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Ever since iPhones officially went on sale in China back in 2009, pundits have claimed that local production of cheaper smartphones would not only block Apple's growth prospects in China but also invade smartphone markets globally. They were wrong, here's why.
China's phone threat was a crank call
Three years ago, there were 300 Chinese companies selling cheap knockoff smartphones. Pundits claimed that their "percentages of growth" in unit shipments and their ambitious global expansion plans were a dire threat to Apple, especially as they started bringing cheap products to the United States.
One of these, LeEco, made waves in 2016 after it bought up Yahoo's old offices in Silicon Valley and announced plans to sell everything from VR Headsets to electric vehicles, Android-based TVs and smart bicycles.
The Verge profiled LeEco's CEO as promoting its smartphones in China by attacking Apple with Nazi imagery that depicted iOS as "tyranny" and spoke of an "arrogant regime of iOS domination," despite the supposed supremacy of Android in terms of unit market share. Last year, LeEco ran into financial difficulties and its plans for U.S. expansion subsequently collapsed.
LeEco--along with many other aspiring Chinese firms--is now also facing problems back home in China. Cheap phone makers are being hit by the same problems that were only supposed to have an impact on Apple: a longer replacement cycle for smartphones, a "lack of innovation" driving new sales and intense competition from other cheap commodity makers.
At this year's Mobile World Congress being held next week in Barcelona, a variety of Chinese brands that formerly showed off phones won't even attend, including LeEco, Meizu, Gionee and Coolpad. Huawei and Vivo will attend, but won't be showing off new models.
"In 2017, the minor upgrades that Chinese smartphone companies made to their offerings were not enough to move consumers to splurge on new models, resulting in a general slowdown in the market," noted IDC analyst Tay Xiaohan.
Outside of Apple's premium growth: commodity deathChina is the world's largest market for smartphones. Last year, however, the nation's consumption of new phones followed a global trend of retracting sales. Gartner just reported a nearly 6 percent drop in global smartphone shipments in the 2017 holiday quarter. In China, weak sales led to a nearly 5 percent annual shortfall in new sales over the last year, according to IDC.
While Apple has weathered the storm to report solid growth in China in the most recent quarter, many smaller Chinese makers have been unable to stay in business.
A report by the South China Morning Post cited IDC's Tay as stating that "more of the smaller smartphone players will be forced to exit the market in 2018 as we expect handset shipments in China to continue declining."
One hundred phone makers are already gone, and the majority of new sales in China are increasingly going to the top five brands: Huawei, Oppo/Vivo, Apple and Xiaomi. That leaves just 23 percent of China's sales for the remaining 200 firms to fight over, even as the size of that pot is also shrinking.
Apple's sales pace in China grew by nearly 20 percentThat contraction was supposed to hit Apple. Instead, the company's chief executive Tim Cook reported that over the December quarter, Apple's sales in Greater China increased 11 percent, despite the quarter being compared against a year-ago quarter that included an extra week of sales.
Cook noted, "on an average weekly revenue basis, we were up 19 percent [in Greater China]. We had an all-time record for revenue in mainland China and of course a key part of that was iPhone."
"Everywhere I look I feel really good about how we're doing in China" - Tim Cook
Apple's iPhone sales in China are not directly competing against cheap brands targeting lower-income buyers; they're focused on affluent consumers in top-tier cities where Apple has been building new retail stores. That's why Cook could note that "Kantar reported that the top five selling smartphones in urban China were all iPhones."
Cook added, "we could not be more pleased with how we're doing," further noting that Apple's success in China wasn't just limited to phones. "We obviously grew share for iPhone in the quarter, but we also grew share in iPad and Mac during the quarter and wearables were extremely strong there in the quarter. And so you know everywhere I look I feel really good about how we're doing in China."
Cook had previously pointed out that 70 percent of all iPad sales in China were new to Apple, while 90 percent of Mac sales were to new buyers or PC switchers. So Apple isn't just selling iPhones; it's introducing millions of new buyers in China to a broad ecosystem of its iOS products, Macs and wearables. That has helped (and will help) to keep buyers loyal to Apple.
