The App Store needs a Refresh

There is an interesting post from Marco Arment today on “App Rot”. In it he takes a look at App Store economics. Like many people before, he points out that the structure of the iOS App Store needs some improvement. There are so many apps, and discovery on the App Store is not that advanced. Arment’s post stands out because he is looking at it from the point of view of an independent app developer, and weighs decisions in terms of what job a developer should take next. (Arment was one of the early developers of Tumblr, and has made some great apps since setting out on his own.)

The root of the problem is that the App Store is out of date. There are basically two ways for users to find apps there. Either Apple chooses to feature them or the app does so well that it is listed in one of the various Top 10 or Top 50 lists. There is a search function but it is pretty basic (albeit greatly improved over past versions).  The problem is that neither of the two leading discovery methods work that well. Apple’s choice of which apps to feature appears to be a random process, at least it appears that way to outsiders. And the ‘Top ‘ lists are self-reinforcing, leading apps can hold onto those positions for a long time.

Arment’s suggestion to developers is to get more efficient in writing apps. Use the best practices and the latest iOS features to stand out. To its credit, Apple is doing a great job of adding features to new versions of iOS every year, and smart developers are getting new tools, and new code (e.g Swift) which make writing apps easier.

Nonetheless, the root of the problem remains. My post on App Store Optimization is over a year old, and the problem pre-dated that post by a couple years. Analytics site Xyo showed data a few years ago showing that the length of time a Top 10 app stays in the Top 10 is growing, meaning that there are fewer new entrants to the Top lists.

I think the best solution is a revamp of the App Store. I have no idea if Apple is working on this, but I can think of a few features I would like to see.

First, better search. Apple knows which apps I already own,  and I would like to see better personalization in the apps I get served as search results. For instance, I have no interest in Korean language apps. I am sure they are wonderful, but my Hangul skills are pretty limited.

Second, the landing page of the App Store should be greatly reduced. There are too many apps on display. This seems counter intuitive. The problem, as I see it , is that once I am on the App Store, I spend the first 15 minutes just looking at what is new, and then I lose interest. Even clicking one level deeper, for instance to look at the Games page, requires another 15 minutes of looking. The landing page should be intended as a starting place for navigation, and geared to helping me think about what I want to look at next. Right now, every click on the app store is a choice between looking at 100 apps or just looking at one. I would prefer a more gradual process that lets me look at a smaller number of the best apps, with links to more exploration.

Third, better filters.  There are large categories of apps in which I have no interest. I would like to have a way to not have to look at those. For instance, a huge portion of games are now Free, with monetization through In-App purchases. I would like to be able to avoid seeing those most of the time.

An important subset of this feature would be the ability to find the latest apps, as well as those using the most up to date versions of iOS. When I search for certain apps, I find a lot of the results are for dated apps with basic functionality and old code. How about a section that show the most up to date apps using all the coolest iOS tricks?

Fourth, a human-curated section. I find that I discover a very large portion of the apps I buy (especially games) from the “Apps We’re Using” list compiled by Apple employees. How about a whole page of those?  I think a dose of human editorializing would go over well.

Fifth, I would like a page of random apps. Just show me 20 or 30 apps picked at random from the App Store (adjusted for language preference and excluding apps I already own).  I think this sort of randomness could greatly accelerate purchases. For a while, I used to look at the App Store on my iPad which allowed for sorting of apps by release date. This was only really useful in creating a list of random apps, and I found a lot of things that way that I would not have found elsewhere. A more organized randomization process could create a nice jolt of serendipity.

Finally, better recommendations. This is a tricky one, it is a hard problem to solve. It would probably work best with links to Facebook or other social networks. But Apple knows what apps I have, combine that with what apps my friends have and what apps the people I follow in Twitter have, and the end result is probably some good app ideas.  There was news this week of a start-up called Homer that is trying to do this. You log onto this app with your Facebook ID, then send them a screen shot of your phone. Homer then decodes the screen shot to capture the apps you own and compares it screen shots it gets of apps your friends own.  The trouble with all this is that individual Apps cannot see what other Apps you have on your phone. This is a sensible privacy policy, but it also means that only Apple can really make these social comparisons.

