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A Gadget Recession

Published Mar 22, 2023

Talk of there being a “tech recession” has picked up in recent months. Weakness in advertising, slowing revenue growth in cloud services, and even declining digital goods commerce has fueled the tech recession talk. Amidst all the chatter, one development that has flown under the radar is just how tough it’s become in the consumer gadget space.

The stage needs to be set before going any further. The consumer gadget space has had a very rocky decade with the highest of highs and some big valleys. The smartphone revolution led to generational-level changes across the industry. We saw a flood of new players enter the game with ambitions that didn’t stop at smartphones. The dramatic rise in smartphone and tablet (iPad) adoption opened doors for new gadget chapters. There’s the wearables revolution with Apple Watch leading the charge out of the gate, soon accompanied by AirPods and wireless headphones. At roughly the same time, we had the smart speaker mirage take shape. That movement quickly splintered into stationary screens and other smart home devices, both of which have been lackluster except for home security cameras. There have been other hardware/industry developments as well such as companies trying their hardest to copy Apple with vertical integration. Apple’s Silicon Mac transition is still in its infancy from the perspective of laptop/desktop market dynamics.

Macro headwinds, decades-high inflation, and a lopsided competitive landscape with the Apple ecosystem gaining momentum has brought about a gadget recession. This doesn’t necessarily mean that the total number of consumer electronic gadgets shipped will decline over a certain time period. Such metrics will be hard to verify. Instead, a gadget recession refers to a difficult stretch for playing in the space. Not all companies will come out losers from this development. But it's tough seeing anyone, even Apple, escape unscathed.

• Apple. The latest earnings point to device upgrading slowing. Due to budgetary concerns, instead of moving down market to cheaper alternatives, consumers are much more likely to hold on to their current (Apple) devices for longer before upgrading. My estimate calls for the number of devices that Apple will ship in FY2023 declining 3% from FY2022.

• Amazon. The Alexa HW portfolio looks and feels tired. Years of Amazon moving way too quickly and embracing ideas that should not have been released publicly has led to a bloated lineup of devices with long upgrade replacement cycles. 

• Microsoft. Surface is in trouble. Management has been talking about consumer weakness for some time now and signs suggest weakness moving into enterprise as well. New product launches are not capturing buzz or mindshare.

• Meta. There isn’t a whole lot to point to in terms of Meta successfully giving consumers what they want from a gadget perspective. The company’s VR efforts have been lackluster.

• Google. In what may be the most difficult hardware portfolio to assess, Google’s mixed signals towards hardware have shifted to focus on Pixel smartphones.

• Chinese-based companies (Xiaomi, Oppo, Vivo, etc.). Global ambitions have been dialed back and the focus put on trying to stand out in an intensely competitive smartphone market with declining unit sales. 

• Other (Sonos, Samsung, Peloton). While some of the individual stories are better than others, no one is ringing the all-clear bells.

While economic and competitive pressures are genuine, there is another factor unfolding in the gadget space that can’t be ignored. Beginning at the tail end of the pandemic, various tech YouTubers began to speak up about a marked slowdown in views and engagement. Things felt off in the tech vertical, and the pandemic didn’t seem to fully explain the situation. In retrospect, the changes may be the byproduct of something akin to a settling out process in the gadget space. We aren’t quite ready to jump into the face wearables era. Apple is expected to unveil their move into the space in a few months with a launch later in the year. Meanwhile, the smartphone and tablet space has been unfolding along ecosystem grounds. The iPhone business has been a replacement business for years with the majority of sales going to existing iPhone users upgrading their device.

Taking a step back to look at broader industry trends, a gadget recession likely won’t be met with a wave of M&A. Instead, it is far more likely management teams will reassess their commitment to hardware in the first place. News of Microsoft and Google getting out of hardware altogether would not surprise me. There comes a point when years of investment dollars and managerial/talent resources just become too hard to justify when there is little to nothing to show for such efforts. The rationale that these companies gave for being in hardware in the first place has never been strong either. Amazon and Meta have publicly demonstrated more of a long-term commitment to their gadget businesses relative to Microsoft and Google. However, both are facing revenue growth pressures that require their respective hardware bars to be raised in order to receive ongoing investment dollars.

