The 2Q 2016 smartphone scorecard: players searching for an exit

Posted on September 16, 2016 by charlesarthur

Exit. Who’s next? Photo by Today is a good day on Flickr.

There comes a time in every former top-ranking sports player’s career when they have to accept reality: they’re not up to it any more. They keep getting beaten by people whom they once would have trampled; what should have been easy wins are now struggles, or upsets. Eventually, they accept the reality everyone else has already seen: it’s time to exit.

And now we’re seeing that happen in the smartphone market. This isn’t really about sales of iPhones being down year-on-year – though they are, for the second quarter in a row, and though in the previous quarter Apple managed to keep its handset ASP (average selling price – calculated by total handset revenue divided by the number of handsets) up, in this quarter it was substantially down, below $600 for the first time since 2Q 2014.

But more generally, this is the quarter where China really began to muscle into the top ranks of Android OEMs – and all the players who used to be the big names there are inching towards the exit. The problem for the big-name Android OEMs is that, because it’s Android, they’re replaceable. Android on one handset is quite a lot like Android on another. But an Apple device, and its integrated software, is sui generis.

Numbers for all

So here are the numbers showing how that replacement is going. The list below is all in diminishing size of handset shipment volume. Other data sometimes has to be estimated, and in the case of Huawei, OPPO and vivo you’d have to be in one of the big analyst camps to know what their ASPs and hence revenues are, and you might have to be at the companies to know whether they’re profitable.

Standout elements from the quarter: Sony made a profit! (Even as it dwindled.) Lenovo kept shrinking; Apple’s ASP fell; Samsung trundled on; LG made more losses (the G5 flagship essentially sank); Microsoft barely turned up.

Q2 2016: the smartphone scorecard * denotes estimate: explanations below
Company	Handsets (million)	Revenues	Handset ASP	Operating profit/loss	Per-handset profit/loss	% profit/loss
Samsung	77.0	$22.61bn	$275.64*	$3.75bn	$48.66*	16.59%
Apple	40.4	$24.05bn	$595.26	$6.71bn*	$166.09*	27.9%*
Huawei	32.1	$7.06bn*	$220	positive?	positive?	positive?
OPPO	22.6	$4bn??	$177*	positive?	positive?	positive?
vivo	16.4	$3.7bn??	$225.60*	positive?	positive?	positive?
ZTE	14.7	$2.5bn??	$170*	??	??	??
Xiaomi	14.5	$2.28bn*	$150	negative?	negative?	negative?
LG	13.9	$2.88bn	$207.52	–$177m	–$12.73	–6.15%
Lenovo/ Motorola	11.3	$1.71bn	$150.97	–$163m	–$14.42	-9.53%
Sony	3.1 (not a misprint)	$3.64bn	$582.26	$4.03m	$1.30	0.11%
HTC	2.3*	$0.5bn*	$217.39*	–$128.50m	–$55.87*	-25.7%
Microsoft Mobile	1.2 (not a misprint either)	$0.23bn*	$190.80*	–$45m*	–$38*	–19.56%
Everyone else	135.4m

Assumptions:
Samsung: 6m tablets sold for $175 ASP at zero profit; 11.4m featurephones sold for $15 ASP at zero profit. (For every $1 fall in featurephone price, smartphone ASPs rise by $0.14 – so with zero featurephones and 6m $175 tablets, smartphone ASP would be $277.84. For tablets, every $5 rise in ASP lowers smartphone ASPs by $0.38 – so if tablets were free and there were no featurephones, smartphone ASPs would be $291.37. It isn’t a huge difference; tablets and featurephones are together generate about $880m, or less than 5% of overall mobile revenues.)

Apple: operating profit calculated at the historic figure of 27.9% (derived from multiple financial analysts). Might have been lower or higher – the 6S range maybe costs more to make than the 6 range, but there’s the SE range which might be cheaper because less retooling needed.

Huawei, OPPO, vivo, ZTE, Xiaomi: ASP figures all estimated, based on their perceived market power

How do I calculate the revenue figures (and hence ASPs) for OPPO, vivo, Xiaomi? According to According to Strategy Analytics,

Global Smartphone Industry revenues declined by -5% YoY in Q2 2016, due to softening of volumes. Apple was followed by Samsung, Huawei, Oppo and vivo from a revenue perspective. The report also captures the Wholesale Average Selling ASP’s for all major vendors across six regions. ASP’s in the quarter declined by -6% globally.

So if Oppo and vivo were bigger than Sony, they must have done more than 3.64bn. (Xiaomi must have been less than them too.) I’m guessing they weren’t that much bigger. For Huawei, which like those two doesn’t release revenue figures, I’ve estimated an ASP (up from the previous quarter) and generated the revenue figure from that.

LG: assume tablet sales were minimal, and had zero profit.

HTC: given that it now sells the Vive headset too, though not in large numbers (certainly not millions), it only takes a small adjustment from the overall revenue.

Microsoft Mobile: Microsoft gave figures for featurephone sales, of 9m; assuming an ASP of $15 for those and gross margin of $5 each (as before) gives the featurephone revenue. Assume the same manufacture cost as before, and you get zero gross margin; even with zero sales/marketing and R+D, you get a negative margin.

Rampant deflation

Everyone’s seeing price declines, which is what you’d expect in a growing market where you also have Moore’s Law and scale coming into play. But this is barely a growth market. Smartphone shipments were up just 0.26% year-on-year. When you look at the trend over the past nine years, we’ve really hit a wall here:

Smartphone growth year-on-year.png

The red line shows the four-quarter moving average, and that’s clearly down. What that suggestion of slowdown doesn’t quite tell is how the market is diverging. The premium end was long ago saturated: people who could buy expensive phones did so, but now there’s no new market to sell into in the developed countries – and consequently the US, China and western Europe are expected to see slowdowns, and even reductions in volume, this year (per IDC). The action, such as it is, will be in emerging markets such as the Middle East, Africa and Latin America – though even they will only see growth of about 5.6%.

In such a world, the companies which initially made Android a Huge Thing are beginning to head for the exit. HTC built the first Android phone. Sony had to go Android (as Sony Ericsson) because it was losing money hand over fist. LG had to figure out how to make smartphones quickly, because its featurephone business was being destroyed.

Now though they’re seeing those be destroyed all over again. You can see the numbers above. And here’s a graph of how pretty much everyone is seeing sales growth compared to the smartphone market turn negative (so if the market grows 10% and they grow 5%, they’re falling behind):

Smartphone OEMs: growth against the overall market

Year-on-year shipment growth measured against the overall market

But I’ve been collecting the revenue and profit/loss numbers too (and publishing them) going back to Q4 2014. That’s seven quarters. What if you add that up?

Seven quarters of hurt

Here’s the lineup when you calculate it over seven quarters:

Seven-quarter smartphone scorecard covering Q4 2014 to Q2 2016 inclusive (all estimate elements as above)
Company	Handsets (million)	Revenues	Handset ASP	Total operating profit/loss	Per-handset profit/loss	% profit/loss
Samsung	555.4	$158.70bn	$285.74	$17.95bn	$32.32	11.31%
Apple	401.07	$263.59bn	$657.22	$73.62bn*	$183.56*	27.92%
Xiaomi	116.92	$18.62bn*	$159.25	?	?	?
LG	102.75	$21.58bn	$210.02	–$428.39m	–$4.17	–1.98%
Lenovo/ Motorola	121	$17.44bn	$144.13	–$1,114m	–$9.26	–6.39%
Sony	47.8	$17.13bn	$358.37	–$908.33m	–19.00	–5.30%
HTC	26.1	$6.45bn*	$247.13	–$717.51m	–$27.49	–11.12%
Microsoft Mobile	41.3	$5.76bn	$139.47	–$2,621m	–$63.46	–45.50%
(Huawei, OPPO, vivo and ZTE aren’t included because I don’t have figures for them over the period; and there aren’t any financials for any of them.)

This bears out a truth that is borne out again and again by analyst reports into best-selling handsets, brand loyalty, and customer satisfaction: these days it’s a two-horse race, Apple and Samsung.

Xiaomi is an unknown, financially. But all the rest are losing money hand over fist, and as Vlad Savov wrote in a terrific piece entitled “Android OEM death watch: Sony, HTC and LG edition“, you do wonder why they soldier on:

The Android ecosystem has never been more diverse than it is today, but I suspect that what we’re witnessing now is a peak from which the basic economics of a maturing smartphone market will rapidly drag us down. Niche players like Nextbit, Vertu, and BlackBerry might survive thanks to their low volume of sales and correspondingly limited costs. But the big names we’ve known for so long, the Sonys and HTCs of this world, seem fated to fade from view.

I think this is absolutely right. Look at those numbers: why is LG putting up with a division that has lost money, and shows no sign of stopping? Although Sony made money this quarter, it’s fading from view. Lenovo’s ASP is so woefully low that it’s an obvious target for every up-and-coming Chinese OEM. (I was recently contacted by Meizu, which is launching into the Asian market: yet another rival for the uncommitted phone buyer.)

It isn’t even as if these struggling companies have scale: Sony has only sold 12% as many phones as Apple over the period (and 8.6% as many as Samsung, which might be the better comparison); LG has managed a more respectable 18.5% of Samsung’s number, but it’s losing money on them, over seven quarters.

Sure these companies have a lot invested in this business; you can’t just shut down a smartphone business like closing a corner shop. There are contracts, staff, distribution deals. But you can edge out, which is what Sony seems to be doing as its range and distribution shrinks. Will LG follow, or is its rivalry with Samsung in Korea just too strong to let it ever let go?

I’m honestly puzzled by companies which tot up millions in red ink and decide it’s fine to carry on. Microsoft is clearly getting out (who wouldn’t, looking at those margins) but how can Sony or Lenovo look at their returns and feel they’re OK? That’s the puzzle here.

Sure, there’s lots else going on: Apple’s falling ASPs and falling sales point to the saturation of the markets. Equally, the cheap hardware is getting really good – the Shenzhen effect, as volume of production means that the only distinguishing thing is software and, to a lesser extent, chip design ability. (Apple, Samsung and Huawei stand alone here.) I’m certainly impressed by Huawei, which offered a dual-lens camera on the new P9 which has a neat refocus/re-aperture effect, well ahead of Apple.

