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Switching to iPhone after 2 Years on Android

19 Dec

I recently switched to an Apple iPhone 5s after 2 years as an Android user.  I had a Samsung S2 for half a year and then had been using a Samsung S3 for another 1.5 years.  After moving back to the US, I was increasingly disappointed with the selection and quality of apps offered on Android.  I was also increasingly frustrated by the lack of performance of the device.  So I ended up switching.

I don’t have a bone to pick in the whole open (Android) vs. closed (iOS) debate.  There are compelling business and product arguments in favor of both approaches.  This post is meant to merely highlight my views on the quality of both products from a user’s perspective. And in that regard, I think Apple is the winner.

The biggest difference you notice as an Android user is the selection the selection, stability, and quality of the apps on iOS vs Android.  For one, there are a number of iOS apps that just aren’t available on Android.  This is particularly true of any new app in the US.  And for those apps that are on both iOS and Android, generally speaking, the Android version is less polished.  The UX is worse, they crash more often, updates are pushed less frequently, etc.  On iOS, everything integrates more smoothly.  Facebook oauth is easier, for instance, or navigating from notifications to the actual apps is smoother.

Another huge pet peeve of mine on Android is all the crappy software the handset manufactures pre-load onto the device, in this case Samsung.  Samsung’s chat service (ChatON), Samsung’s app store, etc.  I don’t know who uses this stuff.  There are better versions of all these services from folks other than the OEMs.  Ultimately, the S3 was full of tech that just doesn’t quite work.  For instance, a facial recognition feature on the security screen that’s supposed to unlock the phone.  It doesn’t really work and it’s not secure, so why include it?  Compare this to the fingerprint scanner on the iPhone 5s, which works perfectly and is actually useful.

Android has its pros no doubt.  In terms of the hardware, there’s the larger screen.  This to me is the biggest plus of Android devices.  Once you’ve used a slightly larger screen, the iPhone feels cramped and typing is more difficult.  I expect Apple to introduce a larger screen option when it releases iPhone 6.  As we spend more and more of our online time on phones, having a slightly larger screen only makes sense.

The other thing you notice once you start using iOS after Android is how bad the autocorrect capability is.  On Android, Swiftkey is awesome – much, much better than the native iOS autocorrect.  I’m not sure why Apple isn’t better (they don’t do software well), but it isn’t.  And it doesn’t feel like it’s improved much over where it was a few years ago.  It may sound minor, but if you send a lot of email or other messages, you notice the difference between Swiftkey and Apple instantly.

All in all, I think Apple offers a more polished experience versus comparable Android devices.  I expect this to continue to give an edge to Apple in more developed markets, especially the US where handsets are carrier subsidized.  Outside the US, Android will continue to dominate (see here for more on this) given the range of price points it offers.

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Explaining the Snapchat valuation

19 Nov

There was a lot of buzz this past week about reports that Snapchat turned down a $3b all-cash offer from Facebook and a subsequent $4b counter-offer from Google.  It’s admittedly an extremely rich valuation for a young company with no revenue.  But I think there’s some nuance to note:

  • I think the investor psychology and math here is important.  VCs are more worried about missing out on the next Facebook/Twitter/Workday/etc. than they are in investing in the next MySpace/Bebo/etc.  For say a $500m fund, the cost of not being in one of the 2-3 huge outcomes that drive investor $ returns every year is higher than the cost of writing a say $30m investment to $0.  Investors, moreover, are probably more keenly aware than ever of the power law dynamics at play in tech investing (see here and here)
  • There’s been some handwringing over how Snapchat will monetize.  I wouldn’t be so worried about this.  Consumer internet companies don’t fail because they can’t monetize.  It seems unlikely that you’re going to have a highly engaged audience of hundreds of millions of users and not enough opportunities to make money.  Consumer internet companies are adept at finding ways to monetize with ads and advertisers are keen to experiment with new potential ROI.  The common early refrain on Facebook, Twitter, Instagram, etc. was that “they didn’t make enough money.”  That, of course, turned out not to be true.  There is a risk though that it doesn’t monetize as well or as quickly as its current backers hope (see Tumblr as an example).
  • Part of the challenge for Snapchat is that it’s grown its user base so quickly so fast.  The company is less than three years old and the rocket ship took off less than 18 months ago.  It hasn’t had an opportunity to explore monetization.
  • The concern of Snapchat’s team and investors should be around the product and making sure its audience stays engaged.  It’s captured the teen and 20-something audience, which is also probably the most fickle set of users.  I think the concern is whether these users move on to some other app over time.  But I think it’s reasonable to bet otherwise as the network effects in a business like this are incredibly powerful.
  • There have been some rumors that Snapchat is going to be raising another large round of funding, much of it going into secondary purchases of founder shares.  I’d be a bit concerned about this.  The founders already took $10m each off the table in the last round.  If the rationale for pre-exit founder liquidity is to give founders the ability to go for big wins, I’m not sure how another large secondary cash out makes sense, especially given that the company isn’t monetizing.  It’s one thing to sell down your stake as a founder when you’re a later stage, EBITDA-generating company.  But I don’t see how it aligns investor, founder, and employee interests at this stage.

