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a16z Podcast

A16Z Podcast — What Comes After the Smartphone

Listen to this episode on SoundCloud.

This post features A16Z's Benedict Evans and Steven Sinofsky, interviewed by A16Z host Michael Copeland, discussing one of the most interesting questions in the future history of computing — what comes after the smartphone? When a technology gets to everyone on Earth, what comes along that is 10x the size?

They (kind of) answer the question. Read on.

What do the iPhone 6S and Microsoft Surface Book say about the present state of technology?

Evans notes that "the feeling in mobile is" that we're at the end of one wave, without another wave coming yet. We've had the smartphone wars, and Apple and Google both won, and we've had the messaging wars and Facebook/Whatsapp/Instagram/etc. won.

At first blush, it looks like phones aren't changing much—they look like last year's phones, which makes it seem like we're on a flattening part of the S-curve. In contrast, if you look at the iPad Pro, Chromebook, and Surface, and it feels like a lot is changing in PCs.

But things tend to look best, be most refined, and have the coolest stuff just before they're about to be completely obsolete. The best sailing ships came at the end of the 19th century, the best battleships in 1945, and the best spy planes just before satellites make spy planes pointless.

You might look at the Surface Pro and think: the PC has been perfected, it's got everything you could possibly want. And in contrast, you might look at the smartphone and think it's kind of boring, and that nothing much new is happening here...but you could look at it the other way around. What's happening in the PC world is it's being perfected because it's over.

"The PC world is over"

In contrast, the smartphone world is kind of just going—we've built the platform, and now we're getting an explosion of innovation atop the platform.

Sinofsky emphasizes the importance of understanding how platforms innovate and diffuse; how they go from one stage to another. What's happening in mobile is that the underpinnings have started to solidify and become predictable (more capabilities, more sensors, better battery life, thinner). We will someday reach a point where you can't improve on the device in a 6-inch form factor, but what's really happening now is the innovation has moved up the stack, into constellations of innovation.

In messaging there were dozens of companies, and now there's a center of gravity that's very substantial. Playing it forward, many areas are unsettled: banking, entertainment, and certainly productivity. The activity in each area is massive because it's building on the stability of the smartphone. This buildout is analogous to the web on top of the maturing PC.

Evans has argued that "the smartphone is not a neutral platform," meaning that while the web browser allowed developers to be agnostic to the underlying operating system, on the smartphone, there's not only the browser to build on, and apps to deploy, but, additionally, Apple and Google are integrating services deeply into the device itself. Thus innovation is occurring on three fronts, but the device is kind of set—it's roughly this size, it's got these capabilities, and performance has grown to the point that we can do things that we wanted to do 3 or 4 years ago. The smartphone becoming a solid platform has enabled a Cambrian explosion of innovation.

THE SIZE OF THE SMARTPHONE REVOLUTION

Sinofsky takes us through the size of each computing revolution.

The whole world of mainframes was less than 100,000 computers. (Actually, they didn't used to measure mainframes in terms of "actual boxes"—they measured them in the MIPS, millions of instructions per second, delivered.) At the height of MIPS utilization, there were about 11.1 million MIPS active, which roughly equals 200 Macbooks.

At the height of word processors (not software word processors, but dedicated machines for typists, from companies like Wang or Sperry), there were maybe 500,000 to a million of those in total, and most of them were in the government.

There were just over a million Digital Equipment minicomputers. To Benedict's point, the DE Vax minicomputer "VMS" software was at its height in 1988-89. It supported whatever programming language you wanted to support, it had distributed systems, the best shell, the best tape drives, disk drives, peripherals, and it all fit together. And then nobody bought it. DEC evaporated seemingly overnight, because it was over. The PC had already showed up.

There were about 5-6 million Apple IIs ever sold, which is arguably the first PC. There were about 17 million Commodore 64s (the most popular single computer model of all time). Why? Because it broke into the den, the living room, not just the garage and the office. Since the dawn of the PC, about 4.5 billion PCs have been sold.

The interesting thing is that for each of those, the first people to buy minis were not the people who bought mainframes, but the people who didn't buy the mainframe. The people who bought the PCs were not the people who bought everything that came before it. Evans points out that the people who had word processors pooh-poohed PCs as "just a toy".

Evans takes us through the PC-to-smartphone numbers: there are something like 300-325 million PCs sold each year, with 1.5 billion active. There are about 2 billion mobile phones sold every year, and almost all of those will become smartphones in the next couple of years, (over half are now). Adding tablets, it's about 2.5 billion each year, with 5 to 6 billion of those in use at any given time. It's ecosystem that's an order of magnitude bigger.

What comes after the smartphone?

Evans ponders: where's the market that's bigger than the phone? The PC industry wasn't created by converting mainframe customers, it was created by building a new industry that was 100x bigger, which left everything else marooned. And that's really what's happening with mobile—first, mobile becomes much bigger than the PC, but the PC continues in parallel. Then, mobile leaves PC marooned and the PC shrinks away to a much smaller base over time. But what does that to mobile? What comes along that's 10x bigger than mobile, that's the next generational change, when mobile has everyone on Earth? There isn't another generational change of that kind—it has to work in some other way.

Sinofsky points out the answer might be hiding in plain sight: in software, written atop the smartphone, which already is 10x bigger. Additionally, "internet of things" (IoT) devices will definitely be bigger, but the key question is how they will be built, and what ecosystem they will be built on top of.

Hardware-wise, Evans says they'll mostly be made of smartphone components. Not the 10-cent devices or the 5-cent sensors, but everything else—a thermostat is a smartphone on a wall, and a drone is basically a smartphone with wings. He believes connecting to and controlling these devices will happen through the smartphone ecosystem. It's not obvious that IoT creates this whole separate ecosystem that can crush Apple, Google, Samsung, ARM, Qualcomm, etc. It feels like IoT is an extension of this business rather than the next generation that's much bigger.

