Do you still have a pile of compact discs? If so, why? When was the last time you listened to one? Like almost everyone else, you probably stream your music today. If you are just outdated, you listen to music you bought from iTunes or GooglePlay and store on your mobile device. But it would be considered prehistoric to tell people you carry around CDs for listening in your car – because you surely don’t own a portable CD player.
As the chart shows, CD sales exploded from nothing in 1983 to nearly 1B units in 2000. Now sales are less than 1/10th that number, due to the market shift expanded bandwidth allowed.
Do you still carry a laptop? If so, you are a dying minority. As PCs became more portable they became indispensable. Nobody left the office, or attended a meeting, without their laptop. That trend exploded until 2011, when PC sales peaked at 365M units. As the chart shows, in the 6 years since, PC sales have dropped by over 100M units, a 30% decline. The advent of mobile devices (smartphones and tablets) coupled with expanded connectivity and growing cloud services allowed mobility to reach entirely new levels – and people stopped carrying their PCs. And just like CDs are disappearing, so will PCs.
These charts dramatically show how quickly a new technology, or package of technologies, can change the way we behave. Simultaneously, they change the competitive landscape. Sony dominated the music industry, as a producer and supplier of hardware, when CDs dominated. But, as I wrote in 2012, the shift to more portable music caused Sony to fall into a rapid decline, and the company suffered 6 consecutive years (24 quarters) of falling sales and losses. The one-time giant was crippled by a technology shift they did not adopt. And they weren’t alone, as big box retailers such as Best Buy and Circuit City also faltered when these sales disappeared.
Once, Microsoft was synonymous with personal technology. Nobody maximized the value in PC growth more than Microsoft. But changing technology altered the competitive landscape, with Apple, Google, Samsung and Amazon emerging as the leaders. Microsoft, as the almost unnoticed launch of Windows 10 demonstrated, is struggling to maintain relevancy.
Too often we discount trends. Like Sony and Microsoft we think historical growth will continue, unabated. We find ways to discount market shifts, saying the products are “niche” and denigrating their quality. We will express our view that the market has “hiccuped” and will return to growth again. By the time we admit the shift is permanent new competitors have overtaken the lead, and we risk becoming totally obsolete. Like Toys-R-Us, Radio Shack, Sears and Motorola.
Aircraft stalls when not enough power to climb
The time for action is when the very first signs of shift happened. I’ve written a lot about “Growth Stalls” and they occur in just 2 quarters. 93% of the time a stalled company never again grows at a mere 2%/year. Look at how fast GE went from the best company in America to the worst. It is incredibly important that leadership react FAST when trends push customers toward new solutions, because it often takes very little time for the trend to make dying markets completely untenable.
InvestorPlace.com declared Snap stock will be a big disappointment in 2018. Bad news for investors, because SNAP was an enormous disappointment in 2017. After going public at $27/share in early March, the stock dropped to $20 by mid-March, then just kept dropping until it bottomed at just under $12 in August. Since then the stock has largely gone sideways at $15.
This was not unexpected. As I wrote in April, Snapchat was not without competition and was unlikely to be a long-term winner. Even though Snapchat and its Stories feature grew popular with teenagers 14 to 19, in August, 2016 Facebook launched Instagram Stories as a direct competitor. In just 7 months – just as SNAP went public – Instagram Stories had more users than Snapchat. It was clear then if you wanted to make money on the photo and video sharing trends, investors were better off to own Facebook stock and avoid the newly available SNAP shares (stock, not pix!)
Now the situation is far worse. Facebook launched WhatsApp Status as another competitive product in February, 2017 and it took less than 3 months for its user base to exceed Snapchat. As the chart below shows, by October, 2017 Stories and Status each had 300 million users, while Snapchat was mired at 180 million users. With only 30% the users of Facebook, Snapchat has little chance to succeed against the social media powerhouse.
Facebook is now a very large company. But, it has shown it is adaptable. Rather than sticking to its original market, Facebook went mobile and has launched new products as fast as competitors tried to carve out niches. The question is, are you constantly scanning the horizon for new products and adapting – fast – to keep your customers and grow? Or are you stuck trying to defending your old business while upstarts carve up your market?”
For most consumers an Android-based phone from one of the various manufacturers, most likely bought through a wireless provider if in the USA, does pretty much everything the consumer wants. Developers of most consumer apps, such as games, navigation, shopping, etc. make sure their products work on all phones. For that reason, the bulk of consumers are happy to buy their phone for $200 or less, and most don’t even care what version of Android it runs. As a stand-alone tool an Android phone does pretty much everything they want, and they can afford to replace it every year or two.
But the business community has different requirements.
And because iOS has superior features, Apple continues to dominate the enterprise environment:
- All iPhones are encrypted, giving a security advantage to iOS. Due to platform fragmentation (a fancy way of saying Android is not the same on all platforms, and some Android phones run pretty old versions) most Android phones are not encrypted. That leads to more malware on Android phones. And, Android updates are pushed out by the carrier, compared to Apple controlling all iOS updates regardless of carrier. When you’re building an enterprise app, these security issues are very important.
