A pedestrian was killed in Tempe, Arizona by an Uber autonomous car.  In 2015, Governor Doug Ducey enticed the self-driving car industry to Arizona by executive order clearing the way for testing in the state.  Last month, he updated this order touting Arizona’s “business friendly and low regulatory environment”.  Following the crash, Uber has stopped all real-word testing of its autonomous cars, which were happening in San Francisco, Phoenix, Pittsburg and Toronto.  The accident is now in the crosshairs of both the U.S. National Highway Traffic Safety Administration and the National Transportation Safety Board.

The recent Cambridge Analytica revelations on Facebook data to help Donald Trump’s campaign is ill-timed for autonomous car companies.  And is forcing regulators to increase scrutiny on the level of self-policing that has so far been granted to tech companies generally. The fatality and recent privacy breach revelations will almost certainly adversely impact the pace of autonomous car technology advancement in the U.S.

There are at least two broad black box areas regulators will want to examine and ultimately address.  One is conceptually straightforward, while being technically bedeviling.  Autonomous cars are trained using AI methods such as deep learning on massive amounts of data to interpret and react to driving conditions.  However, unlike traditional statistical predictive methods such as regression analysis, deep learning does not easily lend itself to transparency of decision making, which leaves it with an air of magic about it.  This reality will make it difficult for regulators to communicate with an increasingly skeptical public.

The other issue is philosophically much more challenging.  Inevitably, autonomous cars are going to be in situations requiring them to make an instantaneous choice between a set of bad outcomes.  For example, the decision when an autonomous car is faced with a choice of modest damage to itself versus more material damage to its surroundings.  Even more fundamentally, what happens when lives are at stake?  How will the car measure tradeoffs and react to them?  At some level the processes for making these ethical decisions must be programmed into the car.  The public at large is unlikely to accept a Google, BMW, Ford, or an Uber unilaterally making such decisions.  Recent headlines on Cambridge Analytica that erode public trust in tech companies, and, now, a self-driving car fatality will force a bright spotlight at the core of autonomous vehicle systems.

The rule of law and consumer protection is a strength of the U.S.  At the same time, these strengths could prove to be an impediment in the race for global leadership in the development of autonomous cars, and AI more broadly.

Just a quick follow up to the post “Retail Drives Smart Home Innovation”…

One area of search where Google is being robustly challenged is product search. More consumers now initiate their search for products on Amazon than they do with Google. Think about that a minute. In fact, the CEO of WPP, the world’s largest advertising company does. When asked what worries him most when he goes to bed at night, his response was Amazon.

This matters. Retail spending accounts for 22% of the $18 trillion U.S. economy, and is a key reason for Amazon’s efforts to extend their retail ecosystem to the smart home. Combined with consumer electronics and CPG, retail contributes to 35% of Internet advertising revenue.  Which makes it important for Google to counter Amazon’s initiatives. The more entrenched consumers are in the Amazon ecosystem, the more likely they are to make Amazon their shopping destination. And the less likely they are to depend on Google for search.

There are a few key takeaways for the smart home. The first is that the big prize with the smart home is retail. Another is that a device strategy is at the core of many of the companies focused on the smart home. Further, it is devices for entertainment – video, music, gaming – that are a strategic priority. Amazon, Google, Snap, Facebook … the list of superstar companies pushing entertainment devices is staggering. Which makes sense. Entertainment is central to the home. It also represents the most complicated wireless problem to solve given the amount of data that needs to be transmitted, and the need to synchronize the packets of data. So, whichever company can provide a compelling solution for entertainment will probably establish an enduring presence in the smart home and reap the benefits that come with it.

A visit to CES 2018 showed the future of the smart home really is a battle between Google and Amazon.  And made me revisit a blog post from December 2016 …

The popular focus on smart home technology is on home automation, such as smart lighting, environmental control, smart appliances and home security. These technologies make up a rapidly growing, multi-billion dollar market. However, that is small change compared to retail. The retail market accounts for a quarter of the U.S. economy, or, about 100 times that of home automation (in 2015, U.S. GDP was $18 trillion and consumer spending accounted for roughly $12 trillion, of which, retail spending was $4 trillion). Growth in retail tracks the economy and has been slow – for instance, Q2 2016 growth was 2% year-over-year. Online retail, however, expanded 16% over the same period and is now almost 10% of overall retail spending. It is no wonder then, that fighting to win control over this huge prize is the driving force behind The Smart Home Wars.

The (re)tail winds have shifted the smart home industry to not necessarily make smart products for the home, but rather, making a home smarter so it can buy products. The most ferocious battle for smart home domination is between Amazon and Google, and this battle is already transforming how we interact with our homes.

