a16z Podcast - a16z Podcast: The Micro and Macro of Mobile

Episode Date: July 25, 2014

Apple during its most recent quarter reported growing app store sales and flat iPad sales. Where do tablets go from here, especially in light of the Apple and IBM partnership announced? How does the iOS ecosystem stack up against Android now that we can (somewhat) accurately compare the two? Benedict Evans analyzes the small details and big moves driving the mobile industry, and makes an argument for why the impact and opportunity of mobile far exceeds the sheer number of devices.

Welcome to the A16Z podcast. I'm Michael Copeland and here with Benedict Evans. Benedict. Welcome. Hello. So it's been a busy week in the mobile world. It's always a busy week in the mobile world. But there's plenty to cover on both a micro and a macro level. So I want you to suss it out for us. And maybe let's start with Apple and its app store revenue. Yes. So there's two things that I thought were interesting in Apple's quarterly results. One is the tablet. which we'll come on to in a bit. But the other was that, as they've done quite often before, they gave a number for money paid out to developers on the App Store. And at Google I.O., Google, for the first time, also gave a number, which was, what, a couple of weeks ago.

Right. And so you can do a sort of like-for-like comparison. Which we've never been able to do. Which we've never been able to do because at I.O., that was the first time Google, I'd ever give a numbers for revenue on the app store. And so Google said they'd paid out $5 billion to developers in, I think, the 13 months since the previous. previous Google I.O. And they said that they have a billion monthly active users of

Android. Both of those are kind of slightly, they're round numbers at schedule events, so they're probably not very precise. And Apple said that they paid out, well, they said they paid out $20 billion to developers in total. And a year ago, they said they paid out $10 billion. So the arithmetic is quite simple even for a history graduate like me. And so you have doubled the revenue. In the meanwhile, Apple have not given a number for active uses of iOS, but if you take trading 24-month sales, you get to about 500 million. If you stretch it out a bit longer, you might get to 600 million, maybe even a little bit more. But essentially, you have double the revenue on iOS for half the users, and so very roughly four times the spend.

And as you look at those two graphs or those two lines between Android and iOS, well, they're So they're both growing. And you don't really have enough data in particular, you kind of want to have more than two data points on Android because they gave the number this year and the number last year for what the number was. They told us what the number was last year. And so you don't really know if the Android line is curving up sharply.

But we're now at, you know, a billion Android devices, sorry, a billion Google Android devices, five or six hundred million iOS devices, for 500 million further non-relevant. Google Android devices in China. Forked one way or another. Yeah, I mean, I'd hesitate to say fork because they're basically vanilla Android. They just don't have Google services on them.

They're not like Kindles. So you've got 2 billion devices or you will have at some point over the summer. Out of maybe 4 billion perhaps total mobile phone users on Earth, there's a lot more connections, but that's maybe how many actual humans there are. So the point is, you know, if Google is at half of iOS now, the users that are, the users that it's going to get, you know, it's going to go from one billion users to two or three billion users in the next couple of years. But those are not going to be people who are going to raise the average. So what you're saying is that even if it doubles or triples the number of users,

it doesn't necessarily double or triple the revenue. Exactly. It's not going to, it might double, it might triple the users and double the revenue for the sake of argument, presuming all the other dynamics don't change, which of course they will. So the point is, yes, you've got twice as many users on Google Android, but as a developer, it's more complicated than that, as we keep saying, you know, where are your users, what are you trying to achieve, what kind of proposition, will it even work on a fragmented platform, will it even work on a lockdown platform, et cetera, et cetera, et cetera. So there's no one market share, there's lots of market shares. So that's the app store. And it's just kind of, it confirms what everybody kind of knows,

which is that people who buy $600 devices behave differently from people who buy $250 devices, and the average price of an Android phone is about $250. Right. So go figure. As Americans say, they are localizing for the A16s podcast. I think the next. thing that, of course, that got a lot of attention is iPad sales. Right. And I posted a bunch of charts to this to my Twitter feed and also on my blog, Ben-dash Evans.com. And I think the useful metric where you've got this really spiky numbers for things for iPad and iPhone sales is to take trailing 12 months revenues, which kind of smooths out the product launches. And the iPhone is growing quite strongly and the iPad has been effectively flat for a year. For one year? For a year. Yeah. So

So, what is that, and this was the same that, and we had this conversation last quarter. I mean, we did a whole podcast talking about iPod sales last quarter. To recap. Still flat is that. Yeah, still flat. Flat Tim. Right. And it's not Android competition.

This is the thing. It's not like Samsung's doing really well either. I mean, they came into the market and they've taken a portion of it. But Apple are not losing sales to iPad. They're losing sales to people not buying tablets. And so the same is the case for Samsung and so on everyone else. Not buying tablets, meaning not buying more tablets, not buying tablets, period. So this is the thing.