(Huawei’s problem is it doesn’t have a coherent strategy: it offered “3D Touch” before Apple too – as did ZTE – but hasn’t followed through; only the latest P9 still has it. Will the dual lens offering spread to the rest of its offerings, or fall by the wayside as happened with HTC’s dual system on the M8 in 2014?)

In search of the lost profits

What then happened to all the profits that HTC, Lenovo, and Sony used to earn? Simple: eaten by Samsung, Apple, and Chinese rivals. The growth of companies like OnePlus, Meizu, and of course Huawei, vivo and OPPO and (less so) Xiaomi means the potential for scale falls away from those already in the market.

However it can take a while for these effects to become visible. HTC’s sales peaked in 2011; LG’s, Sony’s and Microsoft’s in the second half of 2014. From around that time, all the Chinese OEMs began growing rapidly, first in their home market, and then India; and in Huawei’s case, Africa, Europe and the US.

Late exit

Apple looks to have peaked in 2015 – but it has a solid ecosystem and so many users that any erosion would take a long, long time. That’s in stark contrast to every Android OEM, which (as even Xiaomi is finding out) is disposable and replaceable.

But it can take a long time. BlackBerry’s handset sales peaked in 2010, and yet it’s still going. (Though will John Chen finally announce the company is getting out of hardware at the quarterly results on September 28? One to watch.) HTC has been ebbing for a while, for example. Sony has begun withdrawing to Asia. LG is being pushed aside in Europe by Huawei.

The only question is when some of the executives at these companies will finally ask why they’re still trying to play a losing hand. There comes a time for the players to leave the game. When is it?

The iOS 10 changes that actually matter: ad tracking, camera changes, “press to unlock” and more

Posted on September 13, 2016 by charlesarthur

It’s that time of year! Photo by fldspierings on Flickr.

It’s iOS 10 release day, and everyone and their best friend is doing “10 [geddit??] things you need to know about iOS 10”. Most of them aren’t worth knowing, because

• you’ll discover them immediately when you update
• they’ve already been announced.
(Though I do love “how to update to iOS 10” stories. TL;DR: do an iCloud backup, or an iTunes backup, and then press the “software update” button in Settings → General → Software Update. Then wait while the internet falls to its knees.)

Let’s instead go a little deeper into the new OS, and point out the elements which you might not spot at first but which could potentially make a significant difference to your experience. I’ve been using iOS 10 through the betas on an iPad Pro and an iPhone SE, so that’s both the phone and the tablet experience.

Ad tracking

Remember how Apple introduced “Content Blockers” in Safari in iOS 9, and in parallel introduced “Safari Web View” for all apps – which meant simultaneously that you could install a mobile adblocker, and that that adblocker could be used in any app which opened web pages (such as Tweetbot, my weapon of choice for Twitter)?

The ad business had a collective fit over iOS adblocking, and it’s ready to have a second one now. Dean Murphy, who profited handsomely (and rightly so) from his Crystal adblocker, points out that with iOS 10, Apple is taking your ability to block targeted advertising one step further, even if you don’t want to install an adblocker.

On his blog, Murphy explains that “Apple is changing the way that the ‘Limit Ad Tracking’ setting works in Settings → Privacy → Advertising, and it seems to be causing a mini storm in a teacup among the adtech world.”

As he points out, while Apple got rid of the “UDID” (Unique Device IDentifier) for iPhones some time ago, in iOS 6 it provided the IDFA – ID For Advertisers. If you turned on “Limit Ad Tracking”, you’d be given a random new IDFA, plus a flag would be set telling advertisers you didn’t want to be tracked. But guess what! Advertisers don’t seem interested in saluting when that’s run up the flagpole.

So, says Murphy:

In iOS 10, when you enable “Limit Ad Tracking”, it now returns a string of zeroes. So for the estimated 15-20% of people who enable this feature, they will all have the same IDFA instead of unique ones. This makes the IDFA pretty much useless when “Limit Ad Tracking” is on, which is a bonus, as this is what users will expect when they enable the feature. These users will still be served ads, but its more likely they will not be targeted to them based on their behaviour.

This didn’t stop one guy over at Ad Exchanger wailing that Apple is “giving consumers a way to opt out of advertising altogether” (it’s not) and that people shouldn’t have the right to opt out of advertising. Which is quite a stretch. Murphy has some more figures on how much the adtech people aren’t losing by this move. But it’s still a good one by Apple, which fits well with its privacy story.

Open the camera, Hal

So you lift up your iPhone to wake it – did every other article mention it now has “lift to wake”? Yes they did (it’s triggered by the orientation sensors) – and now you have a screen with three little dots at the bottom. You’re in the middle; swipe right (that is, pull from left to right) and you get a ton of widgets.

But swipe left (pull right to left) from the home screen, and you now get the camera. This is such an obvious and timesaving move that it’s amazing it has taken four iterations of the “swipe” motif introduced with iOS 7 (7, 8, 9, 10 – that’s four) to get it right.

Cameralock
The Lock Screen in iOS 10 now shows you that the camera is off to the right (ie, swipe left). My arrows and text, obviously.

Having the camera a swipe left from the lock screen is quick, easy and a hell of a lot more convenient than having to swipe up, as has been the case since Apple introduced that route to the lockscreen camera in iOS 5.1 in March 2012.

You can understand why iOS 7 didn’t change that. People had had less than 18 months to get used to “swipe up” when iOS 7 was released in September 2013. Apple doesn’t do UI changes all at once. It taught people how to swipe, then a year later it introduced bigger screens where they’d need to swipe. So we’ve now had “swipe up for the camera” for just over four years. But it’s logical, and faster, to swipe left: it’s a shorter distance, it’s more natural for your thumb (I always found “swipe up” a struggle if I had the phone in one hand), and that screen on the right is unused virtual space.

So all hail the new way of getting to the camera. Though in iOS 10’s first few weeks you’re going to hear lots of people saying “how do you get the camera?” and probably swiping up to Control Centre – though the camera is there. But be the helpful one, and show them the side swipe.

Not quite better: Control Centre/r access

I don’t know about you, but if I’m typing something in Messages and need to bring up the Control Centre, it’s akin to an Olympic event to raise it first time. More often I hit a few random keys first, and have to retry.

Pulling up Control Centre is tricky
Pulling up Control Centre is hit-and-miss if you have a keyboard running

This doesn’t seem any better in iOS 10; I think it needs some sort of border below the keyboard. It’s a difficulty that seems to have come in with iOS 7, so perhaps in a couple of years..

The other change in Control Centre (I’m going to use the British spelling dammit) is that it’s now split into two panes, which you swipe between as needed: non-audio stuff in the left, audio stuff (such as music playback and audio output direction) in the right.

The new Control Centre in iOS 10 is split across two screens – swipe between them. It remembers which one you last accessed.

Update: I’m told by Ravi Hiranand that the Home app gets its own Control Centre screen, if you have it functioning. As I’ll explain below, I didn’t so I didn’t. (End update.)

This is another thing that will have lots of people saying “hunh?” as they try to get used to it; since iOS 7 (when it came in) it had been all in one place, but with the introduction of Night Shift on the iPhone 5S and above, it was all getting a bit crowded. One pleasing little touch: when you touch the volume slider to change it, the speaker buttons at either end light up. (Update: Marc Blank-Settle says this was already in iOS 9, and he’s right, it was. This is what makes software reviewing tough: you notice something for the first time just when it has always been there.)

Press to unlock

The most subtle change is that it’s no longer enough to rest your thumb (or other finger) on the TouchID button to unlock the phone/tablet. It certainly used to be the case that it was, but on the 6S range in particular this could mean that if you picked the device up to see what was on the notification lock screen, and particularly if you used a phone, chances were high you’d unlock the thing and miss what you actually wanted to see.

Now you have to actively press on the button to both identify yourself and to open the lockscreen. This also fits in with the new Taptic buttons on the iPhone 7 range, which don’t actually move, so that you have to tell them you’re there by actively pressing.

This seems like a trivial point, but in the first few weeks you’re going to hear lots of people whose muscle memory is built around resting their fingers on that button who don’t understand why doing that doesn’t unlock it. On such small things are perceptions of ease of use built.

However you can turn this off, at least on TouchID devices. You have to go to Settings ▶️ Accessibility ▶️ Home button, and there you’ll find “Rest Finger to Open” as an option. Lots of things are hidden down there in “Accessibility”.

You can revert to the old TouchID behaviour via Accessibility.

Deleting apps

Sure, you can delete the stock apps. Don’t bother. You’re not really saving any space. And that app you downloaded to replace it? Takes up more room and doesn’t get system-wide benefits.

Mail, now with filters

Speaking of stock apps, iOS’s Mail is creeping towards a vague parity with what OSX’s Mail could do in about 2000, when the latter was still in beta. Though it is way easier to triage email with swipes on a touchscreen than a keyboard and mouse.

In iOS 10, you can filter email, via a little “filter” icon at the bottom of the screen: tap it to change between filter criteria.

You can filter mailboxes by Unread, Flagged and a few other criteria: tap the icon

We’re still stuck, though, with a very limited number of ongoing filter systems: you can’t set up a “smart mailbox” based on a phrase, for example, even though OSX has had that forever. Here are the options for filters:

Mailfilters

This “what does that do?” thing about the filter icon is something most people will probably come across by accident. It’s helpful, but Mail is still some way from being a powerful app. It’s still only useful.

Maps: you can get there from here

In iOS 9, Maps began getting public transport details, and that has quietly been enhanced over the past year. The key change is that it’s much more sensibly laid out: search is on the bottom, and location plus settings are in the top right.

Even better: search is coordinated among devices, so that if you do a search on your tablet, those searches will also be on your phone. (Finally.)

Ios9 10 maps
The Maps app is improved in iOS 10 (on right) over that on iOS 9 (left): it now puts search in a more accessible location at the bottom, remembers searches from other devices, and can offer ride-sharing app routes.

Notes, collaborate

Apple made something of collaborative editing coming to iWork at the iPhone introduction last week, but it’s offering exactly that in the new Notes: type up a note, and you can choose to share it with someone, who will see the changes that get made, and be able to edit it too.

Obvious use: shopping lists. As long as the person shopping (or suggesting shopping) doesn’t go out of range of data.

Under the hood: Siri and machine learning

The range of things that Siri can do hasn’t changed much in this update – at least, not visibly – but it is improving. And what’s really going to change is that it will be open to some developers, for a limited number of functions. I didn’t see any in the betas (you’ll have to see what developers do with it).