The Mom ‘n Popification of E-Commerce

3 Sep

The e-commerce market in the US has grown at double digit percentages for the last several years despite the general economic slowdown.  This growth is expected to continue as e-commerce continues to take share from traditional retail.  Forrester estimates that  e-commerce will continue to grow at over 10% annually for the next few years and will hit 10% of total retail sales in 2015:

Image

This growth and other factors like new business models (subscription commerce, direct-to-consumer, etc.) has led to an explosion in new venture-backed startups over the last 5 years.  As some have said, it’s “E-commerce 2.0.”  Birchbox, OpenSky, ShoeDazzle,  ModCloth, NastyGal, Warby Parker, Chloe + Isabel, etc. – just to name a few.  

One trend that I think is overlooked in this mix of new e-commerce startups is what I call the “mom ‘n popification” of e-commerce.  You now have thousands upon thousands of online retailers and small manufacturers-cum-online retailers that are trying to build businesses online.  And unlike their venture-backed counterparts, they are bootstrapped or have taken non-institutional friends and family capital.  

These are the online equivalents to the small, local physical retailers we see all over the country.  Some will perhaps grow into much larger businesses, but the vast majority will either stay small or in some cases grow to medium size through slow but steady growth.  Like their physical retail cousins, they need to contend with their big box WalMart equivalents – Amazon, eBay, Blue Nile, etc.  

In the physical world, retail started as small, highly local businesses.  Even though organized retail concepts like the department store had been around for quite some time, it was only really in the last half of the 20th century where you saw the establishment of big, national chains in American retail.  

The online world seems to be operating a bit in reverse.  Amazon, eBay, Overstock, etc. were the early pioneers starting in the mid 1990s and grew quite rapidly in sales and market cap.  

What’s happened now though is that the barriers for small, “mom n pop” entrants to start selling online have really lowered.  It’s easier than ever for someone without an existing brand and very little capital to start selling online.  I think this is due to many factors:

  1. The growth of cloud services means that there’s now e-commerce infrastructure delivered as a service.  And it’s affordable.  Anyone, for instance, can create their own e-commerce store using Shopify and be up and running with a professional looking storefront in a matter of hours.  There’s affordable SaaS products for dropshipping, managing social referrals campaigns, and so on and so forth.   
  2. Payments – a subset of the above services – has been a particular pain point for people looking to sell online.  Mundane issues like accepting multiple currencies have historically been a nightmare for storefront developers.  These problems are being solved today by Braintree, Stripe, Google Checkout, etc.  
  3. The mainstreaming of using your credit card online.  Everyone transacts online now in the US and levels of trust when buying online are much higher than they were 10-15 years ago.  Simply put, it’s easier for a small, no-name seller to credibly hawk their products online.  
  4. The growth of Google since the early 2000s and the growth in Facebook/Twitter has created huge new channels for online marketing.  There are more opportunities than ever for sellers to get discovered organically or through advertising.  
  5. Finally, I wouldn’t underestimate the importance of free shipping, which was pioneered by Amazon Prime and has become table stakes in many e-commerce categories.  