I could go on, but I think this list is a pretty good set. It would help improve searching for specific apps as well as  enhance discovery of apps I never new existed.

UPDATE: I wrote this post in the morning California time, but did not get around to publishing until late in the day. And over lunch a discovered a healthy Twitter conversation on some very similar subject.

Talking my book on Amazon

Amazon reported disappointing results on Thursday, knocking almost 10% off the stock on Friday. I think the company still has a lot going for it, and that this reaction is overdone. Before I get into my reasoning on this, let me state a big disclaimer. I freely admit that I am talking my own book here. I own 15 shares of Amazon. I bought them below $200, so I have a lot of cushion here, and it is not that large a piece of my net worth. But I have not sold the shares, and have no plans to do so. But I thought you should know that I have an economic interest in this argument. Caveat lector.

I have seen a few explanations for the stock sell-off. Revenues were in line with expectations, but profitability was a bit light. Guidance was lower than ‘whisper’ expectations. The usual. But a bigger concern seems to be the fact that Amazon Web Services (AWS) revenues fared poorly, with revenue actually down from the prior quarter. I think this is the first sequential decline in revenue that AWS has ever seen. The AWS aspect of the results featured in much of the tech blog coverage of the results, with a good piece from GigaOm on the subject. Probably the best-stated bear case came from the Register, with their usual blend of tabloid meets solid analytical thinking.

The bear case holds that Amazon is now facing real competition in the public cloud. The Register is the only piece I saw that really explicilty connected the price cuts among AWS, Microsoft’s Azure and Google a couple months ago. This actually makes a lot of sense to me. There is clearly a price war taking place among public cloud vendors now. So it is not surprising to see this hit AWS’ numbers.

Nonetheless, I think this is one of those stereotypical “Wall Street is too short-term focused” problems. The investment case for Amazon is that they are disrupting pretty much everything. They have huge scale, and they are using that to bring down prices on many products and services. This punishes their less efficient competitors, and eventually Amazon should emerge with a very powerful position. The company is in investment mode today, but has its sites  on much greater pricing power further down the road. This is clearly true of the book business where they started. And it seems likely to be true of public cloud computing as well.

Back in December, I wrote about AWS’ cost structure. The conclusion of that post is that AWS is actually immensely profitable. The company has huge leeway to engage in a price war, even with someone as large as Microsoft or Google. In fact, I was starting to think that AWS was getting too expensive and risking turning customers away. Amazon is now cutting prices on AWS at just the moment when more companies than ever are looking to start using public cloud resources. I think this round of price cuts could go a long way to lowering the barrier to adoption, opening doors to a huge new customer base.

I find it very odd that a week or two ago, the blogosphere seemed convinced that Amazon was about to take over the world. Then one quarter of slowing numbers turns that perception on its ear. I do not think much has changed, and AWS will likely continue to grow at a tremendous pace.

Say what you will about the ruthlessness that rests behind this strategy, but if you are willing to accept that Amazon is in investment mode, then this week’s news is not that meaningful. For several years now, investors have accepted the fact that Amazon is not focused on profitability, because it has so much opportunity in front of it, the smarter strategy is to forego profits and grab all the land it can. That remains the case, and I think the company still has a long way to go.

Coming of age in mobile. Yahoo buys Flurry

I wanted to comment briefly on the news that Yahoo! has acquired Flurry. This a turning point, or a milestone. A marker of some sort. The End of the Beginning of Mobile, something along those lines. I originally wrote this the day of the announcement, but delayed posting, in part because I wanted to take some time to read Fred Wilson’s post on Flurry’s history.

First the facts

Flurry was one of the first mobile analytics companies to gain scale. They offered a free suite of tools that developers could embed in their iPhone apps to give the developers a better sense of what users were doing with those apps. For commentators on mobile apps, Flurry was a huge help in the early days (circa 2010). They had data on hundreds of thousands of apps at a time when no one else really had any hard facts (at least no one after AdMob got acquired). Later Flurry added a whole host of other tools, largely around ads and user tracking.