Photos are meant to get a tonne of machine learning. But it’s principally facial recognition, and the “Memories” function is – for me at least, having few photos with location tags – so-so. Yes, it’s nice to have photos collected together from particular days, but ~~this isn’t Google Photos with its ability to find “photos of dogs” from an unlabelled corpus of pictures~~.

Update: Nick Heer points out that it does show you photos that match a keyword (singular is best). It hasn’t done this on the iPhone SE, but on checking my iPad and doing a search in the photos for “horse” I find that yes, he’s correct. iOS 10 calls them “categories”. You can discover what categories it has available by typing a single letter of the alphabet into the search box, and seeing what unravels. (Perhaps someone will make a list. What am I saying? For sure someone will make a list. And look – here it is.)

Type a letter, get a list of categories

[end update]

Then again, the pictures sit on your phone, so possibly over time the capability will be there. (We simply don’t know how much processing power per photo is needed for Google Photos’ identification system, nor how many examples it has to see to hit its training targets.)

Finally: home screen widgets

Apple hasn’t gone as far as Google in Android, and nothing like as far Microsoft in Windows Phone, in terms of what widgets are able to do as a layer over the home screen. They don’t dynamically update while you’re not looking; they hurry to do it when you swipe across. Saves on background processing. But you can edit them, as before.

Home screen widgets on iOS 10

Yeah, that’s all

Sure, there’s a ton of other stuff. There’s:
• the update to Messages (annoy your iOS 10 friends by sending them “Happy Birthday” messages) which now means that it’s becoming something of a platform.
• Apple Pay on the web – possibly that should have been a feature above, but I never tried it out.
• Home. As an app. I couldn’t find any products that actually hooked into this, and I suspect it might be a while before I do. (Ravi Hiranand says Home found his Philips Hue light automatically, and “works better than the original app”.)
• Subtle thickening of fonts, so that text is easier to read. This is system-wide, and very noticeable in the re-thought Apple Music and in Maps.

Finally

So – should you upgrade to iOS 10? Don’t you love how this question is asked as if you might not? You’ve read a whole piece about it that you didn’t have to. You probably will. And yes, you should benefit. Some of the touches are clever, and some are overdue, and some are essential. But it’s all about getting the device out of the way.

The thing you’ll notice the most? Pressing the Home button. It’ll bug you gently for a couple of weeks. Then you’ll forget it. And after that, you’ll notice the Maps app’s improvements. And those you’ll probably forget; can you remember what it was like before? Hardly anyone can.

That’s the way with software: you change things wholesale, and within a few months nobody could draw what the old thing looked like. Believe me, though, if you came across a device running iOS 6 or earlier, you’d be amazed at how… primitive it looks. Pundits might have bitched about iOS 7, but it’s been a wholesale improvement in user interface.

One could wish for better, smarter AI, but that might have to wait a few years for more power on the device. Even so, the “Siripods” (aka AirPods) point towards Apple wanting us to have a closer verbal relationship with our devices.

Colours, names and numbers: why is it ‘iPhone 7’ but just ‘MacBook Air’?

Posted on September 8, 2016 by charlesarthur

Phil Schiller introducing the iPhone 7/Plus in San Francisco. Yes, but why “7”? Photo by tuaulamac on Flickr.

Yes, Apple launched new phones the other day. Yes, there isn’t a 3.5mm headphone jack – which will cause varying amounts of trouble for people and accessory makers. There are “AirPods” to buy ($159, or £159 – even with VAT that doesn’t make sense on the exchange rate front).

We know too that Apple faces challenges: the premium smartphone market is saturated, so that pretty much all sales now will be to people who are replacing an existing smartphone; and Apple only targets the premium end, since even the iPhone SE (which does have a 3.5mm headphone hack, and a 16GB model) starts at $350, which is the lower limit of what analysts call “premium”.

But there’s a subtler question around this iPhone. And it’s this: why does Apple call it “7”? Sure, they’ve moved things around, and redesigned this and tweaked that (oh, yeah, headphone jack has gone). This is known as a “refresh” in the business.

The MacBook. Who can tell which year they’re from? Only the colour indicates that the right-hand one isn’t from 2015. Photos by tuaulamac on Flickr.

So why do we have a number for this product, and yet when the MacBook line had a refresh earlier in 2016, that wasn’t called “MacBook 2” – or even “MacBook 3”, as there was one back in 2010?

Similarly, the expected and long overdue refresh of the Mac Pro isn’t going to be the “Mac Pro 2”; nor is the MacBook Pro line going to get a “MacBook Pro 9”, given that there have been eight iterations already since the line was introduced in February 2011.

On its face, this is puzzling. Apple wants people to upgrade their hardware – that’s where vast amounts of its revenue comes from – and with the iPhone, it signals to people that there are new models available through the numbering system, and also through the colours available. (In 2013, the 5S came in a “gold” colour; in 2015 there was the new “rose gold”.)

By contrast, the PCs come with very little variation in appearance – you have to be quite nerdy to spot the difference between a 2012-vintage model MacBook Pro and the 2015 one, say. Though the MacBook does come in multiple colours, and the “MacBook 2” added rose gold as a colour option. (Hence above we know the right-hand one is a 2016 model.)

Colour as a “novelty” signal has long been a favourite for Apple: remember the original iMac, in “Bondi blue”, where the colour range then expanded – signalling how much newer your model was – until it went mad with the Dalmatian range. Of course if the numbering system were used for the iMac, we’d be up to something like “iMac 20” by now, what with all the variations of the 1998 teardrop, the lampstand, and now the flat-panel version.

Yet the more you look across the product range, the more peculiar this choice of numbering only for phones becomes. It has even been dropped for the iPads; where we used to have iPad 2, 3, 4, and then “iPad mini”, and then Air and Air 2, we now just have iPad Pro and iPad Air. (And mini. Not sure how long that will survive. It’s something of an “iPod touch for the iPad range”.) There’s the Apple TV. Can you tell them apart? Only by size. They don’t get “Apple TV 4”. Airport Express? Airport Extreme?

And how about the iPod? That didn’t get numbers – though it did get descriptors as the range grew (“Classic”, “mini”, “nano”, “shuffle”, “touch”). The changing design was itself sufficient differentiation, perhaps.

Here’s another example from a saturated market: cars don’t get numbers. They get names. There’s the Ford Focus, the Vauxhall Zafira, the Chrysler Plymouth, and so on. Ah – except as John Dodds points out, BMW uses numbers for its ranges (BMW 3 series, 5 series). Hmm.

Note, by the way, that the Watch is getting a “Series 2” moniker, and also new materials and colours. But the descriptors (“Edition”, “Sport”) have been abandoned.

What’s in a name and a number?

What do we conclude? Perhaps those more steeped in marketing will provide a better analysis, but it feels to me as though there’s an urgency in using numbers to name a product: it immediately dates the old one and give the new one a sense of being right here, right now. (Except – odd detail – you won’t find the phone number on the phone itself. Nor is it even displayed in or on the phone. The back of the iPhone used to show the memory; now it doesn’t even do that.)

Why not do the same on the PCs then? It’s not that there’s suddenly a temptation to slide past a lengthening upgrade cycle; Apple used to upgrade them every six months or so like clockwork, but recently has become less interested in doing so. But it didn’t have a number or even descriptor for its PCs back when it was pushing new ones out.

Add in the fact that it’s almost impossible to differentiate between the iPhone 6/6S/7 (and 6+/6S+/7+ – except the latter has dual cameras) except if they’re in unusual colours, and you have a conundrum. Apple attaches numbers to these products in its marketing; yet there’s none on the devices themselves. Perhaps it’s to help people pretend that they have the latest when in fact they don’t; the “unashamedly plastic” 5C sold comparatively poorly (against expectations if Apple had simply continued the iPhone 5, which is what the 5C actually was inside) perhaps because owning one indicated to the world that you didn’t have enough money to buy the top-end new model, the 5S, and that you hadn’t had it the year before either (because you’d have had the 5).

So if the phones don’t have the numbers, why does the marketing? Possibly it’s just to do what marketing should: make you aware there’s a new product. Even if you can’t tell which one other people – or even you – are using. (Do you know which model of phone you have? This might be indicative of how susceptible you are to this marketing method.)

The only other question is: when will Apple stop numbering its iPhones? Will the 2017 version, being the tenth anniversary edition, be the “iPhone Edition” or some such? Once you’re on this thing, it seems unlikely to stop – but I can’t wrap my head around the concept of 2020 rolling around and the “iPhone 9” being unveiled while a few weeks later one of the PCs gets an update that makes it autonomously intelligent with VR, and yet it’s just called “the MacBook”.

(From an idea on Twitter by Joe Asbridge – thanks Joe. Told you I’d write it up eventually.)

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Lenovo’s Yoga Book: a brilliant idea – for 15 minutes or so

Posted on September 6, 2016 by charlesarthur

Lenovo’s Yoga Book: is this the new face of tablet computing? Not quite. Photo by bjtechnewsphotolibrary on Flickr.

I went to IFA in Berlin last week (courtesy of Harman Kardon; they have some interesting stuff I’ll write about presently) and during my time there got a chance to look at Lenovo’s new Yoga Book, which has attracted some interest.

(Here’s the TL;DR: it’s an interesting design, and it’s great that Lenovo is at least thinking of different ways to approach tablet design. But in the end it’s a short-term feature that doesn’t actually offer anything over other designs.)

Lenovo has a gigantic stand there, with the Motorola brand now limited to a little island in the middle of it. There were no smartwatches on view. There was a lot of space devoted to the Yoga Book.

Book your place

How to describe it? The photos mostly do it justice. If it were a laptop, you’d say it was very thin. There’s a hinge, and a tablet-style 10.1in display which is touch-sensitive, and then there’s a basalt-black lower (or side) slab which is where the keyboard would be in a laptop.

The Yoga Book’s “basalt slab” lights up to show an illuminated keyboard; otherwise it’s black. Photos by bjtechnewsphotolibrary on Flickr.

But rather than having moving keys, this lower part is just black – until you press a lit virtual button at the top right, which turns on the underlights (backlights isn’t right) to a virtual keyboard.

That is, indeed, impressive. Seeing the keyboard light into life is one of those “technology delight” moments. There was nothing, now there’s something! And you can type on it, as accurately and quickly as on any hard-surface virtual keyboard. (I can type pretty fast on them, and spent a little while proving it to myself on one of the Yoga Books.)

