The Fire Phone is a disappointingly undisruptive device from Amazon

Amazon today announced its first smartphone, the Fire Phone. The comment below may be attributed to Jan Dawson, Chief Analyst at Jackdaw Research. Jan may be reached for further comment at (408) 744-6244 or jan@jackdawresearch.com.

If you talk to people who use iPhones or Android phones about why they chose them, they frequently answer by saying, “I’m an Apple person” or “I’m a Google person”. The Fire Phone is the smartphone for the Amazon person – someone who buys lots of stuff through Amazon, has a Prime subscription, uses Prime Instant Video and has a Kindle, a Kindle Fire and a Fire TV. Amazon’s strategy here isn’t to take meaningful share in the smartphone market, or even to make lots of money selling smartphones. It’s to cement the relationship it has with its most loyal customers. The Fire Phone is intended to put Amazon’s content front and center, and the Firefly feature is intended to make it easier than ever for customers to buy things through Amazon.

However, for all the talk about disruptive business models such as taking advantage of AT&T’s Sponsored Data plan or heavily subsidizing the device, this really isn’t a very disruptive phone. It acts more or less like any other phone on the market when it comes to the things people use their phones for, and both the phone itself and the data plan that come with it are priced the way these devices usually are. The 3D features are gimmicks at best, which will be great marketing tools to get people to go into AT&T stores to take a look at the phone, but likely won’t drive many sales. Amazon has 244 million customer accounts, and about 10% of those are Prime customers. It’s likely that only a small fraction of those will be prospects for the Fire Phone, and as such the sales will be very limited. Because of the AT&T exclusive and the premium price, Amazon will sell even fewer units than if it had used broader distribution and a more disruptive pricing model. Instead of offering a free year of Prime, it should have just dropped the price by a hundred dollars. There were good strategic reasons for Amazon to launch a smartphone, but the Fire Phone isn’t the phone Amazon should have launched. Instead of something truly disruptive, Amazon has given the world (or technically just the US at this point) yet another shiny black rectangle.

Samsung Galaxy Tab S goes head to head against the iPad for the first time

Samsung today announced the Samsung Galaxy Tab S, a “flagship” tablet that joins other tablets in Samsung’s existing lineup. The comment below may be attributed to Jan Dawson, Chief Analyst at Jackdaw Research.

The first reaction by many people to the launch of a supposed “flagship” tablet from Samsung may be surprise, since it already has a number of high-end tablets in the market at similar price points to the iPad, the market leader in the premium segment. In reality, Samsung’s Galaxy Tab S is less a flagship product but the first of Samsung’s tablets to go head-to-head against the iPad as a consumption-centric device. Samsung has pursued a smart strategy in the tablet market of differentiating each of its devices in some way against the iPad, originally by creating smaller tablets and later by featuring a stylus, multitasking and larger screens. But it’s never before had a tablet that looked like it was so explicitly intended to go up against the iPad.

The two versions of the Tab S look and feel very much like the iPad Air and Mini respectively, at least from the front. They are very similar sizes and weights, albeit with longer, thinner aspect ratios. They’re priced identically, too. And for the first time, Samsung is really emphasizing viewing rather than creativity or productivity as the main feature, with a super AMOLED screen that’s noticeably brighter and sharper than the iPad screens. However, what lets the flagship message down somewhat is that, other than the screen, there’s little to mark these devices out as premium entrants in the market. They use similar materials to the Galaxy S5, itself an increasing anomaly among premium smartphones for its use of plastic rather than metal finishes. Regardless of this, Samsung’s release of the Tab S is a sign of increased confidence on its part in going head to head against the iPad, a device few contenders have taken on directly at the same price point.

