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What more do we want? We have phones that can do outright amazing things…. to the point that I won’t even list them because I’ll offend by missing some cool feature – or worse yet – make myself look worse by not knowing about one.
BUT…
There is one thing that a phone (or watch for that matter) still can’t do – show you the world through my eyes (hat tip BP). Yes, we can record with our phones, and anyone who has been to a concert or sporting event or just a kids recital knows what that looks like.
What about sharing that experience without ever reaching into your pocket or altering your point of view? Without ever missing a goal or song…
As someone who is married to a photographer I am very aware of this concept of capturing the moment, memories, and emotion of something as it is happening and from a particular angle. This idea that Google Glass brings to life, of sharing from your own perspective matches very well with our increased familiarity and usage social networks and wireless data – and frankly, our increased narcissism as a society.
Yes, Google Glass has many other attributes and use cases that we will cover at a later date – but this concept of sharing is one that is not met by any other device. Food for thought.
What have we learned from Zara, Lulu Lemon, and Costco?
These are three retailer play in different parts of the retail market but do share some very good qualities that help them to thrive in this era of ecommerce and rapid commoditization.
1) private label – you get it here only, high quality
2) happy places, emotional connections – shopping at a store is no longer a necessity, make me want to be there
3) curated content / selection – expertise
4) size or speed – Costco or Zara
Contrary to the (finally) growing sentiment that ecommerce will completely wipe out retail, we feel it is going to force retail to improve to the point that the experience of shopping will improve and people will continue buying from retail. That said, the in store experience will need to dramatically change in some cases.
Competing with endless inventory is difficult and we see three options; a) make it obsolete, b) make it too differentiated (or proprietary), c) make it emotional or experiential.
We will dive into this topic at a later date – but as we watch the likes of JC Penny, Sears, Best Busy and Radio Shack fall apart -it is important to understand not that the low prices of ecommerce drove them out of business but that the low prices of ecommerce drove a change in the behavior of consumers – what we were willing to tolerate, what we realized we wanted, and what new trade offs were available. For an existing retailer, the future is not just about have an ecommerce presence… like having just a website wasn’t enough ten years ago. You need to use that platform to drive connections. Leverage the platform to improve your offerings. Examples are popping up already in terms of build your own nutrition bars to to a jean store with a massive selection and no inventory. Retail is far from dead…it’s more that the consumer finally woke up and left the cave.
The first two sectors for 2013 are beginning to overlap in a lot of ways – but for this purpose when we talk cloud we are focusing on providers and the data center while mobile is more equipment and service providers. In general, we continue to be positive on technology spending as a whole. There are not a ton of pie-expanding investments out there – tech spending is all about ROI now and the faster the better. Technology investments are enabling more efficient and nimble companies and helping profitability (and even morale in many cases). There are more themes and more specific niches to consider – but here are the major groups.
1) Cloud
a. Premise: I want what I want, where I want, on any device I want…
b. Delivery: leaders in the cloud services space are AMZN and GOOG. Names to watch: MSFT, RAX, CTXS, and HPQ (last hope). Specifically – CTXS, RAX, and NTAP get attention as acquisition candidates by Cisco
c. Data Center: the “cloud” is a generic term, but in general the idea of housing all of your data at remote data center and delivering it on a global basis instantaneously puts heavy demands on computing resources. The ability to cost effectively scale the data center and deliver speed is critical. Top names: EMC (has VMW and will spin out Data Analytics), CSCO, IBM
d. There are some consultant type plays that would include CTSH, IBM, SAP and ORCL
e. Salesforce.com (CRM) falls into the “cloud” and I love what they are doing, but the valuation, like Amazon, is difficult to digest. CRM represents the SaaS (software as a service) space which saw several M&A deals this summer. The recent darling IPOs are Workday (WDAY) for HR Solutions and ServiceNow (NOW) for cloud infrastructure management
2) Mobility
a. Premise: Freedom; flexibility, and the same premise as cloud only I want it NOW
b. Delivery: telecom networks are traditionally high div paying and we still think VZ and T are fair plays on sell offs – but nothing to be exicted about
c. Infrastructure: as the world seeks to build out 4G networks the lead players are CSCO, ERIC, …
d. Equipment: there are only 3 names to watch: AAPL, GOOG, Samsung. Hail Mary plays in RIMM and NOK
e. Components: QCOM, ARMH, BRCM
f. Mobile Ad Spend – the only pure play is Millenial Media (MM) – but the big guys to watch are Google, FB, and Amazon – Apple is trailing.
