US Drone Market Continues to Grow Rapidly (Aug 24, 2017)
Analyst firm eMarketer has revised its usage forecasts for Facebook, Instagram and Snapchat for the coming year, and although there’s lots of data there, the point the media has latched onto is that it’s predicting use of the core Facebook app among US teens will fall this year. Though I have to imagine eMarketer is basing all this on some kind of survey of teens (notoriously difficult to do), there’s no mention of any such survey in the article from eMarketer, so I’m curious to know precisely what the foundation is, especially given that falling Facebook use by teens has been talked about for years but never seems to have materialized in a discernible way in Facebook’s reporting. None of this, though, is all that surprising, given that Snapchat and Instagram between them seem to have a lock on teens’ social media use, both driven by the increasingly raw and personal sharing these platforms enable in contrast to the broadcast nature of most Facebook sharing. While Facebook has steadily embraced its identity as a time sink filled with content loosely connected to people you know, these other platforms continue to major on true social interactions and therefore are more appealing to those at a stage of life where that’s the most important aspect of social media. Without Instagram, Facebook would potentially be staring a massive liability in the face at this point given that all its organic efforts to compete with Snapchat have crashed and burned, but with it, the company has managed to participate in rather than merely suffer from this trend among teens. And it’s now seeing the upside at least as much as the downside, with several times the user base of Snapchat overall and nearly equally high engagement. As such, I’m not sure any of these needs to be a worry for Facebook even if it’s true, as long as the trend doesn’t spread to older age groups and lead to broader disengagement from Facebook, and as long as Instagram is able to continue to capture its share of teen social media use.
Snap Inc reported earnings for Q2 2017 this afternoon, and it missed analyst consensus estimates pretty much across the board, with lower user growth, ARPU, and therefore revenue, as well as EPS, than expected. Snap’s user growth sequentially was 7 million, a little above its Q4 2016 number but below every other quarter’s growth for the last two years. Interestingly, in a reversal of the recent trend from Facebook, it saw better growth in North America, where its ARPU potential is much higher (currently 5x Europe and 7x Rest of World) but costs to serve are more or less the same than in its two other regions. But if user growth is going to remain slow, ARPU really has to grow rapidly, and it’s not yet seeing the kind of ramp it needs in that trajectory to justify rising expectations of its future performance. Though it saw 60% of its recent ad impressions generated through its self-serve and automated (API) platforms, the increased inventory made available through those platforms has generated lower prices per ad, so even though impressions went up quite a bit thanks to increased time spent and modest user growth, that offset it somewhat.
Management commentary on the call was mostly focused on the new creative tools being made available to users, which have historically driven increased engagement, as well as the evolving ad platform, which is the other major component to driving ARPU up. But the evidence from the Q2 reported numbers suggests neither of these is dramatically changing the trajectory from prior quarters. There is still tons of headroom in ARPU – Facebook’s global ad ARPU is over four times Snap’s, while its North American ARPU is roughly ten times as high – but Snap is a long way from reaching that level yet, with relatively modest increases in North America in the quarter and better growth overseas. My basic thesis on Snap remains the same: it’s a platform with a slow-growing and smallish (relative to the ad giants) base of highly-engaged users heavily skewed toward particular demographics. That will continue to be attractive to those looking to reach those demographics, but will continue to fall short of the appeal of the much bigger audiences and more sophisticated ad tools available at Google and Facebook. I don’t see any of that changing soon, which means Snap is best seen as its own animal, at similar scale to Twitter (though that scale is measured differently) and with some of the same problems. In other Snap news today, Mashable’s Kerry Flynn reports that it has apparently acquired selfie drone company Zero Zero Robotics. There was no mention of this on the call, but if I heard correctly management did mention roughly $200 million in acquisition costs in the quarter, which would gel with this reporting.