I expect this trend to continue.  Aggregate e-commerce volume will continue to be concentrated heavily between Amazon, eBay, Walmart.com, and a few other large players.  But I think the long tail of sellers will keep growing.  Also, new categories of e-commerce will open up to smaller players as services like same-day delivery 3PL gain traction.  Most of these companies will occupy small niches, but they can be profitable businesses for their owners and good employers.  

Finally, I’m very bullish on prospects for horizontal players who are providing software or services to the mom ‘n pop e-commerce market.  Shopify, for instance, has a very bright future as a public company, assuming they don’t let an Amazon or eBay buy them beforehand. 

Monetizing Mobile the “Micro SaaS” Way

25 Aug

In June, I wrote a post about the  staggering growth of Android lately, especially in emerging markets.  And yet, despite this growth, Android doesn’t monetize nearly as well as Apple’s iOS platform:

iOS vs Android - Downloads vs. Revenue

The monetization gap is understandable given the huge difference in price points between the iPhone and the hundreds of Android devices.  Unlocked, the iPhone is the most expensive smartphone on the market.  There’s one device and the only option is storage  (and color).  In contrast, the cheapest Android can be had for <$50.  The vast majority of new smartphone users coming online in emerging markets are from the lower and middle income groups, many of whom are accessing the web for the first time ever.  They can’t afford a $1000 device, which is what an iPhone can sell for unlocked.

This helps explain the monetization gap among other reasons (Android fragmentation, etc.)  And it poses a problem for developers trying to make money from the millions of Android users in emerging markets.  Mobile advertising really isn’t an effective strategy since ad markets are nascent – extremely small in aggregate size and much less productive (i.e., lower CPMs).   And even on iPhone or in developed markets, ads can worsen the user experience and are tough to make money off of unless you have huge numbers of users or a highly valuable audience.  So ad-supported isn’t a viable model.

What about paid app models?  There are problems here as well.  For the lower end of the market, willingness to spend just isn’t there.  It’s hard enough to get someone to spend a few dollars upfront on a paid app download in developed markets, let alone in a market where a user might only be earning $5-10k a year, maybe less.  So charging upfront doesn’t work well.

So what’s the solution?  I think WhatsApp has figured out an interesting model.  A user can use the service for free for a year, but after 12 months has to pay a flat $1 per year to continue using the app.  It’s a sort of “micro SaaS” model.  You get a 12-month free trial period and then have to pay an annual upfront fee to subscribe to the service.

WhatsApp has a very strong network effect, so the likelihood that someone who’s used the service for a year and whose friends are all using the service will balk after a year at paying $1 to continue subscribing is low.

At a $1 per year, WhatsApp is reasonably priced for any user that’s able to afford even a cheap Android device.  A basic SMS plan will easily cost as much as WhatsApp charges for a year and will also be volume capped.  It’s a good value.

The downside of this model is that it really only works at large scale.  Having 10m users paying you $1 a year isn’t a venture-scale business (though very interesting if you can bootstrap).  At 300m, which is Whatsapp’s latest user count, this is a sweet business (see image below via Statista).  And, as I wrote last week, Messaging happens to be “one of the two killer apps on the smartphone,” so it has huge addressable reach.

chartoftheday_1341_Whatsapp_Reaches_300_Million_Active_Users_b

There’s also some risk that the service is challenged by free services that don’t ever charge for users to subscribe and look to advertising, freemium, or in-app purchases for monetization.  At a $1 subscription, there’s really no sunk cost and there’s no technical challenges around switching as there might be in an enterprise SaaS.  There is a huge switching barrier though in the network effect, so I think fears of WhatsApp displacement are overblown (not to mention the fact that it’s a simple, reliable, very well-designed product).

I’m not saying this model is for everyone.  Mobile ads, mobile commerce, and in-app purchases work extremely well in some cases, especially in developed markets.  But I’d like to see more services experiment with the “Micro SaaS” approach and would love to hear thoughts on other categories that are suitable.

