Endeavour Partners - Blog

GigaOM posted this morning a suggestion that the Flip Wins For Now over the Nano:

Since I don’t own a Flip, I thought well maybe this might be a good option. I tried out the device and within a few minutes I realized that this is not for me. Why? The camera is positioned in a really awkward position which makes usage very unintuitive. I guess someone wasn’t quite thinking. Any how does it stack up against Flip? Chris and Liz did a side-by-side comparisonof the new iPod Nano with Flip SD and are underwhelmed by the new Nano

We said earlier ‘Flip the Flip‘ and we still think so. Why? Because in making this evaluation you need to consider two key things:

1. what’s the job that the product is being hired for, what’s its function or functions
2. what else does the potential customer already own

There’s only very limited scenarios under which the Flip is the best choice:

• only want video capture, not music playing
• do not own a 5G Nano

If a customer is evaluating a Nano against a Flip, then it’s only if the only criterion is video capture that the Flip wins. For many customers, the Nano’s music playing function will tip the balance in its favor.

And if a customer already owns a 5G Nano, then it’s going to be really hard to justify $150 or $200 to overcome the problems of poor camera placement. There’s just not enough value going to be available to sustain the Flip…

One of the big impacts of smartphones has been a resurgence in WiFi as noted by, amongst others GigaOM and ABI; we believe that pretty much every smartphone worthy of the name will incorporate WiFi, to enable a whole bunch of convergence use cases, such as connectivity within the home and office for convergence. This may well extend to public spaces as well; we think that there’s a compelling case to be made for ‘drive by downloads’ to unload the cellular networks laboring under the impact of the smartphone surge.

Our Cambridge (MA) office is at Cambridge Innovation Center, at One Broadway, which is a great space, and the importance of WiFi is driven home by a recent post on the blog:

people are beginning to rely much more on Wi-Fi than they had in the past, with some companies dropping wired connections entirely.  Some cell phones, such as the T-Mobile Blackberries our staff use, can now make and receive all their calls over Wi-Fi

There’s a great discussion of the challenges involved, and the outcome, for which are extremely grateful, of much improved reception and performance, thanks to Ruckus‘ BeamFlex (reviewed here)

After all the testing and analysis, one system stood head and shoulders above the others: the ZoneFlex system from Ruckus Wireless.  I remember in particular one of the graphs comparing the performance of the various systems under heavy load.  The other systems showed a jumble of jagged lines representing drop-outs, while Ruckus sailed smoothly through with none.

Another funny story from this effort was that after we were done, we had come to know some other support people very well, but didn’t have a read on the quality of Ruckus support.  Why?  Because we didn’t have to call them!

There’s a wider theme there that harks back to some of our early work with Virgin Mobile; the best customer service is the one you never need…

It seems that Sony Ericsson’s adoption of the make.believe tag line has prompted at least some commentators to call again for it to release a PSP Phone:

But Sony Ericsson’s only real hope for the long-term may be a PSP-branded phone that leverages Sony’s traction in the video game space. While the market for gaming-centric phones is questionable — see Nokia’s history with the Ngage — such a device could prove popular with a young, data-hungry mobile set. And it would be a better investment than a branding facelift.

There’s clearly potential, as one of my colleagues, Brad Hagedorn noted a couple of months ago:

The potential for a PSP phone is clear when we compare the iPhone & iPod Touch’s growth with early sales of the PSP

Global growth of the iPhone, iPod Touch and PSP

Calling the iPod Touch a comparable, if less gaming centric, match to the PSP we see that their early growth is quite similar.  What is interesting though, is the gap between iPod Touch and iPhone + iPod Touch sales, which represents sales of iPhones.  Since the iPhone is essentially a Touch with phone capabilities, this gap is the oppotunity that Sony may be missing out by having a PSP, without having a PSP phone.

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

One of the keys to strategic success in high-tech is to anticipate how technological innovation, customer demand and the business ecosystem will co-evolve. When looking at high-tech, we tend to focus on significant shifts in value creation and value capture, as these are the source of the key threats and opportunities for our clients.

Much of our work recently has been focused on smartphones and on applications, because of our belief that a significant shift is underway in which smartphones and their related services will both represent a very large opportunity, and have a major impact on adjacent arenas as convergence plays out:

• smartphones will first become the majority of mobile phone sales by value, then by volume, and soon thereafter represent most of the installed base and the majority of the margin opportunity
• this shift is already reflected in the disproportionate share that Apple and RIM are capturing of the value created in mobile phones
• the shift to smartphones is changing user’s behaviours and economics in some very significant ways

Deutsche Bank's analysis of value captured by mobile phone vendors

We believe that a key part of this shift from both and economic and behavioral perspective is the adoption and usage of applications on smartphones.

As a result, the recent analysis by AdMob, reported by for example GigaOM is particularly interesting:

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 (their emphasis).

There are two key numbers upon which this estimate is based:

• what % of (all) users download one or more paid applications each month
• how much does each user spend on average

% of users who download paid applications

For the iPhone ecosystem, AdMob estimates on the basis of its survey that it’s about 45%.

Average spend per user on paid applications

Put these two together, and if AdMob’s numbers are right, the average spend per user who buys paid apps is somewhere between ~$7 and ~$12. They provide an estimate on page 6 for the iPhone that it’s ~$9.50.

For the iPhone ecosystem, with about 45% buying paid apps, that implies average spending per month of ~$3 to ~$5 on applications; call it $4.

With about 45 million users in the ecosystem, that’s $180 million per month, of which Apple is taking ~30%, or ~$50 million per month.

Apple has said in its recent response to the FCC that there are ~40 people reviewing applications; on this basis that’s >$1 million per reviewer per month.

The key question here is sample bias: how representative is AdMob’s sample set?

Respondents were sourced through mobile ads on AdMob’s global network

Mobile ads linking to the mobile survey were shown across AdMob’s iPhone and Android networks of over 7,000 mobile Web sites and 3,000 iPhone and Android apps

This may bias the sample towards more active users. We are digging deeper into the numbers, and will report what we find. In particular, we’re focusing on how these estimates from AdMob compare to hard numbers that can be externally verified.