It doesn't have to be true to get published
Loyalty is turning Chinese knockoffs into training wheels for iPhoneChinese brands have proven popular among younger buyers, with nearly half of all Oppo sales going to buyers between 16 and 25. However, a report by Counterpoint noted last year that only a quarter of Oppo and Vivo buyers chose to repurchase the same brand again, while more than half (53.4 percent) of all iPhone buyers chose to get another iPhone. Conversely, just 7.2 percent of Samsung buyers opted to get another Samsung phone.
Samsung has been the largest producer of smartphones globally. However, at the launch of iPhone X and other new models including iPhone 8, 8 Plus and a new low entry price for iPhone SE, Apple's total sales of iPhones exceeded Samsung's in the winter quarter, despite the fact that Apple's Average Selling Price for iPhones reached within five dollars of $800, while Samsung and other Android makers were offering handsets at an ASP of less than $250.
Incessant reports of iPhone X supposedly experiencing "weak demand" due to its price--as Tripp Mickle claimed in his thin, poorly researched article for the Wall Street Journal--were totally wrong. Apple's stand-out, premium-priced iPhone X was, in fact, the company's best selling model every week it was on sale during the quarter, as Apple confirmed in its quarterly earnings call.
Meanwhile, commodity sales of cheap Chinese brands (including BKK's formerly fast-growing Vivo and OnePlus; LeEco; Coolpad and scores of others) collectively tanked by 22 percent, with total shipments falling from 193.6M in the year-ago holiday quarter when iPhone 7 debuted, to just 150.2M in the most recent holiday quarter, according to Strategy Analytics.
Apple is reportedly planning to treat AirPods like its flagship devices, releasing relatively frequent iterations -- beginning with an update this year.
The next pair is allegedly codenamed "B288," and expected to let people trigger Siri by saying "Hey Siri," Bloomberg sources said on Thursday. Currently, owners must tap one of the earbuds.
The product is also anticipated to get an upgrade from the Apple-designed W1 wireless chip. The company could conceivably use the W2, found in the Apple Watch Series 3.
A subsequent 2019 upgrade will be "water-resistant" -- resistant to splashes, but not being submerged, the sources said. That statement is problematic, as AirPods are at least partly water-resistant already. They're worn by many gym-goers, and user tests have seen them survive being submerged. It could be that Apple plans to further toughen them, though that wouldn't be a marquee feature.
The first-generation AirPods have been a smash hit, often in such demand that even now it can take a week or more for an online order to ship. The product should be relatively easy to find at retail stores though, and many competing wireless earbuds are on the market.
Following up on a "Most Innovative Company" award, business magazine Fast Company on Wednesday published a wide-ranging interview with Apple CEO Tim Cook, covering topics like the stock market, long-term plans, and the importance of Apple Music to the bottom line.
The stock market has "little to no effect" on Apple's propensity for innovation, though the company is an outlier, Cook claimed.
"More generally, if you look at America, the 90-day clock [quarterly results] is a negative," he expanded. "Why would you ever measure a business on 90 days when its investments are long term?"
Along those lines, Cook denied that Apple follows other companies with products like the HomePod. The device is Apple's first smartspeaker, but shipped just this month, years after the entry of Amazon and Google into the market.
"What's happening if you look under the sheets, which we probably don't let people do, is that we start projects years before they come out," Cook said. "You could take every one of our products -- iPod, iPhone, iPad, Apple Watch -- they weren't the first, but they were the first modern one, right?
"In each case, if you look at when we started, I would guess that we started much before other people did, but we took our time to get it right. Because we don't believe in using our customers as a laboratory. What we have that I think is unique is patience. We have patience to wait until something is great before we ship it."
The CEO noted that Apple's "forcing function" is its chip requirements, which mean that development often starts three or more years before a product hits the market.
"So we've got things that we're working on now that are way out in the 2020s," he commented, while noting that Apple leave some room where possible to enhance a product even in the months before it ships. Few of Apple's 2020-era plans have been rumored, the main examples being an AR headset and a self-driving car platform.
