Alphabet Earnings, Amazon Earnings
Monday’s update concluded with the following:
“Meta has reported more than $38B of operating losses on its AR/VR efforts. The company needs products like Quest 3 and Ray-Ban Meta to do well and generate revenue to reduce pressure on what are mounting losses.”
There is more to say about the mounting losses in Meta’s Reality Labs and why I think generating some revenue is important. We will focus on that topic today. Our Big Tech earnings reviews will continue tomorrow.
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Paid Video Streaming’s Future, A Problem With Live Sports and Streaming, China Rethinking Its Tech Relationship (Daily Update)
We begin with an examination of Jason Kilar’s piece in the WSJ regarding the paid video streaming industry. After co-founding and leading Hulu, Kilar went on to lead WarnerMedia but was forced out when AT&T spun off WarnerMedia and combined it with Discovery. The discussion then turns to one problem that has become apparent with live sports programming impacting Apple and Google. We conclude with continuing developments in China impacting the tech sector.
Happy Thursday. Let's jump right into today's update.
Paid Video Streaming’s Future
Earlier this month, the WSJ published a series of year-in-reviews focused on various tech, business, and financial subjects. The articles were highlighted in today's print edition. One was written by Jason Kilar and dedicated to video streaming.
After co-founding and leading Hulu, Kilar went on to lead WarnerMedia but was forced out when AT&T spun off WarnerMedia and combined it with Discovery.
There continues to be varying opinions surrounding Kilar’s leadership style and broader views on the media space. My stance has tended to be more supportive than where consensus is found. Kilar’s decision to release all Warner Bros films in 2021 on HBO Max on the same day as in theaters, a decision partially driven by the pandemic, did not make him many friends.
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Apple Watch Momentum Is Building
In a few months, the number of people wearing an Apple Watch will surpass 100 million. While the tech press spent years infatuated with stationary smart speakers and the idea of voice-only interfaces, it was the Apple Watch and utility on the wrist that ushered in a new paradigm shift in computing. We are now seeing Apple leverage the growing number of Apple Watch wearers to build a formidable health platform. The Apple Watch is a runaway train with no company in a position to slow it down.
Mirages and Head Fakes
We are coming off of a weird stretch for the tech industry. As smartphone sales growth slowed in the mid-2010s, companies, analysts, and pundits began to search for the next big thing. The search landed on stationary smart speakers and voice interfaces.
Companies who weren’t able to leverage the smartphone revolution with their own hardware placed massive bets on digital voice assistants that would supposedly usher in the end of the smartphone era. These digital voice assistants would be delivered to consumers via cheap stationary speakers placed in the home. Massive PR campaigns were launched that attempted to convince people about this post-smartphone future. Unfortunately for these companies, glowing press coverage cannot hide a product category’s fundamental design shortcomings.
At nearly every turn, Apple was said to be missing the voice train because of a dependency on iPhone revenue. Management was said to suffer from tunnel vision while the company’s approach to privacy was positioned as a long-term headwind that would lead to inferior results in AI relative to the competition. Simply put, Apple was viewed as losing control of where technology was headed following the mobile revolution.
There were glaring signs that narratives surrounding smart speakers and Apple lacking a coherent strategy for the future were off the mark. In November 2017, I wrote the following in an article titled, “A Stationary Smart Speaker Mirage”:
“On the surface, Amazon Echo sales point to a burgeoning product category. A 15M+ annual sales pace for a product category that is only three years old is quite the accomplishment. This has led to prognostications of stationary smart speakers representing a new paradigm in technology. However, relying too much on Echo sales will lead to incomplete or faulty conclusions. The image portrayed by Echo sales isn't what it seems. In fact, it is only a matter of time before it becomes clear the stationary home speaker is shaping up to be one of the largest head fakes in tech. We are already starting to see early signs of disappointment begin to appear…
I don’t think stationary smart speakers represent the future of computing. Instead, companies are using smart speakers to take advantage of an awkward phase of technology in which there doesn’t seem to be any clear direction as to where things are headed. Consumers are buying cheap smart speakers powered by digital voice assistants without having any strong convictions regarding how such voice assistants should or can be used. The major takeaway from customer surveys regarding smart speaker usage is that there isn’t any clear trend. If anything, smart speakers are being used for rudimentary tasks that can just as easily be done with digital voice assistants found on smartwatches or smartphones. This environment paints a very different picture of the current health of the smart speaker market. The narrative in the press is simply too rosy and optimistic.
Ultimately, smart speakers end up competing with a seemingly unlikely product category: wearables.”
Three years later, I wouldn’t change one thing found in the preceding three paragraphs. The smart speaker bubble popped less than 12 months after publishing that article. The product category no longer has a buzz factor, and despite the hopes of Amazon and Google, people are not using stationary speakers for much else besides listening to music and rudimentary tasks like setting kitchen timers.
The primary problem found with voice is that it’s not a great medium for transferring a lot of data, information, and context. As a result, companies like Amazon have needed to dial back their grandiose vision for voice-first and voice-only paradigms. Last week’s Amazon hardware event highlighted a growing bet on screens – a complete reversal from the second half of the 2010s.
Betting on the Wrist
As companies who missed the smartphone boat were placing bets on stationary speakers, Apple was placing a dramatically different bet on a small device with a screen. This device wouldn’t be stationary but instead push the definition of mobile by being worn on the wrist.
Jony Ive, who is credited with leading Apple’s push into wrist wearables, referred to the wrist as “the obvious and right place” for a different kind of computer.
When Apple unveiled the Apple Watch in 2014, wearable computing on the wrist was more of a promise than anything else. Apple created an entirely new industry – something that isn’t found much in the traditional Apple playbook.