A year ago today, Instagram debuted its Stories feature, which took Snapchat’s feature of the same name and adapted it slightly, something I criticized at the time in a blog post, arguing that the sheer brazenness of the copying should be beneath Instagram. Whatever the ethical shortcomings of such a move, it’s clear that it’s been very successful, with over 250 million daily users of the feature a year later, and Instagram hasn’t been shy in gloating about its milestones, especially where they make for favorable comparisons versus Snapchat. We’re getting more of that today, with Instagram offering up new data on time spent in its app among different age groups, which again compare nicely with Snapchat’s equivalent metrics. Snap Inc said on its Q1 earnings call that its users spend on average over 30 minutes per day in the app, up from a range of 25-30 minutes described in its S-1 filing a few months earlier. Instagram, meanwhile, says that under-25s now spend an average of 32 minutes in the app per day, while older users spend an average of 24 minutes per day. That’s very close to Snapchat’s numbers, but of course at rather larger scale: Snapchat’s most recent daily active user number was 166 million, whereas Instagram now has 700 million monthly active users, meaning that total time spent on Instagram is vastly higher than on Snapchat. All of this is making life tough for Snapchat, which has grown much more slowly since Instagram’s Stories launched, and which will continue to struggle to convince advertisers that it’s worth spending money on reaching its narrower audiences with inferior ad tools versus reaching Instagram’s much broader and larger audience with better targeting, tracking, and ultimately results.
Apple reported its fiscal third quarter / calendar second quarter results today, and they came in at the high end of its guidance and beat analyst estimates. One of the biggest surprises was strong iPad unit growth year on year after four years of declines, and just the second quarter of revenue growth for iPads during that period, thanks largely to sales of the lower-priced $329 iPad introduced earlier this year. But Apple said all its product categories saw year on year revenue and unit growth, with Apple Watch reportedly growing 50% year on year, and Mac and iPhone unit growth up modestly, while the Services business continued on its recent tear, driven largely by the App Store, but also to an extent by Apple Music and iCloud storage plans. iPhone ASPs were up modestly year on year driven by stronger sales of the latest Plus models, and would have been up more if not for the fact that the company sold down its inventory significantly, with almost all the reduction being made up of more expensive phones.
Perhaps more significantly for the longer term outlook, the company provided guidance for the September quarter which essentially guarantees new iPhone hardware in September. I would guess that at the very least Apple will have the successors to the current phones on sale in the usual timeframe and in the usual volumes, while my hunch is that the new higher-end model will also go on sale at the same time but be even more heavily supply-constrained than new iPhones usually are.
Apple continued to talk up performance in mainland China as distinct from the Greater China region it reports, where sales were down 10% year on year, the best result in nearly two years, but still a drag on overall results with other regions all growing, all but Japan at double digit rates. Tim Cook also addressed the issue of VPNs in China which I wrote about yesterday, and defended Apple’s stance, which is a combination of following the law in each country where it operates, and believing that it’s better to engage and stay in a country than leave, even where it disagrees with policy (my notes on this portion can be seen here).
Overall, Apple’s management on the call seemed as bullish as they have for some time, clearly looking forward to what they expect to be a strong finish to the year in both product and financial terms. Tim Cook wasn’t drawn the slightest bit on new iPhones, but did hint at new products this fall, talked about the role of autonomy beyond vehicles and Apple’s big project in this area, raved about ARKit and the potential of AR, among other things. There’s clearly a good mix of products coming to market in the near term and investment for the long term which Apple’s management is also happy about. That’s no guarantee of a strong performance in the September or more importantly the December quarter, but I continue to be pretty bullish on what’s coming over the next few months from Apple.
Pandora’s Premium Subscription Growth Slows in Q2 (Jul 31, 2017)
Spotify Has 60 Million Paid Subscribers (Jul 31, 2017)
The Financial Times reports that Spotify has hit the 60 million paid subscriber milestone, a fact that has now been confirmed by the company’s press site, where it also says it has 140 million active users in total, suggesting 80 million free users. It had previously reported 50 million paid users in early March of this year, suggesting it took just under 5 months to add a million subscribers, while Apple Music added around half that over the same period. It’s been fascinating to watch Spotify’s growth accelerate in the aftermath of Apple’s launch of its competing service, as streaming takes off as the dominant form of music consumption and paid subscriptions generate the vast majority of streaming revenue. That’s indicative of Spotify’s success in both establishing itself as the de facto standard in the market and creating social features that help win new subscribers, and also at signing partnerships with wireless carriers and others who help promote discounted subscriptions. As Spotify’s financial results for last year show, its average revenue per paid subscriber has been dropping rapidly, something I suspect has continued this year. But it’s the paid business that’s profitable on a segment basis, while free streaming loses money, which is why I suggested in a piece for Variety last week that it ditch the free tier. I’m only partially serious about that – the free tier remains by far Spotify’s best marketing tool, but it also remains a point of contention with the music labels, among which Warner is the remaining holdout in signing a new long-term deal.
