a16z Podcast - a16z Podcast: Mobile Falls Hard for Virtual Reality

Episode Date: March 2, 2016

The mobile world has fallen hard for VR, says Benedict Evans. But will virtual reality mean real profit for hardware makers? Evans offers his observations on VR and more gleaned from the largest gathering of the mobile industry, Mobile World Congress. The value in mobile keeps shifting, Evans says, from hardware to software, and the platforms on which that software runs. But the players and the business models are far from set when practically anyone can get into handset business. The forces shaping the future of mobile -- from VR to Algerian handset makers just crushing it -- on this segment of the podcast.

Welcome to the A16Z podcast. I am Michael Copeland, and we have in the room our man in Barcelona, Benedict Evans, who is back now from Mobile World Congress. Benedict, welcome back. Hello. All right, let's talk about Mobile World Congress. It is the largest gathering of what these days? It's something like 90 to 100,000 attendees, and it is the annual global trade fair for the mobile telecoms industry.

So all the people who sell stuff to telcos, which is about a $1.2 trillion industry. So over double the size of the entire advertising industry for context and something like 10 times the size of the online advertising industry. So it's a big industry and it's a big trade fair and it's everything from billing software to base stations to handsets to camera sensors to every single bit of that value chain. There's always been hand-wringing over Mobile World Congress versus, you know, CES and other things. And what's common in both of those massive gatherings is that Apple doesn't show up, or at least Apple doesn't show up officially.

So we hear about all the gadgets that come out of there. It's a sort of Android world, really, is what it's come to, or it used to be the Nokia world. But put that in context. Like what does Mobile World Congress wrap its arms around these days, and what does it start to look like? Well, it's an interesting shift. I mean, I first went in 2001 as a baby analyst, and it was probably a tenth of the size, and it was in Cannes, which was kind of a cold, rainy French provincial town. Did your parents have to take you, or did they chaperone you?

No, although there was an urban legend about somebody whose assistant booked him a flight to Conde in the north of France, which is, if you don't know, if you know the spelling, it looks kind of similar. Right. And so you went there and you saw all the new stuff. you saw the new phones and you saw, my God, phones with cameras and phones with color screens and maybe Java and, you know, this was the point that everything was kind of taking off. And it was also just a year after the European 3G spectrum auctions when European operators spent about 110 billion euros on spectrum to do mobile data services. And I kind of wrote a blog post about

this kind of two weeks ago saying like, it didn't, you didn't really know at the time, this is 2001, it was going to take until 2007 before you actually had a phone that could really do this stuff well. First consumer, really good consumer 3G phones outside Japan took till 2005. The iPhone was 2007. It really took till 2010 before smartphone sales really started exploding. Here we are 2015. We're 15 years later and we're only just at the point that kind of everybody's got one of these things and using it. Well, over half of the Western population of the developed world has got one of these things and they're starting to use it. So it kind of took a long time. does 110 billion for spectrum you know at the time people thought it was crazy looking back if you had known that it was going to take that long a time and you were a telco does that seem like a good way to spend your money i you haven't done the ROI but i don't think any of the business cases that people had had in mind worked out and of course part of that is that telco's all had these sort of strategic visions of everything that was going to be done on mobile phones and you know they they had facebook and instagram and mobile banking and

all of this stuff in mind, but of course they thought they'd all be doing it, and they thought they would be driving, they thought they'd be making money from it, and they thought they'd be selling extra data plans from it, and they're not making any money from it. So they spent all the money, and they built all the network, and their revenue has been, you know, the European operators, the revenue has been flat down for over a decade. So, I mean, this is kind of the thought that I had, is if I was to go back from 2016 to 2001 and kind of explain what was going to happen, you know, what would I have said and would anyone have believed it? It's going to take a decade for this stuff really to start working. When it does, all the crazy

lunatic visions will happen for billions of people. But it won't be done by Nokia or Microsoft. It will be done by this second tier South Korean electronics company, Samsung. And this has been American computer company that you may vaguely remember from the 80s called Apple Computer. Oh yeah, they were groovy. I remember them. And none of the telcos will get any benefit from at all except in the USA they'll manage to sell a lot of data plans because the market's not very competitive but the European carriers won't make any of this and Finland and Japan will start mattering and would anyone have believed like and like the portal model won't work like people thought the AOL model was going to work for telcos they didn't realize that it wasn't