3) Data Analytics
a. Premise: the world is generating data on a exponential scale – but what does it all mean?
b. The only way to describe this space is to say there are lots of people working the solve the problem of extracting information from data – across nearly any end market – healthcare, utilities, retail, tech…etc. There are hundreds of small, private companies working on solutions –most are getting gobbled up by the bigger players: IBM, ORCL, SAP. This space is likely to see several smaller IPOs this year and many more acquisitions.
Niche to Riche?
1) 3D Printing – initial market for industrial prototypes becoming saturated – key to the story is first, low cost home/office printing. Second, improved material possibilities leads to new “mass customization” market: only two real public plays are SSYS, DDD – expect HPQ to try something (they currently license SSYS); Autodesk (ADSK) for software – they will be a part of this.
a. Unknown what Trimble may do – they bought the 3D CAD software from Google (SketchUp) – they likely want to integrate with construction GPS aided equipment but something to keep an eye on. We like Trimble as a productivity enhancement play for construction, agriculture and fleets
2) Social Networking – yes, overhyped and underdelivered in many cases… a lot of this has to do with the misconceptions of what these firms actually DO vs the optionality you are buying. Moving forward, LNKD and FB are interesting, they have the ability to monetize their users and to expand the optionality of their platforms. LinkedIn has an actual market, job placement, and is expanding its offerings. FB is facing lots of problems, the biggest being mobile. The good news is they were able to generate $3-4b in revs without trying – currently they are rolling out new services, revenue models like mobile ads and ad exchange networks at the fastest pace to date. YELP not working. Hail Mary in ZNGA on gambling legislation
3) Housing meets Data – Zillow (Z) and Trulia (TRLA)
Favorite large cap names:
GOOG, IBM, QCOM, ORCL, AMZN, EBAY, EMC, CRM
Turnarounds: MSFT (data center), INTC (servers), YHOO
SMID Names: high valuation – prone to blow ups but like the technology
FIO, FTNT, SPLK, WDAY
A twitter post: “5th grader wants to know if there’s WiFi at the campground.”
It’s not just that he’s asking, its that he even would expect this. We all like to talk about profound shifts, but to truly understand them you need comments like this…or to watch your daughter grab your phone when talking to someone and be confused why she cant’ see them on the video screen… or how I have fingerprints all over my laptop screen.
We’ve all seen this play out in someway with our kids… they will grow up in a world where high speed wireless connectivity is not just asked for or expected.. it will be assumed. Your data will follow you everywhere. Your contacts, payments, shopping history all there. Much like when most of us grew up the “computer” was just penetrating the mainstream homes and you can still remember MS DOS and cell phones the size of bricks…programming the Lotus turtle to draw a circle was a big deal. Now my son is downloading instructions to build Legos on the iPad and watching science experiment videos on YouTube. Their “understanding” of technology won’t be an understanding at all – it will just be.
As the current generation of millenials moves in the workforce and higher purchase power stage of life, this is the type of assumptions we need to make about how technology will impact us and business in the future, and what types of demands we will place on technology – a “smartphone” will be an antique novelty item in 10yrs… just like a StarTac.
We are always on the look out for real change and disruption. What do we mean by real? There are very few times we have witnessed real change in the economic world, perhaps once each generation. The majority of concepts we identify as change are really just extension of the real change or evolution on top of it. Examples: mobile networks, the internet, the PC, television, the automobile, telephone, steam engine and railroads… you get the idea. These are BIG changes. Things like social networking, outsourcing, interstate highways, ecommerce are all extension of the big change or are enabled by it.