- iOS is seamless with Macs, and can be pretty well linked to Windows if necessary for an apps’ purpose. Android plays well with Chromebooks, but is far less easy to connect with established PC platforms. So if you want the app to integrate across platforms, such as in a corporation, it’s easier with iOS.
- iPhones come exactly the same, regardless of the carrier. Not true for Android phones. Almost all Androids come with various “junkware.” These apps can conflict with an enterprise app. For enterprise app developers to make things work on an Android phone they really need to “wipe” the phone of all apps, make sure each phone has the same version of Android and then make sure users don’t add anything which can cause a user conflict with the enterprise app. Much easier to just ask people to use an iPhone.
- iOS backs up to iCloud or via iTunes. Straightforward and simple. And if you need to restore, or change devices, it is a simple process. But in the Android world companies like Verizon and Samsung integrate their own back-up tools, which are inconsistent and can be quite hard for a developer to integrate into the app. Enterprise apps need back-ups, and making that difficult can be a huge problem for enterprise developers who have to support thousands of end users. And the fact that Android restores are not consistent, or reliable, makes this a tough issue.
- Search is built-in with iOS. Simple. But Android does not have a clean and simple search feature. And the old cross-platform inconsistencies plague the various search functions offered in the Android world. When using an enterprise app, which may well have considerable complexity, accessing an easy search function is a great benefit.
Most of these issues are no big deal for the typical smartphone consumer who just uses their phone independently of their work. But when someone wants to create an enterprise app, these become really important issues. To make sure the app works well, meeting corporate and end user needs, it is much easier, and better, to build it on iOS.
This allows Apple to price well above the market average
Today Apple charges around $800 for an iPhone 7, and expectations are for the iPhone 8 to be priced around $1,000. Because Apple’s pricing is some 4-5x higher, it allows Apple’s iOS revenue to actually exceed the revenue of all the Android phones sold! And because Android phone manufacturers compete on price, rather than features and capabilities, Apple makes almost ALL the profit in the smartphone hardware business. Even as iPhone unit volume has struggled of late, and some analysts have challenged Apple’s leadership given its under 20% market share, profits keep rolling in, and up, for the iPhone.
By taking the lead with enterprise app developers Apple assures itself of an ongoing market. Three years ago I pointed out the importance of winning the developer war when IBM made its huge commitment to build enterprise apps on iOS. This decision spelled doom for Windows phone and Blackberry — which today have inconsequential market shares of .1% and .0% (yes, Blackberry’s share is truly a rounding error in the marketplace.) Blackberry has become irrelevant. And having missed the mobile market Microsoft is now trying to slow the decline of PC sales by promoting hybrid devices like the Surface tablet as a PC replacement. But, lacking developers for enterprise mobile apps on Microsoft O/S it will be very tough for Microsoft to keep the mobile trend from eventually devastating Windows-based device sales.
As the world goes mobile, devices become smaller and more capable. The need for two devices, such as a phone and a PC, is becoming smaller with each day. Those who predicted “nobody can do real work on a smartphone” are finding out that an incredible amount of work can be done on a wirelessly connected smartphone. As the number of enterprise apps grows, and Apple remains the preferred developer platform, it bodes well for future sales of devices and software for Apple — and creates a dark cloud over those with minimal share like Blackberry and Microsoft.
People love to watch tech stocks, because there is so much volatility. Just today (April 27, 2017) Alphabet beat expectations and its shares rose $34 (about 4%) after hours. GOOG is up 15.5% in 2017, and 31% for the year. But not all tech stocks do this well. Twitter, for example, had a nice increase of late — but TWTR is down 33% since peaking in early October, and it is down 69% from 10/2014 highs.
So how is an investor to know which tech stocks to own, and which to eschew?
They key, of course, is to watch trends. And to recognize who absolutely dominates those trends. When it comes to the rapidly growing world of social media, it is increasingly clear there is only one Goliath — and that is Facebook.
Felix Richter, Statista
Snapchat created a lot of interest when it hit the scene. A darling of the most youthful set, it was growing very fast and had exceeded 100 million users by January 2016. By January 2017 Snapchat added another 60 million users — growing 60%. But since going public the stock has dropped about 10%. And according to Marketwatch only 12 analysts rank it a “buy” while 23 rank it a “hold,” “underweight” or “sell.”
Should you buy Snapchat? After all, Facebook dropped after its IPO
As the chart from Statista shows, in just eight months Instagram Stories has blown way past the user base of Snapchat. In April 2012 Facebook paid $1 billion for Instagram, then a popular photo-sharing app, which had no revenues. The idea was to leverage Facebook’s installed base to grow the app. Since September, 2013 Instagram has been adding 50 million users per quarter. Instagram now has 600 million active users and became one of the five most popular mobile apps in the world.