It feels, when the iPad first came out, you know, one of the things that I and every other analysts were saying is, okay, first of all, how many people, well, let me take a set back. The question is, how many people are going to buy this? But what that actually is, is this a one per person device like a mobile phone? And does it get bought every once every one or two years? Or is it a one per household? device that gets bought once every four or five years, more like a PC or somewhere in between. And it feels like where we're settling is it's a one per household or two per household device

that gets bought every three or four or five years. The paradox is because Apple, of course, have created this concept where you could completely ignore what the specifications were. You didn't even need to think about what the specifications were. Therefore, people don't care about the upgrades. So you get, every time I talk about this on Twitter, I get loads of people saying, well, there's absolutely no difference between the iPad Air and the iPad 2. And actually, there's an enormous difference. It's got a retina screen. It's half the weight.

But if you're kind of a non-technical person who's bought the thing and is keeping it on the sofa at home to read or watch videos or play games on, then actually the original one was so good, or the second one, certainly was so good that the additional upgrades don't have that much effect. And so does that also mean that those people who by and large wanted them have gone out and bought them? Well, this is the thing. So Apple said that 50% of all the sales are to new owners. So actually you're continuing. It's not that the sales are falling. I mean, this is the thing. The sales are flat. They've reached a certain level per quarter and they've just kind of stopped there. And so it's growing of the user. And the consequence of you not having replacement sales is that the user base keeps growing. So yeah, it's not that the sales are flat. They're not falling. And the old ones are not being thrown away. So the actual number of iPads, being used keeps going up. There's probably 180 to 200 million iPads in use now versus about 80 million max according to Apple told us how the maxed. Which is 80. Wow. Okay. Yeah. So more than double the number of iPads as max on Earth. So the number keeps growing, but you don't have a growth commensurate growth in the number of these things being bought every year because it's not expanding on that dimension. It's more like PCs. I mean, the number of PCs on Earth has, again,

has quadrupled in the last 15 and 20 years. So the other bit of news related to this was, you know, a week or so ago about IBM and Apple striking this deal. So do you think, explain what you think about that, and then does that change the dynamic in terms of the curve potentially? So Steve Sinovsky and I have done a couple of things talking about productivity. And the basic thesis is this, that there's a lot of people whose job involves using PowerPoint or Excel or perhaps Word. and who would feel quite rightly that they couldn't do the tasks they need to do without it

and therefore can't do those tasks on a tablet. Right. But actually that's not what their job is. My job actually is in large part making spreadsheets. But if you are, as it might be, a senior salesperson, and once a fortnight you produce a sales report and you pull a bunch of data out of Salesforce on SAP and ComScore and various other systems, and you dump them into Excel and you make charts,

and then you dump those Excel charts into PowerPoint, and you make 15 slides and you write bullets and your email that are out. And that's your day once a fortnight. You couldn't do that on a tablet, but actually you shouldn't be doing that. That should be a web dashboard that you do in half an hour. Right, right. And that's really the point. Just as when we went from typewriters to PCs, you started out by printing out 10 copies of your memo

and putting it in the internal mail. But that's actually not what happens when you go to PCs. You have this email thing and you have network drives. And in the same kind of way, the tools come in, the tasks will change to fit the tools and the tools will change to fit the tasks. We're still in the tablet phase, at least at work. We're still in that sort of let's make eight copies and put them in the inner office mail, right? Yeah, we are exactly. So we're at the stage where, you know, I can look at a document in box and I can go and look at something

on it, but we don't have all of those tasks and processes, haven't kind of reshaped themselves to fit the fact that you've got this entirely new and device with different capabilities. And I think to the point of the Apple IBM deal you know this is a story around there's a kind of there's a there's a wonky art narrative here which it says well you know it couldn't be HP because HP competes in devices and it couldn't be Oracle and so on and so forth this is right IBM and why IBM and Apple

in particular in the business development deal made in heaven but I think the general point here is how do you take tablets into enterprise how do you do enterprise sales how do you handhold because enterprise products do not get, you know, you can't outfit General Electric with 250,000 tablets and migrate all their apps onto tablets by saying, well, great, go to your local app store. Right.

Just go to your local Apple store. Yeah, that doesn't work like that. Yeah. And so you need sales, but you also need the processes and the consulting and the services around how you would, might reshape that business. You know, if you have... But doesn't, I mean, let me just poke at that a little bit because it seems to me that the world of tabla and mobile in general has buying.

large least from the consumer side been without somebody holding your hand and it won't happen that way in the enterprise well the issue is um so let me give you a tangible example last time i rented a car and i was on a trip you have um you know the the experience when i was a child was that you would go to a booth and there would be a pc and there would be a tractor printer there and you know you'd queue up and he tipped half of the keyboard and your horse and buggy would arrive yeah exactly your horse and bag you arrive. Today, if you go and rent, I've rented a car from Hertz, they've got the guys that wandering around the, um, the parking lot. They've got a tablet in their hand. They can tap, tap, tap on the tablet and they can press go. Now, at the moment, that's actually

