The battle for the next OS
Amazon, Facebook or neither of them ?
Cemeteries are full of companies that didn’t understand the power game
From the Washington Post (September 25):
Amazon has a plan to make sure Alexa is everywhere we go by adding the voice assistant to glasses, wireless ear buds and a shiny black ring.
Those wearables are just a few of the newest grab bag of products announced by Amazon on Wednesday as part of its push to get a little bit of Alexa into every corner of people’s lives. But as those gadgets move from customers’ kitchens and living rooms to their ears and faces, the company will learn how far consumers will be willing to trust Amazon with their privacy… <>…
Because Amazon lacks an Alexa-powered smartphone such as Google and Apple have, it’s looking for other ways to make its always-listening assistant omnipresent
Brief history of the main OS
In the 1990s, Bill Gates had a vision: a computer on every desk. Microsoft has achieved this vision with Windows, which has become the standard, the mandatory gateway for any program that wants to reach the consumer or business, regardless of the PC. The result today is an installed base of 1.3 billion PCs running almost exclusively on Windows. The smartphone has made the PC secondary with the following vision: a smartphone in each pocket. There are many more pockets than desks: we sell about 1 billion smartphones every year and the installed base is nearly 4 billion devices. Two OS have emerged: IOS, the high-end integrated with the iPhone (miniaturization is good for integration) and Android, a modular operating system, for other smartphones. We have gone from a monopoly (Windows) to a duopoly (IOS and Android Google version) working on a much larger scale. Windows has created its monopoly on standardizing the work environment (an essential element for good communication in a world full of friction). IOS and Android have created their duopoly by relying on the App Store and Google Play Store, offering an abundance of applications at your fingertips: the Internet has abolished friction and enhances abundance. Dominating by the number of applications running on their OS (2.5 m for Android, 2 m for Apple), they left the Windows store (less than 700,000 apps) and the Amazon AppStore (500,000 apps) behind, Blackberry having given up.
IOS App Store and Android Google play store charge their duopoly tax (30% on any digital sale) and only very large applications can afford not to go through them (Netflix, Epic Games, Amazon)
However, just as Windows has been eclipsed and is no longer even at the center of the Microsoft universe, Android Google version and IOS also have their threats:
The threats
First is the possible action of the antitrust authorities. The European Commission pinned Google in 2018 for forcing smartphone manufacturers using its version of Android (i.e. including the Google play store) to impose the Google search engine by default (fine $5 billion). Then an anti-trust action against the App Store is underway. From TechCrunch (May 13, 2019):
The U.S. Supreme Court ruled 5-4 against Apple on Monday on a case involving whether or not a group of iPhone users will be allowed to bring an antitrust lawsuit against the company regarding its App Store practices. The iPhone owners allege that Apple’s 30% commission on App Store sales is passed along to users, representing an unlawful and unfair use of Apple’s monopoly power.
Apple had moved to have the case dismissed, arguing that consumers were buying their apps from the developers — not from Apple. And it was the developers who were setting the prices. The court disagreed, saying that Apple contracts with the third-party developers to sell the 2 million apps that are live today on its App Store, keeping its 30% commission on every sale along the way. Apple risks a fine on the App Store and maybe more. History shows, however, that monopolies suffer more from technological change than from regulatory interventions: Microsoft's domination has been dethroned by an unexpected technology: the search engine and not the trial of the 2000s. It is difficult to argue that the trial wasted Microsoft's time and prevented it from seeing the Google threat: the Microsoft Network, a pale copy of AOL was born in 1995 and tried to clone all the innovations of the Internet to integrate them into Windows, whether Explorer, the browser or MSN Search, etc. The difficulty came from a search engine that was becoming more central in our online lives than Windows: Google's. Could this marginalization be repeated today with IOS and Android?
While state action alone is unlikely to destroy a monopoly, it can nevertheless weaken it, just as banderillas weaken the bull in the arena. The example of China is instructive in this respect: the Apple/Android duopoly is fragile there. First of all, the Google Play Store is blocked, which negates Google's advantage. There are 36 different versions of Android depending on the manufacturer. No Android OS stands out from the crowd, no Google Play Store attached. In principle, this should give the advantage to the App Store, which contains nearly 2 million apps for China. But one genius competitor, the Chinese equivalent of Steve Jobs, has created the super app WeChat in 2010. Allen Zhang sees technology as a tool to be more productive, not as a media for entertainment (Facebook). Applied to a social network, this implies a minimalist and effective interface aimed at reducing social friction (time and space). Advertising is limited to two ads per day because it interferes with the social relationship. This user-friendly design has been acclaimed by the Chinese (more than a billion users of the super app). The iPhones installed base is at 230 million devices only. Tencent took advantage of this situation of strength to launch the mini-programs in 2017. Two years later, there are 1 million of them! In order to avoid what Apple is criticized for today, i.e. favoritism between the applications available in the app store, WeChat has not created a store. An application to have visibility must be popular with users (to find it, you must access the WeChat search engine, which sorts according to friends' mentions). This discipline drives mini-programs to excellence. As a result, there is real competition for Apple: WeChat becomes a third OS threatening by the increasing quality of mini-programs. It's pure Clayton Christensen in The innovator’s dilemma: initially presented as an additional way to reach the consumer, these mini-programs gain in complexity and end up really threatening the App Store. As a result, Apple's competitive advantage in China is much more fragile than in the rest of the world, as it relies almost exclusively on hardware.
