A version of this essay was originally published at Tech.pinions, a website dedicated to informed opinions, insight and perspective on the tech industry.
I recently presented at a number of venture capital firms about the next cycle or wave of innovation. An important fundamental observation is to understand that hardware innovations drive software innovations. That software can be local or cloud-based, but the bottom line is that hardware innovation is necessary to move software industries forward. With that in mind, it seems we are nearing the end of the mobile hardware cycle.
There are several observations I want to make about this chart:
The chart depicts the PC, tablet and smartphone computing cycle we have just gone through. You’ll notice a few things. First, it was big. That should be the obvious one. Second, you’ll see that the smartphone is the largest part of this wave. The smartphone drove an internet-connected computing device into the global mainstream in a way no piece of hardware before it could. You may also notice that the S-curve is slowing, which is why it seems we are nearing the end of this particular hardware cycle.
But the most interesting observation is how short the wave is. Notice that this wave grew inside the span of less than 10 years, compared to the early cycle, which was driven largely by desktops and notebooks, and steadily grew over 20 years. The large global rollout of computing is a recent phenomena. We still have much to learn, as many of the lessons in the first 25 years of computing are no longer applicable in an age where computing has gone where it had not been before.
An important fundamental observation is to understand that hardware innovations drive software innovations.
There are still a few hardware innovations in smartphones to come, like dual-lens cameras, which will continue to drive new software innovations. But largely, we are moving from a hardware cycle to a software cycle. This hardware cycle adds roughly another billion consumers to the computing landscape and, between PCs, smartphones and tablets, we now have roughly two billion people with an internet-connected computing device. During the PC era, our software scale was measured in hundreds of millions but now, thanks to the smartphone, the software industry scale is two billion global consumers and growing.
Companies that can leverage this scale are the ones getting the most attention. Key in that discussion are Facebook and Google. But the hunt is on for other companies that can create a software experience that appeals to billions, not just millions. The list of companies that can achieve software scale in the billions like Facebook may be short, but the largest computing base in the history of the industry now exists, so anything is possible.
Looking at the type of category that has the best chance at scale, I can narrow it down to a few. From survey data we have, we know that the top categories with the most active users are social networks, chat/messaging apps, games, maps, photo apps and music/video. It is likely that any app looking for a hundred-million-user scale and beyond should focus on these categories in order to achieve orders of magnitude of scale greater than other categories offer.
We are moving from a hardware cycle to a software cycle, and this hardware cycle adds roughly another billion consumers to the computing landscape.
Chasing scale will be one driven by business models. Those apps that are free and make money off of ads or other services will easily acquire the most customers. However, as this new global consumer market for technology software begins to segment, as we see happening right now, there will be lucrative pockets of opportunity where money can be made without achieving massive scale. The temptation for many companies will be to chase active users instead of focusing on their segment and serving it well. Perhaps no better current example exists than Snapchat.
Snapchat is at a crossroads where it can focus on its current base of users under the age of 30, which will get the company in the 200-million-user range, but not much more. To get beyond that number, Snapchat will need to adapt its service to appeal to a larger demographic. From the outside looking in, it seems that Snapchat is attempting to do this right now. However, there is a risk this will come at the expense of its current users. The company may alienate its existing younger audience as the older demographics get on the service. This is what happened with Facebook, as engagement declined significantly with the younger demographic once their parents started using it. They didn’t leave — they just used it less. They moved to apps like Instagram, which Facebook then bought to help retain some engagement with that audience. This is also why Facebook would buy Snapchat if it had the chance.
The hunt is on for companies that can create a software experience that appeals to billions, not just millions.
Owning a profitable segment of the market is valuable, but often, due to investment or growth pressure, companies will look to serve a broader demographic and thus begin to underserve the one that helped them get where they are. Whether or not this pursuit will pay off will be the key storyline to watch as companies attempt to grow beyond the segments they begin in.
Understanding segmentation is the key to understanding the market. There is no single "market." There are many markets which make up larger markets. If you don’t understand each pocket or segment of the global consumer market, you don’t actually understand the market beyond the surface. This is why, while difficult, I try to see the forest and the trees at the same time.
So what’s next? Is it VR? Is it further advancements in artificial intelligence? Smart home? Self-driving cars? Or it could be something entirely different and unknown. Whatever it is, it’s likely to come from the foundation of global mobile computing, because it is hard to think of any product — one almost every adult on the planet will someday own — that has the scale of the smartphone.
Ben Bajarin is a principal analyst at Creative Strategies Inc., an industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research. He is a husband, father, gadget enthusiast, trend spotter, early adopter and hobby farmer. Reach him @BenBajarin.
This article originally appeared on Recode.net.