via Financial Times
Amazon Uses Singapore as Beachhead for SE Asian Expansion (Jul 26, 2017)
TechCrunch reports that Amazon is launching in Singapore as the first step in an expansion into South East Asia, and other publications have reported that the Prime Now app is live in Singapore. Singapore is a great starting point for Amazon in the region, with high GDP per capita, a small and densely populated area, and proximity to other markets such as Malaysia, Indonesia, Thailand, and so on. As such, a successful launch there could easily serve as a beachhead for expansion into the rest of the region. After a couple of years of higher profits, Amazon appears to be upping investment in growth again in recent quarters, and its international expansion has been a big part of that push, with an acquisition in the Middle East, early moves in Australia, and now this launch. The context for all this, though, is that Amazon is still active in only relatively few countries with its full set of offerings including Prime. Only thirteen countries were included on Amazon’s list of top selling items on its recent Prime Day, and 92% of its global revenues come from just four countries: the US, Germany, Japan, and the UK. That’s easy for those of us in the US to forget, but Amazon is still far from ubiquitous globally and major players dominate e-commerce in several important markets. In Singapore and the rest of SEA, Amazon faces some existing strong competitors backed by some of those larger players from Asia, including Alibaba, so it’s going to be far guaranteed that it enjoys US- or UK-level dominance. But brand awareness seems to be high in the region already and it has a decent shot at establishing a good business in Singapore and beyond.
Lyft’s Gross Bookings Growing at Higher Rate Than Uber’s (Jul 25, 2017)
Bloomberg has some inside data from Lyft that suggests its gross bookings grew by 25% year on year in the second quarter, which would be higher than the mid-teens growth Uber had told investors to expect in a preliminary call earlier this month. As with other recent signals that Lyft may be gaining on Uber, it’s tempting to read this as evidence that there’s some kind of backlash against Uber over its recent troubles, but I continue to see very little evidence of that. Rather, it’s likely that Lyft’s big push into new markets in the first half of this year has helped it grow bookings significantly during this period, while the Uber scandals have made a far more limited impact. And of course Uber’s results are on a much bigger base, meaning that its dollar growth is likely far larger than Lyft’s even if its percentage growth rate is lower. I’m happy to see Lyft gaining on Uber – it’s always struck me as a more ethical company with a leadership with more integrity than Uber’s, and I’ve been using Lyft pretty much exclusively when traveling recently. But I see very little evidence that Lyft is gaining on Uber broadly for this reason, and in using Lyft it’s often been clear just how big an edge Uber has – at airports, there are multiple times as many Ubers in the pick-up area as Lyfts, and at least half my drivers have been drivers for both services, often skewing heavily towards Uber in their actual share of driving (which often turns to a 100% share on specific days given the bonuses Uber offers for driving over a certain amount).
Netflix today kicked off the Q2 earnings season with the first official earnings from a company that I cover, and reported stronger than expected subscriber growth off the back of a House of Cards season launch that was pushed back from Q1. Netflix was way off on its sub growth forecast, and though it surprised on the upside this time around that hasn’t always been the case in several recent guidance misses. Even though Netflix didn’t mention it this quarter, the delayed HoC launch screwed around with lots of year on year comparisons both this quarter and last, since Q1 is usually by far its strongest quarter for subscriber adds and Q2 is usually the low point of the year. Taking a step back, though, Netflix continues on its recent tear, with international growth the major driver, and profits domestically continuing to grow nicely off the back of last year’s price increases. Importantly, Netflix is now projecting that the international business will be profitable on a contribution basis for 2017 as a whole, which will be another major milestone after total non-US subs surpassed US streaming subs for the first time in Q2. The cash flow drain continues to be rapid, with an average of over half a billion dollars per quarter in negative free cash flow over the past year, and over $2 billion in cash content costs in Q2, and $8 billion over the past year, relative to the $6 billion Netflix protected for 2017 on a P&L basis (see this Variety piece I wrote last month for why cash and P&L spending are so different). For now, the subscriber and associated revenue growth are keeping Netflix out ahead of its content spending, but Netflix absolutely has to continue to grow at close to the current rate if it’s to continue to finance massive original content costs and grow profits at the same time.
This is a good time to remind you about the Jackdaw Research Quarterly Decks Service I also offer, which provides slide decks and videos on roughly a dozen major tech companies including Netflix each quarter during earnings season. Tech Narratives subscribers get a 50% discount, so let me know if you’re interested and I’ll send you a coupon code. The Q2 Netflix deck is available now, and will be updated in a few days when the 10-Q is out with more data. You’ll find some of the charts in this Twitter thread from earlier.