a Windows tablet. And if you squint at it, it's actually running an application that's kind of really designed for a mouse. So it's a little bit cumbersome for this poor guy. Um, but that's kind of the point that you're, you know, that guy's job was not, I'm going to sit in a chair in an office and type. That's not his job. His job is helping people rent carts. Right. And what's the best way to help people rent carts? I mean, I sat in an airliner yesterday evening watching a guy loading baggage onto a conveyor belt to go into the whole of the plane. And every plane that comes past, he's got a handheld scanner and he scans the barcode on the label. And 20 years ago, that would not have been being done. 20 years ago, somebody would be sitting with a PC typing those

numbers in if they were doing it, if they were tracking it at that level at all. Right. And And so that's the shift that has to happen. It's that a lot of those workflows change because of this new tool. And I think then, but there's also another issue here, and I think this is the kind of have kind of kind of lead on to a kind of the other theme that we were going to talk about, is there's a sort of leverage effect that applies across all of these devices. So at the kind of crude level, as I think I said earlier, there's as it might be two billion, iOS and Android devices on earth now, give or take, versus probably 1.6, 1.7 billion PCs.

And we'll go to 4 billion iOS and Android. If Apple do a cheap phone, there'll be more iOS. If they don't, it will be mostly Android. But, you know, that's not a kind of important at this scale. So you have... And the PC number is going to stay where it is? Yeah, so the PC number will stay more or less where it is for a while. It will gently drift downwards over time, but with the five-year replacement cycle and, you know, all the other issues that we've talked about, it'll take a long time for that to shrink down. right um but so you've got double so you've got two or three times more devices yeah more iOS and android devices and PCs but then you say okay what does that PC actually mean is that PC at that

desk in Hertz how should we think about that PC um what should we think about the 500 PCs that we know are in a call center running one application that's kind of controlled and secured and lockdown um do those count as the same as the mobile phone that every one of those employees has in their pocket and takes home with them with not exactly dozens of applications so if you were to go from um and so the the point is that you've got one on one point five one point six billion PCs half of those roughly are corporate and they're locked down and even if they're locked down there's a limit on what you're allowed to do with them or what it's appropriate for you to do with them at work and the consumer ones are at home and they're mostly shared by and large and none of these are really

mobile. So they're at a desk or in a home. They're not in the store while you're looking at a product. And so there's kind of a multiplier effect here. First, there's a multiplier effect in sort of what is an actual, what you might call. So there's this concept in HR of a full-time equivalent. So if you've got two part-time guys and one full-time guy, you say you've got two FTEs, two full-time agreements. And so what is a piece of personal computer equivalent? Uh-huh. You know, because we don't have 1.6 personal computer equivalents. we've got maybe 800 million or 700 million or 900 million actual personal computer equivalents when you factor in okay divide the sharing and the locking down and they can't use so actually so that's excuse me that's the first multiplier and that if you disc you have to discount the PC base for usage the second multiplier is the user interface that people talk about not being PC literate computer literate people don't talk about not being phone literate and yes there is a gap but you have this step change in usability with this new generation of operating systems and that changes the accessibility. And then there's a third change which is the shift in sophistication and

complexity of these devices. So for 20 years we had web browser plus mouse plus keyboard. And then on the smartphone you have a camera. There's probably two billion photos being shared every day on social networks from mobile phones. So you have the camera as arguably one of the most important input methods and you have GPS and you have the tilt switches and you have the microphone and you have all the other input methods. So this just is way more. It's kind of a funny thing. It's a kind of slightly counterintuitive things to say, but smartphone is a way more sophisticated thing than a PC. Right.

Certainly from an internet point of view and a kind of consumer point of view, it's a much more powerful and sophisticated device than a PC that just had a web browser and a keyboard and a mouse for all practical purposes. So you've got this sophistication multiplier. Then you've got this location multiplier because it's not just types fixed in one place. You can be standing in a store looking at the Amazon app while you're holding a product in your hat. And so that changes the potential and the scale

of what a mobile device is. There's a sort of an aside here that, of course, means you need new and different metrics. But when you pull all of these strands together, you've got two or three or four times more devices. The PCs actually need to be discounted. The usability changes,

the sophistication changes, the location and the payment methods and everything else change. And so the change in market opportunity that comes out of this. When you combine all of those together, It's not that there's two or three times more devices. It's that you've got five or ten X more opportunity.

And the IBM deal is part of that. The App Store deal, the App Store numbers speak to part of that. The question of precisely how many tablets and what rate they get replaced, you know, it's kind of an interesting part of that. But I think the fundamental point is, you know, we are going through a generational change in the scale of consumer access to the internet. And, you know, how, what does that mean for entrepreneurs? and for users for that matter.

I was just going to give another analogy that I used in my blog paste, which is if you were to go from 5,000 amber screen character-based mainframe terminals to 10,000, even Windows 3.1 PCs, you could say, well,

we've doubled the market here, but you're kind of missing the point, if you say that. You've done a lot more than just double the market. You've increased the market by 10x. Right. And I think, exactly the same thing is kind of applying now in a very different way,

because it's not like PCs are incapable, but... The same way in the sense of that more and more users, more and more different types of users and use cases as well. Different users, more users in more places able to do more things. Right. Interesting. Benedict, thank you so much, and we'll be back with you soon. Thank you.