A River Runs Through Your Smart Home

With revenues of $100 billion, Amazon is the world’s largest online retailer. Amazon is relentless in its goal to establish and maintain strong, long-term relationships with their customers. They pride themselves on making innovations to make purchasing easier, already taking immense strides to make the home “smarter” for purchases.

It comes as no surprise that Amazon’s smart home product direction is geared toward enabling growth in retail sales through immediacy and ease of use. Amazon’s Dash buttons and the Amazon Echo, along with the Echo’s siblings, the Dot and the Tap, are poster children for a smart home in its formative years. Dash buttons are essentially free ($4.99 for a $4.99 credit), and each is associated with one of a few hundred household products, such as Bounty paper towels, Tide laundry detergent, even Diet Coke. The Dash Button is simple: a press of a button initiates the product’s purchase and delivery to you (all through Amazon).

However, Amazon’s most major advancement in smart home technology is the Echo. Echo is a Wi-Fi connected smart speaker, whose key innovation is its skillful application of voice recognition and AI responses. It can play music, provide web search results, and control home automation devices all through voice command. Amazon wants to make the Echo indispensable in the home, and provides a platform for third parties to write programs that leverage the Echo’s voice recognition and connectivity. This will make the Echo’s value increase over time as its functionality expands, much like the Google and Apple app stores.

However, the Echo’s main value to Amazon is it’s ability to maintain shopping lists and make purchases from an increasing selection of products through Amazon. This is the biggest step in smart home technology and has set the bar for any competing devices. As investment continues, the Echo will eventually be able to make most of your household purchases on demand or (where AI technology and the market is headed) predictively. This will lead to consumers making more purchases through, and increased loyalty with, the Amazon ecosystem.

OK Google…

Google has proven itself the leader in developing AI technologies, placing it at the forefront of innovation for smart home solutions. Although a bit late to the direct-to-consumer marketplace, Google’s heavy investment in AI has it marching into battle with a fully loaded arsenal.

When you have $80 billion in cash, you take a few chances. To have a more direct presence in the home, Google has bought Nest and Dropcam, released Chromecast Audio, Chromecast Video and Google OnHub, and even made their own Amazon competing retail delivery service – Google Express. Most recently and most loudly, Google has released Google Home, a voice-activated smart home speaker. Google Home was unveiled earlier this Fall to positive consumer and critical reviews. Like the Echo, you can use Google Home to search the web, set reminders and play music from your Spotify account (as well as other streaming services).

However, a major reason behind the introduction of Google Home is defensive. Internet advertising continues to comprise the vast majority of Google’s revenue. And, a large part of that revenue is related to retail. U.S. internet advertising revenue was at $60 billion in 2015, and growing at 23% quarter-over-quarter in Q4 2015. Of that $60 billion, 22% was from retail, and another 13% from fields closely related to retail.

It is the loss of this revenue that Google is threatened by with Amazon’s smart home successes. Consumers using devices like Amazon’s Echo and Dash undermine Google’s growth in its search revenue: the more a company like Amazon gets consumers to buy directly through their platforms, the lower the need for individuals to search and browse the web to find products, and the less money Google makes through ad sales. Google must protect their search business at all costs.

The Two Tower Speakers

Amazon Echo and Google Home. Two similarly shaped speakers with similar functionality and similar intent. So, who will win the “Smart Home Wars?” On the one hand, we have a retail giant with a clear focus on consumers and the ability to churn out innovative products. On the other, a company with, probably, the largest collection of software talent and massive AI skills. Each is fighting for the future of their core business.

There are two distinct directions their smart home innovations favor. Amazon is all in for ease of purchase, it’s “one stop shop.” If Amazon makes their shopping experience the most intuitive and convenient, they have a large shot at controlling the retail market. For consumers, however, the captivity of convenience will alleviate pricing pressure on Amazon and lead to higher prices. At least, prices that are higher than they would otherwise have been.

Google is repurposing its basic search engine for smart home products and AI, making it easier for individuals to find the best value for their retail purchases. Google’s investment in AI technology also means that it leads the industry in the most innovative ways to predict what you may want, or need, for your home.

The winner may well be decided by whether consumers prefer convenience (Amazon) or whether the ability to find the best deal is more important (Google).

Back to the Smart Future

Conventional wisdom predicts a bright future for smart home products and solutions. It’s still in the early stages, so what shape the products take and what revenue streams the solutions inspire will only unfold in time. The importance of retail is driving Amazon and Google to make the Echo or Home indispensable, and to try and make them the “hub” of the future smart home. However, the market is young and growing rapidly each year, and there will inevitably be additional competitors in this space – Apple will certainly play a part, Microsoft will likely build something based on Cortana, Samsung and LG are working on voice-based assistants, and other players like AT&T, Comcast, and Sony seem poised to enter the field.