So, as we look out over the next few years at potential for change, we see a couple of things the strike our fancy – one being 3D printing. This is just what it sounds like. You can print something, nearly anything, in three dimensional form using materials like plastic and eventually metals and others. It works in a layering process, depositing each thin layer at a time and building vertically. The is virtually no limit to the types of items you can make – save for size and material – both of which technology will solve. So what? I can print a chess piece or model building? You could. And you could also print an antique car part, or customized case, or a machine part, or a prosthetic limb (already happening)….
What?
Yes, THAT is the type of reason this is exciting, that applications are only growing with awareness – just like other big changes who’s original audience and application was far more limited vs. its final mark.
Keep an eye on this space.
We want to discuss Apple’s recent product history and what those products meant to those end markets and to consumers and then continue into a discussion on the TV market and what an iTV might be and mean.
iPod
What did Apple really do for the music and computer industries considering the conversion of music to MP3 and the acquisition of music both legally and more importantly illegally was already well underway?
Apple did 4 things: 1) made it legal and priced attractive 2) pushed the emotion of endlessly portable music (already a feature but advertised it); 3) connected hardware and software automatically (huge for mass market); 4) made an elegant, differentiated device that was “cool.”
Was the ipod itself transformative? No, the device was distinctly better, but nothing revolutionary. Was selling MP3s big? Not really, selling them securely was. The big volumes came when iTunes was launched for Windows. The transformative aspect was the seamless marriage of iTunes + iPod – digital ferrymen for the masses.
iPhone
Was the iPhone a revolution? Yes, it changed the smartphone. It added full touch screen capabilities and a web browser experience was similar to desktop. The biggest changes to the iPhone vs other smartphones were 1) the design and GUI; 2) web browsing; 3) apps. So the combination of apps and browsing took something that was “cool” and made it necessary.
iPad
Was the iPad transformative? Yes, tablets were not new, but tablets the way we use iPad was new. A different more visceral and intuitive experience combined with Apples app and iTunes markets. It altered our perception about what is computing vs consumption. What do I want / need in my device. It replaced or supplemented other content mediums.
The iPad, in addition to its role to replace traditional mouse and keyboard type operations for web surfing, light messaging etc. also opened up and entirely new, more visceral experience for gaming and multi media apps. Lastly, form and function can be applied in the enterprise where countless custom apps are being designed to allow sales people, pilots, warehouses to utilize the mobile devices.
What will the Apple TV be?
Lets start with what TV is…
Traditionally it is an entertainment medium for TV shows, movies and news transmitted in a broadcast fashion utilizing specified time schedules for content. The method or setting for consumption is traditionally the family room, bedroom or other location in the home. TV is a selected passive medium. You are almost always seated or reclining with a method of selecting the specific broadcast (or “surfing” from one to the next), but there is zero engagement after selection.
Modern features like the DVR and VOD have altered certain behaviors. The most important aspect is time-shifting. Consumers are no-longer required to consume on a schedule, the DVR allows selective recording with playback at anytime, while the VoD service allows you to search a catalog of content (catalog currently limited in size, but expanding). The consumption still takes place in the home or living room, but is “improved” by the increased customization options. Live TV, like sports and certain voting shows still command audiences.
Most recently, mobile and tablet devices are being used (much more than laptops ever were) for consuming both in the home and on the go. The service to enable this is fair, but needs improvement. Thus, TV now resembles a hybrid of models. We are still reliant on the broadcast for live TV and for the distribution of content for the DVR service. VoD catalogs are improving but still exist within the overall broadcast service and thus have limits. Typical consumption packages are bundles of TV + Internet (or TV + Internet + Phone). Additional services like DVR and special VOD are extra. Channel selection is wonderful for tail content and discovery, but is largely wasted on the masses. Future interactivity in terms of social and potentially commercial is in the works but not yet deployed to the masses.
In addition, the conditioning of consumer by the DVR and VOD to control viewing is sparking an emphasis on cord cutting (eliminating the broadcast bundle, opting for a la carte web video). Over-the-top (OTT) video which is online viewing like Netflix and Hulu Plu are leading the charge, and in some cases developing their own proprietary content. These services are great and enhance the consumers expereince – but the fundamental fact is they still need the high speed data connection which is predominantly supplied by cable and telephone companies. So by hook or by crook you still need them. In addition, the content companies are accutely aware of this and will not give up the store like the music industry did.
