Narrative: Hardware is Hard
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Narrative: Hardware is Hard (Jan 24, 2017)
Written: January 24, 2017
We live in a paradoxical time when it comes to hardware. On the one hand, it’s easier than it ever has been to create a new hardware product – the Shenzhen ecosystem in China makes every conceivable component available at low cost at volumes from tens to millions, and platforms like Kickstarter and Indiegogo make it possible for anyone with a great idea to raise money from would-be buyers to fund manufacturing. On the other hand, actually selling those products in larger numbers and building a sustainable business off the back of it is perhaps harder than it’s ever been, because hardware is increasingly part of an ecosystem, and those ecosystems have to compete with some of the biggest names on the planet – Apple, Facebook, Google, Microsoft, and Samsung.
Hardware is therefore both very easy and very hard – easy in the short term sense of getting a new product made, and hard in the sense of creating an ecosystem that can compete with the big players on an ongoing basis. Beyond that, smartphones are absorbing more and more functionality that was once provided by standalone devices – think of cameras, camcorders, fitness trackers, e-readers, PDAs, BlackBerries, and goodness knows how many other electronic devices. Being a one-trick hardware pony is particularly tough when you not only have to compete against other dedicated devices from big players but face the risk that the most widely adopted device in the world – smartphones – might eventually absorb the whole category.
Thirdly, competing with a quality product is increasingly tough when cheap alternatives from the very same Chinese manufacturers can easily undercut you on price with decent product quality. Again, the best brands build more than just hardware, but that means standalone hardware manufacturers need to get very good at software and services too, which is tough to do for a startup. Doing all this across multiple product categories at once to form an ecosystem is almost impossible without massive upfront funding, which again works against the new hardware company.
Even for large companies well established in other domains like software or services, getting into hardware can be hard. It may mean competing with erstwhile customers and partners, as both Google and Microsoft have begun to do in recent years, or it may mean learning entirely new skills, as Amazon has had to do, with mixed success (see the Kindle and Amazon Fire TV, but also the Fire Phone).
None of this is to say that it’s impossible to be successful in hardware from a standing start – several big Chinese companies have emerged in the smartphone space in recent years, with Oppo and Vivo becoming top 10 players seemingly out of nowhere. LeEco has become a hardware player from a services heritage with a decent amount of success, though it’s struggling to parlay that domestic success into a strong position in the US and elsewhere, and its rapid expansion is causing financial troubles. Successful non-Chinese hardware startups are harder to find – having a home base in both a massive and low-cost market helps enormously. GoPro and Fitbit have appeared to be success stories in recent years, but over the last few quarters it’s become clearer that both face significant challenges in taking their single-category model much further in the face of small total addressable markets and fierce competition from both cheaper alternatives and big ecosystem players. This is a tough market, and it’s going to take something really special to do well from a standing start in hardware over the next few years.
Facebook’s Building 8 working on camera, augmented reality, mind reading projects – Business Insider (Mar 20, 2017)
This is an interesting roundup of signals about what Facebook is working on in its advanced hardware projects group, which is named Building 8. The most interesting part of the article in some ways is that Facebook might show off some of this stuff at its F8 developer conference next month, which I’ll be attending. The whole point of a division like this, though, is to try to do hard things, which means many of their efforts will fail, and ultimately even many of those which succeed might not be built by Facebook. Though Facebook does now have an explicit hardware product arm in Oculus, it just doesn’t strike me as a company well placed to make a big hardware push, so I’d expect a lot of what this group develops to be proofs of concept and prototypes, with the technology open sourced, spun off, or otherwise made available to other organizations to build and market. There will be some exceptions that end up being built into things like Oculus, but I suspect – as with Google’s similar ATAP group – we won’t see many actual Facebook hardware products come out of Building 8.
via Business Insider
GoPro today both reiterated its revenue guidance for Q1 and announced fairly significant cost cuts including layoffs in an attempt to get back to profitability after five straight quarters of net losses. It will eliminate 270 current and planned positions, which equate to roughly 17% of its headcount at the end of Q4, and says full year operating expenses will be $582 million, which compares to $835 million in 2016 and $618 million in 2015, so a fairly significant cut. The fact that it still expects to hit the same revenue numbers makes me wonder what those people were doing that they can be so easily dismissed without impacting revenue growth. Operating expenses are weighted towards R&D and sales and marketing costs, so the cuts will likely hit hardest in those two areas, one of which would likely impact longer term sales while the other would be likelier to hit short term sales. So color me skeptical that GoPro can make these cuts and still hit its revenue numbers for the year, although investors clearly feel differently (the stock is up over 8% after hours).
This is a good follow-up to this morning’s item about the new Android Wear watch from Huawei, and argues much as I did that other smartwatch makers are largely failing to learn the lessons of or compete effectively with the Apple Watch. It frames the discussion in terms of the compromises and tradeoffs watchmakers choose to make, which seems a smart way to think about it, and has arguably always been one of Apple’s strengths.
via The Verge
I’ve changed the headline here to reflect two key points from the article: that Lenovo has done an about face and decided to re-enshrine the Motorola brand as the main brand for its phones globally, rather than de-emphasize it as previously planned; and that the company is doubling down on its Moto Mods concept, rather than abandoning it as LG has. The branding decision is a no-brainer: it always seemed odd to take an iconic brand like Motorola and retire it in favor of the Lenovo brand, which has far less (and less positive) recognition among smartphone buyers globally. The Mods decision is an interesting one – this article has one of the first numbers I’ve seen on how well they’re selling – it sounds like roughly half of Moto Z phones are bought with at least one Mod, which is actually a pretty decent attach rate (no pun intended). But Lenovo’s latest financial results say the Z is on track for just 3 million shipments in its first year, relative to Lenovo’s 51 million total smartphone shipments in 2016, so this flagship is still a tiny fraction of its total sales. And that’s a problem, because the rest of Lenovo’s sales haven’t been going nearly as well, and those that have been are very low-end focused. That’s not a great recipe for eventual profitability in smartphones, something that’s remained elusive for Lenovo since it bought Motorola.