Amazon and Google chose the humble speaker. The ubiquity of speakers and their naturalness for two-way communication through the clever use of voice interface and AI makes this the most compelling effort so far. But they still have a long way to go. While a hub based on home entertainment is persuasive, consumers are still looking for products that can not only replace existing ones, but connect the entire home into one large system. Amazon and Google’s focus on retail and associated aspects of the smart home experience has led to initiatives that do not meet consumers’ complete home entertainment needs. The natural path for the “Next Big Thing” in smart home technology will incorporate comprehensive wireless home entertainment into the hub: speakers throughout the whole home with multi-channel 5.1 capability, TVs with varying streaming and gaming platforms, and your smart phone, all connected, all on standard Wi-Fi.

Something you hear a lot in Silicon Valley is how hard it is for the little guy to compete against the Googles, the Facebooks, and the Amazons of the world.  They have a platform.  And, it’s hard to compete against a platform.

A lot of the value of platforms is driven by data and how that data can be used to optimize business decisions.  The Economist magazine claims that “The world’s most valuable resource is no longer oil, but data”.  No surprise, then, that substantial investment focus by Amazon and Google is in artificial intelligence (see CBInsights’s very detailed analyses on these two companies).  For a good understanding of the incumbent value of platforms, however, Facebook’s relatively clean business model is the easiest to examine.

Facebook revenue increased almost 6 times from $5B in 2012 to $28B in 2016.  Certainly, a secular increase in internet advertising spend explains part of the trend.  More fundamental in this growth, though, is the increase in the number of daily users from 0.6B to 1.2B, and the time each user spends on Facebook properties.  More time, individually and as a group, means more opportunity to serve up advertising.  And, very importantly, optimizing what ads to serve up and how (hello AI).  In that same period, average revenue per user grew from $5 to $16.

In essence, the platform and the value that it provides is a simple function: # users x time per user.  A startup has to do a great job maximizing the amount of time users spend on its properties.  But, to achieve a compelling financial model, it will inevitably need a large number of users.  Snap ended 2015 with 107M daily users, and averaged $0.6 per user.  By 2016, number of users had risen to 158M, and average revenue per user to $2.7

Facebook’s strategy is focused on pushing these two numbers up, and the bulk of the $25B it has spent since 2012 to acquire companies was directed at Instagram and Whatsapp.  It also made an unsuccessful run at Snap.  That failure led to Facebook mimicking Snap by offering camera-related features on its platforms. Instagram Stories alone has reached 200 million active users.  Which exceeds Snap’s total active users, showcasing the power of platforms.  Facebook now has 1.2B daily users that spend an hour a day on its combined properties.  A digital river of information that Facebook gleefully monetizes.

Not every startup can be Snap, and achieving meaningful volume may require leveraging existing platforms.  For which the platforms will get a meaningful cut.  The other lever that startups have, is to maximize the amount of time users spend on them.  Some of the most popular categories of applications are:

• Social media and browsing: Facebook – an hour a day for each user
• Video: Netflix – 2 hours; YouTube – 1 hour
• Gaming: as a category, 2 hours a day
• Music: Pandora – 1 hour

The killer app would be one that combines all, or a significant subset of these applications into one unified platform.

Sources: “The new face of Facebook” The Economist; “Google Strategy Teardown” CBInsights; “Amazon Strategy Teardown” CBInsights

The four most valuable public companies in the world are, in order, Apple, Google, Microsoft, and Amazon. Samsung is not too shabby either.  The aggregate market cap between these five companies is about the same as the combined market cap of the U.K, and exceeds that of France, Germany, and Canada.

So, what does this $2.7T of market muscle have in common?  Well, possibly a bit.  But, curiously, one is the purposeful push of their own voice assistant speakers.  Amazon led the way in 2014.  The rest of the Big 4 made announcements subsequently, and Samsung is rumored to be planning one as well.

Prior to the launch of Amazon Echo, the market for Wi-Fi connected speakers was worth less than $5B.  Nowhere near the size to attract the attention of any one of these companies.  So, what is the thinking behind these investments?  A look at speaker pricing is indicative.

At $349, Apple’s Home Pod is priced, like most things Apple, to make a profit.  The voice assistant speaker market is now an attractive, high-growth market.  In addition, there is logic to the value of the Home Pod to the Siri, iTunes, Apple TV and HomeKit ecosystem.  The pricing of the Cortana speaker, harman/kardon Invoke, is not known yet.  But, is likely to share the philosophy of Apple, i.e., to make a profit for Harman International, unless it ends up being subsidized by Microsoft.