Felix Richter, Statista, https://www.statista.com/chart/5055/top-10-apps-in-the-world/
The Facebook App Ecosystem Totally Dominates Mobile. Chart reproduced courtesy of Felix Richter at Statista
Looking at Facebook, one has to marvel at how the company has kept users in its ecosystem. As the Statista chart shows, since 2016 Facebook has had four of the top five mobile app downloads. Now that Instagram Stories has blown past Snapchat, Facebook holds all four top positions.
Does anyone remember when Facebook purchased Beluga in 2011 for about $20 million? That is now Messenger, and it opened the door for sending pictures and video. Do you remember the $19 billion acquisition of WhatsApp — which had only $10 million in revenues? Both have added multiple capabilities, and now Messenger has 1 billion active users, and WhatsApp has 1.2 billion users.
In fiscal 2012 Facebook hit $1 billion in quarterly revenue, and ended the year with just over $4 billion in annual revenues. Q4 2016 exceeded $8.8 billion, and for the year $27.6 billion.
It is for good reason that almost twice as many analysts are skeptical of Snapchat’s future value as those who think it will go up.
Snapchat is competing with Facebook, a company that has shown time and again it can watch the trends and put in place products that initially meet, but then eventually exceed customer expectations. One might like to think Snapchat is a good David, putting up a good fight. But this time, investors are likely to be much better off betting on Goliath. Facebook still has a lot of opportunity to grow.
(Photo by Andrew Burton/Getty Images)
Apple’s stock is on a tear. After languishing for well over a year, it is back to record high levels. Once again Apple is the most valuable publicly traded company in America, with a market capitalization exceeding $700 billion. And pretty overwhelmingly, analysts are calling for Apple’s value to continue rising.
But today’s Apple, and the Apple emerging for the future, is absolutely not the Apple which brought investors to this dance. That Apple was all about innovation. That Apple identified big trends – specifically mobile – then created products that turned the trend into enormous markets. The old Apple knew that to create those new markets required an intense devotion to product development, bringing new capabilities to products that opened entirely new markets where needs were previously unmet, and making customers into devotees with really good quality and customer service.
That Apple was built by Steve Jobs. Today’s Apple has been remade by Tim Cook, and it is an entirely different company.
Today’s Apple – the one today’s analysts love – is all about making and selling more iPhones. And treating those iPhone users as a “loyal base” to which they can sell all kinds of apps/services. Today’s Apple is about using the company’s storied position, and brand leadership, to milk more money out of customers that own their devices, and expanding into adjacent markets where the installed base can continue growing.
UBS likes Apple because they think the services business is undervalued. After noting that it today would stand alone as a Fortune 100 company, they expect those services to double in four years. Bernstein notes services today represents 11% of revenue, and should grow at 22% per year. Meanwhile they expect the installed base of iPhones to expand by 27% – largely due to offshore sales – adding further to services growth.
Analysts further like Apple’s likely expansion into India – a previously almost untapped market. CEO Cook has led negotiations to have Foxxcon and Wistron, the current Chinese-based manufacturers, open plants in India for domestic production of iPhones. This expansion into a new geographic market is anticipated to produce tremendous iPhone sales growth. Do you remember when, just before filing for bankruptcy, Krispy Kreme was going to keep up its valuation by expanding into China?
Of course, with so many millions of devices, it is expected that the apps and services to be deployed on those devices will continue growing. Likely exponentially. The iOS developer community has long been one of Apple’s great strengths. Developers like how quickly they can deploy new apps and services to the market via Apple’s sales infrastructure. And with companies the size of IBM dedicated to building enterprise apps for iOS the story heard over and again is about expanding the installed base, then selling the add-ons.
Gee, sounds a lot like the old “razors lead to razor blade sales” strategy – business innovation circa 1966.
Overall, doesn’t this sound a lot like Microsoft? Bill Gates founded a company that revolutionized computing with low-cost software on low-cast hardware that did just about anything you would want. Windows made life easy. Microsoft gave users office automation, databases and all the basic work tools. And when the internet came along Microsoft connected everyone with Internet Explorer – for free! Microsoft created a platform with Windows upon which hordes of developers could build special applications for dedicated markets.
Once this market was created, and pretty much monopolized by Microsoft CEO Gates turned the reigns over to CEO Steve Ballmer. And Mr. Ballmer maximized these advantages. He invested constantly in developing updates to Windows and Office which would continue to insure Microsoft’s market share against emerging competitors like Unix and Linux. The money was so good that over a decade money was poured into gaming, even though that business lost more money than it made in revenue – but who cared? There were occasional investments in products like tablets, hand-helds and phones, but these were merely attractions around the main show. These products came and went and, again, nobody really cared.