This essay is available in podcast form for Inside Orchard subscribers. To listen to this episode and other Inside Orchard essays in your podcast player, subscribe.

TikTok Is Blowing up the Status Quo

Published Feb 7, 2022

Last week, Meta’s Mark Zuckerberg sounded the alarm. TikTok was successfully taking engagement share away from his most-prized pieces of digital real estate: Facebook and Instagram. What had been theorized about for some time is now being discussed out in the open, and we may see others follow Zuckerberg in sending out SOS signals. Companies ranging from Spotify and Netflix to Roku are likely feeling TikTok pressure to some extent. Management teams just haven’t come to grips with such reality. 

TikTok’s “secret sauce” is grabbing a shocking amount of viewer data in order to power a recommendation engine that puts YouTube’s algorithm to shame. Depending on how you interact with a particular 15 or 60-second video clip, subsequent video clips are then tailored to keep you wanting more. It’s not even so much about giving you the same video genre over and over either, which would likely lead to burnout. Instead, there is almost a natural ebb and flow to the video clips that keeps you engaged. TikTok’s video recommendations are so good that users are altering their daily content consumption habits because they have so much trouble moving off platform. 

TikTok is blowing up the status quo by altering the entire content consumption space. Time that used to go to Facebook, Instagram, Netflix, gaming, and sleep is flowing to TikTok. Google and Facebook, seeing the risk that TikTok posed to their business, quickly released me-too products, YouTube Shorts and Reels, respectively. Each appears to be doing well based on management disclosure. The problem is, they aren’t slowing TikTok but rather cannibalizing existing attention and engagement that was already on YouTube and Facebook/Instagram.

Getting us to swipe through literally hundreds of 60 second or shorter video clips in one sitting is on one level frightening and another level disheartening. Attention spans are dwindling to the point that a multi-minute video is now considered too long. More worrying, we are seeing short-form video take the worst of social media and then be amplified.  

• “I saw it on TikTok” has become synonymous with false information and rumors. Thanks to the all-powerful recommendation engines powering short-form video platforms, problematic clips are spread to millions of people even more efficiently and quickly than we are accustomed to on social media. 

• Some video filters for short clips serve no purpose other than to make people feel bad about themselves. 

• Imitation art has always been a thing with which we turn to celebrities for ways of imitating them. Today, this has changed to the point of doing whatever some random person did on TikTok simply because it went viral. If a clip of a young person having a mental breakdown in a car while taping themselves goes viral, others feel they need to do something similar, all in an attempt to also go viral. 

It’s not that these worrying trends were absent on YouTube, Facebook, or Instagram. Instead, short-form video is social media on steroids.

The larger implications found with TikTok’s growing popularity involve how we consume both music and video. One reason why movie theaters don’t have a future is that the entire movie medium is under threat. The number of people willing to spend more than two hours watching a story unfold is declining. We have precedent for what is happening to long-form video when looking at the music industry. Technology has negatively impacted music as an art form. The move from album sales to downloads of individual songs that could be purchased on a standalone basis transformed the music industry. Most people today would be surprised to hear how a music album consisted of songs arranged in a way as to tell a story. Trying to figure out how to even listen to an album in song order is now a question posted in technical support forums. Music is now being equated to 15-second jingles that make for good TikToks.

Some may say that I am overreacting and simply afraid of the change found with short-form video. A few months back, I published a tweet saying short-form video will not lead to a good place. The product lead for YouTube Shorts responded by saying short-form video is additive to storytelling, specifically storytelling “powered by a collective of creators” around the same concept. I wasn’t convinced. 

As for how companies will respond to the status quo being changed, there is reason to think not many will find answers. In a sign of Wall Street facing anxiety as to what may be unfolding in the content space, Netflix and Disney saw their market caps decline by a combined $250 billion from peak share prices. While both companies have since seen rebounds in their share prices, the amount of unknown surrounding business models in the scripted video space hasn’t gone away. Some are questioning just what the end goal may be in all of this. Is Netflix actually that different from Instagram in terms of needing to grab our time and attention to do well? What about Spotify’s bet on podcasting turning out not to be so much about pulling people away from Apple Music but keeping them off of TikTok? These questions begin to scratch the surface of how TikTok has blown up the status quo in terms of conventional wisdom as to where the competitive battle lines are actually drawn. We are moving to the point that the more powerful TikTok becomes, the more likely we are to see content consumption behavior change to boost TikTok (and short-form video in general) further. 