That isn’t quite all that the basalt slab can do: it’s also touch-sensitive, so that you can draw on it using a normal pencil or pen, though it might be advisable – as the photos show – to do that with a piece of paper in between. Great! You can copy your drawings that you made on the back of napkin into whichever drawing app you’re using. (I did not test this. No napkins to hand.) But I did see it being demonstrated plenty on the stand.

The screen itself is also touch-sensitive, in the same way as an iPad or any Android or Windows tablet. That’s because the Yoga Book is both of the last two – it ~~can dual-boot, into Windows or Android~~ or more precisely, either: you can buy a Windows version or Android one. (It doesn’t seem to be dual-boot.)

Here’s the thing, though. What else can the basalt slab do? Nothing. It can’t light up and display more content. It just does a keyboard. (I assume it can do different keyboards, according to language, though I didn’t check this.)

What’s the problem this solves?

So the basalt slab is nice, and it has a “delight the potential buyer” element. But let’s ask: how much better off are you with this than with, say, an iPad Pro with a detachable keyboard (or any iPad with a Logitech or similar attachable keyboard)? Or a Surface Pro?

The Yoga Book has one thing those don’t:
• you can alter the viewing angle for the screen to any angle, including bending the keyboard underneath the screen so that you have a tablet stand at any angle.

And that’s it.

But, but, but, you say: what about all the writing on the basalt slab?

OK, what about it? How is it better to be able to write with a pencil at one remove from the screen itself (rather like using a Wacom tablet) than being able to write directly onto the screen with an Apple Pencil or Surface stylus? I puzzled about this for a while, but I really cannot see any scenario where anyone but a serious artist would want this function. If you occasionally need to get some handwritten content into an app, get something that accommodates a Pencil/stylus. Or, hell, just take a picture of it and draw over it in an illustration app. (Apps such as Procreate make this easy.)

Target market

Lenovo does seem to be targeting the “real artist” slice, judging by its promo material (from the link above):

Draw with the included Real Pen that detects 2048 levels of pressure—capturing subtle nuances of every stroke. No need to worry about batteries; the Real Pen works without ever needing a charge. You can even be more creative by using two hands: one on the screen to select tools, pan, and pinch-to-zoom the other hand using the Real Pen to draw on the Create Pad.Best of all, you can see your creations come alive on the display – unlike most tablets, where your hand blocks the display as you draw.

Ah yeah – the Real Pen costs £43. (Apple’s Pencil costs £79, and doesn’t say how many pressure levels it detects.)

You can draw on the basalt slab with the Real Pen. But why would you, rather than just drawing directly onto the tablet screen? Photos by bjtechnewsphotolibrary on Flickr.`

Perhaps is the basalt slab giving tons more battery life? Apparently not: Lenovo talks of 13 hours’ battery life on Android, which is tablet-ish but not “oh wow that’s utterly incredible, did you do that by hiding the battery in the basalt slab, wow”; though for the Windows tablet it suggests 15 hours, which is a lot more impressive for a Windows tablet.

When you look at it like this, the basalt slab looks less like a “really clever thing” and more like “yeah, it’s a touch-sensitive display that doesn’t display anything but black and white keys”, which is a good way to keep costs down. (Windows developer Mike Hole points out that it’s a bit like the dual-screen Acer Iconia tablet – which he describes as “very niche and flat keyboard [is] a no-no”.)

For all that, the Yoga Book retails for £430 in the UK, which is substantially more than the other two tablets here, which go for £130 and £180. Lenovo’s problem has been that it couldn’t break out of the Android tablet morass, which led it to lose money on them. So the Yoga is a clever move in that regard.

That’s the real problem that it solves: making money in the tablet market.

But is the Yoga Book a breakthrough in tablet design, bringing us dazzling new possibilities? Afraid not. It’s neat, but after a while you realise that the innovation is sustaining, not disruptive.

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A short history of Project Ara, in breathless headlines and sceptical observations

Posted on September 2, 2016 by charlesarthur

Project Ara’s Spiral 2 prototype. This is about as far as it got. Photo by pestoverde on Flickr.

Never heard of Project Ara? Start here. Know it all about Project Ara? Start here, and enjoy the ride.

April 2014: “Building blocks: how Project Ara is reinventing the smartphone” (The Verge):

Ara modules need to have a way to communicate with the rest of the phone, but physical contacts are often dirty and unreliable. So instead, the modules will use “capacitive interconnects,” which are wireless and theoretically more reliable, especially at high speeds. The capacitive pads also will help save space on the modules, since they’re smaller than physical pins.

When it comes to keeping the modules in place, physical latches are fiddly and can easily break. Instead, Ara phones will use electropermanent magnets to hold them in place…

…The head of Project Ara, Paul Eremenko, says he is planning “the most custom mass-market product ever created by mankind” without a trace of irony in his voice.

He and his team have just one year left to do it.

The Verge there, with pretty much the ur-version of the “breathless visit to the lab” feature. And, I’ll point out, it illustrates another classic element of Verge journalism: no effort to seek an outside view from an analyst, OEM, or even a person in the street to ask them “would a phone like this ever sell/make a profit?” It’s this lack of attempt to triangulate on claims that frustrates me again and again about The Verge. So often it’s average trade paper journalism dressed up in pretty web clothes.

My commentary at the time: (when I recorded the link): “The smartphone business is zero-profit for most players. How would a business made up of competing parts suppliers be any more profitable – even if the finished product can be made to work as well as a unified phone designed by a single company? It would either flop, or be driven to commodity (and so drive out suppliers) almost at once.”

Kudos therefore to Craig Grannell, who days afterwards wrote for Stuff that “Modular smartphones are the building blocks of a tech shambles” (Stuff):

“what first seems like a simple, obvious idea is in reality a mess waiting to happen, and one that will offer few benefits for the end user. They won’t save a great deal of money, few will care about interchangeable parts anyway, some will wonder why there are big gaps on the back of their smartphones if they can’t get the various bits to line up properly, and a few geeks will proclaim it the best thing ever, before getting distracted approximately eight seconds later by some great new Google robot that gets injected directly into your hypothalamus.”

Things went quiet for a little while. And then came autumn, and a bit more publicity.

October 2014: “Google plans to make a component store for its modular phone” (Engadget):

Google’s Paul Eremenko, director of Project Ara, recently revealed that the company will be taking a cue from the Play store to create a similar shopping experience for its modular smartphone. What this means, essentially, is you’d be able to buy or sell different components from a single hub, just as is the case now with apps, music, books and more on Google Play – and it would also include reviews and recommendations.

Me: “At a guess, Ara isn’t going to end up as a phone project at all, but something more like Arduino or Raspberry Pi – a playground for hacking things together.”

November 2014: “Project Ara modularized smartphone to enter commercial production in 2015” (Digitimes):

Project Ara under Google’s Advanced Technology and Projects Group (ATAP) is currently working with more than 20 partners and aims to bring its modularized smartphone into commercial production in 2015, according to industry sources.

Makers in Taiwan’s supply chain will play an important role to help realize the production of modularized phones, with related handset frames to be produced by Quanta Computer and connector boards by Foxconn Electronics.

Hardware partners will ship modularized parts, including displays, camera modules, CPUs, wireless modules, batteries, memory devices and cases, to consumers directly through Google’s platform.

Things then went quiet. And quieter. And it turned out there had been “a delay” for unspecified reasons, but something to do with the problem of getting the parts to fit together and communicate.

August 2015: “Some thoughts on the Project Ara delay” (Phoneblocks blog): Dave Hakkens, of Phonebloks, said:

When I shared Phonebloks it was just an idea, something I thought would make sense to reduce e-waste. It was a future vision, something that would hopefully be made in 5-10 years.

Some companies are trying to make a modular phone. Of all those companies Google is taking the biggest leap. They have an insane amount of resources/smart guys and set a 2 year timeframe for themselves to get it done. Seemed unrealistic and turns out it is. They are delayed for over a year!

However this is not bad. Sure the sooner it would be in our hands the better since we could save e-waste.

Me, at the time: “There will never be a useful phone using phonebloks. The premise might work for some lab/testing/environmental equipment, but the price and size will make it pointless when you can get a pocket supercomputer with phone functions for $50.”

April 2016: “Google hires Rick Osterloh as SVP for new unified hardware division” (Recode, under the same umbrella as The Verge): Putting the ex-Motorola chief in charge of Nexus, Chromecast, consumer hardware (laptops), OnHub (router), Project Ara and Glass.

At the time I asked “Won’t [Nest] get folded into Osterloh’s division now?” And lo, in August, it did.

May 2016: “Modular phone Ara to finally launch” (The Register). Except without a modular screen, GPU, CPU, RAM or sensors. What exactly was there to be modular then?

The world waited, and meanwhiel LG launched its G5 smartphone, which did have modular elements; it sold poorly. In summer Motorola launched the Moto Z, with “Mods” which nobody seemed very keen on (“a good phone headed down the wrong path“,” said Vlad Savov at The Verge – one of the few writers there who does take a reality-based position).

September 2 2016: “Exclusive: Google shelves plan for phone with interchangeable parts – sources” (Reuters):

Alphabet Inc’s Google has suspended Project Ara, its ambitious effort to build what is known as a modular smartphone with interchangeable components, as part of a broader push to streamline the company’s hardware efforts, two people with knowledge of the matter said.

The move marks an about-face for the tech company, which announced a host of partners for Project Ara at its developer conference in May and said it would ship a developer edition of the product this autumn.

The company’s aim was to create a phone that users could customize on the fly with an extra battery, camera, speakers or other components.

A spokeswoman for Google declined to comment on the matter.

While Google will not be releasing the phone itself, the company may work with partners to bring Project Ara’s technology to market, potentially through licensing agreements, one of the people with knowledge of the matter said.

Is that an end to it? Probably.

But don’t worry. There’s always another idea lurking in the labs waiting for someone from The Verge to give it a writeup. Wind back to May 2016, and another ATAP division project, this one called Soli, which aims to put radar chips into electronics so you can use hand gestures to control things:

Google built a tiny radar system into a smartwatch for gesture controls (The Verge):

“How are you going to interact with an invisible computer?”

When you hear a question like that posted in a conference room at a major tech corporation like Google, you expect you’re going to be in for an hour or two of technophizing with few tangible results at the end of it.

But then somebody sets a smartwatch on the table in front of you. You snap your fingers in the air just a couple of inches away from it. And the digital watch face starts spinning.

