(1) Users don’t know  they are carrying an Android powered device.

As part of Gigwalk recruitment we ask users to provide us with the type of phone they own.  Here is the exact wording of the question

If you don’t own an iPhone, what kind of operating system is your device running?

That means that the vast majority of users don’t know they are using an Android device.  I was curious so I dug deeper and asked some users who did not include the term Android in describing their phone what they thought Android was and here are some of the responses I got:

• Android is a place to buy apps
• Android is a specific kind of phone (but I don’t have one)

(2) No Experience Lock-In

Longer term this software diversity strategy hampers Google’s ability to lock-in users to the Android platform.  One of the last remaining ways to lock-in users over extended period of times is experience lock-in. Getting a user to switch from Windows to Mac is hard as most don’t want to re-learn how to use an operating system – that is experience lock-in. The same thing will happen for mobile operating systems; as users develop gesture muscle memory around common mobile tasks (calling, texting, emailing, photos, etc.) they are not going to eagerly switch devices.  By inviting hardware partners to customize the Android UI (e.g. HTC Sense) they are introducing software diversity into the ecosystem.  This software diversity means their are no consistent experiences across Android devices.  When a user upgrades their device switching from their HTC Incredible (Android device) to a Samsung Galaxy (another Android device) or Windows Phone is nearly as much relearning work for the user.

1. 5 Billion Mobile Subscribers
   • Ultimately all 5 billions of these subscribers will be buying a smartphone. Some people will buy two so it could be more. While I really like my iPhone, in a market of this size a lot of people won’t agree.  Some won’t like its price, others its size, , some won’t buy because of a missing feature(s), and the list goes on . I think you will be hard pressed to find a non-niche market (>300 million units) in the tech consumer space where a single product dominates.
2. Calling a Game in the 1st Inning
   • The smartphone revolution has only started — their are only a few hundred million devices out there.  Drawing conclusions on the hardware diversity strategy at this stage is like calling a baseball game in the 1st inning with the score 2-1.  The hardware diversity strategy takes many years to fully play out.
   • To suggest that the hardware accessory market won’t develop because of hardware diversity seems is wrong.  Samsung sold 10M Galaxy Android devices in about six months and the accessory vendors jumped on board.
3. Big Bang vs. Constant Drumbeat
   • iPhone takes the big bang approach to marketing.  A single big launch every year a frenzied build-up. For most people who don’t follow technology that big Apple event quickly fades from memory after a day or two – they simply don’t keep this stuff top of mind.  Whereas the marketing power of Android and Windows Phone is a constant drumbeat in TV, web, radio, billboards, etc.  The aggregate marketing spend of the hardware vendor, mobile OS provider, and carrier is going to be huge.
4. How People Buy Phones
   • How techies buy phones is very different then normal people. Head to a Verizon or AT&T store in Waukegan, IL and watch how normal people buy phones.  That will give you a sense of how normal people make phone purchasing decisions.  If they see a huge and sexy Windows Phone display and the sales guy is talking up the Windows Phones’, normals are going to play around with a few of the Windows Phones and buy one of them.

Additionally, Android and Windows Phone are not using the exact same strategies.  Android is taking a hardware AND software diversity strategy – they allow their hardware partners to layer on custom user experiences.  This is a dangerous long term strategy as users never mentally develop brand affinity towards a single user experience.  Whereas, Microsoft is only employing a hardware diversity strategy, and even there its taking on a slightly different form than Android.  Specifically, Windows Phone hardware specs are very strict compared to Android.

Why OpenTable has massive barriers to entry:

• OpenTable is a two-sided marketplace which have significant barriers to entry, see eBay.  Lets say a competitor magically gets 10,000 restaurants to use their OpenTable clone — you have only one side of the market.  Restaurants need new customers making reservations to make this interesting – which OpenTable delivers by virtue of its strong position in Google search results, integration with all the major online local reviews sites like Yelp.com, and increasingly popular mobile applications.  Generating the traffic to drive to restaurants takes years to develop.
• Selling, installing, and maintaining an OpenTable system is not a simple or quick process.  Selling to small business is time consuming and expensive.  Once OpenTable is installed, it’s akin to installing SAP or Oracle Financials for an enterprise – nobody wants to rip it out.