On Apple Music, Cook argued that his company is "not in it for the money" in response to the idea that it could become a stand-alone profit source, rather than an indirect means of locking people into Apple platforms.
"I think it's important for artists," he said. "If we're going to continue to have a great creative community, [artists] have to be funded."
Asked about what Apple could expand into in the future, given the march of technology and society, Cook said that Apple won't be distracted by what doesn't matter.
"The priorities are about saying no to a bunch of great ideas. We can do more things than we used to do because we're a bit bigger. But in the scheme of things versus our revenue, we're doing very few things," said Cook. "I mean, you could put every product we're making on this table, to put it in perspective. I doubt anybody that is anywhere near our revenue could say that."
Across 2017, Google heavily promoted its Pixel phone brand. Despite being lauded as being "the world's most valuable brand" and its status as the world's largest purveyor of advertising, all of Google's global efforts, including DoubleClick and YouTube, resulted in inconsequential Pixel sales. Worse than its failure to sell hardware is the fact that Google has proven that its advertising simply isn't very effective.
Pixel 2 and 2 XL were premium priced, poor sellers
The embarrassing performance of the micro-PixelLast fall, Google released two second-generation "Pixel 2" phones, one it created in partnership with HTC and a larger 2 XL it produced with LG. However, across all of 2017--including the critical holiday launch quarter--Google's total annual sales of Pixel phones amounted to just 3.9 million units worldwide, according to research director Francisco Jeronimo of IDC.
That's fewer phones than Apple sells in a week, but nobody expected Google to outsell iPhones. A better comparison would be Microsoft's ill-fated Windows Mobile initiative, which struggled along for years trying to establish a market. However, by 2015 it was clear that Microsoft's phone sales were dead. That year, it sold just over 4 million "Windows Phones" in the fourth quarter, down from just over 10 million phones in Q4 2014.
Across the full year of its collapsing sales of Windows phones in 2015, Microsoft sold just over 26 million Windows Phone devices, or 666% more than Google's total sales of Pixel phones last year. Google's best-ever sales of Pixel branded hardware is far worse than the performance that caused the termination of Microsoft's dead-end efforts in smartphone hardware.
Pixel and Pixel 2 sold worse last year than one quarter of 2015 Windows Phones
But wait, it's growing not showingSome of Google's fan blogs attempted spin 3.9 million in annual sales as a cause for optimism. 9to5 Google tried to turn the frown upside-down with a cheery comparison, noting that "the company is quickly picking up ground with its Pixel lineup, with sales in the past year doubling," adding that "it shows great growth for the company's lineup."
It then had to acknowledge that "the 'double' is slightly misleading."
That's because Google Pixel sales in 2016 only included the original launch quarter of the original Pixel and Pixel XL. The "increase" referred to all sales of Pixel phones in 2017, including the original Pixel 1 models that sold across the first three quarters of the year and continued to sell as discounted models when the Pixel 2 models were introduced.
"Regardless of which model these numbers show off the most, this is good news for Google," the site insisted. "3.9 million phones may not be a huge number or portion of the smartphone market, but it's pretty excellent for a new lineup."
That's false. But more importantly: why is Google continuing to invest in Pixel (having acquired HTC's design group) after failing to find significant sales for the new phone--which is currently selling at one-sixth the annual volume that caused Microsoft to give up on its entire phone hardware strategy?
Google isn't happy with AndroidWhy isn't Google investing in supporting its Android platform in general terms, rather than creating proprietary Pixel hardware and services that are exclusive to a device it sells only under its own brand, and not shared with its manufacturing partners nor its broader licensees? Quite obviously, giving away Android has done very little for Google.
Android has been nothing but an expensive failure for Google. If it weren't, Google would still be advertising its Android experience the way it did back in 2010, when it still believed that was a viable strategy
Generic Android is certainly not attracting valuable customers. To reach the demographics that appeal to its real customers (advertisers), Google has to pay Apple billions to remain the search provider for iOS. Expensive Google Pixel phones were supposed to attract the buyers of higher-end Androids (and perhaps some iPhone users), but they did not.