What does the consumer want?
Any show or movie ever created, anytime, and we want to watch it on any device. For new shows, we (today) want them the next day after they broadcast on any device… and soon we want to stream it live. For current movies we want to stream it to our houses, or not negotiate the various different services for which movies are where and during which window. Just because consumers are getting more adept at shuffling between services doesn’t mean we want to. We also want to be able to view our own content on our TV or mobile device at anytime – and not have to connect any wires or worry if I’m on the right network or OS.
What can Apple deliver?
Apple helped reinvent the computing and media ecosystems – can they extend this to TV? Yes, but not without cooperation from the content providers and a major improvement in the current economics of television and movie content over the web. Sure, Apple could extend its ecosystem and smooth OS to the television (and largely has already with Apple TV) – but a true innovation for consumers only comes with the right content and pricing scheme. This about how big the 99c individual song was at the time. We envision apps along with voice navigation, seamless sharing and push/pull between Apple devices, multi-screen and split screen viewing…and an a la carte content menu. ESPN for $6.99 per month. Major networks bundle $19.99. TNT and TBS for $5.99 – etc…
Does Apple need hardware to do it? Not necessarily, but they traditionally make money on hardware, and the TV is a significant furnishing feature of the living room. The retina display for smaller screens is amazing, but the technology to scale up to 40+ inches is not there yet. Assuming it does improve, what price premium can Apple fetch? Will high speed internet providers subsidize TVs? The TV industry is one of the worst for CE companies. I do think Apple is very interested in this market – as well as all extended content markets.
An Apple TV would likely look and operate a little differently but the key for consumers is how different the content experience would be. And that is the issue. Read into the supply chain all you want. Without the content, Apple will not do it, and the existing content players and high production costs make it very difficult to negotiate new deals.
With that said, I don’t expect an “iTV” until late 2013 at the earliest. Apple likely has enough on its plate with a 4G iPhone and new iPads (mini?). The existing Apple TV product allows them to test content layouts, menus etc at a low risk.
What could change this outlook significantly? Economics of producing and distributing content and or the development of a secondary revenue stream on the TV platform like the App Store.
JPM Decides to Drop Out
JP Morgan made comments today that they will no longer be participating in the student loan market. They will continue to service existing loans but will not make new ones. This is likely due to one or both of the following reasons: 1) Feds are crowding out private lenders; 2) risk profile of the loans getting too high. Obviously it is the second reason that is cause for a concern given the sheer size of the student loan market. This is a subtle but meaningful change in the outlook for student loans. Many have pointed to the growing balance, but this may mark a turning point in that discussion.
A few other things to note. First, the fact that the largest bank with the strongest balance sheet and “plenty” of reserves doesn’t want to make new loans is alarming. Second, the transition from student to household formation is stunted. The weak job market and uncertain housing dynamic, compounded by excess student debt may be complicating and hindering chances at a housing recovery. Lastly, student loans, since that are not taken against assets, are locked against the individual, there is not getting out of it…then again, it is a Federal loan in most cases…could make for a very interesting chess piece.
Is There Pain in Payments?
Is There Pain in Payment? Yes, but not where you think…The pain in payments is really more about pain in the shopping experience. Saving me the “pain” of a few seconds and a paper receipt at checkout is really just focusing on the last part of a deteriorating experience. As most stores look for ways to trim costs and boost add-on sales they have steadily eroded the shopping experience. Instead of more personal help, service and speed, they try to pull more dollars from your wallet with less effort. A few companies understand the new model and you know it because their stores or establishments are simple, well staffed, and while there may be a line due to the popularity of the product, the line “moves” since the store model is fluid. Those companies also tend to understand the attachment of a brand to a consumer and the emotional journey involved, almost less so than the product itself – think Apple, Chipotle, Trader Joes, Starbucks etc. But back to the initial statement… is there pain in the current payments system (aside from the excessive fees – which is going to be disrupted as well)? Is using your credit card really that difficult? Do you NEED to use your phone to pay for a soda or your new shirt? Let’s take a quick look at different payments, why I think your phone as a simple payment mechanism is vastly overrated and why the real issue is customer service and the shopping experience.