Why OpenTable is undervalued:

• Significant barriers to entry — you would need a minimum of a $50M and 3-5 years to start chipping aways at OpenTable business.  This assumes that OpenTable management is fairly incompetent and does not react.
• Flash sales:  They have an audience and deep merchant relationships enabling them to layer a Groupon like flash sale – very lucrative.
• Mobile:  The volume of reservations will increase significantly as their mobile applications reach critical mass.
• New lines of business: Once they wrap up the restaurant market their is no reason why they can’t do spas, hair salons, and even car-services.

Companies are starting to fall by the wayside as the stacked teams of Apple, Google, and soon Microsoft take firm control of the race.
Lets look at a checklist of capabilities one needs to launch a competitive mobile OS. Half way down this list you will realize that very few companies have assembled a deep and wide enough talent pool to execute a smartphone mobile os on a global scale.

[1] Limited Network Effects: During the PC war application developers propelled Windows PC to its monopoly position – users adopted the OS with the widest range of applications and developers adopted the platform with the most users. In the mobile smartphone OS war the top 20,000 apps that matter will be replicated to the top five mobile os platforms in each market or region muting the possible network effects because the development costs are relatively low.

• 140 million DVD units per year [source]
• 360 million PCs (laptops, netbooks, tablets) units per year [source]
• 100 million videogame consoles units per year [source]
• 1.3 billion mobile phone units per year [source]

Mobile phones sell more than all of those – combined.  The two largest handset manufacturers Nokia and Samsung shipped 175M mobile phones (mostly feature phones) in Q1 of 2010.  That is more than 3x the total global PC shipments for Q1 2010.

The smartphone market of today is not what Google, Apple, Microsoft, HP, and Nokia are fighting for.   Today’s smartphone market is measured in tens of millions of devices per quarter across all the major players and by 2011 there will be 449M smartphone users (i.e. active subscribers).  The smartphone market of three to four years will be measured in hundreds of millions of smartphone devices per quarter.

Let’s be clear why Microsoft is not too late to this game:

• Massive market.  An early lead of 60M devices in a 1.3B/yr shipped devices is not much a of a lead.
• Device churn: People churn through phones rapidly (PC turnover is ~4 yrs and phones is ~18 months)
• Weak lock-In:  Users are not spending hundreds or thousands of dollars on content (music, apps).
• Weak network effects:  Given low cost of developing apps, the important ones are being replicated to the top tier platforms.
• Carriers want Microsoft: They don’t want a Google and Android dominated market.  They want at least four major platforms each with 25% of the market, and believe Microsoft has the patience (i.e. warchest) and persistence to be one of them.

Full Disclosure:  I don’t work at Microsoft and I don’t own any Microsoft shares.  I simply believe the Android vs. iPhone conversation is myopic and ignores how insignificant of a lead both of them have established.

• New Magic trackpad  – this  is very cool as it brings full multi-touch to the desktop (review here)
• 27 Inch LED Display (review here)
• Upgrades to iMac line (review here)

A pretty significant product launch.  So, you would think with Apple passing on a big Steve Jobs press event at the very least they would swap the Apple.com homepage to promote the new products.  Not a chance.  They are laser focused on the iPhone.

First, lets begin with some context on the enterprise software business.  During the golden years (nineties) of enterprise software – companies like Siebel, Peoplesoft, ePhipany and many more brought software from the back-office (order processing and billing) into the hands of sales reps, customer service, marketing, and human resources (commonly referred to as the front-office).  The license based enterprise software revenue model works like this.  They sell $1M worth of software licenses and then charge companies annual maintenance fees (approximately 20% of the original license cost) for patches and incremental versions of the software.   So, a $1M license software deal actually translated into $2M over five years ($200K annual maintenance fees times five years plus the original license deal of $1M.)   Once a customer installs the software they are effectively locked in for many years.  These maintenance revenue streams are highly profitable as they not paying sales commissions and support costs are spread across thousands of customers.

With that context, it’s pretty clear what buyout firms are doing.  Acquire an enterprise software company with a significant customer base, cut new product development, move support to a low-cost labor market, and milk the maintenance revenue stream.

Yes, this is part of the natural product lifecycle – these are companies on their death-bed.   But the unfortunate part of this is that users (customer service agents, payroll admin, and hiring managers) are stuck with barely usable (try using Oracle Applications) and now largely unsupported tools.