After mocking iPhones for being expensive and having a "dated look" in comparison with the latest bezel-free Androids with curved screens, Google's fans were forced to make excuses for the company's dated-looking Pixel 2 models with the highest prices ever, differentially largely by a portrait camera feature copying the previous year's iPhone 7.
Google was gunning to copy everything about Apple while abandoning everything unique about Android because Android has been nothing but an expensive failure for Google. If it weren't, Google would still be advertising its Android experience the way it did back in 2010, when it still believed that was a viable strategy.
Google can fail in hardware; it can't fail in advertising
Google's inability to make money in hardware isn't perceived as a problem. From Google TV to Google Glass to five years of Nexus phones to its Chrome and Pixel devices, hardware has always remained a money pit for Alphabet. The company dumped billions of dollars to acquire Motorola and Nest, establishing nothing more than two more failures and a series of fire sales. Nobody expects Google to be able to sell hardware.
Advertising is another matter. Google has consistently earned about 90 percent of its revenues from selling the paid placement of advertising. That $95 billion in ad revenue is Google's iPhone, the singular product it relies upon while it attempts to create new markets and products to diversify its business.
However, while Apple's sales of iPhones are growing more profitable at higher prices, Google's sales of advertising is becoming hard to sell and more expensive to offer.
The worst thing for Google right now would be to establish that its advertising simply isn't very effective. Yet that's exactly what the failure of Google Pixel is doing.
Across 2017, a variety of PR firms applauded Google for having the "worlds most valuable brand." Brand Finance was among the chorus, claiming that "the company remains largely unchallenged in its core search business, the mainstay of its advertising income."
David Haigh, the chief executive of Brand Finance, put his own firm's reputation on the line in writing that "Apple has struggled to maintain its technological advantage, with new iterations of the iPhone delivering diminishing returns, while the Chinese market is now crowded with local competitors."
Remember when the Chinese market didn't have local competitors? Such as back in the days of iPods when China didn't have any ability to listen to music at all--or right up into 2009 when Apple's iPhones weren't even officially sold in the country, but somehow the Chinese market still had the world's largest national phone carrier networks?
None of Google's advertising had any real effect on consumer behavior. The ads didn't work and Pixel phones did not sell
Using the words "diminishing return," of iPhones is simply asinine, given that Apple has never earned less money, or has ever sold iPhones for more. What's actually diminishing is Google's profit margins on advertising.
And what's worse (for Google) is that no amount of native ads for Pixel phones--placed right on Google's search page, the most valuable property the company has--managed to push any commercially significant slice of potential buyers to go slightly out of their way to acquire one. That's bad.
In addition to its own search page, Google also relentlessly pushed Pixel across its Double Click ad space, forcing the brand into squares and rectangles across blogs and within ad-sponsored apps. It also promoted Pixel relentlessly on YouTube, supposedly reaching the very demographic of buyers who love to open packages. None of Google's advertising had any real effect on consumer behavior. The ads didn't work and Pixel phones did not sell.
Not even Google's ads offering $300 refunds could save Pixel 2
Google sycophants worth as little as Google adsGoogle wasn't advertising Android. It wasn't extolling the virtues of its open platform, or promoting how great it is to side-load apps or to download and compile your own operating system kernel. The Pixel branding downplays all of these once-touted ideas to deliver as much of an iPhone-like experience as possible: push-button simplicity where you touch the button and a perfect photo is magically generated for you.
For Pixel, Google promoted one of the most popular features of smartphones: the camera. It promoted the idea that one feature--a version of Apple's Portrait mode background blurring--was so great that it didn't matter that Pixel 2 lacked a zoom lens or a faster processor or a higher quality display.
This might have seemed like an effective advertising campaign strategy. Google got every one of its blogging partners to fall in line, from the Verge to Toms Guide. They all announced that the only thing that mattered in a new phone was the presence of a feature Apple had debuted the previous year.