Outside China, the duopoly is less threatened from the inside by a super app. Facebook, WhatsApp or Instagram could be potential super apps (2.7 billion users combined). But they were designed more for entertainment than for productivity with advertising as a means of monetization. This is not very suitable for an OS which is above all a tool: WeChat is a platform, Facebook only an app, but a popular one. You shouldn't look at Google either: the Search application could theoretically play this function but it would directly cannibalize the Google Play Store installed on 80% of devices and it would not be very interesting to attack Apple on the 20% it dominates (not to mention the antitrust risks).
So Apple and Google have a strong duopoly on the smartphone OS, outside China and confirm it on adjacent products (watches, tablets, glasses, etc.). A displacement can only be made by a disruptive innovation. The Verge (23 September 2019):
Facebook announced today that it will acquire CTRL-Labs, a company that manufactures a bracelet that can transmit electrical signals from the brain to the computer.
The agreement, which Bloomberg estimates is worth between $500 million and $1 billion, is the largest acquisition Facebook has made in the past six years, paying $2 billion to acquire virtual reality company Oculus VR in 2014. It also marks a substantial increase in investment in Facebook's growing hardware ambitions, as CTRL-Labs technology will be used in future augmented reality and virtual reality projects on the social network.
This article is to be compared with the Washington Post article on Amazon's new products. Everyone in their own way is trying to create the new OS with new devices. And that makes sense, as both companies missed the smartphone OS train.
The Alexa strategy
Let's first analyze Amazon's strategy: the company is trying to impose Alexa, its virtual personal assistant as the new OS. The example of previous OS shows that to dominate, the OS must be a standard, which transforms itself into a platform both to differentiate this standard and to monetize it. IOS is inseparable from the App Store and Android from the Google Play Store. Windows was also used as a platform for Netscape, Adobe, etc. For Alexa to become a standard, Amazon tries to introduce this small piece of intelligence into as many objects as possible, the idea being that communication between these objects is facilitated by a single standard: Alexa would become the ambient intelligence, relying on AWS cloud. Amazon has spared no effort to introduce Alexa everywhere, relying on its distribution strength and even buying well-known hardware manufacturers:
Acquisition of Ring in February 2018. Ring manufactures high-end surveillance cameras and video bells. The company is growing strongly.
Acquisition of Eero in February 2019. Eero provides wifi access points and repeaters, capable of extending the signal, without an ethernet cable. This is interesting for Amazon because in the future, the technology can be integrated into Echo devices and installed in all rooms. Wifi is central in the house and is an essential piece of communication for the Internet of things, therefore to build a standard.
Theses acquisitions accelerate Alexa's adoption, which Amazon is forcing ahead with, creating new products (glasses, rings, Echo devices) and integrating wherever it can. Amazon's strength is its ability to lead a Blitzkrieg and surprise opponents. This is what the company is doing today with Alexa announcing in early 2019 an installed base of 100 million products. As such, this figure is not very impressive when compared to the installed base of 1 billion IPhones (including Siri) and 3 billion Android smartphones (including Google OK). Alexa's superiority is in the variety of appliances that integrate it: There are 150 products including Alexa, 100 of which are offered by manufacturers outside Amazon. Alexa wants to become the standard of ambient intelligence. And Amazon is good at marketing: it’s easier to say Alexa than Ok Google !