Give it a couple of years and we’ll be writing the obituaries, I guess.

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Inside the unprofitable world of (Lenovo’s) Android tablets (updated)

Posted on August 22, 2016 by charlesarthur

Lenovo’s Yoga Android tablet: likely not much profit here. Photo by pestoverde on Flickr.

Corporate reorganisations! What are they good for? Absolutely nothing – except in the rare cases when they force a company to restate its financial results using the new reporting lines. The fallout from this is that you can often figure out, at least for a few previous quarters, how previously hidden bits of the company were faring.

Which leads us to Lenovo, which in April reorganised itself from having a “PC” division which made PCs, and a “mobile” division which offered smartphones and tablets, to having a “PC and smart devices” group which offers PCs and tablets, and a “mobile” group which offers smartphones.

It restated its revenues and operating profits for those divisions for the previous four quarters. What happens when it does that is that you can see, by how the numbers shift, what sort of contribution tablets were making to the overall business.

Reshape, restate

The results for the April-June quarter (the calendar Q2, but Lenovo’s fiscal Q1) include this restatement:

Lenovo financial restatement

Of course the old numbers for the previous organisation are still there. So to find out how much business, and how much profit, we just go back and compare the old numbers with the new ones – that is, the PC-only figures for revenue and operating profit, and the PC-plus-tablet figures.

A quick bit of arithmetic then shows you the tablet revenues and operating profit.

(Note this is only the Android tablets – the Windows devices were already part of the PC division.)

Here’s what we get.

Lenovo Android tablet revenue
(“CQ” means “calendar quarter”, eg CQ1 is January-March.)

And as IDC records tablet shipment figures, we can also get the per-tablet average selling price (ASP) and per-tablet profit.

The raw figures for ASP, profitability and volume are these:
Lenovo tablet profitability

Which make this graph:

Lenovo tablet ASP and profitability
(figures in US$)

A bad business

What have we learnt? It’s long been fairly clear that Android tablets really aren’t a great business to be in. They’re low-volume, low-margin (if there’s any margin at all) and because it’s Android, people tend to have little brand loyalty – essentially, it’s a glorified screen.

I can’t see that any of the smaller competitors in Android tablets (Acer, Asus, Lenovo, Huawei, LG) are making an operating profit, or at least one worth considering. Sure, they will make gross profit – they get more money than the raw materials cost – but once you include other costs such as sales, marketing, administration and R&D, they’re sunk.

Samsung is the exception here: I’m confident its tablet business is profitable, because it has scale (it’s the largest Android tablet maker by some distance, with 6m shipped in the second quarter, making up about 25% of all Android tablet shipments) and also makes the components itself; that flywheel effect of creating your own scale with stuff you make yourself has a knock-on effect. But even Samsung has struggled with the idea of high-priced tablets; it has considered just giving them up and aiming for the low end. But it didn’t.

The lower you go

Looking at Lenovo’s ASPs, which wander around the $110 mark (I’ve previously guessed them at $100 and zero profit in my handset analysis; nice to have that confirmed), it’s easy to see why. There’s barely any money in Android tablets – a fact that was confirmed after I wrote this post (see the update at the end). Take a look at how small a part of Lenovo’s business they are:

Lenovo's PC, smartphone and tablet sectors

In his meta-analysis of the Android-iOS landscape, Benedict Evans estimated that there are 150m-200m Google Android tablets in use, and perhaps another 200m “naked Android” (no Google services) in China. For comparison, he reckons there are about 250m active iPads, of varying sizes.

The key difference is that Apple’s iPad sells for way more than Lenovo’s (or Samsung’s). The ASP for all iPads in the latest quarter was $490, and it has never fallen below $400. Sure, you can argue that the iPad is overpriced, but you can also expect that as long as it keeps selling, Apple will get the profit it needs to encourage it to keep going.

The other point: if you ~~can~~ can’t make a profit selling tablets, you won’t be able to improve them, or market them seriously.

Compare that with Apple’s efforts, where its True Tone screen (on the 9.7in iPad Pro) is likely – certain, really – to come to the new iPhones later this year. But in the tablets first. Lenovo can push – but only because it has the PC division. The tablets, have been dragging it down.

And finally..

There’s a nice coda. In its latest results, Lenovo says “Tablet: profitable with double-digit growth premium to the market”. Looking back, it has never before said that tablets were profitable; it’s done lots of talking about growth and position, but not profit. We can’t see how profitable, though, because we don’t have those comparative numbers as we did before.

The other coda: you can work out the tablet revenues and profits by using the pre- and post-split numbers from the smartphone division. But they come out different. Via the smartphone division, revenues come out as $1,231m v $1,150m via the PC division; operating profit comes out as -662m from the smartphone numbers, v -33m from the PC numbers. But I’ve gone with the PC figures, because there are all sorts of writeoffs – inventory, restructuring, redundancy, acquisition of Motorola – in the smartphone numbers which confuse things hugely. There are no such in the PC division numbers, so I’ve gone with them.

(Update: corrected typo of “if you can’t make a profit selling tablets..”)

Bigger update: a week after this appeared, Digitimes had two stories on the squeeze in the tablet market. The first noted that in 2Q 2016, the tablet market shrank again, to 40m units:

Among the three major camps [Apple, brand OEMs and cheap “white box” vendors], white box players performed the weakest in the second quarter. With more large-size independent design houses (IDH) quitting the market plus shortages of components including panels, memory and processors, white-box players saw their combined shipments drop to a new low at 13.8m units in the second quarter.

Non-Apple first-tier vendors’ inexpensive tablets were mostly released in the second quarter, but combined shipments were down 7.1% sequentially to reach only 16.98m units as product differentiation, number of models, and price competitiveness were all inferior to in 2015.

And then there was the news you might expect, of both brand names and white box vendors pulling out:

Asustek Computer and Acer have turned to focus more on niche applications, while Micro-Start International (MSI) has already phased out of the business and to focus mainly on gaming PC product lines. China-based white-box players that have joined Intel’s China Technology Ecosystem (CTE), have also mostly stopped pushing tablet products.

Dropping demand is expected to cause Asustek’s tablet shipments to fall below three million units in 2016, according to sources from the upstream supply chain, leaving Apple the only player that is still able to achieve strong profits from the tablet sector.

That’s pretty stark. (Note that the Digitimes stories go behind a paywall after a few days, if you’re coming to this late.)

Asus, you’ll recall, made the Nexus 7, which was probably the best-selling Android tablet ever – Sameer Singh estimated it at around 6m-8m units in 2012.

But a lot of the companies that jumped into the market thought that tablets would be like smartphones – updated every year, or perhaps every two. Turned out they were all wrong, including Apple; the sales cycle looks more like three or even four years, much closer to a PC. (The iPad 2, from 2011, is still widely used.) After the boom in 2012, the tablet bust has been abrupt – and only those with the manufacturing and financial muscle have been able to stay the course.

ARM: the weightless corporation that outweighs Intel

Posted on July 18, 2016 by charlesarthur

The news that Japan’s Softbank is spending £24bn to buy ARM – the UK company which designs (but does not actually make) the chips that power pretty much every smartphone and tablet in existence, plus almost every internet-of-things product in existence – has got people very confused.

The price is a 41% premium over its closing price on Friday – though the share price leapt on the news by 45%, creating a puzzle for those who hold the shares. A few points first:

• it isn’t specifically caused by the fall of the pound after the Brexit referendum. True, Softbank is buying in yen, and that has appreciated against the pound – from about 160 yen/pound just ahead of the referendum to 140 yen/pound on the day of the bid. That’s a 15% change, so Softbank got some benefit on the side. Possibly the market thinks it could go higher.

Sterling has become cheaper against the yen since the referendum (fewer yen needed to buy a pound)

• it isn’t going to affect “British companies” and your smartphone won’t get more expensive. ARM designs chips, but doesn’t make them; there are no British companies making chips in British foundries from ARM designs. There would be no advantage to Softbank or ARM to increase the royalty on its new licences because companies would simply stick with the older versions.

• Softbank says the purpose of the takeover is to benefit from all the “internet of things” applications that are coming into view. Given that this is a market which will be multiple times bigger than the smartphone/mobile phone market, which was already multiple times bigger than the PC market, you can see that Softbank thinks it’s on to a good thing.

Design for life

But take the valuation on its face, and consider this: ARM doesn’t actually make anything physical. All it does is produce the designs for chips, which others then have to take away and turn into something physical. They pay ARM a royalty for each chip they make using its designs.

It might not sound like a promising way to rake in money, but ARM has the advantage that it can shift its focus as quickly as the market demands, and can hire and deploy people wherever it needs to. There’s barely any capital investment to consider, apart from a few offices and testing facilities. Its value comes directly from its staff and their capabilities. As is often said of IP-related businesses, the company’s future value literally walks out of the door every night. It truly is a weightless corporation.

ARM lets other companies, such as TSMC, Samsung and Apple do things with its designs, in return for royalties. Apple goes one stage further, tweaking the designs and then getting someone else to build them.

But through this all, ARM is weightless. It has a comparatively tiny staff, but precisely because of that it is able to pick the path to focus on. When it was set up in November 1990, the idea seemed a bit fanciful: everyone knew you had to own your own chip foundry to be successful at making chips, like Intel and AMD. Letting other people make your chips wasn’t going to be profitable. Being just a design company seemed even less sensible.

However, ARM turned out to have made all the correct calls. It focussed on low power consumption. It focussed on functionality. It focussed on the RISC (reduced instruction set computing) model – unsurprising, since its name is a contraction of “Advanced RISC Machines” – which has benefits both for low power and for reliability. (To understand the difference between RISC, as found in phones/tablets, and Complex Instruction Set Computing, CISC, as found in Intel-style PCs: think of RISC as a short-order cook who can do a few simple meals but quickly; think of CISC as the chef who can do amazing a la carte, but needs lots of time and care to prepare it.)

RISC turned out to be where the world wanted to go – though not for PCs, where RISC turned out to be a bust (Motorola’s PowerPC model, used by Apple and IBM, simply couldn’t keep up for sheer processing power with the Intel CISC model; Apple abandoned it in 2005, having always hedged its bets by keeping an Intel-compatible version of Mac OSX in the laboratories ready to be deployed.

However mobile phones and smartphones and tablets and chips in your lightbulb and thermostat and monitoring camera all benefit from being RISC-based. There’s a big, big future there.