even going to work for AOL and so like the future took longer and looked very different and there's a kind of an interesting tension point here and like all the conceptual stuff happened like all the amazing visionary stuff that people babbled about and visionaries and futurologists and so on said was going to happen. It all happened. But it took a lot longer. And all the people who thought they were going to make money from it, didn't make any money from it at all. So I thought that, but I just thought I was kind of casting my mind back and thinking about how it all happened, but it all kind of ended up looking different from how we expected. And then looking at, you know, kind of bringing up to the present day where, you know, it used to be that all the stuff was

announced there. And then Apple obviously pulled the announcements elsewhere and Samsung pulled its announcements elsewhere. This year, a lot of new stuff was announced. Right, we saw all this, like, modular phones. It was kind of a throwback to, you know, in some ways shrugging off the kind of, I don't know, bounds of the iPhone. Like, let's try something different. Yeah, I think there's a bit of that. I mean, LG has got a modular thing. Sony is kind of really kind of thinking about how to create kind of more of a lifestyle brand around its products. Samsung basically had the S6S in the S7. It like, yes, it's better, but it kind of looks the same as the last year's model, which is, you know, it's fine, but it's not changing

the world. And then everybody piling into VR, which is sort of function of the dynamic of the Android market, which is everyone selling a commodity product with commodity components and a commodity operating system. So what are you going to do? Well, obviously, you should do VR. And so Samsung has evolved a gear. LG has a VR headset that's actually tethered from your phone, which is kind of interesting. HTC has a VR headset that's actually tethered from a high-end PC, so it's an $800 headset. So it directly competes with the Oculus headset, and basically which

will be out this spring or this summer or something. The Vibe, although is that how you pronounce it? It seems like a bad, like it's a name that. Viv or Vivre, you know, it's like Revive. Yeah, so I had the demo, it's cool, it works, it's $2,000, it's $800 plus like a $1,500 PC. Oh, wow. Which is

the same ballpark as the Oculus. And so VR, it's interesting, like everyone's piled into VR, but I think it's Chris Dixon made this point. It's like you have the high-end product, which is very expensive and still not like where you want it to be in the long term in terms of like pixel density and so on. And then you have a low-end product at a high-end price, which is what you get on cardboard or the smartphones and so on, which is you still got a, well, not a high-end price. You get the cheap headset, but you're

not getting the high-end product. Right, but you have your smartphone and you get Yeah, but it's, you know, it's not the experience that you really want from, which is what you get from what you sort of get from Oculus and Vibe today and we'll get from that over the next couple of years. And so there's this kind of sense of like, let's kind of hurry up and wait somewhere else from the smartphone guys in that the experience is there, but it's not kind of that this is like the V1 and this is the test in the demo that makes you think, okay, this is going to be interesting. But it's not what you want yet. It's kind of like the pre- iPhone. And so you think the handset guys are getting there because they believe that that's where VR goes is to the

handset? Yeah. So I, you know, my kind of, my sort of basic thesis is clearly it's not, it's not going to be a $2,000 product for it to be mass market, and it's probably got to be on your smartphone, and it's got to be a lot better than the experiences now, and that means it's going to take a couple of years. And so in two, three, four, five years time, depending on what you think you need and what you think the roadmap looks like, this becomes a kind of a standard part of mid-to-high-end smartphones with a headset, and then everything gets built off the back of that. And there may also be a games console product, so obviously there's the HoloLens where they just announced their

dev kit at, I think, $3,000, $2,000 or $3,000, I think it's $3,000. And then there's a rumored Sony product for a games console as well. But, you know, again, this is a little bit while out. And so, you know, you go, you have the demo, you think this is astonishing, this is part of the future.

And it will, no question will be part of the future. It's not quite here yet. Right. Given how handset makers make money or don't make money, how does a VR help them? I mean, are they going to, again, are they going to try to steal games?

Well, then you get this question like, does this become a condition of entry? Like, you know, you buy the Samsung one over the HDC one because it has this, over the LG one, because it has the gear VR. And you may not use it a lot, but you buy it a bit, and you get like, you cream off another bit of the high-end market. And so you get this kind of subordinate question of, well, how long is Apple going to stay out of this? The product right now is probably not what Apple would want to sell, but do they leave it open to the Android market and to Google for the next two, three, however long, until they think they can get it perfect. We'll see. My suspicion is they'll wait a while. Apple tends to be kind of a fast follower in this stuff and then come in with what they hope it's kind of a market-defining product. Well, and the rumor is that they're hiring like mad and working on something. Apparently so, yes. But we'll see. But I thought there was kind of an interesting contrast because on the one hand you have these kind of jumps into the future. Probably the most kind of interesting or kind of interesting company for kind of what it symbolizes is something I've found in the kind of the back alleys.

