Self-driving cars are about platforms, not about cars

There is growing consensus that fully autonomous cars will become a reality by 2020. Google self-driving cars have driven over 1.2 million miles. Elon Musk, Tesla CEO, predicted in September 2015 that Tesla cars will have fully autonomous capability in 3 years. Zvi Aviram, CEO of MobileEye, a supplier of self-driving systems to many car makers, expects their technology will support fully autonomous driving by 2019.

Most traditional car makers still see autonomous driving as a feature of the car, rather than a market shift that will open the path to the creation of a completely new winner-takes-all industry. It’s just like PC makers focusing on adding connectivity to their products and missing the transition to the Internet platforms (Google Search, Amazon, Facebook). Or telecom operators focusing on adding always-on fast data connectivity to their networks and missing the transition to the mobile platforms (Google Android, Apple iOS).

Is the same about to happen in the car industry? Are car makers about to miss the transition to transportation platforms in the same way as PC makers missed the transition to Internet platforms and telecom operators missed the transition to mobile platforms?

The future transportation value stack will be very different from the existing automotive industry. It quite remarkable that only two companies, Google and Uber, are present in all layers of the stack that are necessary for creating a dominant transportation-as-a-service platform.

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The car hardware (the body, the power train, the wheels) increasingly becomes a commodity. Modern cars are good-enough for typical everyday use offering little opportunity for differentiation. Car commoditisation will only accelerate with the transition to electric vehicles. Electric vehicles are much simpler mechanically and easier to make, which opens the gates for new players, including such electronics and Internet services players like Apple, Google, LeTV and even Acer. It’s also notable that Tesla ‘open-sourced” their electric vehicle patents in 2014 pledging not initiate patent lawsuits against anyone who, in good faith, uses Tesla’s technology.

Autonomous driving is about guiding the car along the road, following the rules while avoiding obstacles and crashes. It involves lots of sensors, computing power and sophisticated software, but the most important part here is the ‘data’. Self-driving systems are machine learning systems that are trained to evaluate the environment and make fast decisions on how to react.

The ‘data’ represents all the collective experience learned by multiple cars driving in test and real-world conditions. The more cars you have on the road and the more miles these cars have driven in all possible conditions, the more experienced, safe and precise the self-driving system becomes. Google is undisputed leader here having its fleet of test cars driven over 1 million miles. Tesla’s Autopilot feature introduced in October 2015 on Model S cars will allow Tesla to start training its self-driving system in real-life conditions on tens of thousands of cars.

Uber seem to be behind in terms of putting real self-driving cars on the roads. The company poached 40 researchers and engineers from the Carnegie Mellon’s robotics lab in March 2015 and partnered with University of Arizona on optics research for self-driving cars.

Navigation is about figuring out which roads and streets the car should drive on in order to get from point A to point B. Google is again is a clear leader here with Google Maps and Waze. A consortium of German carmakers (Audi, BMW and Daimler) is trying to uphold an alternative acquiring the Here Maps business from Nokia in August 2015 for $3.1 Billion. Uber also works to create a proprietary mapping platform winning independence from Google and Here Maps. The company acquired San Jose-based deCarta in March 2015, absorbed part of Microsoft Bing mapping assets in June 2015 and has partnered with TomTom in November 2015 to use its mapping and traffic data. (Is Microsoft about to miss the huge opportunity in the future automotive and transportation markets?)

Fleet routing this is where it gets much more interesting. Self-driving cars combined with Uber-style on-demand services make individual car ownership less and less attractive. Some people even claim that hardware-as-a-service is the end game for Tesla. The shared usage models will turn car market into something that looks like a public transport platform, where operators will match in real-time the demand for transportation with the location and the capacity of self-driving vehicles. In other words, fleet guidance is about deciding in real-time where every car needs to go. Which car needs go to a specific pick up point? Shall the car drive to where the demand is expected in the coming 15 minutes? What is the optimal time to recharge or refuel? When and where to go to do the service and maintenance? Where to park, and more.

This is a very complex computational problem to solve at the scale required to support fleets of thousands of self-driving cars. Bill Gurley, one of Uber’s early investors, gives a glimpse into how difficult it is in his blog explaining why UberPool is the new Uber’s “Big Hairy Audacious Goal.” (BHAG). UberPool helps the company to build capabilities that will be directly relevant for the optimal routing of large autonomous fleets.

I’m sure Google is not standing still here as well. Being a machine learning company, it has the scale and the technical depth to become the leader in this space. Add to that real-time bidding capabilities with extremely complex optimisations that Google has mastered for its online ad business. One can even argue that building such transportation platform is the reason for Google’s interest in self-driving cars.

It’s very difficult to see how traditional car makers will be able to compete with software-centric companies in this space.

Finally, the transportation platform is the most intriguing part of the value stack. Moving people around Uber-style is not the only use for self-driving cars. What else can we do with the fully autonomous fleet of robotic vehicles, given that they don’t not have to look as Uber or Google cars of today? These robotic vehicles can be specialized delivery vehicles (see this Domino’s Pizza car as a hint for how they may look like), small delivery drones like Transwheel or StarShip or even autonomous motorbikes, like Motobot by Yamaha.

The number of possibilities and applications for autonomous transportation is mind boggling. No single company, even as nimble and well-funded as Google or Uber, will be able to address all possible needs and use cases by themselves. The recipe for addressing these yet to be known needs and use cases is in plain sight. It is a platform connecting vehicle manufacturers, vehicle operators, service providers and application developers with users (much like Google did with Android).