Capital values

Compare the £24bn bid value to Intel’s valuation, which at the moment stands at $165.60bn (£114.84bn at current exchange rates). Intel has a business model very unlike ARM’s: it designs the chips and it then builds them. This has allowed it to make gigantic profits when times are good and when the world wants the chips that Intel is making.

But you could see Intel as two companies: an Intel-ARM (call it Intel-A) which designs chips, and a “sub-Intel” which then makes them. Intel-A only licences to sub-Intel, and sub-Intel generally only makes chips designed by Intel-A.

Put that way, it sounds a bit inefficient: wouldn’t Intel-A make more money by licensing its chips to anyone who wanted to make them? And couldn’t sub-Intel use its foundries more efficiently by making chips from anyone?

Certainly a lot of (combined) Intel’s value is tied up in its capital assets. Its Q1 2016 balance sheet shows “property, plant and equipment” having a value of $32.64bn, and inventories of $5.75bn – that’s $38.39bn tied up in capital, or nearly a quarter of its value tied up in capital. It’s hard to believe though that an orderly selloff of Intel’s foundries would recoup all that. Much of the valuation (and by extension the company’s market cap) lies in the expected utility of those foundries to make chips that people will want to buy.

Compare that with ARM’s 1Q results. Its direct revenues are tiddly by comparison – £276m, but the operating margin is 48.6% and it had operating profits of £137.5m. Its “plant and equipment” is a grand £58.9m, and inventories £1.6m; that’s
just 2% of its value. ARM could change direction to focus on any sort of chip design it wanted at a moment’s notice. If Intel wanted to start making ARM-design chips, it might be challenged because those foundries aren’t optimised for it.

The trouble with the future

That’s all great while the world is buying a growing number of PCs and Intel-design x86 chips. But it isn’t. The number of PCs sold continues to fall (it’s now down to 2007 levels, ie pre-financial crash) and there’s no sign of Intel making great inroads into either the smartphone/tablet space or the internet-of-things space. Intel recently reorganised itself to roll its “mobile” element into its “client computing” group, thus removing a lot of embarrassing red ink that the mobile side had pulled together.

But Intel also knows that only the paranoid survive; and so it has an “Internet of Things” group which is strongly profitable ($123m on sales of $571m in 1Q 2016), though the sums involved aren’t big by its standards. But they are growing.

The trouble with the future for Intel is all that capital tied up in its foundries, which represent a legacy that is now fading. They’ve done great, and will surely continue to make money. But the growing number of delays to new Intel chips, and its move away from “tick-tock” to a three-year schedule, suggest that it’s struggling to cope with the demands both of its past investment, and the demands of the future.

Contrast that with ARM’s stated intention:

ARM technology now reaches around 80% of people in the world, with chips based on our technology driving billions of products every day. To date more than 86 billion ARM-based chips have been shipped, and our Partners are shipping over 4 billion every quarter. Our strategy is to develop and deploy energy-efficient technology; to enable innovation through a broad ecosystem of Partners, building on our shared success; and to create superior returns for our shareholders by investing in long-term growth.

You’d have to say that ARM looks like a good bet for the future – better, for the moment, than Intel.

It’s dark out there: the Q1 2016 smartphone scorecard

Posted on June 24, 2016 by charlesarthur

It’s all a bit murky in the smartphone market right now. Photo by Moyan_Brenn on Flickr.

The arrival of 2016, and the dramatic slowdown in the smartphone market in the US and China, is putting brand new pressures on the bigger players, though more noticeably on the smaller ones.

Inasmuch as nobody who isn’t Samsung, Apple or (I think) Huawei is making money at scale from smartphones. All of the “small big” players such as LG, Sony, Lenovo/Motorola, HTC, and – I’m fairly certain – Xiaomi are losing money. Of the first four named above, their collective loss on smartphones in Q1 2016 was $850m (all prices are given in US$ throughout); and for Xiaomi, which sold fewer than in the same period in 2015, at an ASP (average selling price) below everyone else including Lenovo/Motorola, it’s hard to see that it could have scraped a profit.

Not only that, but Apple finally came under pressure: both its smartphone shipments fell (despite a fair bit of inventory stuffing) and so did its ASP, from over $690 in the fourth quarter to just over $640 in this one, the lowest value since it introduced the larger-screened 6 series phones in September 2014.

Samsung meanwhile sailed along, pushing almost as many phones out of the door and seeing only mild erosion year-on-year of ASPs. Notably, Samsung’s profits were their highest since the second quarter of 2014 – helped, surely, by the decision to push the Galaxy S6 flagship out before the quarter ended.

So first the numbers.

Q1 2016: the smartphone scorecard * denotes estimate: explanations below
Company	Handsets (million)	Revenues	Handset ASP	Operating profit	Per-handset profit
Samsung	81.9	$24.25bn	$242.48*	$3.5bn	$42.75*
Apple	51.2	$32.86bn	$641.83	$9.17bn*	$179.06*
Huawei	27.5	$5.72bn	$208	positive?	positive?
LG	13.5	$2.67bn	$197.57	–$224.64m	–$16.64
Lenovo/Motorola	11	$1.74bn	$159.36	–$105m	–$9.55
Sony	3.4	$3.64bn	$473.32	–$372.2m	–$109.47
HTC	2.5*	$0.46bn	$182.80*	–$148m	–$59.20*
Microsoft Mobile	2.3	$0.50bn*	$217.20*	–$154m*	–$67*

Assumptions:
Samsung: featurephones (estimated 18.1m of them) sold for $15, made a profit of $0 each. If their ASP is higher, the ASP of the smartphones is lower; if their profit is higher, the per-handset profit for smartphones is lower. For tablets, the assumption is the 6m shipped had an ASP of $200, and show zero profit. If they sell for a higher price, phone ASPs are lower; if they make a profit, per-handset profit is lower.

Apple: profit margin per handset of 28%. This is a longstanding historical figure worked by analysts better at this stuff than me. It will actually vary by quarter, depending on phone mix, how new the phones are, and storage (more storage = better profit margin). But this is a usable rule of thumb.

LG: sells no appreciable number of tablets, and doesn’t make a profit or loss on them. (In Q1 2015 it shipped 1.4m tablets, which didn’t have an appreciable effect on anything.)

HTC: shipments had to be estimated based on its (woeful) revenues. I’ve said previously that I don’t think HTC will ever make a profit again in smartphones, and nothing I’m seeing makes me feel I was wrong.

Microsoft Mobile: featurephones (15.7m of them) had an ASP of $15, and made zero profit. Lower featurephone ASP would mean higher smartphone ASP. Any profit would mean more losses for smartphone handsets. Lots has to be assumed about Microsoft’s handset business, including gross margin (I assumed $50m on its $500m smartphone sales – possibly generous), and R+D costs and sales/general/administrative costs (assumed $50m and $75m respectively). The numbers still don’t work in its favour, even though a year ago those figures were over $500m together.

There’s one other notable Microsoft comment in its 10-Q: “Patent licensing revenue decreased 26%, due to a decline in licensed units and license revenue per unit.” That would be Android handsets paying a licence. Whether that’s due to Huawei rising and not having a patent deal isn’t clear. But it’s one to watch.

Discussion: gravitational pull

The takeaways from this only become clear once you look at the longer-term trends. Android OEMs losing money isn’t new, though Lenovo’s continuing inability to turn Motorola into a money-making (or “not money-losing”) proposition suggests that some things are eternal.

To do that, we have to graph what has happened since 4Q 2015 (the first quarter for which I began collecting this data.)

First though, the handset landscape – as in, how many handsets do these people shift? Best seen in graphical form, so you can get an idea of who’s rising, or falling, or what-the-helling.

Screenshot 2016 06 24 14 56 28

For phone ASPs, I’ll introduce a new measure – the “blended Android ASP”, which is the weighted average ASP, found by taking the available revenues for Android OEMs, and dividing by the total number of handsets shipped by those OEMs. Samsung tends to weigh heavily on this. I’ve included Xiaomi by assuming its ASP was $160 during 2015, falling to $157 in Q1, based on information from analysts. For Huawei, there’s no data except for Q1, when its ASP was $208.

Phone ASPs:

Screenshot 2016 06 24 14 31 15

This can be a little difficult to read, but you can see clear trends: Sony is the only company which is consistently raising its ASP. Even Apple is seeing a trend where it falls, while Microsoft in the past couple of quarters has done that. But for both, that has come at the cost of, well, profit.

Let’s see if when you compare the ASPs to the “blended” Android ASP, so you get an idea of how the prices change relative to the known ASPs. (This is not the ASP for all Android phones all over the world – for that you’d have to pay $$$$ for an analyst report from IDC or Gartner.)

Screenshot 2016 06 24 14 17 53

ASPs first: what’s pretty clear (and expected) is how far above the crowd Apple is; how Samsung’s figures tend to dominate the sector; how Sony’s are climbing; and how Xiaomi and Lenovo/Motorola are well below the crowd.

Sony has a strategy of raising ASPs in order to find profit somewhere, somehow, up there. Trouble is, it keeps not managing to. Microsoft ditto (perhaps). The problem they both have is that they’re selling fewer handsets over time, which makes profit harder to achieve because your fixed costs (overheads such as staff, administration, buildings etc) don’t shrink in the same way.

I’ve assumed that Xiaomi’s ASP was $160 throughout 2015; the figure for the first quarter of this year comes from IDC. That $160 figure makes sense: in June 2014, Bruce Einhorn at Bloomberg was comparing Huawei and Xiaomi (in a piece that seems prescient now) about Huawei’s insistence that it could be China’s top smartphone brand, and noted that

Huawei may not be able to compete with Xiaomi’s razzle-dazzle, but the Shenzhen-based Huawei has made big strides of its own in building its brand and making cool handsets. Last year it launched the Ascend PG, which Huawei said was the world’s slimmest smartphone, with a depth of just 0.24 inch (6.18 millimeters). In the first quarter of 2014, Huawei shipped 13.5 million smartphones, compared with Xiaomi’s 10 million, according to Bloomberg Industries. At $155.30, the average selling price for Huawei’s phones is slightly less than Xiaomi’s $159.60. And like Xiaomi, Huawei now sells most of its phones under its own brand. Three years ago, most of the handsets Huawei sold carried operators’ brands, with only 30% using Huawei’s own brand. Today, 95% of Huawei phones use the Huawei brand.