Ballmer optimized the gains from Microsoft’s installed base. And a lot – a lot – of money was made doing this. nvestors appreciated the years of ongoing profits, dividends – and even occasional special dividends – as the money poured in. Microsoft was unstoppable in personal computing. The only thing that slowed Microsoft down was the market shift to mobile, which caused the PC market to collapse as unit sales have declined for six straight years (PC sales in 2016 barely managed levels of 2006). But, for a goodly while, it was a great ride!
Today all one hears about at Apple is growing the installed base. Maximizing sales of iPhones. And then selling everyone services. Oh yeah, the Apple Watch came out. Sort of flopped. Nobody really seemed to care much. Not nearly as much as they cared about 2 quarters of sales declines in iPhones. And whatever happened to AppleTV? ApplePay? iBeacons? Beats? Weren’t those supposed to be breakthrough innovations to create new markets? Oh well, nobody seems to much care about those things any longer. Attractions around the main event – iPhones!
So now analysts today aren’t put in the mode of evaluating breakthrough innovations and trying to guess the size of brand new, never before measured markets. That was hard. Now they can be far more predictable forecasting smartphone sales and services revenue, with simulations up and down. And that means they can focus on cash flow. After all, Apple makes more cash than it makes profit! Apple has a $246 billion cash hoard. Most people think Berkshire Hathaway, led by famed investor Warren Buffett, spent $6.6 billion on Apple stock in 2016 because Berkshire sees Apple as a cash generation machine – sort of like a railroad! And if those meetings between CEO Cook and President Trump can yield a tax change allowing repatriation at a low rate then all that cash could lead to a big one time dividend!
And, most likely, the stock will go up. Most likely, a lot. Because for at least a while Apple’s iPhone business is going to be pretty good. And the services business is going to grow. It will be a lot like Microsoft – at least until mobile changed the business. Or, maybe like Xerox giving away copiers to obtain toner sales – until desktop publishing and email cratered the need for copiers and large printers. Or, going all the way back into the 1950s and 60s, when Multigraphics and AB Dick practically gave away small printers to get the ink and plate sales – until xerography crushed that business. Of course you couldn’t go wrong investing in Sears for years, because they had the store locations, they had the brands (Kenmore, Craftsman, et.al.,) they had the credit card services – until Wal-Mart and Amazon changed that game.
You see, that’s the problem with all of these sort of “milk the base” businesses. As the focus shifts to grow the base and add-on sales the company loses sight of customer needs. Innovation declines, then evaporates as everything is poured into maximizing returns from the “core” business. Optimization leads to a focus on costs, and price reductions. Arrogance, based on market leadership, emerges and customer service starts to wane. Quality falters, but is not considered as important because sales are so large.
These changes take time, and the business looks really good as profits and cash flow continue, so it is easy to overlook these cultural and organizational changes, and their potential negative impact. Many applaud cost reductions – remember the glee with which analysts bragged about the cost savings when Dell moved its customer service to India some 20 years ago?
Today we’re hearing more stories about long-term Apple customers who aren’t as happy as they once were.
Genius bar experiences aren’t always great. In a telling AdAge column one long-time Apple user discusses how he had two iPhones fail, and Apple could not replace them leaving the customer with no phone for two weeks – demonstrating a lack of planning for product failures and a lack of concern for customer service. And the same issues were apparent when his corporate Macbook Pro failed. This same corporate customer bemoans design changes that have led to incompatible dongles and jacks, making interoperability problematic even within the Apple line.
Meanwhile, over the last four years Apple has spent lavishly on a new corporate headquarters befitting the country’s most valuable publicly traded company. And Apple leaders have been obsessive about making sure this building is built right! Which sounds well and good, except this was a company that once put customers – and unearthing their hidden needs, wants and wishes – first. Now, a lot of attention is looking inward. Looking at how they are spending all that money from milking the installed base. Putting some of the best managers on building the building – rather than creating new markets.
Who was that retailer that was so successful that it built what was, at the time, the world’s tallest building? Oh yeah, that was Sears.
Markets always shift. Change happens. Today it happens faster than ever in history. And nowhere does change happen faster than in technology and consumer electronics. CEO Cook is leading like CEO Ballmer. He is maximizing the value, and profitability, of the Apple’s core product – the iPhone. And analysts love it. It would be wise to disavow yourself of any thoughts that Apple will be the innovative market creating Jobs/Ives organization it once was.
How long will this be a winning strategy? Your answer to that should determine how long you would like to be an Apple investor. Because some day something new will come along.
It’s been over a decade since the Internet transformed print media.
Very quickly the web’s ability to rapidly disseminate news, and articles, made newspapers and magazines obsolete. Along with their demise went the ability for advertisers to reach customers via print. What was once an “easy buy” for the auto or home section of a paper, or for magazines targeting your audience, simply disappeared. Due to very clear measuring tools, unlike print, Internet ads were far cheaper and more appealing to advertisers – so that’s where at least some of the money went.