The platform will harvest permissionless innovation by startups and developers to discover and deploy new services and applications we cannot even imagine today – in the same way that no one could predict Instagram, Snapchat or WeChat on smartphones. Uber already works with developers extending its service into a platform. Google also has a long history of relying on permissionless innovation by developers to win its competitive battles, from Google Maps to Android. It’s only natural that Google will use the same approach to dominate self-driving cars.

It’s still too early in the game to say which companies will dominate the future transportation market. One thing is a safe bet: The future transportation ecosystem will look very different from the existing automotive industry. It will resemble modern technology ecosystems with their platform business models, permissionless innovation by developers, and domination of software-centric companies.

— Michael

The 3 unlikely lessons from the Microsoft/Nokia Adventure

Microsoft has finally raised the white flag in the battle for smartphone dominance. Microsoft announced that the company will be scaling down its mobile phone business it acquired from Nokia laying off 7,800 employees and writing off $7.6 billion (this is almost the entire value of the Nokia Devices and Service business minus the cash it came with).

IoT-Developers_FINAL

The decision is dramatic, but hardly unexpected. David Pierce writes in WIRED:

“Give Nadella some credit for seeing the writing on the wall, though to be fair it was basically written in huge letters and lit by floodlights.”

The writing on the wall is still there and can help us see where Internet of Things will be in a few years.

Lesson 1. Business model, not product features define your destiny

In my analysis from 3.5 years ago on the VisionMobile blog I argued that the paramount challenge for Microsoft and Nokia is a broken business model, not product features, user interface or integration of software and hardware. (A business model describes how a company creates, delivers and captures value.) From my 2012 blog:

“The basis for competition in software and mobile has changed – the once-successful business models of Microsoft and Nokia can no longer ensure profitable growth.

Combining two business models of the 1990’s won’t help the two companies regain their positions in the new world order, dominated by companies with Internet-age business models, like Apple, Google, Amazon and Facebook.

Looking at the industry through the lens of software-defined business models has helped us to accurately predict years before the story unraveled the duopoly of Apple and Google (2009), the demise of Palm (2009), the outcome of HP’s foray into mobile with WebOS (2010), BlackBerry’s meltdown (2010), and the failure of Windows Phone (2012).

The story repeats in Internet of Things. Much like in mobile, [tweetable]software-defined business models cause deep shifts in how value is created and delivered[/tweetable]. The IoT winners will be decided by business model innovation, not by technology, product features or standard committees. VisionMobile’s Stijn Schuermans wrote about it here – What the Internet of Things is not about.

Lesson 2. Skate to where the money will be, not where it has been

The mobile industry continues to change. In 2013 we wrote, together with Sameer Singh, in the The evolution of the handset business models:

“A third wave of disruption will again reshuffle the deck for all [mobile] industry players. We will see growth in a new class of business models, where handset hardware is no longer seen as a source of profits, but is treated as a distribution channel for digital products and services.

As price competition increases, commoditization pressure in the smartphone industry, variations of “hardware as distribution”, could become one of the primary drivers of profitability.

In 2014 Xiaomi became the most valuable tech startup in the world by executing on “hardware as distribution” business model and creating a new e-commerce market for itself. From “Only for fans, or why Xiaomi is not what you think it is”:

“Comparing Xiaomi with other traditional smartphone makers is like comparing Apple with Orange (a mobile network operator). The two happen to be in the same industry, but they are really in different businesses. Apple, Samsung, Huawei, Lenovo sell phones to make profits. Xiaomi sells phones to seed competitive e-commerce business that goes far beyond mobile.

Nokia and Microsoft focused on chasing today’s competition and missed the market transition that turned their strengths into weaknesses. The same will be true for the Internet of Things (IoT): five years from now the IoT market will be very different from what it is today. The future IoT winners skate to where IoT is going to be, not where it is today.

Lesson 3. Follow developers to find future winners

Microsoft and Nokia spent a fortune trying to attract developers to its Windows Phone platform. But it was too late. Google and Apple understood the importance of developers much earlier and had established thriving developer ecosystems. VisionMobile’s Andreas Constantinou wrote in “The Dead Platform Graveyard”:

“You can’t buy developer love. You can only plant the seeds.”

The data from the VisionMobile Q1 2015 survey of 8000+ developers shows that the majority of developers, including most valuable innovators, make apps for the Android and iOS duopoly (71% and 54% of developers respectively). The story of Windows Phone proves that distant 3rd place is not viable in the ecosystem race. Moreover, as we argued earlier, ecosystems create “Black Oceans” that make competition impossible for late comers to the ecosystem party.

Software developers emerge as a driving force in industry after industry, not just in mobile. VisionMobile’s Stijn Schuermans writes in Developer Megatrends 2015:

“Developers are conquering the wrist, with 3,500+ Apple Watch apps and 2,300+ Android Wear apps.
They’re conquering the car. Android Auto and Apple Carplay will be available on dozens of car models this year. 250+ OBD apps provide aftermarket solutions for car data, with growing support from big players in telecom and insurance.
Developers are conquering the home, taking advantage of new technologies and platforms like Samsung SmartThings, Apple HomeKit, Google Weave, Eclipse Smart Home or dozens of device APIs.
Developers are even conquering the sky. Major drone players like DJI (from Phantom fame), 3D Robotics (dronekit.io) or Airware are providing SDKs for drone apps, helping developers to put drones to use in industry, agriculture, construction or mining.
Cities, healthcare, clothing, factories, … – They’ll all fall to the wave of innovation by developers.