The IoT future

Sinofsky says there will be hundreds of devices per person—we won't be able to count. But the stitching of them together will be via the cloud, and there will be a notion of identity across all of them, with a shared user experience and shared system for developers to program on top of (there's only so many OSs people are going to do things for).

Evans agrees, saying that you won't have 15 software ecosystems in your home, you'll have maybe 3, and a bunch of overlapping Venn diagrams of communication. The light bulb will talk to the phone or the thermostat, via some shared system.

Sinofsky notes that right now most IoT devices come with their own screen or USB router/hub (like his door lock and garage opener), which won't be the way forward. He believes that people are underestimating the opportunity to build whole new ecosystems on top of the "stack" provided by the smartphone.

He provides a litany of historical analogues. When the PC was taking hold, the debate was over operating systems and graphical interfaces (PC vs. Mac), everyone underestimated the impact of Microsoft Office, which created a whole separate ecosystem layer, which was equal in size to the OS. The same thing happened on mainframes—the mainframes were interesting, but Oracle built a database ecosystem on top of them, and then that ecosystem was established, SAP et al built on top of that. The infrastructure of the web has allowed for whole new companies, which often dwarf the infrastructure.

The IoT space will be similar, he believes. It will be built on top of the existing frameworks, which will be very empowering for companies in the smartphone stack, from the people who make ARM chips, through the supply chain, through the phones, to the companies who provide the software support people have. The companies that make garage door openers or light bulbs will lack competency at many of the elements of creating good customer experiences, and other companies will spring up to provide those services.

The reinforcement of the smartphone ecosystem

Evans notes that the smartphone ecosystem is following a well-worn path that the PC blazed in the '80s and '90s. In the past, if you wanted to put computer into something, you used a PC (e.g., an ATM, electronic kiosk, or machine tool would use a PC as its computer). Today, you wouldn't do that. You'd use mobile components instead of Intel, and you'd use Android, or something connected into iOS. Thus the smartphone ecosystem becomes bigger and bigger, and swamps the old ecosystem (PCs) in terms of innovation and scale effects. Statistically, the Wintel ecosystem is now 15% of computing unit sales, and is going to go down to maybe 10%. Like with PowerPC and Mac OS in the '90s, people will shy away from investing in innovation on such a small platform.

To demonstrate this, you might put a Surface Pro next to an iPad Pro, next to a Macbook, next to an iPhone 6S, next to a Lumia (which you can plug a screen/keyboard/mouse into, as it's running Windows 10, meaning in practice it's a PC, or a Mac Mini with a screen). While industry analysts might draw distinctions like "that's a tablet, that's not a tablet, that's a smartphone with removable keyboard...", these distinctions aren't meaningful. The only distinction that's meaningful is: which of these devices are based on the future, and which are based on the past? Or, which ecosystem are they on? Are they on the ecosystem that has all of the scale and all of the growth, and where all of the innovation is going to be focused, or are they on the ecosystem that doesn't have that and is going to be left behind?

To Evans's earlier point about the best-ever sailing ships being made at the end of the 19th Century—that's what a Surface Pro is, compared to the iPad Pro. The first steam ships had masts because they kept breaking down or sinking (like the iPad Pro has a keyboard). The sailing ships were much better and faster for a little bit, but they were on the flat part of the curve. This is kind of where the whole x86 Windows architecture is—it's perfect, but it's reached its logical conclusion.

Sinofsky presents another thought experiment: imagine you're an electrical or mechanical engineer, and you develop new kind of sensor. You need the rest of the computing platform to use your sensor. Which chip manufacturer do you want your sensor to be tightly integrated with? It's not just unit sales, but it's the manufacturer that has the health to absorb it at the software level, the firmware level, the integration level. As Benedict mentioned, this is basically what happened to Apple in the '90s. It was just too small to support the innovation at the scale needed to compete with what was going on at Intel.

WHERE DO STARTUPS FIT INTO THE PLATFORM OF THE FUTURE?

Evans says it depends on which part of the hardware-software stack you want to think about. Working up from the bottom, you start with ARM, and all the licensees and companies who make chips for ARM. Then you have Qualcomm, Spreadtrum, and Mediatek, who are packaging the chips up so that people who don't know anything about cellular technology or semiconductor design can still create smartphones. And then you have the whole Shenzhen ecosystem of phone makers, and it's unclear how that will play out, particularly whether you'll have smartphone equivalents of Dell, HP, and Compaq, who become the global scale players. (The future of Android is unclear in general).

Next up is the software ecosystem, which is Android and iOS. The Apple ecosystem has 700-750 million active devices, two-thirds of all App Store revenue, and roughly half of web traffic, so it has sufficient scale to attract developers. (Which means this operating system war is the first time we've had two winners.) Further up the stack is Google, creating discovery, and Facebook, creating social and discovery, and many other companies trying to create other waves of value on top of those.

Sinofsky highlights the opportunity for startups in enterprise or business computing, which is very understandable (the customers actually buy things). There are numerous opportunities to solve business process and business innovation challenges, on top of commoditized infrastructure and scale, like AWS, Azure, or Google Cloud.

The two stable points of iOS and Android allow a whole bunch of innovation to happen. In the PC era, once Windows and Intel stabilized, it enabled the web to exist, because it gave targets for the browser, targets for graphics drivers, etc. So we're in a golden age where if you start a company, the level of uncertainty about where to begin is much lower than it was even a year ago.

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