Yahoo! confirmed the deal late in the day, but no terms were disclosed. The big blogs cited valuations from $200 million to $1 billion. RWW literally has the range at $300 million to $1  billion. This is the same as saying no one knows how much Yahoo! paid because that range spans the gamut from a great exit to a weak one. According to Crunchbase, Flurry had raised $73 million, although I suspect that data may be understating the total. Reading between the lines (aka guessing) if Flurry had really sold for $1 billion or anywhere north of $500 million, someone would be saying so, loudly. Bottom line, seems like a modest exit for a well known company.

Truth be told, I have been hearing warnings about Flurry’s results for a couple years. The first red flag was their pivot in 2012(?) hard into the ad space. I regard the Flurry team very highly, so I think this exit has something to say about the broader app market.

 

Now the Analysis

Flurry’s early success led many (myself included) to wonder if the mobile app market was going to develop very differently from the shrink wrapped PC software market that came before it. With mobile app stores providing a largely open distribution channel, the way was now open for hundreds of thousands of new developers to enter the market. We are still feeling our way through that change.

The first takeaway I have from the news is that selling tools to developers is still a hard business to be in. This was one of those old truisms from the PC software market. Surely having all these new customers offered a new market for tools. Turns out that some things never change. The Developer tools, or Developer to Developer (no relation to this D2D) market is not big enough to support large companies.

The second conclusion I have is that there is a bubble in app development, and that bubble is stretched pretty thin. I am not calling the whole appconomy a Bubble (capital B), nor I am claiming that the whole mobile space has gotten overly-frothy (San Francisco real estate not withstanding). Nonetheless, Flurry’s sale seems to me an example of what happens when there are too many venture dollars chasing a too small market. Flurry had a lot going for it,but was never able to find a breakthrough business model.

Again, I am referring to that pivot into the ad market. Flurry has more data on mobile app usage than probably any company out there other than Google and Apple. But the value of that data, apparently is not worth so much. There are too many other companies out there charging little or nothing for smaller subsets of that data. Those companies will probably not exist much longer either, but they were around long enough to make the future of Flurry cloudy enough to merit a sale. This is bad money pushing out the good. I am not saying every mobile ad company is bad, just that there are a lot of bad business models getting funded out there, and that makes it hard for the good business models.

So what does this sale mark? I suspect this just proves what we have long suspected – Google, Apple, Facebook and a handful of others are the big winners in the app market. Google is able to take app usage data and throw it into its core search business, Facebook can do something similar with app usage against its social graph data. And Apple likes having a robust, highly competitive app market because it highlights their integrated hardware’s advantages. I think the mobile ad market is solidifying around the majors. This is not necessarily bad for app developers, but probably should be of concern for the hundreds of ad networks out there.

Finally the Lament

I want to close on a personal note. I was a big fan of Flurry. Not as a customer, but as someone deeply involved in the mobile app space. I will be sad to see them swallowed inside the “mobile first” Yahoo!. Covering the mobile app space has not been easy. Finding hard data has been challenging. For a long time, there was only AdMob and their excellent monthly reports. Much of that team ended up at Flurry after the Google acquisition of AdMob. They continued to put out some of the most interesting blog pieces about mobile usage. You know that meme that compares consumer media usage (TV, Newspaper, Mobile and radio) to ad spending? The one that showed mobile ad spending is poised to grow hugely… That came from Flurry. China is now a huge app market. You know who called it first? Flurry. I could go on, but you get the idea.

As you go into the dark Purple ether, know that you will be missed.

What Value does Equity Research Provide?

I have been writing lately about the state of equity research. In the comments a few people mentioned alternatives that already exist, and I mentioned a couple in my post. I should highlight Estimize as one of the more interesting ones that escaped my earlier list.

Anyone wanting to start a company that tackles this problem will have to confront the fact that the role of equity research is very unclear, and hence its value. In my first note on this subject, I noted that for the investment banks and brokers, equity research is now a marketing function. It helps to show the value of the firms’ underwriting and trading platforms. But that is just one perspective, it leads to a bigger question. Does research actually influence clients’ decisions about those other things?

