Endeavour Partners - Blog

Earlier this week I was in Oslo, giving a presentation on the future of the digital ecosystem on behalf of Innovation Norway. There is a huge shift in value underway, triggered by the advent of the app phone, and now extending across the whole of the digital ecosystem: communications, computing, consumer electronics and content. While this is creating lots of new opportunities, one of the key challenges facing any entrepreneurial venture is the clash amongst three titans – Google, Microsoft and Apple – all of whom have market caps north of $150 billion and see this as a death match.

Market capitalization of the three titans

There’s a great picture of the clash on DataViz today:

Clash of the Titans

A post this morning on Engadget about the similarity between the most recent ad for the iPad, and one for the original Apple Newton gave me a profound sense of déjà vu.

It’s far from unusual to see Apple ripping off others when it comes to spots, and the same is true in reverse. But copying itself? Head on past the break to catch the similarities between Cupertino’s freshest iPad commercial and an eerily familiar Newton ad from yesteryear — something tells us the former will make a somewhat more indelible mark on the world than the latter, though.

Back in the mid-90’s, more than fifteen years ago, I was one of the pioneers of tablets with digital cellular connectivity: working in New Zealand for what is now Vodafone New Zealand we put together the Apple Newton with the Nokia DataCard and the Nokia 2110 to provide the first predecessor for today’s smart phones; this was before event the very first Nokia Communicator.

Anyway, take a look at the two videos:

There’s an interesting guest post on TechCrunch this morning by Marc Benioff of salesforce.com, an archetype for or epitome of cloud services, talking about how ‘cloud services’ are evolving. I hate is ‘Cloud 2′ moniker, and agree with some of his hypothesis, if not all:

Cloud 1 ————————————->Cloud 2

Type/Click———————————->Touch
Yahoo/Amazon—————————–>Facebook
Tabs——————————————>Feeds
Chat——————————————>Video
Pull——————————————->Push
Create—————————————->Consume
Location Unknown————————->Location Known
Desktop/notebook————————->Smart phone/Tablet
Windows/Mac——————————>Cocoa/HTML 5

Fundamental Shift in Cloud Computing

FWIW, we believe that amazon.com and Google will both thrive, and remain deeply skeptical about Twitter.

One very interesting development, is how this battle is affecting standards for rich graphics on the web. Marc notes the move to Cocoa and HTML5; we were skeptical about HTML5 but may re-examine our position given the impact of the iPad and the iPhone, as highlighted by this recent post from Gizmodo:

The iPad doesn’t run Flash. If your website uses Flash, it won’t play well on the iPad. Turns out, a lot of people want their sites to look pretty on the iPad. So the internet’s already starting to look different.

One of the more interesting effects of the iPhone was that it drove a ton of websites to format their content for the phone in at least of two ways, and often both: iPhone-optimized sites, with more finger-friendly navigational elements that look almost app-like, and actual iPhone apps. We’re seeing a repeat with the iPad, though the adjustment appears to be less about the screen size than its lack of Flash support, and there’s the fact a lot of sites will be ready on day one. (Though before we go any further, let’s be clear: Flash is sticking around, for many reasons, regardless of Apple’s opinion of it.)

Does the iPad herald a new age of connected devices, or is it “just a big iPod”?  Reviews have been mixed.

Apple's iPad: With WiFi for $499; with WiFi and 3G for $629

And even if you love it, will you be willing to pay the extra $130 upfront and $29.99 per month for 3G service, or is WiFi sufficient? (Particularly given that a 3G chipset adds only $7-10 to the BOM).

I suspect WiFi is sufficient, and that the price of 3G connectivity is too steep.  It is too steep, in particular, because in a new era of multiple connected devices each new device cannot come with its own expensive data plan.  It is one thing to pay for home broadband ($40-50) and a smartphone data plan (~$30).  It is another to add a netbook, a MiFi, a connected camera, an eReader, and/or an iPad and have each of these carrying its own contract.

Would you buy a separate data plan for each of these devices?

My family looked at netbooks for Christmas this year, and chose to buy without the subsidy and wireless broadband contract.  The most common use cases for netbooks and iPads are still likely to be in places with WiFi connectivity:  Home, office, hotel, café.  And if you own more than one connected device, then you are better off buying a MiFi portable WiFi hub (from Verizon or Sprint) and sharing 3G connectivity across multiple devices than having a 3G connection for each device.