Much like in mobile, [tweetable]IoT competitive battles will be decided by attracting developers, not by standards committees.[/tweetable]

There is a lot to learn from how the mobile industry was reshaped by software-defined business models, market-creating innovations and developer ecosystems. The lessons are in the plain sight. Microsoft and Nokia ignored them at their own peril. Who will be next?

Will developers stop playing the app lottery?

[How long will developers be loyal to ecosystems that seemingly set them up for failure? The odds are clearly stacked against developers as most of them struggle to make a living. The sustainability of co-creator ecosystems is in serious peril, it would seem. A look at other lottery-like industries provides an explanation, and a surprising perspective.]

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Great news from Apple’s HQ, everyone! The App Store is breaking records (yet again, some point out), both in terms of popularity with users and in the total amount of money they spend. What an awesome time to be an app developer, isn’t it?

Well, not quite. Tim Cook doesn’t exactly paint the whole picture. The truth: all that app store goodness is very unequally distributed across developers.

The figures in our Q3 2014 State of the Developer Nation report are once again crystal clear: [tweetable]the vast majority of app developers struggle to make a living. 7 out of 10 don’t earn enough to sustain full-time development[/tweetable] (we call them the Have Nothings and Poverty Stricken). That would be over 2 million people, roughly the population of Slovenia. Almost 90% of that record app store revenue will go to just 12% of developers.

While more app store revenues are clearly a good thing for developers, the money is peanuts compared to what Apple makes. In Mobile Megatrends 2014, we showed that [tweetable]Apple captures 80% of the total iOS “ecosystem GDP”, while developers capture less than 15%[/tweetable] (including commissioned apps released without any revenue model).

The situation on Android is even worse. [tweetable]Whereas 50% of iOS developers live below the poverty line, the number for Android is 64%[/tweetable]. Also for Android, hardware makers capture 80% of ecosystem GDP, while developers are scrambling over the left-overs. Other ecosystems like Windows Phone or Blackberry don’t have the scale to provide viable escape routes.

Is this sustainable?

Can this situation continue, or will these ecosystems eventually collapse as developers get fed up? [tweetable]How long will developers be loyal to ecosystems that seemingly set them up for failure?[/tweetable]

The prospects are indeed grim. Marco Arment, for example, speaks about “vastly increased commoditization” as well as declining consulting revenues in a post titled “App Rot”. He quotes other Indie developers saying “There’s a chill wind blowing”, “The app gold rush is well over”, “In my tenth year as a full time indie dev, … I think that yes, it is much harder these days” or “Considering the enormous amount of effort I have put into these apps over the past year, [my sales figure is] depressing.” Expressions of distress that are far removed from Tim Cook’s optimism.

And yet, they’re still at it. The number of app developers shows no sign of declining.

The app lottery

[tweetable]App development is a lot like playing the lottery – as long as there is a chance to win big, people will play.[/tweetable]

Investing significant amounts of money and effort when the odds are stacked heavily against you is not a rational choice. But it’s a very human one. We’re collectively bad at assessing likelihoods, especially in situations as complex as marketing a killer app. We get as much pleasure from fantasizing about a big win as we would get from the win itself, especially if we’re poor to start with. The fantasy gets even better because we can’t imagine any other way to get this rich, this quick. The final nudge is the sense of regret we would feel if we didn’t implement that great idea we had, while someone else hits it big on the app store with that same idea. [tweetable]Rational thinking versus pleasure center lit up by fantasies? It’s no contest, really.[/tweetable]

There are plenty of other industries with the same characteristics. The same income inequality and hope-driven creation play out in music and other forms of entertainment, game development, and entrepreneurial communities (as long as there are exits, there will be wannabees). Future industries will show the same pattern, too. Internet of Things, anyone?

Ecosystems can sustain this situation as long as there is supply of developers hoping to get rich. Only 1.6% of developers have an app that earns >$500K per month, but those few big wins will make all the difference for the motivation of the Have Nothings, the Poverty Stricken and the Struggling to keep creating (source). Asking whether developer ecosystems are sustainable is like asking for how long casinos will exist given that most participants lose money. “Indefinitely” would be a safe bet.

iOS 8 – Apple’s Hidden Agenda

It’s abundantly clear from WWDC announcements that Apple is working hard to lock users into the system by combining devices into one seamless experience (PC, mobile, tablet, home, wearables). What many people might not realise is that Apple is fighting just as hard to lock in developers.

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[tweetable]iOS is now fully in the third stage of the ecosystem lifecycle.[/tweetable]

You see, platform strategies differ throughout the life of a developer-centric ecosystem. To get started, ecosystems must solve the proverbial chicken-n-egg problem by establishing a beachhead market. Once network effects are in place, ecosystems must expand fast to stay ahead of competing ecosystems, hopefully to arrive at a winner-takes-all outcome. We’ve written extensively on this blog how mobile ecosystems have done that by subsidizing some participants (developers) and by commoditizing others (e.g. handset makers in the case of Android). In the case of Android and iOS, that battle has been won. (More about that in Mobile Megatrends 2014 – just out!)