Note that Xiaomi’s ASP hasn’t shifted in those 18 months; by contrast, Huawei’s has rocketed, from that $155 to $208 now (according to IDC).

Profit: still mostly missing in action

For profit, the picture – unless you’re Apple or Samsung – remains unrelentingly grim. Although we don’t know how it looks for Huawei and Xiaomi.

For Huawei, its only known ASP (that I have; if anyone from IDC/Gartner wants to send more details, please do) is at a level where at best you’re breaking even. Given the colossal volume Huawei has managed in smartphones – it’s now the third biggest – it could have hit the economies of scale necessary to go past breakeven.

Xiaomi, meanwhile, is venture-funded, and selling at a very low ASP, and has seen sales go into reverse in the first quarter compared to the previous year. ASPs have followed. Even if you think that its model of selling online is clever, it’s hard to see that it would be making a profit. But we don’t know.

In the end: it looks dark

Looking at the handset shipment graphic, one would have to say that HTC, Sony and Microsoft are all heading towards the exit. They’re bigger than a lot of small players out there (OnePlus, Micromax, etc) but they’re trying to play on a global scale, and that’s very expensive. Even Lenovo, which is discarding Motorola parts as fast as it can, struggled in its home market of China and is now casting around for other places to sell.

LG seems to want to be in the game, but Xiaomi is challenging it, and Huawei has already overtaken it. All that is saving it is the fact that the smartphone business is part of a conglomerate that also makes air conditioners, washing machines, TVs and so on.

The really interesting one is Apple. Its ASP finally dropped – and by quite a bit. Its shipments fell – and again, by quite a bit (it only got where it is by stuffing the channel). Its per-handset profit dropped, in line with the ASP.

The question that keeps being asked is: how long can Apple stay above the fray? But the answer comes back, again and again: probably a lot longer than others can stay in the game.

Would you fund this?

If you were shown those graphics and asked who you’d like to be backing, it probably wouldn’t be Xiaomi; you’d want to be up there with Apple and Samsung, where the money is good and prices are high. But building a premium brand is the sort of thing that you wanted to start doing 30 years ago (at least).

I’ll admit I’m puzzled by the determination with which companies like Sony and LG and HTC stick to the smartphone business. If you’re losing money regularly, why do it? Perhaps it’s a fear of what comes afterwards – of the void beyond. Even BlackBerry is refusing to get out of the handset business, even though it barely generates gross margin on each handset (that is, hardly covers the costs of the actual device, never mind the sales/distribution/research process that gets it to someone).

Here in the UK we’re about to find out what #Brexit means; a leap into the void beyond. Maybe some smartphone makers are similarly worried about what happens if they stop making phones. Or it’s just too expensive to wind it all up, and safer to take small acceptable losses rather than big company-defining ones. (It’s the same approach that has seen once-big names in the PC business such as Toshiba simply rein in their distribution and manufacturing there.)

So maybe this is how the smartphone business ends for the companies which aren’t Apple and Samsung but which were early into the business: not with a bang, but a whimper.

Chromebooks: low-end disruption amid the PC collapse

Posted on June 20, 2016 by charlesarthur

Just a flesh wound? Scan by fae on Flickr.

Revenues are draining out of the PC business like blood from someone who has come off worse in a swordfight in Game Of Thrones. According to the data I’ve collected from the top four Windows PC OEMs which publish financial data – HP, Lenovo, Asus and Acer (but not Dell, because it has been a private company since September 2013) – there’s a steady drop in the total revenues in the Windows PC market.

Screenshot 2016 05 31 16 54 44

I calculate this from the recorded revenues from the companies, and then comparing that to the number of PCs they’ve shipped according to IDC, and the number of PCs shipped in the total market. Importantly, that number excludes Apple, where revenues show a less clear pattern:

Screenshot 2016 05 31 16 56 12

An update: I was asked to show the revenues for the companies. This comes from their company reports, and from IDC’s figures for PCs shipped. Note that IDC excludes Chromebooks and 2-in-1s; that would favour companies which sell either of those devices (as they get the revenue, but it doesn’t count against PCs shipped). Apple however doesn’t call its 2-in-1 a PC – it’s an iPad, and it puts it in that category (which isn’t measured here).

Note how Acer’s figure is falling faster than the overall trend.

What’s noticeable there is how Acer’s revenue per PC keeps sliding. Asus, meanwhile, has staged a recovery, along with HP. And Apple sails above the lot.

If you look at operating profits for the Windows PC OEMs, the picture is again a little clouded, but there’s a clear general trend over the past couple of years: after heaving themselves out of a bad period in mid-2012 to the end of 2013, there was a sudden uptick in their fortunes in 2014 when the end of Windows XP heralded a burst of spending by corporations on new PCs. Since then, though, decline has set in again.

Screenshot 2016 05 31 16 55 59

Note this is a weighted average: Lenovo sells more machines, and is more profitable, so that pulls up the average.

(The past couple of years don’t include Dell, which went private in late 2013, and hasn’t published revenues or profits that can be precisely tied to PC shipments since. Some figures did surface earlier this month, but on putting them into my past data for Dell they suggested that PC revenues had soared beyond a level of any other company. I think that instead Dell has changed its reporting structure, and mixes services revenue with PC revenue.)

That might look healthy enough, but in fact the operating margins vary from around 5% (Lenovo) and 4% (HP Inc) to 1.3% (Acer). If you look further down the chain, to companies like Fujitsu and Toshiba, their PC businesses are shrinking in size and making operating losses. I’d be surprised if Samsung is doing better than breaking even on its much-reduced PC business, which has roughly halved in revenue since the end of 2014 to just under $600m per quarter; at the average price of PCs, that’s about 1.2m units per quarter.

We don’t know Apple’s operating profits on PCs, but historically the figure has been just under 19% of PC revenues – which means that it has an operating margin roughly four times higher than any rival, while its average selling price (ASP) of $1,265 is more than double the $490 of the big players. On those figures, Apple sweeps up roughly half of all the profits in the PC industry.

But now change – more precisely, disruption – is on the horizon with the advent of Chromebooks capable of running Android apps – which will, crucially, include Microsoft Office.

Thin end, big wedge?

Credit to Tom Warren for spotting the story: Chromebooks outsold Macs for the first time in the US in the first quarter of 2016, shifting an estimated 2m against 1.76m Macs. It’s an important story, and one which I’ve been expecting for a long time: Chromebooks are beginning their low-end disruption of the PC market. This can only grow. The important question now is, who loses and who gains?

Sure, you can argue with the numbers – Apple doesn’t break down shipments for the US, and IDC has in the past got its totals wonky for the worldwide and US figures. But what’s mostly put some peoples’ noses out of joint about this data point is that Chromebook sales have been compared to Apple’s. That’s Google and Apple. The big rivalry in tech.

That’s because the only other two candidates for the “sold more than” metric by IDC’s data were Acer (0.71m shipped in the US) and Lenovo (1.92m in the US). But the trouble with doing that – “Chromebooks outsold Acer” or “Chromebooks outsold Lenovo” – is that (a) nobody cares (b) both Acer and Lenovo sell Chromebooks, so they’d be the ones outselling themselves.

Use “Apple” in the headline, though, and everyone’s happy: Apple doesn’t sell Chromebooks, and it’s a savoury tale.

But this an important story of low-end disruption. Clayton Christensen, who first formulated the theory, should be happy. Low-end disruption is the idea that long-developed, complex, expensive products are replaced at the low end by cheaper good-enough products which, while they can’t do everything the complex expensive ones can, are still fine for a segment of the market. Then the low-end products improve, as technology tends to, until they serve more and more of the market, driving the complex products further upmarket (to retain revenue as unit sales shrink). Eventually, in the limit, the high-end makers give up.

When Google announced the Chromebook in June 2011, I was agog. The potential for disruption was obvious – though at the time I thought it would be more popular with enterprises than education or consumers. On that basis, I thought they could chew away billions of dollars of Microsoft revenues and profits.

That didn’t happen, and the reasons why eluded me for some time, but it boiled down to a few things: enterprises often needed specific Windows-based apps; consumers were pretty happy buying Windows machines (or tablets, as happened with greater eagerness for a few years); schools wanted to experiment with tablets. Also, Chromebooks didn’t have Microsoft Office – which many businesses, and consumers, still see as essential to getting stuff done. Furthermore, ChromeOS was essentially a browser, and people need more than just a browser to do everything; witness the popularity of apps on smartphones and tablets.

Early lessons

In schools, though, Chromebooks were just the job. They were cheap; they didn’t need expensive software licences; they were easy to set up; and you could create web- or intranet-based content that the students could learn with. They were essentially laptop-lite. And that was fine. (My youngest child uses a Chromebook at school; the other uses his own laptop; the eldest, at the equivalent of high school final year, uses a school-issue iPad. Clearly, mileage varies a lot between schools.)

But now, with the impending arrival of Chromebooks that can run Office, the stage is set for low-end disruption to tear through the PC market, which is already struggling with the effects of consumers turning to tablets and smartphones in preference to PC upgrades.

Just as important is that PC OEMs may actually have good reasons to make Chromebooks in preference to Windows PCs. The research company Gartner recently pointed out that there are only two properly profitable niches in Windows PCs: high-end ultramobiles, which is the only segment showing revenue growth, and gaming PCs, which are tricked out with high-spec components (especially GPUs). For the rest, it’s a depressing slide towards the bottom.

Among the fixed costs for those PC OEMs is the Windows licence. But what if you could remove the cost of Windows from your bill of materials? The machine at once becomes more profitable. Though there is a fly in the ointment: to work well with Android apps, it will need a touchscreen, which is an expensive item.

Even so, you can see how a PC OEM trying to shore up their revenues and profits – which are increasingly hard to come by – would look for any new space they can. Chromebooks definitely look like that space.

However, I don’t expect it to disrupt Apple yet. The company most at risk from this is still Microsoft, because if people choose to use Chromebooks, it’s usually going to be in preference to Windows PCs. Apple remains the choice of the high-paying buyer – the segment, as noted above, which stays resistant for the longest.

The other question is which PC OEMs will stand to benefit most, or lose most, from the growth in Chromebooks. I think those which have high cost efficiencies, or can price higher based on brand, will benefit. Samsung has good cost efficiencies (it makes a lot of the stuff) even though its brand is weak in PCs, so could do well. Acer and Asus? Hard to say. HP makes money selling cheap PCs with value-added Microsoft deals, but could switch to doing cloud deals around ChromeOS. Lenovo, though, might have the most to lose if it can’t keep squeezing extra margin from selling Windows.