With this in mind, it actually could make more sense for wireline broadband providers to subsidize netbooks and iPads and connected consumer electronics than for wireless companies to do so.  In our case, the netbook bundled with FiOS Internet or Comcast’s DOCSIS 3.0 service would have been more compelling than the 3G offer.  For the iPad, a purchase for less than $499 with WiFi and a bundle of pre-loaded apps and services (such as Verizon Media Manager or a Comcast TV Everywhere app) from a broadband service provider would be interesting indeed.

The Register reports the sad but unsurprising news that Nokia’s flagship store on Regent Street is going to close.

Nokia Store Regent St UK (from silicon.com)

It was actually the most recently opened store: there are others at London Heathrow and in places like Helsinki, New York, Chicago and São Paulo. You can check it (and the other stores) out online: http://www.flagship.nokia.com/

For those of you who don’t know the locale, it is directly opposite Apple’s UK flagship store.

Apple Store, Regent St UK (from the London Evening Standard)

I recently suggested to a client that they visit the two stores, for a sharp contrast in economics, illustrating what we call “asymmetric competition“:

• the Nokia store sells ‘phones – lots of different models
• the Apple store sells ‘phones – a couple of different models
• the Apple store also sells services, such as mobileMe at ~$100 a year
• the Apple store sells music and video and applications, through iTunes (as cards, in the store)
• the Apple store sells computers

As a result, at the moment Apple has fundamentally different economics from Nokia. Apple makes money in a variety of related ways, from mobile devices, and from personal computers (each of which generates several times the margin of even an iPhone), and from complementary cloud services and digital media and other devices.

Perhaps unsurprisingly, this Apple Store is London’s most profitable store, generating ~£60 million a year or £2,000/sq ft, three times the sales per square foot of Harrods.

Harrods

Each iPhone drives significant additional revenue and contribution beyond the device itself; as a result, Apple’s economics are fundamentally different from Nokia’s, or indeed from any other player without the same scope of activities.

There’s a related discussion about ‘phones vs platforms, and on the shape of product portfolios, which I will post on later this week.

At 4G World here in Chicago, the debate is raging on about the potential value of femtocells.  One audience member asked yesterday, “If I already have a 20 Mbps broadband connection and a WiFi access point, then why do I need a femtocell?”  I think he was on to something, but it is interesting to go back in time a little and see how the relative business cases for WiFi and femtocells have changed as the market evolved.

This feels like a confession:  Three years ago, I was a proponent of femtocells as a solution for indoor coverage, particularly when compared to WiFi UMA.  Too few devices had WiFi, and it seemed unrealistic to expect many users to adopt a solution that required such a constrained selection.  Different family members or different personnel within an organization may have very different device preferences or be at different points within the replacement cycle.

By contrast, femtocells allow installation of customer premise equipment where it is needed, and the problem is solved.  Individual users don’t need to change their behavior, and if the costs were right, then it could be an attractive solution for many households and businesses.  But the costs were too high (I priced one at $300 at the time) and commercial availability was and still is limited.

Fast-forward three years and the market has changed dramatically:

1. Lead by the iPhone and RIM’s Blackberry, smartphones are rapidly gaining share – in developed markets, the majority of users will have one within two device replacement cycles
2. The challenge is no longer only about indoor coverage, but now also includes an immediate need for additional data capacity to support high bandwidth applications
3. Leading smartphones will nearly all be WiFi-enabled

The result is that homeowners and businesses no longer need to pay to install a femto cell, and users no longer need to be constrained to specialized, suboptimal devices.  For most people, WiFi coverage already exists in their home and office, and these same people are likely to carry a WiFi-enabled smartphone now or within two upgrade cycles.

These smartphones are also responsible for driving a massive increase in data traffic and clogging up 3G networks.  WiFi provides a mechanism for operators to offload 30% or more of this traffic without massive upgrades — and in advance of LTE networks coming over the next 3 years.

Device makers are scrambling to offer smartphones that match Apple’s iPhone as the key competitive benchmark (including WiFi).  Mobile operators are responding to increasing smartphone usage with investments in WiFi assets and improvement of seamless switching between WiFi and wide-area cellular to offload some of the associated explosion of data traffic.  The way the iPhone restricts high-bandwidth applications so they can only be used over WiFi is a good example of a first step in this direction.

Meanwhile, the level of investment in femtocells is small by comparison, involves a tough value proposition to customers, and is focused on solving a problem that is largely taking care of itself.