In 2012 Google surpassed all print media in generating ad revenue. Source Statista courtesy of NewspaperDeathWatch.com
While this trend was easy enough to predict, few expected the unanticipated consequences.
1. First was the trend to automated ad buying. Instead of targeting the message to groups, programmatic buying tools started targeting individuals based upon how they navigated the web. The result was a trolling of web users, and ad placements in all kinds of crazy locations.
Heaven help the poor soul who looks for a credenza without turning off cookies. The next week every site that person visits, whether it be a news site, a sports site, a hobby site – anywhere that is ad supported – will be ringed with ads for credenzas. That these ads in no way connect to the content is completely lost. Like a hawker who won’t stop chasing you down the street to buy his bad watches, the web surfer can’t avoid the onslaught of ads for a product he may well not even want.
2. Which led to the next unanticipated consequence, the rising trend of bad – and even fake – journalism.
Now anybody, without any credentials, could create their own web site and begin publishing anything they want. The need for accuracy is no longer as important as the willingness to do whatever is necessary to obtain eyeballs. Learning how to “go viral” with click-bait keywords and phrases became more critical than fact checking. Because ads are bought by programs, the advertiser is no longer linked to the content or the publisher, leaving the world awash in an ocean of statements – some accurate and some not. Thus, what were once ads that supported noteworthy journals like the New York Times now support activistpost.com.
3. The next big trend is the continuing rise of paid entertainment sites that are displacing broadcast and cable TV.
Netflix is now spending $6 billion per year on original content. According to SymphonyAM’s measurement of viewership, which includes streaming as well as time-shifted viewing, Netflix had the no. 1 most viewed show (Orange is the New Black) and three of the top four most viewed shows in 2016.
Increasingly, purchased streaming services (Netflix, Hulu, et.al.) are displacing broadcast and cable, making it harder for advertisers to reach their audience on TV. As Barry Diller, founder of Fox Broadcasting, said at the Consumer Electronics Show, people who can afford it will buy content – and most people will be able to afford it as prices keep dropping. Soon traditional advertisers will “be advertising to people who can’t afford your goods.”
4. And, lastly, there is the trend away from radio.
Radio historically had an audience of people who listened to their favorite programming at home or in their car. But according to BuzzAngle that too is changing quickly. Today the trend is to streaming audio programming, which jumped 82.6% in 2016, while downloading songs and albums dropped 15-24%. With Apple, Amazon and Google all entering the market, streaming audio is rapidly displacing real-time radio.
Declining free content will affect all consumers and advertisers.
Thus, the assault on advertisers which began with the demise of print continues. This will impact all consumers, as free content increasingly declines. Because of these trends, users will have a lot more options, but simultaneously they will have to be much more aware of the source of their content, and actively involved in selecting what they read, listen to and view. They can’t rely on the platforms (Facebook, etc.) to manage their content. It will require each person select their sources.
Meanwhile, consumer goods companies and anyone who depends on advertising will have to change their success formulas due to these trends. Built-in audiences – ready made targets – are no longer a given. Costs of traditional advertising will go up, while its effectiveness will go down. As the old platforms (print, TV, radio) die off these companies will be forced to lean much, much heavier on social media (Facebook, Snapchat, etc.) and sites like YouTube as the new platforms to push their product message to potential customers.
There will be big losers, and winners, due to these trends.
These market shifts will favor those who aggressively commit early to new communications approaches, and learn how to succeed. Those who dally too long in the old approach will lose awareness, and eventually market share. Lack of ad buying scale benefits, which once greatly favored the very large consumer goods companies (Kraft, P&G, Nestle, Coke, McDonalds) means it will be harder for large players to hold onto dominance. Meanwhile, the easy access and low cost of new platforms means more opportunities will exist for small market disrupters to emerge and quickly grow.
And these trends will impact the fortunes of media and tech companies for investors The decline in print, radio and TV will continue, hurting companies in all three media. When Gannet tried to buy Tronc the banks balked at the price, killing the deal, fearing that forecasted revenues would not materialize.
Just as print distributors have died off, cable’s role as a programming distributor will decline as customers opt for bandwidth without buying programming. Thus trends put the growth prospects of companies such as Comcast and DirecTV/AT&T at peril, as well as their valuations.
Privatized content will benefit Netflix, Amazon and other original content creators. While traditionalists question the wisdom of spending so much on original content, it is clearly the trend and attracts customers. And these trends will benefit streaming services that deliver paid content, like Apple, Amazon and Google. It will benefit social media networks (Facebook and Alphabet) who provide the new platforms for reaching audiences.
Media has changed dramatically from the business it was in 2000. And that change is accelerating. It will impact everyone, because we all are consumers, altering what we consume and how we consume it. And it will change the role, placement and form of advertising as the platforms shift dramatically. So the question becomes, is your business (and your portfolio) ready?