Remember that there are two ways for financial firms to monetize research. It can drive trading revenue as institutional investors trade on the stocks that the analysts cover. It can also drive companies considering IPOs or other financial transactions to choose one bank over another. This second function is a complicated topic in its own right. I will save it for another day, one of my IPO posts, or my over-the-horizon IPO book. For this post, let’s just focus on the ability of research to drive trading revenues.

I do not have the exact stats, but equity trading is a multi-billion dollar industry. It is much smaller than it used to be, and shrinking more as commissions and trading spreads plummet, but it is still a big business. The world’s institutional investors still use the large and small brokers to execute trades. Technology is at the point where most funds could probably eliminate the trading commissions they pay, but for some reason they still pay something to their brokers. Some of this value comes from the trading platform itself, the brokers, especially the big ones, have some clear advantages in providing liquidity.  But if you ask most investors (and a growing number of traders) there is a clear sense that trading is increasingly a commodity.

So there must be something else, and part of that something else is likely research. Good analysts can provide value. I would lump the areas they provide value into five categories:

* In-depth knowledge of companies and management. Fund managers often cover hundreds or thousands of stocks. The research analysts cover a few dozen. They have the time to pick up deeper knowledge, and help keep the investors up to date when needed.

* Access to company management. It is hard for companies to get their message out, especially smaller companies. Management teams only have so much time to spend meeting investors. By dedicating a large portion of that time on speaking to research analysts, they can leverage the voice those analysts have.

* New ideas. This one is a bit tentative, but analysts can and do come up with good ideas.

* Legwork. Good research requires a lot of work, chasing down contacts, organizing schedules, building financial models, etc. Investors could do all of this themselves, but having the analysts do it saves time.

* Providers of consensus estimates. Every quarter, all companies’ results are compared to published estimates, and those comparisons drive big swings in stock prices. Those consensus estimates are still collated entirely from the public research analysts. (Estimize is seeking to change this.) Having a vote in this process is hugely influential.

* A public face. This is probably the most important piece. Analysts are public figures. They get interviewed on TV and in the press. Their sales force makes sure their voice gets head by thousands of investors. This is an important position, but also a tricky one as all the constituencies involved seek to influence it.

What it all boils down to is that analysts have a public-facing role and have the time to do in-depth research. Any business model seeking to alter the current model will need to provide a public platform with wide outreach and a way to collate useful data back to interested parties. Fortunately, these like like problems built for the Internet to solve.

 

The End of Nokia Series 40? I hope not

Among the big tech news items last week was Microsoft’s announcement that they were going to cut 18,000 employees and restructure the company. The big cuts seem to be coming from the recently-acquired Nokia handset business. The headlines around this were the discontinuation of the Nokia X phone which ran Android. This is not surprising. It makes little sense for Microsoft to be pushing a Google-based product. But buried in the news, was what I consider a much more important announcement, Microsoft will also discontinue Nokia’s Series 40 phones. This has huge implications. I am still digging into this a bit, so I am not 100% clear on what is getting cut, but if true, I think Microsoft may be making a very far-reaching mistake.

So first, a couple caveats. There is no official confirmation yet abut this. Most of the blog reports about this refer to a post on BGR India, who claims to have a copy of an internal memo from the head of the Nokia’s feature phone business. The Verge also confirms  this but provides little further detail. I delayed a little posting this, waiting to see if any harder news emerged, but so far nothing. My best guess is that this is true, it fits with the broader strokes in their CEO’s memo.

As I see it, the heart of the problem is Series 40. This is the tried and true operating system (OS) that runs low-end Nokia phones. In my opinion, Series 40 is the root cause of Nokia’s success in the 90’s and 00’s. For a very long time, it was the simplest and most intuitive mobile phone OS on the market, in a time when no one really appreciated the value of a mobile OS. My joke is that the killer app for mobile phones used to be the Snake game that came standard with Series 40, but more accurately it was the high degree of user friendliness that Series 40 provided. This catapulted Nokia into the leading market share position they held for the first decade of mobile.