Despite this lockstep marketing from every major Google advertiser, including breathless praise for a feature even when it was clearly not working properly (Dieter Bohn of the Verge insulted his readers with "it looks good" when posting a terrible portrait example), Pixel 2 sold incredibly poorly over the holidays--worse than Windows Phone in its death throes.-- Dieter Bohn (@backlon)
Clearly, there wasn't really much value in the phoniness of Google fan-bloggers to call a failure "success" and to excitedly award blue ribbons to a middling, rebranded HTC or LG phone with a spectacularly high price.
It wasn't just Google's own ads, its paid-placement homepage and its partner blogs that failed to sell any commercially significant number of Pixel phones. Google also paid others to advertise its brand. It blanketed conventional advertising spaces including the New York subway and roadside billboards. It put ads on conventional TV, on top of the advertising it forced all over the place on YouTube.
This all cost a lot more money than sales of a scant number of phones returned in revenue. However, the biggest, most expensive thing Google demonstrated was that its Paid Placement, DoubleClick and YouTube ads aren't very effective at targeting potential buyers, and that Google itself isn't very good at framing advertisement messages capable of swaying members of the public to make a sale--even when that product is one Google has worked to create itself, and targeted at the very tech-savvy, ready to spend customer that Google thinks it best knows how to reach.
That's all far worse than just flubbing another phone.
Spotify could be gearing up to take on Apple's HomePod with its own competing smart speaker or other hardware, after new job advertisements for the music streaming service reveal it is looking for employees to set up the manufacturing process for its first physical products.
Spotify co-founder and CEO Daniel Ek. | Source: Spotify
Three notices on Spotify's own recruitment website, found by Musically, relate to hardware production fields at various levels. The "Senior Project Manager, Hardware Production" and "Project Manager, Hardware Production & Engineering" roles details jobs overseeing the project that will help in the "creation of innovative Spotify experiences via connected hardware."
A third listing, "Operations Manager, Hardware Product," is more direct in advising of the firm's goal, stating "Spotify is on its way to creating its first physical products and setting up an operational organization for manufacturing, supply chain, sales, and marketing."
The advertising for new employees in those positions do indicate that Spotify wants to start manufacturing hardware, but that it still early in the overall process. References to working with third-party designers, contractors, and manufacturers, as well as one job's role including managing inventory and the supply chain, strongly points to this being a production effort that would use an assembly partner, such as Foxconn, instead of setting up its own production lines.
It is worth noting that the existence of the job postings are not a sign that Spotify will commence manufacturing efforts in the near future. Such roles could be filled long in advance, giving the company an opportunity to plan out the process long before it commits to manufacturing.
Currently, Spotify does not provide any hardware of its own, instead relying on working with other hardware producers to make Spotify work with third-party devices. This does leave Spotify vulnerable in cases where hardware producers decline to work with the company and makes it difficult to use the streaming music service with its hardware, such as with Apple's HomePod not including native Spotify support, forcing it to be used through AirPlay.
Developing its own hardware would enable Spotify to have control over how the end user experiences the service, as well as what other streaming competitors would be allowed to use the device.
So far, it is unclear exactly what kind of products Spotify intends to produce, but given its audio-centric nature, it is likely to be some form of smart speaker, similar to the HomePod and Amazon's Echo range. The latest job ads do not indicate the product category, but The Guardian reports other postings from April last year state Spotify wants to create "a category defining product akin to Pebble Watch, Amazon Echo, and Snap Spectacles."
Other job ads at that time for a "Product Manager, Voice" and "Director of Product, Natural Language Understanding" were detailed as working to make Spotify work more efficiently with voice-based systems, such as in cars or with third-party apps. Considering the more recent hardware-related postings, it is entirely possible these earlier postings could have been part of an effort by Spotify to start working on its own smart speaker or similar products.
Currently, Spotify is the most popular music streaming service in the world, with upwards of 70 million paid Premium subscribers, and possibly as many free listeners, but it is facing fierce competition from Apple Music in the United States. It is reported Apple Music is increasing its subscriber count by 5 percent per month compared to Spotify's 2 percent monthly growth rate, which could lead to Apple Music overtaking Spotify in terms of subscribers in the U.S by the summer.