I mean, this is kind of the point of Mobile World Congress is you just walk. and walk and walk. So my watch test, my smart watch tells me that I did 38 miles in four days of just walking and looking. So the company I met as an Algerian family-owned conglomerate as just kind of common story from middle-income markets in the cement business. Then they got into the white goods business, fridges and washing machines and so on, their own factories and so on, making them, built up a chain of 150 stores around Algeria selling these. Then they get into what we call brown goods, so TVs, making TVs, which again, you buy the power. panels from LG and put them together.

Right. Then they get into smartphones. What's the brand typically for this company? So now their smartphone brand is Condor, and Condor has a third of the Algerian market. Oh, wow. More than any other player in the market. And this is, that's so fine, so that's Algeria. And so, but what this symbolizes is this question of what happens to the future of the Android OEM space.

Because, so Samsung cloned Nokia. You know, you get people in the valley say they cloned Apple. They cloned Nokia. in the sense of every handset, every price point, every technology, every frequency, every operator, every sales channel, sales channel in particular. So it's on the street in Bogota and, you know, rural wherever you can get a Samsung phone. And that only took them so far. But in parallel what's happened is that the smartphone industry has kind of turned into the PC industry of the 80s

in that you have commodity components, commodity operating system, and 1,000 people piling in trying to work out how to do this. It's like the PC clones. And so the question is, like, what does the value chain look like once you leave the factory gate in China? Where does it go? Who sells it under what brand? How do you get that phone at, say, anything from $40? And incidentally, the entry price of an Android to 3G Android phone now with half a gig of memory is probably $40 to $50, no, $25 to $30 wholesale. And then 4G is more like $40.

And that's, you know, it's not a great experience, but it's not bad, especially not at that price. And so here is the thing. So you have Condor buying some components and putting them together in Algeria and selling them through their chain of 150 shops. And who else has got 150 shops in Algeria that can sell phones? You know, not Xiaomi. Yeah, probably no one. I don't know, but not Xiaomi. And so then you have them.

And then you have Wicco in France, which has built a distribution in France. The phones are made in China. They brand and sell them in France. You have Micromax in India, you have Cherry Mobile in Philippines, you have maybe a dozen other companies scattered all across this quadrant of some combination of making, designing, branding and marketing, but above all else, being the guys you can actually put them into the hands of consumers. Do you sell online? Do you sell in shops? Do you have a strong consumer brand? Do you not? Do you change your software? How much do you change your software? How many people are trying to cleanse Xiaomi? And so, of course, Xiaomi had these two innovations. One is change the software in a way that makes Android kind of differentiated. and two, have a completely new route to market in terms of kind of online flash sales. Turns out an awful lot of people are trying to clone the software approach

and it's not yet clear whether the online flash sales model will work outside China. They've tried to make it work in India. They've done okay. It clearly hasn't, you know, they don't dominate the market there yet, but, you know, we'll see. And then you have, you know, Apple kind of sitting out at one end of that, which is they don't own any of the factories, but they do. They design the whole thing and the branding and the marketing and the distribution and everything else. And so they're kind of right in one corner of whatever that quadrant would look like.

and then you have a whole bunch of people who go to Foxcon and say we'll have number 7 and number 15 please and can you make it green and silk screen our logo on the back Right which to your point the PC clone days were just like that and in some ways you

you could build your own but you almost didn't care until you know I was a gamer or I was a business person or I was a and then somehow They tended to make the PC it's not perfect analogy because the PC cloners did tend to put them together themselves

whereas a lot of these companies You follow all these companies aren't putting them together themselves. Although, you know, with the example of Condor, actually, they are putting the thing together themselves or half of it. You know, they do about half of the work, they say. What you then have, or what you haven't yet had is kind of the Dell. That is to say the company that comes along and says, do you know what, this is kind of a crappy low margin business, and we're going to love that and be that. And we're going to create the business model that wins in that world.

And we haven't quite had that. But what I thought was interesting coming back to Condor is like, if you're in the cement business, what margin do you think is a great margin to make? Now, then if you are in the consumer, if you are then in the handset business, what margin do you think is a great margin to make? And if you're in consumer electronics, or TVs, what margin is a great margin to make? I'm just guessing, and I don't know this for sure, I'm guessing the margin, even in TVs, is better than the margin in cement. Well, that's a bad example because the TV is like half a point. No one makes any money in TVs. But it's kind of my point is you have a question of, you know, total commodity product.