That was then, and many people would argue that a pre-2007 (i.e. pre iPhone) feature phone OS is of no use in today’s smartphone world. But there are still 6 billion mobile phones out there, of which about 4.5 billion are feature phones and roughly a third of those run Series 40. We can debate the math a bit, but I do not think it is a stretch to say that there are still at least a billion Series 40 phones out there. That installed base rivals Android, and is far larger than the iOS base.

It is obvious that Series 40 is not a viable platform for future phones. Sticking with Series 40 as long as they did eventually brought down Nokia. But that is not the same thing as saying now is the time to kill the platform. From the memos quoted on the blogosphere, it seems like Microsoft is now cutting all investment in Series 40 with a goal of shutting down all Series 40-based phone platforms within 18 months.

Now maybe we are missing a piece, but this sounds like a “cold turkey”, hard stop to Series 40. I think a smarter plan would be to keep Series 40 going for a few more years, and use that as the transition platform to gradually move users to Windows Phone. This seems to be an abrupt end, where a smoother transition would make more sense.

The risk goes back to that statistic above, the fact that most of the world’s mobile phone users are still on feature phones. They may not own Series 40 devices anymore (having long since moved to Mediatek China OEM devices) but they are still very familiar with Series 40.

My guess is that when you look at Nokia’s numbers, they are still spending an enormous sum on marketing and support for Series 40. From a cost-cutting perspective, the decision makes sense. However, I think this misses a key strategic nuance. The Nokia brand is still worth a considerable amount. Consumers know Nokia and are familiar with Series 40. Having the old OS stick around a little while longer would seem to give Microsoft a big edge up in terms of distribution and brand reach. But the old Nokia has a massive manufacturing and logistics complex. For a Microsoft that seems to be refocussing back to software, ditching this must seem be a big temptation.

The flaw in this logic is that much of the world is still uncharted territory. Android seems to have the advantage here, but that is not a foregone conclusion. Microsoft should instead look to unload much of the Nokia manufacturing assets but license out Series 40 to Mediatek or some of its customers. Better yet, keep the whole thing in-house and use that as a springboard to eventually bring a few billion mobile users back into the Microsoft fold. Actually, to be precise, most of the people on Series 40 today have probably never owned or used a Microsoft product, so this is a way to reach a whole new audience.

Seen from a Developed World perspective, Series 40 makes no sense. But that is not where the fight is, at least that is not where Microsoft can quickly (or ever) win a fight. Better to save some of the Nokia supply chain baggage and Series 40, and use that as a very powerful springboard to expand in developing markets. I recognize that this is still very far from the core of what Microsoft wants to be, but if they already have the assets better to hold on to them. From an outside perspective, Microsoft appears to be throwing away something that could eventually be very important to them.

Put another way, it makes no sense that Vertu phones will be around longer than Series 40.

 

Vertu

Some challenges to fixing financial research

Following on my comments from a few days ago, any start-up that wants to attack the securities research space is going to face a few challenges.

First, is that there are already so many firms churning out research. The director of research of at one of the largest hedge funds once told me he had over 300+ brokers providing his team research. Over the past few years, I have encountered a lot of smaller brokers, and have been amazed at how many there are. Anyone who wants to tap into this market has to recognize that providing more research is not going to be the winning model.

Second, much of the research that is coming out is bad. There I said it. The truth is, if you ask any analyst they will tell you the same. Even good analysts do not always put out good research. This is an attention-driven business, and just like any ad-driven website out there, this means that analysts have to publish constantly, even when they do not have anything new or useful to say. So I still see analysts publishing daily notes with highlights of yesterday’s news. I do not think many people read it, but I understand why the analysts publish it. Couple this to the fact, that at many smaller firms, analysts are paid based on how much commission their trading desk does in the specific stocks they cover. This is a perverse incentive that drives many analysts to publish loud, attention-getting notes; and a disincentive to publish longer, more thoughtful pieces. Better to be noticed and wrong today, than forgotten and right a month from now. When you look at like this, your realize how similar financial research is to the broader web publishing industry.