In general, an OS's competitive advantage is cemented by the platform it builds. It will be extremely difficult with Alexa because the voice does not lend itself at all to the discovery of applications. Alexa has 70,000 skills, certainly more than Google, but who uses them? The network effect traditionally expected from a platform is non-existent here. Alexa can compensate by building its network effect on the mass of data collected by ambient intelligence: the more the mass of data increases, the more artificial and efficient the intelligence, which increases the use and therefore the mass of data collected. From then on, Alexa would become the most efficient and widespread artificial intelligence system, thus the standard doubled by the network effect characterizing a monopolistic OS. The potential would be even more impressive than that of the smartphone: the Internet of billions of objects. The fact that artificial intelligence is narrow and not general, i.e. an automatism responding to a specific function, reinforces the advantage of the one who is able to put this automatism everywhere. This is much more effective than trying to clone a general intelligence (Siri type), which can only be frustrating. Alexa is therefore on the right track to build the new OS, building on its strong point: distribution.
The Facebook strategy
Amazon had completely missed the smartphone OS, because it had built it on e-commerce. The Fire phone made it possible in the blink of an eye to photograph an object, then to obtain the price on Amazon and order it. It was certainly very good for Amazon, but not so good for the user. The Fire Phone was a flop. Facebook had also made its attempt with the First, a smartphone manufactured by HTC. First put forward Facebook, the OS had to be social above all. First was also a severe failure.
Marc Zuckerberg has not given up on his dream of creating a new OS, just like Jeff Bezos. But unlike the latter who has completely rethought his OS, the former wants to stay in the same vein and create a social OS, i. e. facilitating relationships between people. Its new vector is virtual/enhanced reality, which will require a different hardware than the smartphone: a virtual reality headset for the living room (replacing the TV, according to Marc Zuckerberg) and augmented reality glasses for the street (agreement between Facebook and Ray Ban). For Marc Zuckerberg, virtual/enhanced reality is above all social, it allows teleportation, i.e. authentic interpersonal relationships at a distance, which the smartphone does not allow. Facebook would therefore have a natural advantage in this field, relying on its powerful Facebook, WhatsApp and Instagram social graph. As a new market, Facebook (just like Apple with the iPhone) wants to start with a hardware that replicates sensory movements in the most faithful way and integrate it into an OS on which third-party applications could be grafted. This explains Facebook's significant investment in Oculus in 2014 and the very recent one in Ctrl-Labs; the objective is to be able to track and digitally reproduce the signals sent by the human body, thus eliminating distances. Facebook wants to create the best hardware/OS integration to make the impossible possible: teleportation. Marc Zuckerberg is convinced that there is a large market for this and that it can constitute a standard consolidated by an application platform. Extract from the Keynote of 25 September introducing Oculus 6:
We are already working on the next Oculus Quest, and we want to make sure that everything developers build for today's helmet is fully compatible. In addition to shipping new hardware in the future, we will continue to release further software updates for Quest as developers launch new content so that its value as a dynamic VR product increases over time.
Marc Zuckerberg's vision is not lacking in ambition but could face the following obstacles:
Is there a market other than a niche market for virtual reality headphones? Certainly for games or professional simulations, the helmet can be interesting. Oculus launched its first helmet in March 2016. To date, there has been no clear adoption: only $100 million has been sold from the Oculus platform since its inception: no need to create a standard. Zuckerberg's vision of replacing TV with virtual reality headphones seems unrealistic. The time spent in front of the TV with more or less concentration is 5 hours a day. It is difficult to imagine yourself at home with a helmet 5 hours a day, cooking, dining, etc !
Facebook plans to launch augmented reality glasses in 2024/2025 with a social focus. The advantage of glasses over a smartphone is absolute discretion. It is likely that Marc Zuckerberg will add to this: branches reading the instructions from the brain for example. This discretion can lead to a kind of espionage and thus harm what Facebook wants to develop: the social relationship. Apple is more likely to use AR glasses as a tool.
A virtual reality OS would be built on Facebook's social graph to exploit the possible synergies within the group (see Facebook Horizon developed in beta). The obvious problem is that the virtual reality OS is closer to the user's intimate part: his body. How can we accept that Facebook can use this information in one way or another as part of the circle of friends?
Facebook's business model is advertising. This is contrary to Oculus' business model, which must on the one hand be extremely vigilant about respecting users' privacy and on the other hand target a high-end clientele willing to pay to avoid advertising (just like Apple)
Amazon has a more modest vision than Facebook: introducing a small piece of intelligence everywhere to make our lives easier. It is a disruptive Christensen innovation that is improving with a permanent feedback loop. And Alexa sells: 100 million Alexa connected products have already been sold, despite potential privacy breaches. Users like the trade off. Facebook has a bold vision but it creates contradictions with its business model and for the moment is having trouble finding its market. However, let us not too quickly reject Marc Zuckerberg's ideas: he is very advanced in the field of cryptography and could well combine Oculus and crypto to make an innovative product that respects privacy by construction. If the Libra project had lead in the wing, it would be a good way to reposition Facebook's crypto team.