Cash vs. Credit/Debit
Ok, this is not really a competition any more. While cash is still the preferred method for some individuals, and certainly has its perks for certain transactions, it is by and large the dinosaur of transaction methods. Credit/Debit has taken over for obvious reasons when we view it through the lens of change. Plastic cards eliminate the potential pain of running out of money, of change, of receipt aggregation and they help in the consumer satisfaction realm as card companies can withhold payment or ease the return exchange. In addition, many card companies run loyalty programs. Cash does get discounts now given the fee structure for cards – but I look at this more as an opportunity to disrupt the credit card space then for cash to increase relevance. There is already pressure building on the fee and network structure of credit cards.
Plastic vs. Phones
Now it gets interesting, the long discussed potential for conversion of payments from your credit card to your phone. I am going to try and walk through this one step at a time as I feel its very important to draw distinctions here on what is currently being offered vs. what is possible in the future. Today, my credit card swipe takes ~10 seconds. Wallet out, swipe (victory ring), press credit, then yes, and no signature for most transactions less than ~$30. Upon leaving, I receive a printed receipt to accompany my electronic credit card statement. I have the option to submit an email at checkout for electronic receipts but this is currently too irregular to deal with. There is also the “tap and go” method for cards eliminating the need for swipe and press, saving a few seconds. The initial idea of phone or mobile payments is to turn you phone into a tap and go device using near field communication (NFC) technology. It will likely require some form of app or authentication, but will also provide a detailed electronic receipt (vs credit card totals). This could also be bolstered by ads for coupons etc, but really the current idea boils down to just paying with a phone instead of a card, which may end up being a slower process. As it stands now, there is virtually no “pain” in the credit card transaction save for the printed receipt and security concerns… only one of which is “solved” by NFC. The real pain and opportunity in retail is much bigger and rests in the broken shopping experience.
The Return of Customer Service and Loyalty…
Consider the sci-fi idea of facial recognition at a store front – or some other form of contactless authentication – payments, coupons, recommendations, size and color preferences, location of friends, recent purchases or likes by friends, etc can all be delivered to you during your visit. On the back end, consider the concept of simply bagging merchandise and exiting, your complete receipt sent to your phone, no scanning or waiting. At this point we may be crossing lines of personal comfort and data… but we are also changing the model in a definitive way. Having me use my rewards card and cash, or credit or even my phone are all very similar mechanisms and actions amd achieve little in the way of engendering true loyalty. Having the store recognize me on entry to make my experience DURING my stay better and actually simplifying and speeding up the checkout process, that’s interesting…the pain of adoption while not high for normal shopping days, would be quite high in weekends and holidays, morning routines or frequently visited chains – the return of customer service and loyalty.
Winners: Apple, eBay (PayPal), Master Card, Visa, and American Express all could make changes
Losers: NCR and other point of sale devices; VeriFone and other parts of the payment network; Visa, Mastercard and Amex need to be careful
Disrupters: Square, Dowalla, TransferWise, Level Up
When will then be now? Soon…
The first part of the migration to the online world was really about replicating activates that we previously did offline… mail a letter, make a phone call, book a reservation. The second act was/is about improving those, scaling those, and fundamentally altering those activities…online chat and video calls, Open Table. The third act is more immersive, it crosses more boundaries, or better said, removes them all together. It’s about actions that are fundamentally born in the digital world – shifts that are taking place that don’t have an offline precedent. A major driver of that third act is the influence of data and who controls it. The start of this can be seen in social networking. Our desire for a social network is not unique to online, nor is “sharing” and online phenomena – but the mixture of a private and public persona…a quasi public life on top of which interests, new, stories, general communication, and even commerce and business marketing all occur – that is new. Prior to this third act this type of mixture of life and data wasn’t really available offline, and it really isn’t all about scale – sure for marketing or sharing a picture the scale is the trick – but the idea of instant updates, commentaries, locations, recommendations, and actions that leverage the social graph is unique.