One worry is that retailers and consumers will get confused by the sheer number of Samsung tablets available, with Tab, Tab Lite, Tab Pro, Note, Note Pro and now Tab S tablets in the market, at as many as four different sizes. Most retailers will struggle to stock more than a couple of these options, but Samsung appears to see the Tab S as its main tablet going forward, with the Note and Tab lines meeting specific needs for productivity-centric and price-sensitive customers. It’s also not clear that the screen alone will convince would-be iPad customers to make the switch, especially since Android tablets continue to suffer from poorer apps and content options. Samsung is addressing the latter issue with its ongoing Galaxy Gifts program, offering free trials to premium apps and content, and with digital magazines customized for the specific dimensions and capabilities of the Tab S. But in a world where Apple still dominates the premium end of the tablet market as competitors continue to vacuum up much of the low- and mid-tier opportunity, it’s not clear that the Tab S will make significant inroads.

WWDC announcements

Apple today announced new versions of iOS and Mac OS X, along with a new development language for both operating systems and a large number of additional features and APIs for developers. The following comment may be attributed to Jan Dawson, Chief Analyst at Jackdaw Research. Jan can be reached at jan@jackdawresearch.com or (408) 744-6244 for further comment.

Apple’s approach to cross-device integration in contrast to Microsoft’s

Apple’s approach to integration between Apple devices, which it calls Continuity, is in stark contrast to Microsoft’s. Apple is focused on a common user experience across devices, whereas Microsoft has focused on a common user interface and code base. So far, Microsoft’s approach has felt forced, layering a touch interface onto its PC operating system, whereas Apple’s approach feels more natural and useful. It’s also the kind of thing only Apple, with its tightly integrated approach to hardware, software and services, could pull off.

Replacing Google in its last stronghold on the iPhone – search

Over the last two years, Apple has been removing Google from core parts of the iOS experience, with Google Maps and YouTube being the obvious steps taken last year, though Google continues to be the default search provider in Safari on iPhones. However, while Apple has no chance at replacing Google as a search engine in its entirety, it has also spent the past couple of years slowly inserting itself as an intermediate search engine on iOS. This started with Siri but is now continuing in both iOS and OS X with Spotlight search incorporating web search results. In many cases, users of Apple devices will now find answers to their questions without ever entering a traditional search into a web browser. Even the browser address bar will now serve up search results from other sources before the user hits enter. This is an enormous step forward in Apple’s removal of Google from its last bastion on the iPhone, and could have a significant effect on Google’s mobile search business.

Increased openness to third parties a shift in tone

Just as Apple is stripping Google of its roles on Apple devices, it’s actually opening up opportunities for other third parties throughout its ecosystem. The integration of Box and OneDrive as storage options, the inclusion of third-party widgets in the Notifications area on OS X and iOS, the whole Extensibility concept and third party keyboards are all big advances in Apple’s openness to third parties. This is a healthy recognition on Apple’s part that it can’t possibly do everything, and that the iOS experience has been unnecessarily limited by Apple’s relatively closed approach to third party integration in these various areas. This may partially neutralize one of the main attractions of Android, which is the much greater openness to these third party services, although on Apple devices it’s being done in a way that’s very security-conscious, sharing very little data between apps and developers.

Swift, Metal, CloudKit, HealthKit, Touch ID integration and more mean a boon for developers

With so many user-focused announcements, it would be easy to forget that WWDC is Apple’s developer event. But the last half hour of the keynote was also enormous for developers, with a new programming language and lots of new APIs. Developers now have new ways to create value around Apple’s operating systems and the Apple ecosystem as a whole. The mood in the keynote haul was enormously positive around these changes. The introduction of Swift, though announced with less fanfare, may be equivalent to Steve Jobs’ introduction of the original OS X in that it creates a platform for the next 15 years of Apple’s development.

HomeKit and HealthKit cement the iPhone ecosystem

Apple’s new HomeKit and HealthKit platforms promise to bring Apple’s core integration principles to third party devices in two industries which currently suffer enormously from fragmentation. Both the smart home and wearables markets are currently characterized by huge numbers of players whose products don’t talk to each other. Though others have tried, Apple is arguably the first player with the consumer pull to really make a difference in bringing these industries together in a way that makes sense for end users. Smart home adoption should be hugely boosted by Apple’s entry to the market. The healthcare industry is likely to be much slower to be disrupted, not least because the number of people who care about tracking health data is still very small. But Apple’s solution should make a big difference for the minority who do make us of it, much like the rest of Apple’s products.