This essay is available in podcast form for Inside Orchard subscribers. To listen to this episode and other Inside Orchard essays in your podcast player, subscribe.

The Live Events Industry Needs Mixed Reality

Published Aug 2, 2021

When we look back at the early 2020s, many will describe the period as transitory in nature. Wearables are increasingly grabbing the spotlight from mobile while new technologies such as mixed reality are still a little bit off in the distance. We are starting to see glimpses of what mixed reality, more commonly referred to as VR, will be about, including activities that stand to benefit from mixed reality. A great example is seen with the live events industry (theaters, plays, fine arts and music venues, and all of the corresponding backstage and support companies). 

As part of the pandemic relief stimulus program passed by U.S. lawmakers earlier this year, the Shuttered Venue Operators Grant program has been described as a $16.2 billion “bailout” of the U.S. local entertainment industry. Forced shut by the pandemic in 2020, many companies that put on or support live events faced financial distress. 

Last week, the U.S. government released data on bailout recipients. Here in Connecticut, 131 theaters, cinemas, event promotors, talent agents, and various other entities tied to live events have received $100 million from the program. (If you live in the U.S., you can check out which of your local institutions received funds here.)

A very good argument can be made that using taxpayer money to support the live events industry following a once-in-a-century pandemic makes complete sense. For many of these companies, the bailout funds will directly prevent their doors from closing. However, for me, seeing the breadth of those needing bailouts as well as the amount of funds received put a spotlight on an industry that has become dependent on various kinds of financial support for its survival. Many of you, including those outside the U.S., can probably think of local stories in which a live events venue (theatrical plays, concerts, fine arts etc.) needed financial help to survive. 

Instead of looking at this development with distress, there is an opportunity for technology to play a role and not only keep the live events industry alive but also bring it to new heights. That may seem like too rosy of a projection, especially as technology has long been viewed as a culprit or accomplice in the decline of live events. In the essay, Movie Theater Nostalgia, we talked about how movie theaters face severe headwinds going forward as they battle the rise of on-demand content consumption and new-age communication mediums. The item that may have been missed in the discussion, and which pandemic stimulus has now helped expose, is that the live events industry faces structural headwinds without considering technology’s impact. 

Needing people to travel to a live events venue and pay what is an increasing amount of money for a seat in order to be entertained for anywhere from one to four hours has become an increasingly difficult proposition to wrap a business around. The idea was a lot easier to achieve decades ago when consumers had limited entertainment and travel options. Going to the movie theater used to be a half-day affair. I recall stories of my mother going to the “movie theater” with her family as a young girl with groceries in hand. The movie theater made it possible for patrons to store their groceries purchased next door in a fridge. The theater ended up selling relief before people needed to lug their groceries back home.

As the decades progressed and consumers saw more travel and entertainment options, live events began to face headwinds that have only gotten stronger. It’s not that the industry was suddenly wiped away because of technology but rather the economics have gradually become harder to overcome. As the number of people buying tickets to events like plays, theater, and other fine arts venues declined, ticket prices went up to compensate for the weaker demand. Today, paying $100 to $200 for a mediocre seat at a local theater for an off-Broadway show is not uncommon. Such pricing is needed to keep the lights on - and that’s after the impact from significant fundraising, support from boosters, and government grants. The live events industry has been on life support for a long time. 

Technology has a role to play here by expanding the size of audiences consuming live events. By wearing a headset that blends one’s actual surroundings with technological enhancements, the feeling of being somewhere else, such as inside a live events venue in a different city, state, or country will be made possible. Instead of going through such experiences alone, it will also be possible to experience such events with families and friends either seated in the same room or thousands of miles away. 

The idea that a local venue can put on a play and have more people watch the performance than there are seats found at the venue introduces entirely new economics. Ticket pricing could plummet similar to how software pricing declined while smartphone adoption moved higher. There would no longer be a need to break even off of a very limited base of patrons. Thanks to mixed reality, live events that may never have made financial sense could become a reality leading to far more advanced live events than those we see today. 