Poke’Mon Go is a new sensation. Just launched on July 6, the app is already the #1 app in the world – and it isn’t even available in most countries. In less than 2 weeks, from a standing start, Nintendo’s new app is more popular than both Facebook and Snapchat. Based on this success, Nintendo’s equity valuation has jumped 90% in this same short time period.
Some think this is just a fad, after all it is just 2 weeks old. Candy Crush came along and it seemed really popular. But after initial growth its user base stalled and the valuation fell by about 50% as growth in users, time on app and income all fell short of expectations. And, isn’t the world of gaming dominated by the likes of Sony and Microsoft?
A bit of history
Nintendo launched the Wii in 2006 and it was a sensation. Gamers could do things not previously possible. Unit sales exceeded 20m units/year for 2006 through 2009. But Sony (PS4) and Microsoft (Xbox) both powered up their game consoles and started taking share from Nintendo. By 2011 Nintendo sale were down to 11.6m units, and in 2012 sales were off another 50%. The Wii console was losing relevance as competitors thrived.
Sony and Microsoft both invested heavily in their competition. Even though both were unprofitable at the business, neither was ready to concede the market. In fall, 2014 Microsoft raised the competitive ante, spending $2.5B to buy the maker of popular game Minecraft. Nintendo was becoming a market afterthought.
Meanwhile, back in 2009 Nintendo had 70% of the handheld gaming market with its 3DS product. But people started carrying the more versatile smartphones that could talk, text, email, execute endless apps and even had a lot of games – like Tetrus. The market for handheld games pretty much disappeared, dealing Nintendo another blow.
Competitor strategic errors
Fortunately, the bitter “fight to the death” war between Sony and Microsoft kept both focused on their historical game console business. Both kept investing in making the consoles more powerful, with more features, supporting more intense, lifelike games. Microsoft went so far as to implement in Windows 10 the capability for games to be played on Xbox and PCs, even though the PC gaming market had not grown in years. These massive investments were intended to defend their installed base of users, and extend the platform to attract new growth to the traditional, nearly 4 decade old market of game consoles that extends all the way back to Atari.
Both companies did little to address the growing market for mobile gaming. The limited power of mobile devices, and the small screens and poor sound systems made mobile seem like a poor platform for “serious gaming.” While game apps did come out, these were seen as extremely limited and poor quality, not at all competitive to the Sony or Microsoft products. Yes, theoretically Windows 10 would make gaming possible on a Microsoft phone. But the company was not putting investment there. Mobile gaming was simply not serious, and not of interest to the two Goliaths slugging it out for market share.
Building on trends makes all the difference
Back in 2014 I recognized that the console gladiator war was not good for either big company, and recommended Microsoft exit the market. Possibly seeing if Nintendo would take the business in order to remove the cash drain and distraction from Microsoft. Fortunately for Nintendo, that did not happen.
Nintendo observed the ongoing growth in mobile gaming. While Candy Crush may have been a game ignored by serious gamers, it nonetheless developed a big market of users who loved the product. Clearly this demonstrated there was an under-served market for mobile gaming. The mobile trend was real, and it’s gaming needs were unmet.
Simultaneously Nintendo recognized the trend to social. People wanted to play games with other people. And, if possible, the game could bring people together. Even people who don’t know each other. Rather than playing with unseen people located anywhere on the globe, in a pre-organized competition, as console games provided, why not combine the social media elements of connecting with those around you to play a game? Make it both mobile, and social. And the basics of Poke’Mon Go were born.
Then, build out the financial model. Don’t charge to play the game. But once people are in the game charge for in-game elements to help them be more successful. Just as Facebook did in its wildly successful social media game Farmville. The more people enjoyed meeting other people through the game, and the more they played, the more they would buy in-app, or in-game, elements. The social media aspect would keep them wanting to stay connected, and the game is the tool for remaining connected. So you use mobile to connect with vastly more people and draw them together, then social to keep them playing – and spending money.
The underserved market is vastly larger than the over-served market
Nintendo recognized that the under-served mobile gaming market is vastly larger than the overserved console market. Those console gamers have ever more powerful machines, but they are in some ways over-served by all that power. Games do so much that many people simply don’t want to take the time to learn the games, or invest in playing them sitting in a home or office. For many people who never became serious gaming hobbyists, the learning and intensity of serious gaming simply left them with little interest.
But almost everyone has a mobile phone. And almost everyone does some form of social media. And almost everyone enjoys a good game. Give them the right game, built on trends, to catch their attention and the number of potential customers is – literally – in the billions. And all they have to do is download the app. No expensive up-front cost, not much learning, and lots of fun. And thus in two weeks you have millions of new users. Some are traditional gamers. But many are people who would never be a serious gamer – they don’t want a new console or new complicated game. People of all ages and backgrounds could become immediate customers.
David can beat Goliath if you use trends
In the Biblical story, smallish David beat the giant Goliath by using a sling. His new technology allowed him to compete from far enough away that Goliath couldn’t reach David. And David’s tool allowed for delivering a fatal blow without ever touching the giant. The trend toward using tools for hunting and fighting allowed the younger, smaller competitor to beat the incumbent giant.