As the ecosystem matures, new platform features become less about acquiring new users to further fuel network effects. Apple is now defending its iOS ecosystem. Its focus has shifted to capturing and keeping the most valuable users. Tim Cook spent several minutes on stage to highlight that Apple is capturing users away from Android in China. The best users, obviously, not those buying $50 Android devices. Here’s how Ben Thompson over at Stratechery puts it: “[Apple’s Jony Ive implicitly acknowledged] that smartphones have reached the saturation point, especially in the premium segment that Apple has chosen to focus on. However, this is problematic because Apple needs to grow. There are two ways to do so: steal share from competitors and sell more to existing users. While the sheer number of announcements at Monday’s WWDC keynote was almost overwhelming, much of what was announced slotted neatly into one of these two strategies.”

But as we know, iOS is a two-sided platform. [tweetable]To keep the most valuable users, Apple needs to keep the best and brightest developers and entrepreneurs engaged[/tweetable], too. This is a top priority for Apple.

Ecosystem lifecycle

Locking in developers

If developers create apps first (or even only) for iOS, then Apple is sure of a steady stream of high-value, exclusive apps that make iOS devices more attractive to users. The goal of keeping valuable users is tightly intertwined with Apple’s ability to keep developers on the platform. It does so by making it more difficult and costly for developers to switch away from iOS development.

A first set of initiatives intended to lock in developers are SDKs like Touch ID and Metal that only make sense when there’s little fragmentation (Apple’s natural advantage over Android). Creating a login mechanism based on a fingerprint sensor only makes sense if a lot of devices have such sensors. We can reasonably assume that future Apple devices (all high-end) will, while the same cannot be said for mainstream Android handsets.

Nat Brown astutely explains how the same principle works for Metal, a low level graphics SDK: “Of the class of very advanced programmers who will jump on Metal are… the teams that maintain the game engines, frameworks, and toolchains used by 95% (perhaps 99%) of the games for mobile. Unity3D, Unreal Engine, and a few others simply dominate mobile gaming on both iOS and Android. […] Due to this I find it unlikely that the API itself will act to lock anybody into iOS from a classic API perspective – everybody is using an engine or framework and indeed tools much higher up the value chain. But… Metal could very well offer an iOS performance lock-in on mobile.The most realistic rendering games will look great on iOS until Google does deeper/better driver work on Android. As it turns out, that is crazy hard due to the diversity and fragmentation of Android hardware. In this respect, if Metal is indeed a 10x speed improvement or a 10x detail improvement, it may very well be a masterful move – non-iOS games from the same engines will just look lousy on Android. Wow.”

Then there are SDKs that are basically platforms inside the platform, like HealthKit and HomeKit. While there are alternatives out there (e.g. SmartThings and OpenHab in home automation, Human API and Validic in health), Apple might be the path of least resistance and easiest experimentation for developers who are just starting to discover IoT. Furthermore, Apple has a key advantage over its competitors. It can dangle the carrot of hundreds of millions of users in front of developers. As a developer, once you build on Apple, you can’t go back, except at a very high switching cost.

Apple also creates lock-in by embracing the cloud, as Ben Evans pointed out. In the Naked Android post, we wrote about how Google gains more control over developers by developing all the most valuable functionality into proprietary cloud services, not in the open Android OS. To some extent, Apple is doing the same. With the newly announced Apple-only BaaS CloudKit in particular, Apple is aggressively subsidizing developers. The free storage and usage levels for CloudKit are orders of magnitude beyond other BaaS providers and would cost tens of thousands of dollars on competing platforms if used all. Some services might not be economically viable without it. The more developers adopt Apple’s cloud services (including CloudKit), the more difficult it will be for them to abandon Apple or go cross-platform.

Two platforms, two identities

iOS and Android are naturally (and intentionally) developing distinct identities. As Evans mentioned: “It might get harder to make essentially the same app on both platforms. If a core, valuable thing you can do on one platform has no analogue at all on the other, what do you do?” As a result, developers who are serious about iOS will stick with iOS.

SDKs playing to Apple’s fragmentation advantage, new platform attempts (uncharacteristically focused on developers first before polished consumer products have appeared) and building out cloud tools for developers all serve to make it more difficult for developers to port iOS apps. This will help to ensure a profitable future for Apple for years to come.

The cross-platform platform: Facebook’s developer strategy

When Facebook was first listed on the stock exchange in 2012, investors were concerned. Had the company missed the mobile wave? 5 years after the launch of the iPhone, most of Facebook’s revenues still came from desktop. Zuckerberg’s team recovered. Today mobile already represents 60% of revenues, and Facebook is about to double down. Apps will become a central part of the social network’s monetisation of mobile. Stijn Schuermans shines a light on Facebook’s new mobile developer strategy.

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Two years ago we wrote that Facebook was a prime candidate to become the leader of the mobile web; the one who would take care of the missing platform ingredients (reach, discovery, monetization). It should come as no surprise then that over the past year Facebook has shown a renewed focus on helping developers to build – grow – monetize their apps across all mobile platforms. Zuckerberg himself called it the cross-platform platform in his keynote speech on f8. We couldn’t have said it better ourselves.

