites or the users. More likely the former. So as I’ve already said, the next group of successful startups, who are not in as strong a position as the big players, are the very companies who are likely to suffer the most.

With net neutrality rules, the ISPs are unable to charge websites and must instead compete on the speed and stability of their pipes, and drive revenue from the user.

Theoretically this means of course that over time without net neutrality, costs of Internet access could reduce but at the expense of innovation across the Internet. Many more companies are free to innovate with net neutrality and not have to pass on any extra costs charged by the ISPs.

If you assume, as has been the case for over 20 years now, that new Internet services will push the available technology to the limit. In a competitive ISP market, ISPs will continue to increase internet speeds.

One day, virtual reality streaming will hit the market?—?that requires much better internet access than is available today. ISPs unsurprisingly will look to win customers (and charge a premium) to access this service.

Overall, this is really about where the power sits in the market?—?is it with the ISPs or the websites. Do we think ISPs will really build capacity first or do we let websites drive innovation and push ISPs to keep up.

For me net neutrality leads to a more interesting and innovative world. It also means more jobs. That isn’t a bad thing surely?