But as we look forward, what will it mean to conduct a greater and greater percentage of our lives in a connected way? The lines of traditional commerce and community, already blurred by the forces of the connected world, are all but disappearing.
Big Data: Real Time, Real People, Really Important…
Companies like Social Flow and Bitly present wonderful sets of data that show context as being the most important factor of all in a data stream. Location is nice, demographics and history too… social circle a good bonus, but context… or the conversation as someone put it, is a much more important piece. For example, if you and I are walking down the street near a Starbucks talking intensely about the Yankees win last night it may be more relevant for someone at that moment somehow someway to suggest I get my son a Jeter jerseys for his birthday RIGHT THEN as opposed to interrupting me about a 10% coupon for lattes after 3pm. Sure, I but lattees a fair amount, but right then you are interrupting my conversation, my space, to present me something that is not additive to my experience. Yes, I understand why you are doing it, but it’s still misplaced. The jersey is additive and captivating. Data sets like Twitter often have better context. The main draw back of the social data is that it is curated. Your Facebook persona is curated. Your search history on the other hand, is random and representative, but may just be tangents. Twitter is RIGHT NOW. The three are distinctly different.
Another dynamic that is emerging is true realtime web interfaces. Not those that require a refresh or an automatic browser request. But true interactivity on a website. This raises the specter of “web 3.0” being something transformative for both consumers AND companies. A company called Realtime is working on this.
Fun Data Anecdote…
This is from a data analytics professional. The best indicator of the potential for a prison riot is…. A run on Snickers bars at the sundry shop. This rational activity reflects concern that the sundry will close during and following the riot.
I want my, I want my…
The big difference in the adoption of any new technology, gadget, service, or any change really is the “total pain of adoption” (hat tip to Pip Coburn). What level of anxiety is relieved or caused by that change. Am I willing to change certain other aspects for the perceived benefit. We see this as an evolving issue in the privacy vs online world experience scenario. The world at your finger tips comes at a price particularly in the freemium model economy. The personalized experience we get on the web is a direct result of the ability to monetize our data stream, activity and potential for sale/upgrade. The privacy battle around that data is getting heated as more and more of our lives are spent and shared online. To the extent that consumers resist this intrusion, their experience will suffer. However, to the extent that companies overstep their trust, the same pain will be experienced in reverse. Security and privacy are very sensitive and convoluted topics. In general, people are willing to allow the data flow as long as the experience is enhanced. It is clear we need better tools to analyze the seemingly disparate data streams and enhance the experience; the old models are just not enough.
You want the world to be as open to you as possible…but at your discretion. If the web is to continue its evolution as part of our very human fabric, then the ability to turn on and off our privacy will be increasingly necessary. Yes, we want to share more, and by sharing data we improve our experience, much like entering a store and explaining what you want to improve the service…but, I also reserve the right for discretion and privacy – a very human feeling. This is as much about sensitive financial and health information as it is about what information I am sourcing and from where.
We anticipate that there will be more high level security breaches in the near future that cause consternation among regulators and consumers. One avenue we see as interesting in the future is the ability for a consumer to control, or even profit from the release of their personal information. Currently you get a discount on a product in exchange for the data, but you are not aware of what data they are collecting and how frequently. Think Google’s apps or Amazon’s $79 Kindle with ads. Instead, we see an opt in world where you are paid to provide accurate details regarding your habits and preferences in exchange for a fee and a more tailored experience, which could also include deals and ads that matter to you – like %50 off at a steakhouse instead of another spa treatment.
You see something you want to buy, done. You want to share something with one person or the entire world, done. You need information and to get something, done. The ONLY way to do that is with a smart device with dynamic security and privacy controls and high speed networks – otherwise the user experience is too subpar and will drive a negative feedback loop.
Positive: security software, data analytics, IBM, Splunk (private)
Negative: any privacy mishaps are bad for Google, Facebook and Apple
Note – of the three big personal data collectors, only Apple doesn’t NEED your info. Apple makes its money sell you devices, and takes a cut of apps and content. Google and Facebook rely solely on advertising and the ability to customize those ads to your data.
The Change Investor 