For more of my pre-WWDC take on HomeKit and HealthKit, see these two blog posts:
http://www.beyonddevic.es/2014/05/27/apple-and-the-smart-home/
http://techpinions.com/apple-destroyer-of-fragmentation

Media comment on AT&T/Cricket re-launch

AT&T today re-launched the Cricket brand acquired through Leap Wireless under the AT&T umbrella. The comment below may be attributed to Jan Dawson, Chief Analyst at Jackdaw Research.

The Cricket re-launch marks a new sub-brand for AT&T in prepaid, replacing the Aio Wireless brand it launched about a year ago. This time, it’s combining a familiar prepaid brand with one of the top two wireless networks in the country. This is the first time one of the top two US wireless networks has really put significant heft behind a prepaid brand, and it should be a big boost for Cricket in the market. In addition to the Cricket brand and AT&T network, AT&T is bringing some of the lessons it learned from Aio to the new venture. Aio was given free rein to develop its own processes, retail environments, culture and brand when it was launched by AT&T, operating at arm’s length from the rest of the company. As such, it did a lot of things differently from the parent company and these could easily have been lost as Aio was absorbed into Cricket. However, it looks as though AT&T has kept some of the best parts of Aio rather than simply replacing them, and those will start to filter through in the retail stores, in the branding and in the online and mobile customer experience.

Prepaid is hot in the US wireless market, having long been the red-headed stepchild of the industry. It now represents about a quarter of the subscribers at the big five providers, and is growing fast at Tracfone and T-Mobile in particular. AT&T’s prepaid subscribers haven’t grown in two years, largely because its GoPhone brand isn’t heavily promoted and Aio was still nascent at the time of the acquisition. Cricket represents a chance for AT&T to tap into this market and benefit from some of the growth that’s happening there. The challenge will be marketing the benefits of the AT&T network when AT&T is keen to keep the Cricket brand separate from its own and downplay the connections so as to preserve the perceived value of the AT&T-branded experience. Cricket’s prices are significantly lower than AT&T’s own branded services, and so it will be very careful about articulating the connection between the two, even as it wants to tout the benefits of the much more robust network.

Part of what’s been behind the growth of prepaid in recent years is the increased flexibility it offers versus traditional 2-year contract plans. Whereas it was once the province only of people with sub-prime credit, it’s become more mainstream among people with good credit who want the greater flexibility it offers. But as contracts and device subsidy models on the postpaid side start to change, it’s possible that the attractiveness of prepaid will begin to fade again, and growth will slow as some subscribers migrate back to postpaid plans. AT&T’s bet on Leap is an investment in prepaid’s future, but it remains to be seen whether that’s future is as bright as it has seemed.

AT&T DirecTV is about new addressable markets

Note: This past week I posted analysis of the market context for both these mergers here, including a large amount of data and charts. One of those charts is at the bottom of this post.

Additional note: At the time of writing, the AT&T-DirectTV merger is rumored to be announced on Sunday. I don’t work on Sundays, so if you’d like to reach me for comment, you can do so today, ideally via email at jan@jackdawresearch.com. Or wait until Monday. 

The comment below may be attributed to Jan Dawson, Chief Analyst at Jackdaw Research.

There is precious little growth in the consumer wireline market, and the total number of customers for some combination of wireline voice, broadband and TV has stayed stubbornly constant for the last couple of years. The major providers are largely swapping subscribers, and the only way to grow is to steal more subscribers from your competitors than you lose to them. In addition, each of the major providers has a set geographic region within which it operates, and organic expansion out of that region is pretty unattractive because of the cost of building new infrastructure. As such, the only way to grow is to expand inorganically by acquiring a provider with a different footprint and boosting its growth. The Comcast-Time Warner Cable and AT&T-DirecTV mergers are essentially the same in this regard – they’re both attempts to grow by acquiring a presence out of their traditional footprint.