This discussion extends beyond live theatrical events to include mixed reality helping music and sporting events and even interactive sites like museums, zoos, and aquariums. It’s not so much that these locations will fail to exist in physical form without mixed reality but rather that technology can introduce such events to far larger audiences. Geographical limitations and other limitations dealing with space (limited parking, square footage, seating, etc.) go out the window. By completely rethinking how we consume live experiences, mixed reality can the turn the live events industry into something that we have never seen before. 

This essay is available in podcast form for Inside Orchard subscribers. To listen to this episode and other Inside Orchard essays in your podcast player, subscribe.

The Advertising Triopoly

Published Apr 12, 2021

The press has come to rely on a very wide net when describing “tech” companies. Some of this is to be expected as tech continues to invade new industries. However, there is something wrong found with using “tech” to describe any company making money one way or another from software and data. My stance on “tech” is that it has lost much of its descriptive meaning when it comes to business models and product strategies. 

Instead of lumping today’s corporate giants into one massive “tech” bucket, a different categorization based around advertising is more valuable. For the first time, a retailer, social media company, and information services company are grabbing more than half of all advertising spending in the U.S. The pandemic was the catalyst responsible for pushing the three over the 50% mark. 

Wall Street doesn’t see any end in sight when it comes to Amazon, Facebook, and Google and their advertising prowess. Accordingly, the press has taken it upon themselves to be the last remaining force of resistance to the three. It is not a coincidence that massive media campaigns have been waged against Amazon, Facebook, and Google. All three have awful narratives and perceptions if going by press coverage. From my position, much of the press outcry and criticism has become too stretched to be any good. The press made one giant mistake in their quest to go after these advertising giants. By turning every little thing into a massive crisis that supposedly was going to bring their downfall, the press cried wolf too much. The end result was valid criticism being watered down to such a degree that readers and listeners became tired with it all. In a way, the press’ attacks have helped strengthen Facebook, Google, and Amazon. 

That’s not to say that there isn’t controversy found with the advertising triopoly. Instead, few are able to correctly point out the actual issues. Another way of describing the advertising triopoly is the data triopoly. Consumer-friendly services, most of which are free, are offered with the goal of grabbing consumers’ attention, and by extension, their data. This data is then used to both enhance the underlying services, which results in better and stronger engagement, and attract brands, which have a never-ending craving to get in front of consumers. 

There is nothing inherently wrong with the triopoly giving away services (email accounts, cloud storage, video streaming, music streaming, messaging, reviews, business solutions) for free just as there is nothing wrong or evil found with leveraging customer data to enhance or better the service over time. However, there are two primary problems found with the dynamic:  

1. Companies are not being clear and up front with their customers as to what kind of data is being collected and how the collection process works. The average consumer would be shocked to learn how much of their data is actually being collected. It is no longer good enough to collect data about what consumers’ are doing on your own online property. The goal is now to track customers while they are on other online properties. 

2. Companies are building detailed customer profiles in an effort to better compete against other companies.

 A good argument can be made that the two preceding problems end up being byproducts of giving services away for free. If services weren’t free but instead paid, the companies offering such services wouldn’t be in as much of a need to build detailed customer profiles or hide their true data collection intentions. However, this view comes across to me as being a bit too cynical. We have not seen what would happen if the advertiser triopoly was actually up front with customers about data collection while making a concerted effort to curtail data collection in an attempt to enhance customer privacy. It is not a guarantee that their advertising grip would actually weaken in such a scenario. Instead, we are left with a company like Apple, sensing no viable solution to the two preceding problems, taking it upon themselves to address the underlying issues. 

As for who stands to be the largest business losers from the advertising triopoly, industries that have essentially become commoditized are high on the list. The demise of local newspapers has been well telegraphed. Less focus has been put on how the advertising triopoly holds complete and total responsibility for its destruction and broader problems found with the entire news industry. It is ironic that two of the three advertising companies that make up the triopoly have been trying to “save” the news industry by throwing money at publishers. Unfortunately, such efforts are too little and too late. The simple presence of the advertising triopoly leaves little to no room for a news industry long supported by advertising. (We are going to see continued consolidation in the news industry, including the online space, which should leave enough room for a pretty decent niche publication scene.)