Given the improvements in user experience (Apple) and collaboration tools (Facebook, LinkedIn, etc.) over the past five years these older software tools are a massive productivity drain for millions of users.  There needs to be a better and faster way to flush out mostly defunct enterprise systems and migrate users quickly to something usable.  There is hope, companies like Yammer cleverly bypasses traditional IT purchasers and first hooks the people that matter most — the users.

1. Multiple Parallel Deals:  This is another way of saying broad offer selection. With only a deal or two a day per city (~50 or so cities) the activation energy a competitor needs to catch up is fairly small (sales force and some search marketing spend).  If they had more liquidity on the supply side (hundreds of deals per day per city) it would be very hard to create this kind of supply with a sales force.  To do this effectively they need to build a recommendation engine that ensures that I never see a deal for a pedicure.
2. Turn Competitors into Sales Franchises: Local businesses don’t have the time or desire to transact with multiple group buying sites. Furthermore, Groupon’s competitor’s are starting to plateau, as this happens will seek new ways to generate incremental revenues.  Groupon can avoid a bloody fight with these competitors by turning them into a local sales franchise.  They bring deals to Groupon and in return get a cut of any deals sold. Of course, these local sales franchises have to use all the listings and contract management systems Groupon provides.
3. Build Local Business Reviews:   For each deal many hundreds of people experience the service.  If 10% of these wrote a detailed review they could quickly become an excellent source of business reviews.  Today’s Groupon in San Jose is running a deal for Cindy’s Yoga (see here) that 792 people purchased.  If ten percent of purchasers wrote a review (or 79 reviews) Groupon would have 36 more reviews than Yelp’s listing for Cindy’s Yoga (see here).

Their objective centers around maximizing profit from the complementary product (Draft) rather than the core subscription product, Campfire. This is akin to Bloomberg trying to charge a hefty premium for content — Bloomberg news content is a complementary product to their lucrative subscription Bloomberg Terminal business.

The objective should be to get every Campfire user with an iPad to purchase the Draft app.  Price it low enough to make it a no-brainer decision for these users.  If every Campfire user (with an iPad) purchased the Draft iPad app Campfire would become far more valuable. Campfire users would post more content via Draft and more conversations around the content creates deeper customer lock-in.  As Campfire becomes more valuable customer are less likely to cancel their subscription.  37Signals knows better then anybody else that losing a subscription revenue generating customer is very hard to replace.

Given the amount of controversy this $10 price point is generating the last thing 37Signals needs is Campfire users thinking twice about purchasing the app — at $4 or $5 these types of users don’t think twice.

[See here for an excellent essay on product complements by Joel Spolsky)

1. Limits Google’s Ability to Achieve Mobile Ad Dominance: The mobile ad business is a two-sided network. Apple is ripping away one side of that marketplace (or at least a very large chunk of it — 100M eyeballs).  This will limit AdMob’s (i.e. Google) ability to achieve critical mass in the mobile ad space during these formative growth years.
2. iAd Accelerator: With AdMob out of the picture advertisers will move their mobile ad budgets to other ad networks and clearly  the iAd network will grab some of these dollars accelerating its growth as it attempts to reach critical mass.  Remember, in any market with strong network effects the strong get stronger and the weak get weaker.  Apple is positioning iAd to get stronger.
3. Keeps Ad Innovation Alive (some): A key hallmark of an open system is the increased rate of innovation. By opening iPhone to select mobile ad networks the iOS platform will still benefit from the ad innovation these providers generate.
4. Switching Costs for Developers are Still Low: In a mature market developers could incur significant switching costs i.e. if AdMob had 10x better ad relevancy algorithms combined with an advertiser base 20x the combined competition it would be challenging for the others players to match the revenues developers were generating.  But in such a nascent marketplace nobody has these kinds of advantages.

• • Other mobile ad networks (Apple iAd, Millennial, Greystripe, and Mojiva) will quickly pick up the slack and provide comparable monetization rates.
  • The cost of switching to another ad mobile provider is not significant – a new billing relationship, a couple of lines of code, and new analytic tools to monitor your performance.
  • The vast majority of mobile developers making real money (now) are not doing so with AdMob display ads — they are doing it with paid apps.

Finally, do you really believe that app developers would give up access to 100M mobile users who have a credit card on file.