It’s almost certainly not a coincidence that not one but two rumors about Snap working on additional hardware have sprouted the week of its IPO, both apparently well sourced yet conveniently vague on whether a product will actually ever be launched. This is good hype fodder for an IPO with some serious question marks over it, and yet non-specific enough that the company can afford never to release either of these two products (the Times reports a drone, while TechCrunch discusses a 360 degree camera). None of this is to say that Snap – which now calls itself a camera company and has one piece of camera hardware already in Spectacles – won’t release more camera hardware in future. In fact, I’d say it seems very likely. But when it happens, we’ll see whether that’s actually a bet that ends up moving the needle or just ends up being a novelty as Spectacles seem to have been. I’m still not convinced that Snap will ever be able to make a serious business out of hardware, its marketing genius notwithstanding.
I commented on the reports a couple of weeks back that Xiaomi would be building its own chips, and guessed that Xiaomi would likely start at the low end of its device range and work up from there, and that’s exactly what they’re doing: the Mi 5C is the first phone using Xiaomi’s homegrown chips, and sells for a little over $200. It’ll be interesting to see what if anything comes out of the reviews of the phone about its performance relative to Xiaomi’s earlier low-end phones – a solid early performance is critical for building confidence that Xiaomi knows what it’s doing here. The company also said it had spent a billion yuan – around $145 million – on building its capability, and that it received some help from the Chinese government, though it’s not clear how much. To put that in context, Apple’s acquisition of PA Semi alone cost $278 million, and that’s before all the additional work and money it put in organically following the acquisition to build its own chips. So though Xiaomi is splashing out somewhat here, it’s still a small investment in the context of earlier similar investments.
HMD Launches New Nokia Phones – Wired (Feb 27, 2017)
Quick explainer for those that haven’t followed the saga of Nokia over recent years: Microsoft bought Nokia’s Devices and Services business, including the smartphone and feature phone businesses, a few years back, along with exclusive use of the Nokia brand in these markets for several years. That exclusivity has now expired, and Microsoft last year sold the rump of the feature phone business to a new Finnish entity called HMD Global, which now has the rights to manufacture phones under the Nokia brand. The original owner of the Nokia brand and devices business, which now mostly makes telecoms network gear, has essentially nothing to do with these new phones. The MWC announcement actually covered three smartphones, the Nokia 3, 5, and 6, but almost all the attention has been on its resurrection of the extremely popular candy bar feature phone from 17 years ago, the Nokia 3110. It’s fascinating to see both the BlackBerry and Nokia brands get reboots at MWC from new companies – both were once key players in the global industry but have fallen enormously from those heights, and are probably past the point where a meaningful resurrection is possible, considerable nostalgia notwithstanding.
I think this headline from the Verge captures my sentiments on this phone pretty well. I have covered BlackBerry as a company pretty closely in the past, and still do to some extent, and whenever I write about them or post charts on Twitter, the first response I almost always get is “I though they went out of business”. The reality is that BlackBerry has dropped so far out of the public consciousness in what were once their biggest markets that a phone like this at this point isn’t really going to get them anywhere. The moment for this phone was years ago, not today, and at this price ($549) it’s not an option for the markets where the BlackBerry brand still means something to consumers, like Indonesia. So many of even those who once insisted on a physical keyboard have now caved to the inevitability of the full touch screen, and the vast majority of those won’t go back now they’ve discovered apps, content stores, and everything else modern smartphones have to offer and BlackBerry devices have never really been able to. At least now the risk is mostly on TCL’s books rather than BlackBerry’s, and the reality is that the hardware business at BlackBerry is so small now (under $100 million in the November 2016 quarter) that this is almost all upside for the company – if TCL doesn’t sell any, that’s more or less a continuation of the tiny hardware revenue BlackBerry has been booking, and if it sells a few hundred thousand, that’s useful additional revenue. But this is very likely to be a tiny overall revenue opportunity for both companies, and I’m curious to see how long TCL sticks with the partnership.
Fitbit Reports Final Q4 2016 Earnings (Feb 22, 2017)
I covered Fitbit’s preliminary earnings release a little while back, and we already knew these results weren’t going to be pretty. This was the first quarter of year on year declines, and also featured the company’s first meaningful losses since 2013, when it recalled its Force device. Its costs, especially its sales and marketing costs, rose considerably as a percentage of revenue, and its cost of revenue in particular was well up on last year’s despite the much lower revenue. As I said a few weeks ago, though Fitbit is downplaying these results as a temporary setback and promising a recovery, I see little evidence to support that assertion. Interestingly, some of the metrics Fitbit only provides once a year around user numbers suggest that it’s sold relatively few second devices to the same users – its registered user number is over 80% of its total number of cumulative devices sold, suggesting under 20% were sold as second devices to the same users; in addition, its active user number is now under half its total registered user number, suggesting an over 50% abandonment rate. Those two combined, together with the relatively small addressable market for dedicated fitness devices, are why Fitbit is having such trouble.
via Fitbit (PDF)