But there’s an important difference between the two mergers: Comcast and Time Warner Cable are essentially identical assets under very different management, while AT&T and DirecTV have very different assets both under similarly good management. Comcast’s bet is that it can apply its successful strategy and backend infrastructure to the TWC assets and get that business growing and adding customers again. In the process it will gain scale and thus negotiating power with content owners. But in acquiring DirecTV, AT&T will be acquiring a very different asset, one that gives it a national footprint in TV services to go with its national wireless footprint, but which doesn’t have any wireline broadband or voice assets. This creates the opportunity for AT&T to provide a new kind of triple play of satellite TV along with wireless voice and broadband outside its traditional wireline footprint, in addition to providing a more traditional triple play inside its footprint, utilizing DirecTV where U-verse doesn’t make sense to provide the TV element of the bundle. This means an opportunity to sell AT&T wireless services to the DirecTV base, but also an opportunity to sell DirecTV services to AT&T wireless customers outside of AT&T’s wireline footprint. And of course, it’ll also offer some of the same benefits in terms of negotiating power as the Comcast-TWC merger.

Given that AT&T has bumped up against the upper limit of its acquisition strategy in both the wireline and wireless telecoms space, it’s been looking overseas for expansion opportunities, and in particular at Vodafone. But cross-border mergers have never performed well because the synergies are small, the duplicated assets in each country large, and because cultural differences usually prevent companies from applying the same strategies in each market. But domestic acquisitions usually fare much better, with significant synergies as well as scale economies. As such, the DirecTV acquisition makes a lot of sense for AT&T as an opportunity to grow domestically while avoiding some of the problems it experienced when it tried to acquire T-Mobile.

However, especially in the context of the Comcast-Time Warner Cable merger, this acquisition raises important questions about scale in the US market. Were both mergers to go through, they would create two dominant providers which would dwarf all other providers – total customer relationships for both companies are shown in the chart below (which takes no account of the divested subscribers at Comcast since it hasn’t provided enough detail to make a full calculation). These two mergers would involve the four companies that already have the largest number of customer relationships, and each would likely end up with around 35 million customers, compared with DISH at under 15 million and Verizon at just over 10 million. The companies will have to work very hard to justify regulatory approval in that context, especially since the wireless market is already dominated in this way by two larger players, one of which happens to be AT&T.

Total customer relationships incl mergersLastly, it’s worth noting that although the US is by far DirecTV’s biggest business, about a quarter of its revenue comes from its Latin American business, which operates satellite providers in several countries. AT&T already owns a small stake in America Movil, a Latin American mobile operator, and there may be some small complementarity between these assets. But the Latin American business is more likely to be a distraction than a benefit for AT&T, with limited synergies between the domestic and overseas operations. As such, it’s quite possible that it will look to offload rather than keep the Latin American assets either immediately or over time. As mentioned above, the synergies between cross-border activities in this market tend to be very small, although they’re often overestimated by acquirers.

 

Amazon’s TV device brings greater firepower to set top boxes at a price

Amazon today announced its entrant in the consumer set top box space, the Fire TV, which will cost $99. The comment below may be attributed to Jan Dawson, Chief Analyst at Jackdaw Research:

Amazon’s Fire TV device brings greater power to the consumer set top box space, at a price. In contrast to its tablet pricing, which has undercut major competitors, Amazon has instead focused on boosting the specs and performance, at a price. The $99 price point means Amazon is going head to head against Apple TV, and will be significantly more expensive than Google’s Chromecast and several of Roku’s offerings. Together with the recent increase in the price of Amazon Prime, this appears to signal a greater conservatism on the part of Amazon on pricing.

The box itself largely takes the approach of doing the same things as other set top boxes, but doing them better. The exceptions are voice search and gaming, where Amazon has gone significantly beyond what other consumer TV boxes offer. Voice search is notoriously fickle, and it’s not an area where Amazon has a lot of experience, so we’ll have to wait for the first reviews to see if it’s any good. If it does work, it’ll be a significant improvement on the text input functions on other major boxes. The games feature mimics Roku’s games features, but goes significantly beyond them, building on its existing relationships with game developers through the Amazon App Store for Android.