The music industry has similarly come under pressure from the advertising triopoly, not due to declining revenues from streaming but rather from the art form being used and taken advantage of in pursuit of building up ecosystems. Fears of podcasting and video not being too far behind music are valid. There are then niche industries, or at least industries that would seem to be niche, such as restaurant and product reviews, that have been decimated by the advertising triopoly. While an enduring entrepreneur can take a swing or two at these troubled industries, it will likely take massive capital in an effort to grab users and only then would consolidation seem like the inevitable conclusion.

Turning to the government for help with taming the advertising triopoly is easier said than done. The regulatory issue isn’t actually found with what companies are doing with customer data once it is collected, but rather it’s found with the collection of the data in the first place. Examining data collection practices would then unveil a systemic problem found throughout the corporate world with very few exceptions. Breaking up the advertising giants won’t accomplish as much as regulators think. Instead, competition can be intensified by giving customers more control over their data and the collection process. Focusing on the data itself will end up being the best way of equalizing the situation as it was data that gave power to today’s advertising triopoly.  

This essay is available in podcast form for Inside Orchard subscribers. To listen to this episode and other Inside Orchard essays in your podcast player, subscribe.

Movie Theater Nostalgia

Published Mar 1, 2021

Humans love going to places. The idea that we will one day wear a pair of VR googles in the home in lieu of actually going on vacations, visiting family and friends, or just simply going out to social gatherings is a fantasy.

Although humans like going to places, the list of failed social gathering ideas is long and storied. Dance halls, arcades, pool halls, and roller skating rinks once defined culture. Today, these venues are nothing more than relics with a few owners trying to keep the memories alive for the select few willing to pay for the nostalgia. 

The list of social gathering places that have lost out to time and technology will only get longer. We see the latest addition before our eyes: movie theaters. Some think movie theaters will be fine postpandemic. Others are convinced movie theaters will go the way of the dodo bird. Reality is found somewhere in the middle. There will be physical movie theaters in the future, but they will look like a shell of their former selves. Movie theaters will become the new arcades - still around if you search hard, but irrelevant. 

Most movie theater screens will either meet the wrecking ball, contractor’s hammer and saw (for conversion into something else), or they will be bought by families that feel a calling or duty to keep the nostalgia alive. 

Movie theaters aren’t in decline because video streamers are seeing success in grabbing eyeballs. Netflix, Amazon, or Apple are financially able to purchase a movie theater chain tomorrow and give away free tickets to subscribers to watch exclusive films. This may seem like a great idea to some. However, a growing portion of the population would feel differently. Movie theaters face a very difficult future because society is moving on from the idea of traveling outside the home to sit in a dark room to consume video content. It’s telling how everything from reclining chairs to steak and lobster have been used as carrots to get people inside a movie theater. The problem with movie theaters isn’t a suboptimal food selection or uncomfortable seating. Instead, fewer people want to venture out the home, sit in a dark room, and spend two hours watching a movie that began at a time not of their choosing. 

As for what is driving this trend:

• The rise of on-demand consumption. The thought of needing to pick out a specific time to go somewhere to watch video content will seem as foreign as needing to leave the house to play a video game. It simply isn’t going to register to people.

• New-age communication. Turning the smartphone and wearables off for two hours is becoming unconscionable for a growing number of people.

It certainly doesn’t help that the rise of streaming is causing some blockbuster movies to be watched in the home at the same time that they are being watched inside theaters. However, blaming that development for the demise of movie theaters is misplaced. It does little but leave an opening for nostalgia holders to think “if only tech companies would support movie theater operators.” 

Unfortunately, these developments aren’t confined to movies. A similar trend is slowly occurring with theaters in general. Don’t let Broadway’s commercialization overshadow what are deteriorating economics found with operas, plays, and other performance art that take place in (large) dark rooms at a time not of our choosing. It’s telling how such activities increasingly need to be supported by cities and states. The logic is that such institutions are part of culture. The real purpose of such funding is to keep the nostalgia flowing. 

Movies aren’t going anywhere. Theater isn’t going anywhere. Instead, the way we consume these art forms will change. Selling tools for retrofitting basements into “video consumption” rooms contains more upside than owning a chain of movie theaters.

Nostalgia is a powerful drug. While it is possible to sell nostalgia, one who does is ultimately stuck selling old ideas into a society that is always forward looking. 

This essay is available in podcast form for Inside Orchard subscribers. To listen to this episode and other Inside Orchard essays in your podcast player, subscribe.