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The mobile platforms of Apple and Google became so successful because of the large amount of apps that they drew in. For developers, however, this meant heavy competition, few opportunities to stick out and a difficult environment to build a business on. [tweetable]Facebook now positions itself as the developer’s partner that helps to de-commoditize apps.[/tweetable] Facebook can lure mobile apps to its own camp by enabling developers to compete better. Apps will depend on Android and iOS to become available on the majority of handsets, and on Facebook to reach users, get discovered and make money.

Three aspects of Facebook’s strategy warrant a closer look.

Facebook builds a Mega-SDK

Facebook knows developers very well – hacker culture is deeply embedded in the company’s DNA. [tweetable]Facebook is now extending that developer DNA beyond company boundaries[/tweetable], just like Amazon has expanded its cloud operations DNA outside of the company by commercializing its Amazon Web Services (AWS). “Unlike their past developer efforts, which were all about pulling content onto Facebook, this year was about pushing Facebook’s infrastructure out into all kinds of mobile apps”, as Ben Thompson put it. It is a very natural way to empathise and connect with the developers who will build complements to Facebook and Amazon’s core businesses.

How is Facebook going to entice mobile developers? By building one of the first true Mega SDKs. [tweetable]As we predicted last July, Facebook’s Mega SDK will be built around app marketing services[/tweetable]:

  • analytics (relevant acquisitions include Parse, Monoidics, Little Eye Labs, Airlock)
  • promotion (more than 350 million app downloads through mobile app ads to date)
  • re-engagement (Engagement Ads were announced at f8)
  • monetization (the new Audience Network)

Half a dozen acquisitions in the past year, new products and a new developer incentive program (FbStart) all say that mobile developers are becoming incredibly important to Facebook. Although we have to stay careful of course: Mike Mace correctly points out that Facebook in the past has shown predatory behavior (incorporating 3rd party apps into the core product) and neglect for developers.

Digital identity is Facebook’s essence

Facebook’s new anonymous login and privacy features are not just about soothing the privacy pundits and the company’s most vocal users. They point to a deeper reality: digital identity is at the core of everything Facebook does.

[tweetable]Facebooks needs developers to make the Facebook digital identity ubiquitous across web and mobile[/tweetable]. The social network giant does that by reducing sign-up friction on the user side (hopefully also making developers more comfortable with integrating Facebook login). Social login was also a main feature of Parse. Several other highlights at the f8 conference (Send to Mobile, the mobile Like button, even Applinks) make most sense when viewing them as ways to increase the value of a Facebook login relative to a proprietary identity, another social login provider, or no identity at all.

[tweetable]Why this focus on identity? Because it’s crucial for Facebook’s survival[/tweetable]. A study from early 2014 claims that Facebook is about to lose 80% of its users, drawing a parallel with infectious diseases that spread, then flare out. Whether or not that comparison holds water, identity is a powerful antidote to this scenario. If users don’t just use Facebook as their social network, but also to access scores of unrelated services, then it will be hard for users to drop Facebook entirely. The company will still have to work hard to keep users active and engaged, but it will have an opportunity to try.

And, not to forget, Facebook gains a treasure trove of user behavior data that will reach far beyond its own services.

It was no accident that identity was the first item on the “cross-platform platform” list in the graph above, before social. On the web, Facebook also accounts for more than half of all social logins. It fully intends to achieve the same in mobile. The company’s future depends on it.

Facebook wants to become “Google for mobile”

Facebook and Google are mortal enemies, because they have the exact same business model.

  1. Create value for users by developing a score of valuable services (most of them free to use), and enlist developers to create thousands more.
  2. Deliver that value across all digital devices; on the web and on mobile.
  3. Capture value by selling user reach, engagement and hyper-targeting to advertisers.

It is no wonder then that there are many similarities between both companies. Facebook is taking that similarity to the next level with its new products.

The Audience Network is the AdMob of Facebook. It aims to become the key competitor for Google in mobile advertising.

But the boldest move is Applinks. [tweetable]In the most optimistic case, Applinks will allow Facebook to build the PageRank of mobile[/tweetable], a head-on attack on its arch rival. (Facebook has already kindly offered to host an index of all applinks.) At worst, Applinks can substantially boost Facebook’s app install business (CPI) through affiliate marketing schemes, earning revenue on each referral. That supports the Mega SDK for developers as well as Facebook’s own income statement.

The surprising business model of OTT2 messaging apps

[In the first part of this two-part blog post, we introduced a second tidal wave of mobile ecosystems (after Android/iOS), mobile-first and twice over-the-top (OTT²): messaging apps. OTT² ecosystems drive engagement by commoditizing hardware, apps and services. In part 2, Stijn Schuermans explores the unexpected way in which the engagement from messaging apps is monetized. (Hint: it’s not advertising.)]

04 OTT2 messaging apps

In the first part of this two-part blog post, I introduced a second tidal wave of mobile ecosystems (after Android/iOS), mobile-first and twice over-the-top (OTT²): messaging apps. Messaging apps are proving to be so much more powerful than just chat. While most apps are just value-adds for iOS and Android, messaging apps are the first that can create a substantially new mobile landscape. They are important not just because of their market momentum of 100s of millions of users, but because they build on asymmetric business models, the same economics that brought Apple and Android to their dominance.

By definition, a company with an asymmetric business model creates (and sometimes destroys) value in one vertical, in order to capture value in its core market. For example, Google commoditized handsets by providing the Android OS for free in order to defend its advertising business. So what is the core business of messaging apps that is being boosted?

