One of the most important concepts in business is TAM, which most know stands for “total addressable market”. TAM is the problem that Google (Alphabet) faced in its revenue loss early this week, and also the problem Apple confronted the next day. Even though these two tech giants are in different markets, market principles still apply to them both, and both have the same choice to make now.
Google’s growth in ad revenue disappointed the Street, even though the company turned in revenue growth (19% in constant currency) that would have been the envy of most tech companies. Here, though, the Street may have unrealistic expectations because ad revenue isn’t a pot of gold at the end of the rainbow.
Global ad revenues have, over time, tended to expand roughly at the same pace as global GDP, because companies were willing to spend about the same percentage of sales on advertising year over year. The total ad spend reached about $740 billion at its peak, but it’s declined as advertisers have turned to digital-based ads, including Google, to target better for less. Today, it stands at about $612 billion according to my model, and it’s growing again at about 4% per year.
If you want to grow revenues by 20% in a market that’s growing at 4%, you need to gain market share, which means that all the Googles and Facebooks of the world are fighting for the ad pie along with all the TV networks, radio stations, billboards, newspapers, and others who rely on advertising. One sign of the fight is that we see more TV commercials per hour than ever before, simply because networks have to accommodate the competitive pressure by selling more time to get roughly the same money.
Competition between Google and Facebook for ad dollars isn’t surprising and in itself isn’t likely very destructive, but competition with the networks could be a problem. Video is the largest source of traffic online, and a major source of ad revenue in itself. Video content production by the networks is almost totally ad-funded, and if the networks are under pressure for ad revenues, then at the least programming quantity and quality is likely to suffer, and that suffering can then translate into lost viewership, more lost ad revenues, and eventually content starvation. How many years of “I Love Lucy” reruns could we stomach?
Google is the market leader in ad revenue, which makes it particularly difficult to steal market share from others. That’s why Street analysts are already saying Google has to look beyond advertising, and talking about why Google’s cloud initiatives have to succeed. But there may be other, easier, choices, as we’ll see.
For Apple, the problem is obvious—smartphone market saturation. There is a total addressable smartphone market, and there’s a subset of that market that are willing to pay a premium price for being cool. We see some of these people any time we drive past an Apple store. What Apple is now facing is that the cool-people subset of the smartphone market isn’t growing any faster than the market overall, and the problem with smartphones is that you can’t sell them easily to those who already have them. Sure, you can try to get people to toss their phones every year for the latest and greatest, but the problem with that is that this year’s “greatest” is successively more difficult to differentiate from last year’s, feature-wise.
To make matters worse, there’s a host of Apple competitors who offer quite serviceable phones at a third the price of an iPhone. There are high-end competitors that many would rate as good or better than iPhones and that still cost perhaps 60% to 70% of an iPhone’s cost. Obviously, that means having iPhone sales off by 17% shouldn’t be a big surprise. Particularly when Apple says it’s going to be getting into things like subscription TV and wearables to raise revenues from another source.
The big challenge Apple faces in its quest for additional revenue is the closed-ecosystem nature of Apple’s business. There’s no vendor out there as restrictive in terms of competing hardware, software and apps conforming to their policies, etc. Those who (like me) remember the old days of the Apple computers versus the IBM PC know what happens when you try to keep everything to yourself. IBM had an open architecture that spawned a whole PC industry, and it won decisively in market share. Can Apple continue to look inward, to focus on its own “cool” base of customers, and ignore the broader market?
If you’re a manufacturer of best-in-the-world left-handed golf clubs, you have a TAM challenge, just like Google and Apple do. In a way, though, you may be better off because it’s probably obvious to you that you can’t base your revenue planning on genetic modification of future babies to enhance the number who are left-handed. It’s not as clear-cut for Google and Apple, and if we’ve learned anything about public-company behavior in the last couple decades, it’s that they’ll do anything to avoid compromising the near-term for the long-term. They might well admit (privately) that they can’t stick their heads in the sand for years, but a couple of quarters? Hey, why not? Quarters, of course, eventually add up to years, so both companies have to look to the long term even if they keep their visions close to the vest to keep the Street happy.
For Google, as for all OTT players who have ad revenue dependence, the solution is paid services. As an example, public cloud services to support consumer applications and business productivity represent an incremental one trillion-dollar market, which is almost double the whole global ad spend. What’s needed to support a win in that space is nothing more than what Google has excelled in doing for a decade—creating a cloud-native infrastructure model.
Google’s failing has been in the articulation of the vision. Google’s Andromeda project work is the best and largest example of virtual-network and cloud-native deployment on the planet, but few know anything about it. I asked a dozen Wall Street analysts whether they believed Andromeda could be the basis for a Google push toward new revenue, and all of them admitted they had no idea what I was talking about. Google (like so many tech companies) is great at geek-speak and bad at Street-speak. They need to productize their technology vision to open new revenue doors.
Apple obviously doesn’t have a geek-speak fixation. They do have a long-standing “cool-speak” fixation, though, I was doing some consulting for a big NYC bank when the commercials for Apple’s Lisa computer came out. One showed a young guy going to work with his Irish Setter, sitting down at his Lisa, and being productive. A couple banking executives were talking with me about it when an executive VP joined us and asked what we were discussing. When he was told, his response was “What kind of company would let someone bring a dog to work?” Moral: If you want to sell to banks, you have to say things bankers identify with, and geek-speak and cool-speak are both going to miss the mark.
The good-even-great news for Apple is that the Street and even their customers are prepared to accept that somehow they’ll pull a rabbit out of the hat on new revenue sources even when logic seems to speak against the success of their initiatives. They have the runway to launch something revolutionary, but to do that the need something to launch.
I’ve been critical of Apple’s cloud vision for years now, and I still believe that Apple needs a cloud strategy. I’m not arguing that they need to offer public cloud computing services, but that they need to build out cloud infrastructure to support a more service-centric future. Google has the needed technology but doesn’t have the technology salesmanship; Apple is the opposite. Apple, to do TV, can’t just resell somebody else’s TV; the margins won’t satisfy investors. But to do more than that, Apple would need to build out something like Google’s architecture, and they apparently don’t want to do that.
That makes wearables the near-term hope of Apple, but only that. They’ll get a grace period because of their image, and they might get a bump from 5G starting in late 2020, but by 2022 they’ll need to have something really smart in place, and they don’t seem to have anything in motion that would produce it. They can dabble in self-driving cars and subscription TV, but wearables would have to be their next big thing, and even that has its limits. Watches are easy, and they’re having some success. Augmented reality might offer something, but the investment needed in AR is enormous and the risks are even bigger.
In the long term, both Google and Apple need paid services, and both need both a platform and positioning to make them successful. Google likely has the former, but Apple remains behind in its conceptualizing of the cloud. The early focus on wearables could accentuate their device-myopic view of the world. That could make Apple’s positioning acumen less valuable; knowing grass doesn’t make you a forester.