The big question is what Apple has up its sleeve for Apple TV. Amazon is embracing the fragmentation that exists in the TV space today, offering an impressive array of third party video apps on the Fire TV while also creating exclusive content on its own channels. But the great opportunity in the TV space is to bring unification rather than fragmentation to consumers, creating a single unified service and interface for video across multiple devices. That’s where Apple has a great opportunity, and if it is able to take advantage of that opportunity, it could provide significantly more value than Amazon has here. (For more on this concept, see this blog post).

Microsoft announces Office for iPad

Microsoft today announced a full version of Office for the iPad, available later today. The below comment may be attributed to Jan Dawson, Chief Analyst at Jackdaw Research:

You have to think about today’s announcement in several parts. On the one hand, the product Microsoft demoed today looked incredibly impressive, much cleaner and easier to use than any of Microsoft’s other Windows versions. That in itself is a huge step forward, and suggests similar improvements may be coming to touch-based Windows devices like the Surface. But at the same time, Microsoft is coming to this very late, roughly four years after the launch of the iPad, and during those four years people who use iPads have found other ways to get work done, whether third-party apps or Apple’s iWork apps. Many of those apps are free, and at most $15 or so on a one-off basis, while editing documents in Office on the iPad will cost at least $70 a year. The big question is whether people will want to pay that kind of premium for the ability to use a “full” version of Office. So many people whose work lives are iPad-centric have moved away from Office entirely, and Microsoft will now have to win them back. The overlap between the 3.5 million consumer Office 365 subscribers and the 150 million or so iPad users is likely vanishingly small, and Microsoft will have to change that.

The other big challenge for iPad users is how to get documents in and out of Office on the iPad. For anyone who’s used productivity apps on the iPad, they know that in the process of opening, editing and emailing a document, the emailing part can be as painful as the editing. Microsoft is clearly favoring OneDrive as the major way for people to get documents in and out of Office on the iPad, which makes good strategic sense. But it doesn’t necessarily make sense for iPad users, who are much more likely to be invested in iCloud or even Dropbox for document storage.

For all these reasons it’s unlikely that the iPad for Office announcement will make a huge difference either for Microsoft or anyone else. But it does signal a much more significant strategic shift on the part of Satya Nadella. He’s shown a willingness to allow Windows to fade into the background, as demonstrated by both the Office iPad launch and the recent renaming of Azure. That’s critical to Microsoft’s future success, as the obsession with promoting Windows above all else (including its customers’ needs) has been one of the biggest forces holding Microsoft back from success in the mobile space. This recognition, and the change in strategy that have flowed from it, are more significant than any individual product launch Microsoft might announce.

HTC announces HTC One (M8)

HTC today announced the successor to last year’s HTC One, which is being referred to as the HTC One (M8). The comment below may be attributed to Jan Dawson, Chief Analyst at Jackdaw Research.

The new HTC One builds on the success of the device HTC launched last year. Like previous HTC devices, the new HTC One features premium materials and majors on design. Apple and HTC continue to be the only manufacturers making really premium-feeling and premium-looking devices. The new device should be a great step-up for existing HTC users. The dual cameras give the company a hook to hang their innovation credentials on, but belie the company’s claim that it’s not doing gimmicks. It’s the sort of feature that makes for great demos but hardly anyone uses in practice and almost no-one buys a phone for.

The biggest challenge for HTC is not that last year’s phone was badly reviewed – it wasn’t. It just hasn’t been able to convince consumers that they should buy it. As such, HTC’s problems lie in marketing and brand awareness, not in the phone itself. Launching a successor, even with some innovative features, is far from enough for HTC to turn its performance around. Unless it manages to solve its fundamental problem with marketing, it could launch the best phone in the world and it wouldn’t matter. If you want a premium experience today, you choose an iPhone, and if you really want to use Android, you choose a Samsung Galaxy phone. HTC simply hasn’t carved out more than a tiny niche for itself in the market. In the US, HTC has fallen back into fifth place, as LG and Motorola have climbed the rankings. Less than 10 million people in the US use HTC phones, compared with over 40 million using Samsung phones and over 65 million using iPhones.