A third problem is that there are no easy tools for solving the issue. Web-based media can apply all sorts of algorithms to optimize readership because the numbers of views they get are so large that statistical models work. For financial research, the target audience is small by web standards, with a huge array of things they care about. I think of this is a “columns and rows” problem. A typical, large web site measures millions of viewers on a dozen metrics – how long they stay on the site, what screen position they view first and most, etc. This is a database with millions of rows but only a few columns. By contrast, investors care about dozens or hundreds of stocks, have different extra requests (for different financial metrics, industry data, etc.) and any number of other subtelties, but there are only so many investors out there. This is a database with a thousand columns and only a hundred rows. My sense is that the data tools out there are not really optimized to solve these kinds of problems, and the sample sizes (i.e. the audience) is so small that statistical modeling does not yield great results.

Another problem is that research is extremely perishable. If an analyst has some hot new data, it gets disseminated in the market extremely quickly. Investors trade on it within hours if not minutes of its release, and within 24 hours the data is literally and figuratively yesterday’s news, and thus of no value. This is not only true of specific data, but of broader ideas or patterns of analysis. If an analyst figures out some clever new data source, investors find out what it is quickly and move to replicate it.

Finally, the biggest problem is that almost no one pays directly for research. The brokers “give it away” for customers who pay via trading commissions. This does not entirely eliminate subscription models, but it does make them harder. Over the years, I have known many analysts who have tried to hang their own shingle, but have struggled to find clients willing to pay hard dollars for a subscription. There are many of these shops who hold out hope for regulatory change. And every few years, we see headlines about some large investor who is moving to a model where they pay for trading and research separately. For the time being, anyone providing research has to contend with hundreds of competitors whose price is ‘free’.

All this sounds rather bleak, but I think there is a more optimistic conclusion to draw. As I mentioned in the last post, research is just another form of content. There are a lot of media companies struggling with the same problems, and many of the successful business models employed elsewhere, can be used for financial research. There are still plenty of technical problems to iron out, but also many potential solutions.

I plan to explore these more in my next post, but let me give one example. The way I see it, financial research is screaming for a freemium model of some sort. Someone should offer tiered research. Longer, less “actionable” notes (notes which do not demand immediate stock buying decisions) should be free. Clients could then judge the quality of the analyst’s knowledge and pay for the trading ideas, and pay for access to detailed financial models, and access to the analyst on the phone or in person. There are a few firms that are working on variations of this, but so far no one  has explicitly tried to copy any of the web-based models. My guess is that the next successful business to emerge in this space will not be a research provider, but a clever distributor of other people’s research.

My point is that technology and the web have the potential to make financial research viable again, and we are in very early stages of that happening.

The declining quality of equity research

In my previous post, I lamented the decline in the business model behind traditional equity research. I think equity research can and should play an important part in the financial markets. Unfortunately, the current business model means that analysts are getting paid less and less, and talent is leaving the industry.

This idea has been kicking around in my head for a long time. Two recent events prompted me to finally put in writing.

The first was the fall of Gowex, a multi-billion bankruptcy that appears to have been a complete fraud. As Benedict Evans pointed out in a Tweet  it is hard to imagine a company getting this big without equity coverage, and presumably that coverage would have unearthed warning signs much earlier. There are many more examples where limited or just plain weak research coverage let fraudulent companies bilk investors before getting uncovered.

The second topic was the recent debate over the valuation of Uber. First NYU professor Aswath Damodaran published a piece of FiveThirtyEight arguing that Uber’s last valuation of $17 billion was far overdone. Damodaran uses a good framework for this analysis, and his site has a lot of interesting reading. However, a few days later Bill Gurley, a partner at Benchmark Ventures, posted a response arguing the opposite, that Uber is worth far more and that Damodaran had made some wrong assumptions. Both sides used the same framework for their arguments, one that I would consider a pretty basic starting point for any equity analysis. I think Gurley got the numbers right, but both sides make valid points. The problem is that it is rare to see this kind of analysis anymore in equity markets. And as much as I believe Gurley is making a sound, honest analysis, he is an investor in Uber and thus an interested party. There is a broader problem in the markets when the best analysis is coming from interested parties.

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