My money is on WiFi.

So, after all the discussion last week, how big is the App Store ecosystem?

Our analysis suggests that total App Store ecosystem revenues will be between $700 million and $1 billion for 2009.  This estimate breaks down as follows (** see note for more details):

2.7 billion downloads * ~15% of downloads are paid apps * $1.75-$2.50 per paid app = $700 million – $1 billion

But, as Digital Clockworks points out, in all the debate about numbers and methodology some of the most interesting and important elements of the story are being missed.  First, this is a big, rapidly growing market.  The key difference between our estimate and some of the lower numbers we’ve seen is that we’ve accounted for continued growth over the second half of 2009.  The second half of the year will generate 50% more revenues than the first half.  Also, we see this growth continuing.  Over the next 12-18 months the iTunes App Store will become a multibillion dollar annual business.

More importantly, however, the iPhone and the App Store have revealed a new paradigm for how mobile users will interact with their devices and use the Internet.  The App Store represents one more example of how “over the top” approaches over IP networks are beating out purpose-built, vertically-integrated network businesses.

Most of us wouldn’t dream of paying for a customized Internet experience on a tailor-made device from our broadband service provider (*** see note).  But that is the way we used to buy telephone service, and it continues to be the way we do things for mobile and video services.  Over time, all of these businesses will follow a similar pattern, breaking down into their component parts so that the best adapted players win in each piece of the business.  The only questions are:  “Who are the best adapted?” and “How long will it take?”

The App Store represents a major 'over the top' incursion in mobile data. How long will it take for 'over the top' models to eat into the mobile voice market and the video market?

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Notes:

** Total downloads for 2009 come from Endeavour Partners’ analysis and forecast of App Store downloads, tracking Apple announcements; ratio of paid vs. free apps comes from Pinch Media but is consistent across multiple sources; average price per paid download has been reported as low as $1.67 and as high as $2.87, so we used a range

*** We actually used to buy Internet services this way as well:  AOL, Prodigy, NetZero, and PeoplePC (which included a PC in the bargain!); there is a segment of users who appear to be heading back in this direction (see the success of Comcast.net or the recent push for connected netbooks with service from AT&T or Verizon)

Mobile Entertainment has spotted a fascinating development: the Apple’s App Store now apparently has a ‘top grossing’ ranking.

Why is this so important? One of the things that we think is critical is a ruthless, relentless focus on the data; what do the facts tell us? One of the most common metrics used is market share, but here’s the very first question you should ask yourself:

• volume (units)?
• or value (revenue)?

In mobile phones, for example, these can mean very different things: Apple has ranked as high as #3 by value (and #1 or #2 by profit), despite having only a small share by volume. Whenever you see market share data, ask yourself if it’s market share of volume, or market share of value.

In mobile applications, where many are free, it’s not enough to just know ‘Top Free’ or ‘Top Paid’, you really need to know revenues to understand the economics well.

Moreover, if rankings on this chart at least, correspond to market share of value, rather than market share of volume for paid apps, it enables developers to re-price to maximize revenues. Compare, for example, Top Paid versus Top Grossing for today; Madden NFL is #2 on Top Paid at $7.99, but #1 on Top Grossing, as AppBox Pro only costs $0.99. Moreover, TomTom at ~$100 was always going to find it hard going to make it into the Top Paid (it’s not there now, at least down to #50), is #5 amongst Top Grossing.

Top Paid

Top Grossing

This may help stall the rush to the bottom which has been the cause of so much unhappiness amongst developers.

I am a huge fan of the BBC’s Planet Earth – as something of a gadget skeptic, the BBC version in high definition was just about the only thing that I could imagine forgiving the purchase of a Blu-Ray player for.

[youtube=http://www.youtube.com/watch?v=aIVcg0eGEsg&hl=en&fs=1&]

As I was watching for the umpteenth time the astonishing footage of the snow leopards, with my Mac having just been upgraded to Snow Leopard, I found myself asking whether as a species, in particular an endangered species, snow leopards should have some sort of recompense for Apple using their name, beyond raising awareness and the activities of independent retailers:

The launch of the new Mac OS X is bringing much-needed awareness to one of the world’s most endangered big cats: the snow leopard of Central Asia. For months the staff of the Snow Leopard Trust, the largest and oldest organization working to save the cats, has been fielding calls from people asking “did you know the new Mac OS is called ‘Snow Leopard’?” Not only had Apple named their new operating system after the otherwise elusive big cat, they are featuring a photo of a snow leopard front and center on their product box.