The surprising core business of second-wave mobile ecosystems

[tweetable]The dominant business model for OTT² messaging apps is – perhaps unexpectedly – not advertising, but m-commerce[/tweetable].

With messaging apps, the business model focus shifts from selling the app (up-front or using in-app payments) or selling the audience (via ads) to selling goods through the app. The business model entails the promotion and sale of virtual goods (stickers, mobile games, apps), physical goods and services (like taxi rides, as explained in part 1 of this post). Mark Watts-Jones offers this handy overview of how messaging apps make money:

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Let’s take a closer look at some examples.

  • WeChat’s revenue About 85% of the $1.1B that Tencent’s WeChat app will earn this year will come from online gaming, estimates The Economist. The rest will come from stickers, services like sponsored accounts, and the fast-growing area of m-commerce. Already merchants are selling goods via WeChat as diverse as fruits, smartphones (150K Xiaomi phone in 10 minutes), movie tickets, taxi rides and insurance against malignant tumors. You can pay at vending machines with the app. Entire books have been written about how to do marketing on WeChat.
  • Line’s revenue Games accounted for 60% of the $338M that Line made in 2013. Another 20% comes from sticker purchases and the rest from business services like official accounts and branded stickers. Line has been actively testing the e-commerce waters with flash sales, hot deals and the Line Mall marketplace.
  • Messaging and e-commerce in investments Investment activity gives another view on how crucial m-commerce is as a revenue model for messaging. Viber was acquired by Japan’s e-commerce champion Rakuten. Alibaba, China’s king of online sales, invested $215M in Tango. In the other direction, Tencent has invested in JD.com, another large Chinese e-commerce player.

Also somewhat surprisingly, the innovations in this business models don’t come from US entrepreneurial hotspots like Silicon Valley or Boston. It is Asian companies that lead the way. The subscription model of WhatsApp (prior to its acquisition, at least) is the exception, not the rule.

The dominance of m-commerce makes sense

While advertising is certainly a popular and straightforward choice when monetizing user attention, the prevalence of m-commerce in messaging apps should actually come as no surprise.

First, consumers are increasingly comfortable with buying on their mobile devices. Mobile now accounts for a quarter of e-commerce traffic, a fast-growing category by itself. On the web, e-commerce is a trillion-dollar industry, an order of magnitude larger than advertising (which broke the $100B barrier in 2012) and dwarfing other revenue models like gaming, gambling, SaaS or media streaming. We can expect the same to happen in mobile. In fact, many retailers see a substantial amount of their online audience coming from mobile devices.

Counterintuitively, this growth of mobile retail might accelerate as more people in emerging economies come online. Connie Chan from Andreessen Horowitz says that in third and fourth-tier cities in China, for example, traditional brick-and-mortar retail infrastructure like shopping malls might not exist, leaving m-commerce as the more convenient option.

8_revenue-models

For app developers, m-commerce is a good choice, too. e-Commerce and affiliate programs are among the highest-grossing revenue models for mobile developers, dwarfing the median revenues that developers can expect from ads or even in-app purchases.

It’s no wonder then to see significant investments in mobile commerce. David Marcus, Paypal’s CEO since 2 years, has made mobile a strategic priority for the company and (as a former founder of mobile payment company Zong) has in fact been selected by eBay’s executives to do exactly that. Tencent, being of the protagonists of this story as the company behind WeChat, has recently made investments worth hundreds of millions of dollars in e-commerce companies like JD.com, Dianping (often referred to as China’s Yelp) and E-house (real-estate). m-Commerce has been hailed as the next big thing for many years – these investments indicate that things are finally starting to move in a significant way.

Developers are catching on

The m-commerce megatrend, especially in OTT² ecosystems, has not escaped the attention of mobile developers.

[tweetable]Messaging ecosystems are fast becoming a major channel for the discovery and promotion of apps[/tweetable], a long-standing pain point in iOS and even more so Android. Look at the recent move by Tencent to enable app downloads from WeChat. It capitalizes on the trust inherent to social referrals (in earlier editions of Developer Economics, Facebook was highlighted as a main app promotion channels for the same reason). It might also tip the balance to Tencent’s own app store in a country where Google Play is mostly absent and a plethora of app stores compete for attention.

The high earnings potential of m-commerce for developers is also translating in fast-growing adoption. In our Developer Economics research, we found that e-commerce sales grew significantly in popularity as a revenue model from 5% in Q3 2013 to 8% in Q1 2014. The role of app makers is changing from Developer-as-a-Programmer to Developer-as-a-Salesperson.

The mobile success recipe

In summary, a clear recipe is emerging for the next giant tech companies in the age of mobile. First, use ecosystem economics to create value for your users, and don’t be afraid to subsidize or undercut adjacent market arenas if that helps to boost traction. The network effects in your ecosystem will help to solidify your competitive position and make it difficult for others to attack you, including the carriers and operating systems on which your platform is built. Next, use the highest-earning revenue model on both the web an in mobile to monetize: e-commerce. Any app that succeeds in doing this, messaging or not, will have a bright future ahead.

OTT2: the second tidal wave of mobile ecosystems

[The mobile space is about to be shaken up again. Get ready for the second tidal wave of mobile ecosystems to reshuffle the market. These powerful new ecosystems are mobile-first and twice over-the-top (OTT²): they are built on top of telco services and on top of app platforms.]