Can you create some differentiation around brand, around the design of the handset, around the software that you load onto it, maybe using cyanogen, which is our portfolio company, to create something nice on top of Android? But how do you put it into customers' hands? How do you build the support, the customer support, so that if there's a problem, people can get it resolved and how far do you need to do that? How far do you need to make it as opposed to be which bits of that value change you need to put in place? And, you know, that is completely open at the moment. You described this family from Algeria that makes,

you know, from cement now to smartphones in the condor brand. Google doesn't have the answer to this question either. Google's decided to like, you know what, we can't do it the way we were doing it. We're going to bring it more in house and do our own. So it's a tricky question, clearly. This great observation that Sundar, Pinchai made, who was then running Android and is now running Google, made this kind of point that, you know, when Samsung dominated Android, people said, gee, Sundar, you've got a big problem, Samsung dominates Android. And now that Samsung doesn't dominate Android, people are saying, gee, Sundar, you've got this big problem. Like, all these other companies coming up. Right. I mean, I have a, you know, I have my sort of, sort of a separate conversation.

But, like, clearly there is a question within this for Google, which is, like, does, given, like, the kind of the fundamental shift as we went for. One of the fundamental shifts as we went from the desktop internet to the mobile internet was that the smartphone itself is the platform and therefore the operating as opposed to the web browser. And so very often you're targeting the smartphone and the smartphone operating system itself becomes a user acquisition model. So the platform, whereas Windows wasn't, you know, Microsoft couldn't do stuff that changed how different websites could access their customers. Google could, but Microsoft couldn't and Apple couldn't. Whereas on a smartphone, the operating system owner is actually doing stuff. And so it matters to some extent for Google.

what the Android world looks like because that may mean that stuff Google want to do or other people wants to do may affect how people get to Google and obviously you see this with what Michael Apple is doing in iOS that they do stuff that roots people away from Google

not necessarily out of kind of aggression but just because that's kind of the natural flow of the product evolution and so you do get this question what is the Android world going to look like and how does that affect Google? Do you get lots of people trying to change Android? Do you get lots of people just saying

you know, we're going to take the latest cyanogen build and we're going to do, put, you know, preload three apps and put a logo on the front and that's, and we're done. My suspicion is probably more the latter than the former, but it just kind of poses this interesting question of, you know, what is all this stuff going to look like? And, you know, in the long term, you know, there are, so there's probably less than 300 million PCs were sold last year.

That will drop down to probably 200 to 250 million PCs being sold. And there's one and a half billion PCs on Earth, maybe a bit less and that might drop down to one and a quarter maybe even one and there are two billion phones being sold as opposed to so you'll go to a world and that will rise a bit and so you will go to a world in which there are four billion maybe five billion people with a mobile phone most of which will be running iOS or Android and sales of iOS and Android devices every year of over 2 billion units. And so the unit sales of iOS and Android will be 10x sales of PCs, and the install base

will be probably 5x, the install base of PCs. And what that world looks like is kind of, you know, we don't quite know yet, is that going to look like the world of white goods? You know, is it going to look like the world of TVs? Is it going to be lots and lots of regional players? Is there going to be a Brazilian company that just has a quarter of. of the market in Brazil, or they're going to be two that have two-thirds of it between them. What is that?

How is all that going to shake out? Will it be Samsung? Will it be Lenovo Huawei? Will it be, you know, do we move to a world where there's just lots and lots and lots of companies doing this? Do we move to a world where manufacturing happens, you know, outside of the places it happens now, too, or is that just so locked down now that you think there's not much chance of that shifting?

Well, it's interesting. You know, you could argue, I don't have a strong view on this, you could argue that as the product becomes more commoditized. it becomes, you know, these three chips plus this screen plus a piece of injection molding, plus this bat, so on, so on, so on, so on, that you have less need for the kind of the cluster of expertise that you have in Shenzhen. Right. And that's more of like, certainly like the assembly may move outside China.