If you like Snow Leopard, why not give something towards snow leopards:

[youtube=http://www.youtube.com/watch?v=ifY_JgDDMW0&hl=en&fs=1&]

The Snow Leopard Trust has been working since before the Mac to try and protect snow leopards; there’s a great timeline here.

AdMob posted some interesting App Store usage data last week, suggesting that the App Store ecosystem is generating $200M in revenues per month prompting at least one commentator to proclaim the App Store ecosystem to be a $2.4B annual opportunity:

If I were to tell you that Apple’s app economy was worth more than $2.5$2.4 billion a year, you would laugh hysterically, shake your head and walk out of the room, yes? Surf on over to some other web site? But here I am telling you exactly that! According to mobile advertising startup AdMob, there are some $200 million worth of applications sold in Apple’s iPhone store every month, or about $2.4 billion a year.

These numbers are significantly higher than our recent estimates, so we decided to look a little deeper. We’re not alone in being a little skeptical, however:

Estimates that the iPhone App Store is worth $2.4 billion a year are utterly ridiculous, iPhone developers say.

“Do the math and that’s a ridiculous claim,” wrote developer Layton Duncan of Polar Bear Farm, an iPhone developer based in New Zealand.

Duncan did the math: $2.4 billion divided by the 65,000 apps in the App Store is $37,000 per app, per year. And while some developers earn that, many do not.

David Barnard of App Cubby, … says AdMob’s number is at least 5x too big. The iPhone App Store is worth $250 and $500 million per year, estimates Barnard….

Here’s what Barnard says are the average prices for Apps in the App Store:

• Top 10 = $1.99
• Top 50 = $2.23
• Top 100 = $3.18

According to Barnard, it takes about 400 sales per day to break into the top 100; and about 10,000 sales per day to hit  the very top of the charts. Assume the average sales in the top 100 to be about 1,000 per day. If the average price for an app in the top 100 is $3.18, that’s about $116 million per year for the top 100 apps.

“Most apps sell in the single digits per day, and quite a few don’t sell at all,” Barnard says. “There is a long tail, but it’s a very skinny one. I wouldn’t be surprised at all to learn that the top 100 grosses as much as all other apps combined.”

Comparison between our April 2009 estimates and Admob’s August 2009 numbers:

Admob data is significantly higher than our estimates

AdMob reports:

1. a higher number of installed devices
2. more than double the number of downloads per user
3. a higher percent of users buying paid apps
4. a much higher dollar value spent per revenue-generating user

Luckily, there is a rock solid number we can use to adjudicate these differences.  Apple has been periodically reporting total App Store downloads and we have been tracking and projecting this number:

April = 179 million, August = 260 million

Total downloads for April were approximately 179 million while total downloads for August were approximately 260 million.

Factoring this back into the AdMob analysis:

Based on AdMob's estimated number of August iPod and iPhone users, the number of downloads per user per month is 5.7, not 13.6

The AdMob data is significantly overstating downloads per user.

So, where is the disconnect coming from?  While the total downloads reported from Apple are “hard” numbers, the AdMob data is survey-driven and has two potential sources of inaccuracy.  The first source is sample bias:

All data in the feature section is based on survey results taken by users on their mobile device.

Respondents were sourced by responding to mobile ads throughout AdMob’s iPhone and Android networks.

There was no incentive offered to participate in the survey.

There were 1,117 total respondents:  390 Android, 380 iPhone and 347 iPod touch.  The survey was run from August 14th-August 21st

Based on the methodology described above, we believe sample bias could explain the entire discrepancy.  In essence, AdMob’s sample is skewed heavily toward active users (rather than “all users”).  This cleanly explains the higher number of downloads, the higher percentage buying paid apps, and the higher average revenue per user.

The other potential source of inaccuracy is that the survey captures self-reported estimates by users about their usage patterns.  Surveys of this nature are notorious for over or underestimating usage as people both lie to give a more favorable impression of themselves (putting forth who they want to be rather than who they are) and just have a hard time accurately remembering what they did over any given period of time.

Taking these together, it looks like AdMob’s results are distorted by a couple of half-truths:

• the people who responded to the survey are unrepresentative of the market as a whole
• they may also be exaggerating a little, or perhaps kidding themselves as well