The Third Wave Opportunity on Mobile

19 Aug

There’s really two sets of major players on mobile.  The first is historically desktop-focused companies where their pageviews started on the desktop and are now shifting rapidly to mobile as the share of time spent by users switches from the desktop to smartphones and tablets.  This includes services like Groupon, Google Maps, Yelp, Dropbox, Facebook, Twitter, eBay, Fab, Digg, Huffington Post, Gmail, Linkedin, Amazon, Skype, Salesforce, Kayak, TripAdvisor, and a whole host of others.  The second group is companies who started on mobile and don’t make sense without it.  Evernote, Uber, Prezi, WhatsApp, most mobile games, Roambi in the enterprise, and others are in this category.   

What’s interesting is that in terms of pure reach, the traditional desktop companies are really dominating.  The first wave of adoption of mobile apps has benefited strong desktop brands whose services make as much sense or are stronger even on mobile.   Check any smartphone n the US and you’re likely to see some mix of Facebook, Yelp, Google Maps, and Twitter apps to name a few.  Perhaps this shouldn’t be surprising since these are some of the most popular services globally.  And as mobile increases as a percentage of online time spent and as total hours spent online increases because of mobile, you’d expect these services to benefit.   

The next wave of adoption is of mobile-first services.  For some companies like Evernote and Whatsapp, the boat has already sailed in this regard.  For others, there’s huge headroom for adoption.  I’d also argue that there should be a whole slew of services built from the ground up for mobile that we haven’t seen yet.  This is the “third wave opportunity” for mobile apps.  

Gaming and Messaging have been the two killer apps on the smartphone, the former in terms of total time spent and the latter in terms of frequency.  After these, your traditional desktop services like Gmail and Facebook consume a ton of time.  And then you have your set of mobile-first services like Uber that aren’t in the Gaming or Messaging categories.  That last category is growing rapidly and should see many new players emerge.  

There are new ways of re-imagining everything we do on the Web, but for mobile.  For instance, Prezi is re-imagining how you create and view PowerPoint-like presentations on the iPad, and Roambi is reimagining Business Intelligence for mobile. 

In particular, I think there’s a whole host of enterprise applications that can be rebuilt from the ground up for smartphones and/or tablets.  CRM, corporate chat clients, time sheeting, meeting management, conference dial in, and Excel/spreadsheeting are a few examples of generalized apps that need to be rebuilt for smartphones and tablets.  

I also think there’s a whole slew of vertical-specific apps that are ripe for the taking.  Hospital management, big law firms, personal financial advising, hotel management, auto dealers, financial traders, and many other areas have a need for specialized mobile apps.  

In some cases, the incumbent, traditional desktop players will get their act together when it comes to mobile and continue to dominate.  In other areas, these players will either be too late to the opportunity or might lack the ability to, whether because of organization issues, a lack of talent, or something else.  

If I was investing in or looking to start  a company, I’d be looking for these third wave opportunities, especially in areas where the incumbents aren’t equipped to capitalize on the opportunity.  

Driven by Android, the Tablet Market in India is Exploding

25 Jun

Image

I wrote a post last week on what’s driving smartphone/Android adoption in emerging markets.  I wrote mostly about smartphones and largely ignored the tablet market.

And like clockwork, IDC just released a report on the tablet market in India.  In short:

  • The tablet market is booming as “shipments soared to 2.66 million in 2012, a mammoth 901 percent year-on-year growth from 2011…”;
  • It’s dominated by Android with Apple having <10% of the market;
  • Low-cost (<$250), 7″ tablets are vast majority of share;
  • Local players like Micromax and Karbonn and cheap Chinese imports are winning even though Samsung has the largest market share.  Note: local players still use contract manufacturing in China, but they’re Indian brands.

This article has a nice rundown of the report and quick summary from IDC here.

I wouldn’t expect any major changes to Android/non-Apple dominance in the near future.  Apple simply can’t compete on price in a market where most consumers can’t shell out hundreds of dollars for even an iPad mini.

Also, as with the smartphone market, I’d expect spending on cheap Android tablets in India to continue to grow rapidly.  Prices will continue to decline, there’s several government initiatives aimed at growing tablet access, and you have Reliance’s 4G rollout coming soon.  Expect Reliance 4G rollout to pair a cheap Android tablet with affordable data plans and bundled content/services.

The next really interesting question that needs to be answered is what killer apps and services are going to be built on top of all of these tablet and smartphone devices, especially in India.  And can they figure out a way to make money in a market where non-text, non-search mobile advertising is extremely low in $ terms and where consumers willingness to spend is low.