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It’s 2014. We’re 6 years into the smartphone revolution, and the mobile space is starting to settle down. iOS and Android are clearly in the lead among app platforms – their ecosystem strategy has created a natural duopoly in which competing platforms no longer stand a chance. Smartphone innovation is no longer radical, but mostly incremental. There are signs that smartphone users are becoming overserved by the latest and greatest flagship devices: smartphones are becoming “good enough” as such and undifferentiated for mainstream users.

But things are about to be shaken up again. [tweetable]A second tidal wave of mobile ecosystems is gaining strength, ready to thoroughly reshuffle the mobile market once more[/tweetable].

These powerful new ecosystems are mobile-first and twice over-the-top (OTT²): they are built on top of telco services and on top of app platforms. I’m talking about messaging apps of course: WhatsApp, Line, WeChat/Weixin, Viber, Telegram, KakaoTalk, Kik.

Gaining momentum

[tweetable]Messaging apps are proving to be so much more powerful than just chat[/tweetable]. Even well established social networks and ecommerce giants are getting nervous enough to make high-value surprise acquisitions (we’ll talk about Facebook in a moment).

The first indicator of their momentum is the sheer size of their user bases. Tango, considered to be a smaller player, has 200M registered users and 70M monthly active users (MAU). Wechat has passed 350M MAU, WhatsApp has over 450M MAU. Chat apps don’t just get downloaded often, but they are incredibly engaging. A large share of engagement minutes is going to staying connected with friends, family and business partners, and chat apps are increasingly the way to do so. Chat messages overtook SMS in global message volume in April 2013. In essence, the rise of messaging apps relegated telcos as a group to the status of just another communication ecosystem.

Investors agree when it comes to their value, if we can believe the recent M&A, IPO and investment activity.

  • WhatsApp was acquired by Facebook for $19B
  • Viber was acquired by Japanese e-commerce player Rakuten for $900M in cash
  • Tango received a $280M series D investment, including $215M from China’s e-commerce king Alibaba
  • Line is rumoured to prepare for a $28B IPO
  • KakaoTalk is also preparing for an IPO, aiming at a $2B valuation

OTT2 graph

Unfair advantage

[tweetable]Messaging apps are important because they build on asymmetric business models, the same economics that brought Apple and Android to their dominance[/tweetable]. They are subsidizing or commoditizing hardware, apps and services to grab users and boost their core business. The first examples of this are already evident.

  • Messaging apps are of course commoditizing the quintessential telco services: voice and texting. Whatsapp announced a VoIP play. Even large operators in emerging markets with incomplete mobile penetration like China Mobile are reporting financial performance challenges, citing competition from chat apps as the reason.
  • Tencent (known from the wildly popular instant messenger QQ and chat app WeChat) and Alibaba (China’s e-commerce champion) are fighting their battle for user acquisition and engagement in the most unexpected of places: taxis. Not only have Tencent and Alibaba both invested in taxi hailing apps (DiDi and Kuaidi respectively), they are both actively subsidizing taxi rides by giving discounts if users use their apps. The mini price war is so intense that in some cases, users actually get paid when taking a taxi.
  • Apps like Line and Tango are taking a page from iOS and Android’s playbook, using game developers and content providers to add value to their platforms.

With this “user landgrab” and high engagement, messaging apps are competing with the telco services and app platforms on which they are built, who are trying to achieve the same reach and share of attention. [tweetable]While most apps are just value-adds for iOS and Android, messaging apps are the first that can create a substantially new mobile landscape[/tweetable].

So what is the core business of chat apps that is being boosted? We’ll discuss the surprising dominant revenue model of social apps in part 2 of this post. Stay tuned!

— Stijn

Flip of fortunes: making devices compatible with apps

There used to be a time when developers worked hard to make their apps compatible with devices. [tweetable]Nowadays, device makers are working hard to make handsets and tablets compatible with apps.[/tweetable]

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  • Amazon built the Kindle Fire on the Android Open Source Platform in order to leverage Android’s developer ecosystem and adding value only in the missing parts of Android.

  • BlackBerry built a “runtime for Android” into its BB10 platform in an attempt to close the app gap with its main mobile OS competitors. Jolla used a similar tactic in its Sailfish OS.

  • And now Nokia has produced an Android phone, the Nokia X, against all expectations considering their focus on Windows Phone over the last years and the acquisition by Microsoft. The Nokia X is positioned as a low-end “stepping stone” device relative to the Windows Phone based Lumia range.

How did this flip of fortunes come about?

Why supporting Android apps is becoming a must

Apps used to be bite-sized additions to the functionality of the mobile device; individually unimportant except for a very small number of key apps. [tweetable]The bargaining power of app makers is clear from the financial results of developers – that’s to say: near zero.[/tweetable] Six years into modern smartphone platforms, a full 60% of developers are still below the “app poverty line”, i.e. earn less than $500 per app per month, according to our latest Developer Economics survey (download the full Q1 2014 edition for free).

However, apps in aggregate have now become a must-have and a big driver of competitive positions. It’s no longer enough to build your own app ecosystem, or even feasible for that matter. iOS and Android form a de-facto duopoly that is impossible to compete against. [tweetable]To survive as a mobile device maker you need to tap into Android’s app base[/tweetable] (as iOS is closed for other device makers).