In business trends are just as important. Any competitor can study trends, see what people want, and then expand their thinking to discover a new way to compete. Nintendo lost the console war, and there was little value in spending vast sums to compete with Sony and Microsoft toe-to-toe. Nintendo saw the mobile game market disintegrate as smartphones emerged. It could have become a footnote in history.
But, instead Nintendo’s leaders built on trends to deliver a product that filled an unmet need – a game that was mobile and social. By meeting that need Nintendo has avoided direct competition, and found a way to dramatically grow its revenues. This is a story about how any competitor can succeed, if they learn how to leverage trends to bring out new products for under-served customers, and avoid costly gladiator competition trying to defend and extend past products.
Snapchat filed its latest fundraising with the SEC this week. According to TechCrunch, $1.8 billion cash was added to the company, based on a current valuation in the range of $18 billion to $20 billion. Not bad for a company with 2015 revenues of about $59 million. And quite a high valuation for a one-product company that probably nobody who reads this column has ever used – or even knows anything about.
Why is Snapchat so highly valued? Because revenue estimates are for $250 million to $350 million in 2016, and up to $1 billion for 2017. From 50 million daily active users in March, 2014 Snapchat has grown to 110 million users by December, 2015 – so a growth rate of about 50% per year. And this growth has not been all USA, over half the Snapchat users are from Europe and the rest of the world – and the non-USA markets are growing the fastest. Clearly, at 20 times 2017 revenue estimates, investors are expecting dramatic growth in users, and revenue to continue. They anticipate numbers of the magnitude that drove the valuation of Google (over $500 billion) and Facebook ($340 billion).
What is Snapchat? It is the complete opposite of this column. Snapchat is like Twitter only without the text. Of course, most of my readers don’t tweet either, so that may not help. It is a picture or 10 second video messaging app. But, most of my readers don’t use messaging apps either, so that may not be helpful.
Think of texting, only you don’t actually text. Instead you send a picture or short video. That’s it. Pretty simple. Just a way to send your friends pics and videos with your phone – although you can be creative with the pictures and make changes.
People who use Snapchat find it addictive. They may send dozens, or hundreds, of pictures daily. To single friends, groups, or even all their friends – since users can pick who gets the pic.
For many of my readers, this must seem ridiculous. Who would want to send, or receive, several pictures every day from some, or many, of your colleagues and friends?
In 1927 Fred Bernard [trivia] popularized the phrase we use today “A picture is worth a thousand words
.” And today, that is more true than ever. Pictures are replacing words for a vast and growing segment of the population. This is now a very fast growing trend, and it is projected to continue.
“Why is this a trend, and not a fad?” you may ask. The answer goes to the heart of how we use language and images. For thousands of years very few people knew how to read or write. To promulgate information, religious and government leaders would have artists paint images that told the story they wanted spread. These images were then taken from town to town, and people were taught the stories by having someone explain the picture. Then the image could be recalled by the population. It was only after the advent of mass education that using written words became the primary medium for providing information.
Simultaneously, paintings were really expensive. And early photography was expensive. Both mediums were used primarily to memorialize a story, or event. Thus there were relatively few of these images, and they were often treasured, hung on walls or kept in albums for later review. Most of my readers are still stuck in the historical context of thinking of pictures as memorials.
But today images are extremely cheap and easy. Almost everyone has a phone with a camera. So it is easy to take a picture, and it is easy to view a picture. Pictures have become free. And if you can replace a thousand words with one photo, it is far more efficient – and thus from a resource perspective photos are far cheaper (think of how long it takes to write an email as opposed to taking a picture). Given that this flip in resources required has happened, and that the use of mobile technology is growing worldwide and will never revert, we know that this is not s short-term fad, but rather a trend.
Once we communicated by telephone calls. That has dropped dramatically because real-time communication takes a lot more effort to coordinate and implement than asynchronous communication. I can email or text any time I want, and my friend can receive that message when it is convenient for her. And she can choose to respond at her convenience, or not respond at all. Thus email and texting exploded due to the technical capability and their improved economy. Today we have the ability to communicate in pictures or short videos which is even more information dense, and even more economical.
I’m sure many of my readers are saying “well, that may be good for someone else, but not for me.” And that’s good, because you read these columns. But factually, the number of readers is destined to decrease as the number of viewers go up.
There’s a reason every time you open an on-line magazine column you are bombarded by short videos ads. They are more communication dense and they are more successful at capturing attention – even if they do irritate you.
There’s a reason that fewer and fewer people read books, and rely instead on columns like this one to gain insights. And there’s a reason more and more people connect on Facebook rather than sending emails – and rather than sending snail mail (when was the last time you actually mailed someone a birthday card?). Haven’t you ever watched a YouTube video rather than read an instruction manual? While you may not imagine using pictures to replace language, the fact is it is happening with increasing frequency, and lots of people are making the switch. Thus it is a trend that will affect how we do many things for many years into the future.