After years of deep skepticism and cynicism, consensus reaction towards Apple Watch has changed and is now positive. Much of this is due to the fact that it’s impossible to miss Apple Watches appearing on wrists around the world. According to my estimates, approximately 35% of iPhone users in the U.S. now wear an Apple Watch. This is a shockingly high percentage for a five-year-old product category, and it says a lot about how Apple’s intuition about the wrist was right.
Apple Watch Installed Base
The number of people wearing an Apple Watch continues to steadily increase. According to my estimate, there were 81 million people wearing an Apple Watch as of the end of June. According to Apple, 75% of Apple Watch sales are going to first-time customers. This means that 23 million people will have bought their first Apple Watch in 2020. To put that number in context, there are about 25 million people wearing a Fitbit. The Apple Watch installed base is increasing by the size of Fitbit’s overall installed base every 12 months. Exhibit 1 highlights the change in the Apple Watch installed base over the years.
Exhibit 1: Apple Watch Installed Base (number of people wearing an Apple Watch)
(The calculations and methodology used to reach my Apple Watch installed base estimates is available here for Above Avalon members.)
Deriving Power
From where is Apple Watch deriving its momentum? The answer is found in The Grand Unified Theory of Apple Products.
One of the core tenets of my theory is that an Apple product category's design is tied to the role it is meant to play relative to other Apple products. The Apple Watch is designed to handle a growing number of tasks once given to the iPhone. Meanwhile, the iPhone is designed to handle a growing number of tasks given to the iPad. One can continue this exercise to cover all of Apple's major product categories.
Apple Watch is not an iPhone replacement because there are things done on an iPhone that can't be done on an Apple Watch. This ends up being a feature, not a bug. The Apple Watch’s design then allows the product to handle entirely new tasks that can’t be handled on an iPhone. This latter attribute goes a long way in explaining how Apple Watch has helped usher in a new paradigm shift in computing. Apple Watch wearers are able to interact with technology differently.
(More on The Grand Unified Theory of Apple Products is found in the Above Avalon Report, “Product Vision: How Apple Thinks About the World,” available here for Above Avalon members.)
A Health Platform
In January 2019, Tim Cook surprised many by saying Apple will be remembered more for its contributions to health than for any other reason. Here’s Cook:
“I believe, if you zoom out into the future, and you look back, and you ask the question, ‘What was Apple’s greatest contribution to mankind?’ it will be about health.”
Many assumed that Cook’s comment hinted at Apple unveiling a portfolio of medical-grade devices that would go through the FDA approval process. Such thinking was based on a fundamental misunderstanding of Apple’s ambition and approach to product development.
Apple’s health strategy is based on leveraging hardware, software, and services to rethink the way we approach health. This means Apple wasn’t going to just launch a depository for our health data – something that is needed but which ultimately falls short of being truly revolutionary. In addition, Apple wasn’t going to just offer health and fitness services that amount to counting steps or keeping track of miles run.
By the time Cook gave his bullish comment about health, Apple had already placed its big bet on health four years earlier by unveiling the Apple Watch. In what ended up being one of Apple’s best decisions, the company avoided going the route of medical-grade devices requiring government agency approval to reach consumers. Instead, Apple framed its health platform as a new-age computer that ultimately is an iPhone alternative.
Health monitoring is one of the key new tasks that the Apple Watch, not iPhone, handles. To be more precise, Apple Watch is handling the following four health-related items:
Proactive monitoring (i.e. heart rate and blood oxygen)
Well-being assistance (i.e. sleep monitoring including the runup to sleep)
Fitness and activity tracking (i.e. Activity and Workout apps)
Fitness and health activity (i.e. Apple Fitness+)
With Apple Fitness+, Apple didn’t just release a virtual fitness class service. Instead, Apple Fitness+ is an Apple Watch service. In some ways, Apple Fitness+ reminds me of Apple TV+. A future in which Fitness+ workouts are available on third-party gym equipment displays including on treadmills and stationary bikes is not a stretch. In addition, classes from other companies such as Nike could further elevate Apple Fitness+.
Competition
If the Apple Watch is a runaway train, there is no obvious candidate in a position to stop or even slow the train. While other companies are slowly waking up and seeing the momentum found with Apple Watch, there is still much indifference, mystery, and misunderstanding as to why people are buying wearables. Too many companies still think of wearables as glorified smartphone accessories. Such thinking makes it impossible for competitors to see how Apple Watch is ushering in a paradigm shift in computing by making technology more personal in a way that other devices have failed to accomplish or replicate.
One of the main takeaways from Apple’s product event earlier this month is how Apple is its own toughest competitor. The Apple Watch’s most legitimate competition is found with older Apple Watches and non-consumption (i.e. empty wrists). While this introduces its own set of risks and challenges, there is still no genuine Apple Watch competition from other companies after six years. This is an indication of the power found in controlling your own hardware, software, and services in order to get more out of technology without having technology take over people’s lives.
Listen to the corresponding Above Avalon podcast episode for this article here.
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For additional discussion on this topic, check out the Above Avalon daily update from October 1st.
Above Avalon Podcast Episode 147: A Faster Bumper Car
In episode 147, we take a look at the changing competitive landscape facing the giants (Amazon, Apple, Facebook, Google, and Microsoft). Comparing the situation to bumper cars, we discuss why Google and Facebook have the slower cars that are no longer able to hide within the traffic. Additional topics include deep dives into three competitive battles in particular: Apple vs. Google, Apple vs. Facebook, and Amazon vs. Facebook vs. Google.
To listen to episode 147, go here.
The complete Above Avalon podcast episode archive is available here.