Amazon Prime price increase is about streaming, not shipping

Amazon today announced that it will increase the price of its Prime service by $20 to @99 per year, following through on its promise during its Q4 2013 earnings call in January. The following comment may be attributed to Jan Dawson, Chief Analyst at Jackdaw Research:

Amazon attributes the Prime price increase to the increased costs of shipping. However, Amazon’s net cost of shipping has actually stabilized over the last several years, as this blog post details. The real reason for Amazon’s price increase is that it has been giving away a video streaming service roughly equivalent to Netflix for free as part of Prime. Given the rumors about Amazon launching a music streaming service as part of Prime as well, it seems far more likely that Amazon is recognizing that it can’t continue to ignore the high costs of giving away so much content for free any longer. That model has broken Amazon’s usual model of aligning its own interests with those of its customers, as the more users use these services, the more benefit they receive and the higher Amazon’s costs.

Amazon has always been honest about the fact that free shipping was one of its most effective marketing tools, and it spends roughly as much on subsidizing shipping each year as it does on traditional marketing. Prime members buy much more from Amazon and it has always made up the cost of shipping through higher sales. But the big problem is that Amazon likely incurs a cost of around $60-80 per customer for offering Prime Instant Video, with no direct revenue at all, putting the service significantly in the red before it even provides any free shipping. That, and not shipping, is the real reason Amazon has to raise the price of Prime, and it should be honest about that fact. It’s disingenuous to pretend that giving away video streaming has nothing to do with the price hike.

Samsung’s new devices acknowledge industry maturity

Samsung today announced its latest flagship smartphone, the Galaxy S5, along with a fitness-oriented wearable, the Galaxy Gear Fit, in addition to providing more details about its new Gear smart watch devices, which were announced over the weekend. The following comment may be attributed to Jan Dawson, Chief Analyst, Jackdaw Research:

“Samsung’s announcement was much lower-key than its recent events, which seems to be an acknowledgment that too much of the attention has been focused on the spectacle rather than the content at previous launches. But it also seems to have toned down its attempts at bombarding potential customers with massive numbers of new features, choosing instead to focus on just a few key features for each device. At the same time, Samsung made a big deal about meeting users’ needs rather than necessarily inventing anything itself. Samsung now appears to be focused on innovation by focus group, talking about new features as meeting the top three user demands in a particular area, for example. This is a recognition of the increasing maturity of the smartphone industry in particular, where we no longer see big leaps forward in core features, but instead are seeing the same features already present in other devices showing up on each new flagship from the major vendors. But it’s also disappointing to see Samsung so humbled by the relatively poor performance of the Galaxy S4 that it appears to have given up on inventing its own new ideas.

The fitness devices fix some of the problems that plagued the first Galaxy Gear, but without pricing it’s hard to know how compelling they will be. With the exception of the Pebble, most successful wearables today are in the fitness category, so it makes sense for Samsung to enter that market with the Gear Fit. The Gear Fit looks reasonably compelling, though the screen orientation is a bit odd, as the wearer will have to bend their arm in an unnatural way to get a clear look at it. The curved screen is the latest in a long line of display innovations from Samsung, but it’s not clear anyone is buying wearables for the screen. A simpler screen with better battery life might well have been a better investment from a user point of view. The new Gear watches also look like solid improvements, but they reinforce Samsung’s core strategy. Just as Apple won’t release iTunes for anything but iPhones, it appears Samsung won’t make its wearables compatible with anything but Galaxy devices. That makes sense from a strategic perspective, but limits the addressable market, though it’s now a large base at 200 million.

Samsung needs to prove that it can get back to the sort of growth it experienced in the smartphone space in 2011 and 2012, which means giving people compelling reasons to upgrade but also increasingly to switch from other vendors and platforms. The Galaxy S5 is a nice upgrade for someone with a two-year-old Galaxy S3, but there’s not much here to suggest it’s going to win many converts from other vendors or first-time smartphone users, especially as this is likely to be a premium device. The emphasis on wearables may be an acknowledgment of that fact: that growth will have to come from elsewhere in the future and not just from smartphones.”