To convince consumers to buy your device, you need apps. Not just any apps, mind you. The hot apps of the moment (they usually are found on iOS first, Android second), as well as a long tail of apps catering to every imaginable use case. They need to look good and be fully featured too – lowest common denominator apps won’t do if you want to put a device in the market.

To convince developers, you need to deliver many users at low development effort. The best way to do that is to produce an Android-compatible device. The second best way is to bet on HTML5 with many good cross-platform tools and advanced APIs – something that both Blackberry and Windows Phone have struggled with as well.

A good long-term strategy?

Both on the user and on the developer side of the ecosystem, device makers will fight a serious uphill battle if they don’t support Android. But is supporting Android a good strategy for Amazon, BlackBerry or Nokia in the long term?

For players like Amazon and possibly Nokia who add value on top of Android, the move is in principle sustainable. As we explained in an earlier article: you don’t need to make an OS to win in mobile. Amazon and Nokia are basically replacing Google’s cloud services with their own (and in Nokia’s case: Microsoft’s), and use the Android OS for all the rest. This enables them to add value where it really matters, i.e. where Android and Google are weak. In Amazon’s case it’s crystal clear: the e-commerce giant leverages its promotion prowess and credit cards on file to help app developers monetize better.

Device makers who try the Android compatibility approach can still lose out to fragmentation however. We argued in the Naked Android article that only a few companies in the world have the clout with developers to convince them to spend the effort on replacing cloud service APIs. GlassBoard developer Justin Williams illustrated that perfectly in his recent post, where he muses on whether or not to adapt his app to the Nokia X. (Short answer: he won’t.)

[tweetable]For Blackberry and Nokia-X-as-a-stepping-stone-to-Windows-Phone, there is little hope that supporting Android will get them out of the slump.[/tweetable] They might attract opportunistic developers looking for a few extra users, but those developers are not likely to add to the momentum of the Blackberry and Windows Phone ecosystems. “Moving up” to the native ecosystem on those devices means that developers need to rewrite their apps. This idea clashes with the opportunistic motivation that attracted them in the first place.

That’s my take. I’d love to hear your opinion. What do you think that device makers should do?

— Stijn

Facebook buys back over 100B monthly engagement minutes it lost to Whatsapp

[tweetable]Facebook will live or die by user engagement, especially on mobile[/tweetable]. Whatsapp sends 18 billion and receives 36 billion messages a day. Let’s say it takes about 7 seconds to send a message and 3 seconds to read a message. This is based on watching how my teenage kids use Whatsapp texting and sending pictures. The math is simple:

((18B messages * 7sec + 36B messages * 3sec) / 60) * 30 = 117B minutes per month

facebook-whatsup

People have limited time and attention. So most of these 110+ Billion minutes were taken from the potential Facebook mobile engagement minutes. Wow! That is the cost of doing nothing for Facebook.

There is more

Whatsapp is growing at about 1M users a day. That means Facebook looses at least an additional 12.4 Million engagement minutes each and every day. For simplicity I take into account only Whatsapp users that are active daily, which are 70% of 450M monthly active users:

3.9B minutes per day / 315M daily active users = 12.4 minutes per day per user

Now what?

The Whatsapp blog says:

“Here’s what will change for you, our users: nothing.

The company remains independent and loyal to its promise of “No ads!”. There will be no immediate monetisation opportunities for Facebook. What can be there for Facebook beyond averting future disaster of Whatsapp killing Facebook mobile engagement? Or even worth, falling into Google’s hostile hands?

Mark Zuckerberg writes about the acquisition:

Our mission is to make the world more open and connected. We do this by building services that help people share any type of content with any group of people they want. WhatsApp will help us do this by continuing to develop a service that people around the world love to use every day.

Will we see 450M mobile numbers brought in by Whatsapp coming into play helping Facebook connect people? Time will tell, but the potential is there for Facebook to become huge integrated communication provider on par with China Mobile, the world’s largest mobile operator.

(China Mobile has 700M subscribers but, given that many people have two phones, the number of users is much lower and close to 450M of Whatsapp monthly active users.)

– Michael

(This article was originally published on Michael’s personal blog – here)

HTML5 performance is fine, what we are missing is tools

HTML5 is perceived as a lower quality platform, mainly because of performance. This comes both as a result of survey data, as well as developer interviews. Yet, industry experts claim the problem is lack of tools. So what is the HTML5 really missing, performance or tools? VisionMobile’s Web Technology Lead, and author of our acclaimed “Can HTML5 compete with native?” research report, debates the performance vs. tools issue.

HTML5-report

In April 2013 VisionMobile asked mobile app developers what stops them from using HTML5. 46% answered “Performance issues”, followed by 37% who said “Lack of APIs” (sample size: 1,518 developers).

WHAT STOPS MOBILE DEVELOPERS FROM USING HTML5?

We spoke to developers about their views on HTML5 performance. Apostolos Papadopoulos, author of 4sqwifi, a highly acclaimed public WiFi password app, noted “Quality and user experience is top priority for us. Therefore, we prefer going with a Native API”. It’s a common practice for developers to go native for better performance and user experience. But user experience, meaning following the behavioural conventions of the native platform, is a different story and HTML5 can’t help much. Developers can try to imitate but for a truly native UX they have to use Native SDKs; unless we are talking of Firefox OS or the long-awaited Tizen. Continue reading HTML5 performance is fine, what we are missing is tools