LeEco Says Cash Situation Far Worse than Expected (Jun 28, 2017)
Facebook Hits 2 Billion Monthly Active Users (Jun 27, 2017)
It’s a milestone I’ve been anticipating since Facebook’s last earnings call in May: Facebook has hit 2 billion monthly active users, up from 1.936 billion at the end of March, signifying slightly faster growth in Q2 this year than last year, and putting Facebook MAUs at around 27% of the world’s total population. In and of itself, the milestone is no more important than any other number Facebook might have reported – there’s no magic to two billion – but it’s indicative of Facebook’s massive reach, which continues to grow more quickly over time. As I said back in May, Facebook is the first company ever to have announced two billion regular users for any product, though Google search has to be close, and other Google products such as Android and YouTube have been officially pegged at 2 billion active devices and 1.5 billion monthly users respectively. What’s perhaps even more interesting is the way Facebook itself seems to be downplaying the milestone – Mark Zuckerberg’s post on the topic is very brief, while Facebook’s corporate post (linked below) quickly glosses over the number and goes back to the company’s recent focus on community and using its enormous influence explicitly for good. Partly, I think that reflects a new humility on the part of Zuckerberg about the mixed influence Facebook has had on the world, but I also wonder if it wants to avoid painting a target on its own back from an antitrust and broader regulatory perspective, especially in light of the EU action against Google this morning. Lastly, it’s worth talking briefly about where that growth is coming from, and where it will come from in future. Facebook’s first billion came roughly half from North America and Europe, and half from the rest of the world, while just 16% of its second billion came from those first two regions, and 84% came from Asia and the Rest of the World, with nearly half the total coming from Asia. That picture is only going to skew even more in that direction going forward, with Asia in particular and the Rest of World region to a lesser extent driving over 90% of growth. That means more Internet.org-type activities to grow the addressable market, but it also means that growth in users won’t bring nearly the revenue growth past user growth has, because ad spend and incomes are far lower in many of the markets where Facebook will grow going forward. Update: I’ve just published a deeper dive on Facebook’s first, second, and third billions on Beyond Devices here.
Today’s Instagram announcement is ostensibly about the launch of live video replays, a new feature that allows users to save their live videos for 24 hours as an Instagram Story. However, the part most outlets I’ve seen have focused on is the announcement of 250 million daily active users for Instagram Stories as a whole, which is naturally being compared once again with Snapchat’s overall user numbers. That’s always a bit disingenuous because comparing a single feature in an app with 700 monthly active users with daily active user numbers for a standalone app isn’t a like for like comparison – some large number of people who regularly use Instagram as an app might occasionally dip into Stories without ever posting one, while the average Snapchat daily active user spend sover 30 minutes in the app every day, suggesting a very different level of engagement. But this is the inevitable comparison, not just because the Stories feature was copied from Snapchat but also because its launch seems to have come at just the time Snapchat user growth slowed. The reality is that Facebook’s reach is now such across its many apps that it can easily launch new features and services and have them reach this kind of scale, and in the process eat into the time spent in other apps, but I don’t think anyone at Facebook would suggest that Instagram Stories by themselves generate nearly the engagement of Snapchat as an app, and even Instagram as an app likely only generates the same engagement and time spent as Snapchat among a minority of users. But that doesn’t mean Instagram Stories isn’t a huge hit for Instagram and a great way to neutralize the ongoing threat presented by Snapchat as a competitor, especially among the demographics where it hasn’t yet gained wide adoption.
Instagram is apparently cracking down on some of the third party services which exist to artificially inflate follower counts by generating automated likes and comments on other accounts. Several have apparently shut down recently and blamed their closures on Instagram policy decisions, and it appears Instagram’s recent focus has been on these third party services rather than on user accounts that make use of them, which is both more efficient and better for PR – any attempt to target actual accounts risks false positives and a big backlash. But both Instagram and Twitter continue to suffer from a problem with not just what we might call artificial growth but accounts which are entirely automated, usually in order to push products off Instagram itself. Just in the past couple of weeks, my private account has had follow requests from half a dozen clearly pornographic accounts, and although Instagram has shut each one down relatively quickly, the identification of such accounts needs to happen more proactively.