I think WhatsApp is the first app to really take advantage of the Android adoption trend in emerging markets like India, and it’s also showing the way in terms of how to monetize price-sensitive users at scale.  More on this soon.

Smartphone Adoption, Emerging Markets, & the Android Effect

17 Jun
There’s a huge explosion happening in smartphone usage.  Growth in penetration rates in developed markets has started to slow, but in emerging markets like China and especially places like India and Indonesia, smartphone ownership rates are still relatively low as a percentage of subscribers (see slide 40 of Mary Meeker’s latest Internet Trends report).

The main factor driving growth in emerging markets has been the decline in device prices being driven by cheap, local handset brands running pretty generic versions of Android, as well as the rise of Samsung as the premier Android handset maker.  In terms of local competitors, you have companies like Xiaomi and ZTE in China and Micromax and Karbonn in India.

Hardware prices are declining quickly and hardware is being commoditized by the use of low-cost contract manufacturers in China.  Also, the quality of the low-end Android devices being produced today is dramatically better than it was even 18 months ago.  They’re not iPhones or Samsung Galaxy level, but they’re quite good.  And for people using internet on their phone for the first time or having any internet access period, it’s more than adequate.

Most of the smartphone growth in emerging markets is going to Android.  In Q4 2012, ~70% of smartphones sold globally were running Android compared with 30% for iOS.  This is a significant increase in share over 2011.  Many of the market share losses from RIM, Nokia, etc. are accruing to Android.  The big point, though, is that most people in emerging markets cannot afford an expensive device and lower-end Androids are orders of magnitude cheaper than iPhones.

In addition to wealthier populations, the rise of the cheap Android device is less notable in the US because carriers subsidize a large portion of the handset price.  In the US, Android has ~52% of the market according to comScore and iPhone has 35% for the 3 months ending Nov 2012.  In India, an entry-level iPhone 5 retails for ~$800.  That same phone is $199 with a voice and data plan from a US carrier.  Of course wireless rates in the US are higher and you’re locked into a single plan for a fixed amount of time, but nonetheless the upfront investment in the device is relatively low.  At $199 or $299, it’s harder for Android to have as pronounced cost advantage over iPhone.

A couple of takeaways from all of this:
  1. Despite their impressive growth, I would be leery of investing in local handset brands.  They are producing a good whose price is consistently falling.  They’re also benefitting from the open runway that low smartphone penetration provides, but as ownership broadens, new purchases will be driven by the replacement cycle and their growth rate will fall.  Replacement cycles in emerging markets are longer as well, which exacerbates the problem.  Finally, I expect Apple to introduce a lower cost iPhone and also expect the cost advantage between “budget brand” Android handsets and “premium brand” handsets (i.e., Samsung) to narrow as the latter gets more aggressive on price.  We are on the upward part of a hardware cycle for these companies and I wouldn’t want to get caught on the tail end.  This isn’t to say that these aren’t great companies with impressive growth over the last few years, but just a reflection on their investment potential at this point.
  2. Hardware is hard.  This reminds me of the PC market.  You have punishing downward pressure on prices driven by ever declining component price declines and manufacturing efficiencies.  This isn’t the case in software and services.  Yes, as Apple and Samsung have shown, software can help differentiate your device and drive consumer preference, but it’s not an adequate bulwark against price erosion.  As Apple shows, margins still erode.
  3. Despite #1-2, there’s an opportunity for local players to build durable brands in their home country and region.  Clever marketing, pricing schemes, proprietary apps (thinks Messaging and Games), etc. can all help these players differentiate.  I wonder though if these become the Compaqs, Gateways, and Dells of their market.
  4. As many people are expecting it to do, Apple needs to introduce a lower cost iPhone.  It’s margins will decrease further if it does, but pure profit dollars should surge.
  5. Open source — in this case, Android — helps to commoditize hardware and to lower the cost of new technology adoption.
  6. The sheer number of Android users in markets like India and China (iPhone too) will be staggering.  Even if ARPU is low, there’s a huge opportunity for apps targeting these users.  WhatsApp and other mobile messaging apps might be the first examples of this.
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