That certainly happened in some other sectors. It may do. I don't have a strong view on that. Certainly you can start seeing that happen for some of these companies, like, you know, Condor is doing half of the work in, they say, doing half the work in, you know, we'll see. it may do and you know Shenzhen may move on to kind of

high margin you may move up the value change just as has happened in other industries but it just kind of fascinates me to just kind of see like on the one hand you have the VR world and this kind of super high end vision of the future on the other hand kind of scurrying around in the kind of

hall six and seven you've got these other guys building this kind of completely different question as to like it's not the technology it's like who owns the shop in the third-tier market town in Mozambique. Right, right, right. Was there anything else that you could, you know,

we began this conversation about kind of your early days and the early days of Mobile World Congress. Do you get a sense of, and, you know, the telco is paying this massive amount of, you know, money for a spectrum that turns out didn't actually turn into a great business for them? Is there a group that's ascendant and or descendant? Do you get a feeling like that it's,

telco isn't really the thing, it's something else? Like, how does that express itself? at Mobile World Congress? Well, what's happened is that the value kind of moves up the stack with each generation. And so it went from being the network operators who designed and built, I mean, back in the 80s, the network operators designed and built all the equipment, like Bell Labs made all the gear for AT&T, and NTT made it part of their own equipment, or captive manufacturers did. And so that got disaggregated, and the telcos don't make their own equipment anymore.

and then the guys who made equipment also made handsets. And it's kind of interesting that, you know, if you think back, again, 15 years ago, none of the companies that kind of created cellular are in the handset business anymore. Like none of them, they're all out of it. Like Nokia, Erickson, Zemans, you know, Motorola, all of those companies are out of the handset business. Samsung is the only one, and they were, yeah, they were there, but they weren't like one of the kind of primary creators of cellular technology. Samsung are the only brand name from 15 years ago that was still in the handset business, pretty much.

I mean, there may be another, I can't think of another one line. Bell Labs is now part of Nokia, incidentally, which tells you how the world has changed, because Bell Labs merged, became Lucent, which merged with Alcatel and Alcatel Lucent, Nokia bought Alcatel Lucent's network business. So that value moved up, but then the operating system moved away from the headset makers, except for Apple, and then the value moved, the services moved away from the operating system, and so you get this continual disaggregation moving up and up and up the stack, And then, you know, which is not kind of conversation for another day, then you look at what's happening on handsets.

And it's like, okay, Facebook trying to do what we chat and to some extent by do have moved in China, which is move the discovery and acquisition and, you know, engagement, another layer up stack from the operating system. And so we'll see at F8 and then I.O and WWDC what Apple, Google, Facebook planned to try and do around this stuff. Which all of those are lining up in the next couple of months, right, in the springtime more or less. Exactly, yes. so and they're all sort of you know we keep circling around this question from on mobile of like we are post Netscape and post page rank we moved on from the world where it was web browser mouse keyboard but we haven't like got any stability on what that will look like and this is not incidentally something that was anyone was really discussing on the show floor at mobile world congress

but this is like the next question as to loo what is the discovery acquisition engagement stack look like at the top of the stack and then what layer appears above the app whether it's you could argue it's a r or vr on the one hand you could argue it's AI on the other I mean this is kind of my joke my kind of career is going to move from as my career started I was in telecoms and it was all about five letter acronyms like wcdMA and then you move to tech and it's kind of three letter acronyms and now it's like the three acronyms that matter iR VR VR and AI so now's two letter that's funny I want to just put in a plug for the low end VR I think that You know, we talk here a lot about high end versus low end.

If you haven't done the low end, go do it. I mean, it's... So here's an interesting aside. So Samsung, both at CES and on their stand here, had a demo stand where you had like, I think, like 30 or 40 seats. Whether you queue up, you sit in the seat, you put the gear VR on the seat, the kind of stand kind of moves around and they play a roller coaster demo. And that was full every single day, the whole day at CES and full every single day the whole day at Mobile World Congress. And you can do the kind of the back of the amount of mass on a K-5-minute demo times four days or whatever the number is. But it kind of tells you it's interesting that the people who are paying however many thousand dollars to go to this conference and stay in the hotel and who work full-time in this industry are willing to queue for 15 minutes to have this demo because they haven't seen it yet.

Yeah, no. I mean, never mind like quote-unquote civilians or normal people or whatever you muggles or whatever you want to call. Like people who don't work out at Slight-Tech. People in Sight-Tech haven't seen this yet. Yeah. Yeah, it's cool stuff, and so if you get a chance, go do it. Benedict, thank you. Welcome back, and you're going to be leaving again soon,

and we'll talk more about where you go next, but we will talk more about mobile. Thanks. Fantastic.