Snapchat has capitalized on this new trend by making an app which allows you and your friends to communicate far more information a whole lot faster. Rather than interrupting your friends with a phone call (they may be busy right now,) or writing them an email or text message, you can just send them a photo. Have you ever used your phone to photo a label and sent it to someone who’s shopping for you? Or taken a photo of an item so you can find an exact replacement? That same action now can become your way of communicating – of telling your current story. Don’t tell your friends what you had for lunch, just send a photo. Don’t tell your friends you are shopping on Madison Avenue, just take a picture. Pictures are not archives, but rather just a fast, more compact and information filled form of communication.
Snapchat did not discover a new bio-pharmaceutical. It did not create a breakthrough new technology, such as extended battery life. It did not identify a sales opportunity in a far flung country. Nor did it have a breakthrough manufacturing process. Rather, merely by being the leader at implementing an emerging trend Snapchat’s founders have created $20 billion of current value.
Now that you know this trend, what are you going to do so you can capture additional value for your business?
Phablets are a very hot, growing market. Phablets are those huge phones (greater than 4″ screen size) that some people carry around. From almost nothing in 2012, over the last 3 years the market has exploded:
Source: Jay Yarrow, Business Insider http://www.businessinsider.com/in-one-chart-heres-why-the-ipad-business-is-cratering-2015-3?utm_content=&utm_medium=email&utm_source=alerts&nr_email_referer=1
The original creator of this market data, Kulbinder Garcha of Credit Suisse, thinks this demonstrates cannibalization of tablet sales by phablets. And this is supposedly a bad thing for Apple.
But there is another way to look at this. By introducing and promoting a phablet (iPhone 6+ and Galaxy S6,) Apple and Samsung are growing users of mobile media and mobile apps. As the chart shows, growth in tablet sales was nothing compared to what happened when phablets came along. So people who didn’t buy a tablet, and maybe (likely?) wouldn’t, are buying phablets. The market is growing faster with phablets than had they not been introduced, and even if tablet sales shrink Apple and Samsung see revenues continue growing.
Who wins as phablet sales grow? Those who have phablet products in the market, and newer versions in the works.
Source: Kantar WorldPanel and Seeking Alpha http://seekingalpha.com/article/3032926-microsoft-the-china-mobile-backed-lenovo-windows-10-smartphone-could-be-a-future-tailwind?ifp=0
As this chart shows, the companies who dominate smartphone sales are those who make Android-based products (#1 is Samsung) and Apple. Microsoft missed the mobile/smartphone trend, and even though it purchased Nokia it has never obtained anything close to double digit share in any market.
Unfortunately for Microsoft enthusiasts, and investors, Microsoft’s Windows10 product is focused first on laptop (PC) users, second on hybrid (products used as both a laptop and tablet), third tablets (primarily the slow-selling Microsoft Surface) and in a far, far trailing position smartphones.
As data from IDC shows, Surface sales are inconsequential. So the big loser from phablet cannibalization of tablets will be Microsoft. Given its very small user base, and the heavy losses Microsoft has taken on Surface, there is little revenue or cash flow to support an intense competitive effort in a shrinking market. Apple and Samsung will market hard to grow as many sales as possible, and likely will make the tablet products more affordable. Thus one should anticipate Microsoft’s very small tablet share would decline as tablet sales shrink.
This is the problem created when any business misses a major trend.
Microsoft missed the trend to mobile. They didn’t prepare for it in any of their major products, and they let new products, like music player Zune and Lumia phones, languish – and mostly die. By the time Microsoft reacted Apple and Samsung had enormous leads. Microsoft is still trying to play catch-up with its “core” Windows product.
But worse, because it is so far behind, Microsoft’s leaders are unable to forecast where the market will be in 3 years. Consequently they develop products for today’s market, like tablets (and their hybrid products,) which we now see will be obsolete as the market shifts to new products (like phablets.) Because Apple and Samsung already have the new products (phablets) they are prepared to cannibalize the old product sales (tablets) in order to overall grow the marketplace. But Microsoft has no phablet product, really no smartphone product, and will find itself most likely writing off more future Surface products as its tiny market share erodes to nothing.
So this trend to phablets continues to make a Microsoft comeback as a major personal technology competitor problematic. Windows 10 may be coming, but its relevance looks increasingly like that of new Blackberry models. There is little reason to care, because the products are years late and poorly positioned for leading edge customers. Further, developers will already be onto new competitive platforms long before the outdated Microsoft products make it to market. Without share you don’t capture developers, without developers you don’t have a robust app market, without apps you don’t capture customers, without customers you can’t build share — and that’s a terrible whirlpool Microsoft is captured within.
Be sure your business keeps its eyes on trends, and does not wait to react. Waiting can turn out to be deadly.