The fly in the ointment: iTunes

Ironically, there’s one potential barrier. It’s the most widely used Windows desktop program that isn’t available for Chromebooks: Apple’s iTunes. Given that tens of millions of people, at a conservative estimate, and perhaps more than 100 million still rely on iTunes to organise their music, and to sync their iPhones and iPads, the absence of iTunes for ChromeOS or Android could turn out to be a stumbling block on the road to total Windows disruption. (Notice how the most eager adopters of Chromebooks so far have been those which don’t need to manage iTunes. And Apple Music on Android is an app for the paid streaming service, not the music-you-own organiser.) It certainly didn’t help WindowsRT that iTunes wasn’t available for it.

Sure, I know and you know that people can and have been managing their iPhones and iPads and music and app libraries since 2011 using iCloud, without resource to iTunes. Don’t discount it, though. The generation which might find it easiest to live without is the first-time PC buyer. But even more problematic for Microsoft is that they just don’t seem to be buying PCs at all. It’s hard to see this Game Of Thrones ending well for Windows.

Apple’s paid search experiment shows there’s still no PageRank for apps

Posted on June 9, 2016 by charlesarthur

Hey, over here! Paid ads need to be relevant. Photo by Michael Rehfeldt on Flickr.

So Apple is doing it: introducing paid search ads to the App Store. People will go to the App Store, search for something, and if a developer has bought an app ad (it can only be an app; no links to content outside the store) and it’s deemed relevant by Apple’s algorithm, then one will appear at the top of the results, backgrounded in blue and making it clear it’s not part of the organic listing. Apple has put up more of the detail.

Of course this has riled developers, for reasons I’ll explain. But a few things first.

There will only be one ad because, Phil Schiller told me, people are going to be searching on mobile, and “we don’t want to push organic search results too far down the list.”

Schiller’s rationale for introducing paid search goes like this. People who want to get apps find them through searching: there are hundreds of millions of searches every week on the App Store. Two-thirds of downloads come via searches. If you want to advertise your app to people who are looking for your app, or something like it, where would you want to advertise?

Logic would suggest you’d do it right there, around search. But until Monday (when it starts in the US, in beta) that avenue hasn’t been available. So developers have resorted to all sorts of tactics – social media, plying reviewers with downloads in the hope of good reviews, paying reviewers for good reviews (on some of the scuzzier sites), buying ads that redirected to the App Store (which I think indirectly drove Apple’s introduction of content blockers), trying anything.

So Apple says: hey, stop spending your marketing money where you can’t be sure anyone will see your efforts. Instead, do it on the App Store, where you know they’re searching!

The mechanics are pretty much identical to Google’s AdWords (the mechanism that puts up ads against searches on Google). It’s an auction system, where the winner pays only what the second-highest bidder offered (so you bid $4, I bid $5, I win but pay $4), and pay-per-click – you only pay if someone does click. No minimum bid, no exclusivity.

“We look at it as giving every developer the chance to drive downloads through marketing,” Schiller said.

Meritocracy has been delayed

This, then, is Apple’s answer to developers’ and users’ repeated complaints that “search in the App Store is broken”. The basis of the complaint is that when you search for apps, you get too many junk results for apps that aren’t relevant, or are outdated/un-updated, or which are straight-up ripoffs.

In other words, there’s still no PageRank for app search. But that’s what people really, really want. Developers and users want a meritocracy; by going for paid ads, Apple is instead giving them an oligarchy.

Ahead of the call with Schiller, I contacted various developers, and some users on the Above Avalon Slack channel (you have to subscribe; totally worth it in my view). I didn’t say that Apple had any changes coming; instead I just asked what three things they’d like to see improved about the App Store ahead of WWDC.

Top of everyone’s list? “Better search”. But what do we mean by “better”?

When I pressed Dave Verwer (who runs the excellent iOS Dev Weekly list) on this, he admitted that

“search is hard. However Apple has a huge amount of data not only on the apps that we buy, but on those that we use, where we keep them on our device home screen. I’d love to see Apple personalise search results in order to provide customers with more relevant results.”

James Thomson (of PCalc and DragThing fame) was also in favour of “better search and discoverability”. But this is a motherhood and apple pie response. How do you do it?

“I’d like to see old apps that haven’t been updated in years gradually retired from the store. I don’t want to search for apps and find ones that won’t even run properly on the latest devices,” Thomson said. “I would (unscientifically) guess that over half the apps on the store are ancient and broken and if you cleared them out of the search results, that would improve matters enormously. I think paid search on keywords is a terrible idea for indie developers and will only benefit the big companies with deep pockets, rather than the users. It will make the playing field even less level. Search should return the best and most relevant results, not the results that have the biggest marketing budget.”

That last is the strongest point. Schiller told me that nobody will be allowed to buy out a keyword; and you can be sure that Apple will have learned from the experiences of Google, where rows over ads bought against trademarks have been many and vicious.

Even so, I wonder if Apple is quite prepared for it. I think policing ads for scam apps which put in fake metadata is going to be a giant effort in its own right.

What about users? David, a user on Above Avalon, put it like this:

“Discovery is the big thing I’d like. It’s just like Spotify – they have all the music, but I still just use my playlists I built some 6-7 years ago. Then they launched Discover Weekly – and finally it was a format where I could truly discover new music again. I feel like being sixteen again (I’m 32), finding bands and even entire genres.

“So if Apple managed to actually get me to download new apps that are not just “my bank released a new app for managing my index funds” or “this city council has their own parking meter app” – I think they and app developers would benefit. I rarely these days truly discover new things in the store. I doubt it is because new things aren’t released. They don’t even have to be new. Just new to me.”

Or ask Daniel Jalkut, another developer:

“I think for discovery, there is a great potential in tapping social trust networks. I know Apple is famous for “not getting social” but imagine if there were an incentive to both review and rate apps because people trusted your point of view, and there was some payoff in the form of fame or fortune? I think Amazon gets a bit of this in the fact you can rate reviewers and they get some kind of “top reviewer” status after a while.

“Similarly, what if I could click a little ‘trust’ icon next to Charles Arthur’s review byline, and from then out whenever I searched … for anything … apps you had rated well floated up? I would click the “trust” icon for friends whose tastes I share, prominent bloggers who I’ve seen thoughtfully review apps, and random strangers whose reviews and rating keyed into my same tastes. By having some kind of opt-in trust system, you would reduce the risks of gaming, because nobody could game their way into your trust network except by your approval.”

The rudiments of searching

As Bloomberg had already discovered that Apple was thinking about paid search, developers have had time to ponder what might happen. Marco Arment was unforgiving back in April:

Such a system would exacerbate much of the App Store’s dysfunction, disincentivizing improvements to organic search and editorial features while raising the cost of acquiring new customers above what many indie developers and business models can sustain.

But then he seemed to relent:

Assuming the system would be auction-based by keyword like Google AdWords, for less-contested keywords, marketing apps could become much easier. Buying a few good phrases could inexpensively put your app at the top of the list to help you get off the ground and start to seed organic growth.

More significantly, we could buy increased exposure to the most likely customers to buy our apps. More paid-up-front apps could become viable, and prices could rise.

What’s almost certain to happen is that the money that used to flow into social media campaigns and ads on various other media will instead flow to buying ads on the App Store. Apple thus will capture more of developers’ marketing budget. And (per the point above about the 65% of installs) it can argue that that’s as it should be. I would guess that Facebook and Google are likely to be the two who won’t be significantly hit. (Google might lose a little.) Ben Thompson says the same – Facebook will be fine. Update: Thompson backs that up with an excellent point: Google has offered paid app ads in Google Play for a year already, and that’s had no appreciable effect on Facebook’s app install revenues, even though Android has the larger number of downloads overall.

Just to reinforce that, one of the developers I spoke to said that they use Facebook to target people who they know will be interested in their games; the way it can deliver the ads to the right demographic works for them.

If Apple selling paid search ads skims off those scammy ads which take over mobile pages and dump you in the App Store – looking at you, deadline.com – then some publishers will lose out, but other and better ads can replace them.

What it isn’t: “better” search

This isn’t the PageRank for apps that people had been hoping for. But the problem is that despite so many people thinking and talking about the need for “PageRank for apps”, we still don’t seem to know what it looks like.

Is it downloads times activity? One developer I spoke to recalled a time when their app was downloaded millions of times in a single weekend; when they looked on the Monday, their app ranked in the late teens. “I may be biased, but I’d think we should be No.1, because we know people were using it,” they said. Sure, that sounds reasonable. Downloads? Rate of increase of downloads over a minimum? Activity per download? Apple can get all those numbers, as indeed do a number of the meta-services like AppAnnie.

I asked about this. Schiller replied that simply biasing search towards download numbers times activity, and not having ads, would mean that the big established players would remain. (Think of Instagram and Facebook.) There wouldn’t be a way for small apps to break through. There’s some truth in that, certainly. Perhaps there just isn’t a PageRank for apps. (Sameer Singh at App Annie reckons that Google Now on Tap, in Android 6.0, is going to turn into PageRank for apps, but thinks it’s “a few years out”. We’ll have to wait and see.)

The other stuff, with subscriptions, is potentially going to help a lot more companies achieve long-term business success: halving the take by Apple in the second year of a subscription is helpful. There’s no more data sharing, but at least there’s more money. Plenty will be happy with that, at least.

Another point to consider: how will this be done? I wondered if this will take an iOS update to achieve, since the App Store isn’t decoupled from iOS in the way that Google Play is from Android. Schiller demurred on this. There’s more to come at WWDC. The really amazing thing would be if Apple is going to decouple bits of iOS from the system apps, as Google does. That would be remarkable. But now I’m really speculating.

Finally, why announce this now? Schiller said it’s because there’s “so much” to come. Well, sure, but there always is; content blocking, which arguably is huge, wasn’t in the keynote speech (except as a line in a word cloud on one slide), and people only slowly came to realise how important that was during the week. Apple could, for example, have preannounced that. But didn’t.

No, I think that Apple saw how concerned people were about paid search ads when the Bloomberg story came out, and decided that rather than having the entire discussion post-keynote be about that, they would instead announce it formally, along with improved subscriptions and the already-happening “faster review”. Let the storm clear, and then move on.

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