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Top-down vs. bottom-up: Which market analysis method is appropriate when disruption is knocking

In terms of platforms, IDC expects a relatively dramatic shift between 2011 and 2016, with the once-dominant Windows on x86 platform, consisting of PCs running the Windows operating system on any x86-compatible CPU, slipping from a leading 35.9% share in 2011 down to 25.1% in 2016. The number of Android-based devices running on ARM CPUs, on the other hand, will grow modestly from 29.4% share in 2011 to a market-leading 31.1% share in 2016. Meanwhile, iOS-based devices will grow from 14.6% share in 2011 to 17.3% in 2016.

Via: IDC – Press Release – prUS23398412

The company provides a stacked bar chart (follow link above) to illustrate their view of the market. I took the data they included and measured the implied growth rates for the product categories:

IDC is implying that in four years the tablet market will be growing at 10%, the Smartphone market will grow at 11% and the PC category will grow at 11%. In other words, five years from now the PC market is expected to grow faster than the tablet market and just as fast as the smartphone market!

What’s more remarkable is that this situation is not going to happen in four years. The slowdown in growth is actually expected much sooner. The growth rates two years from now are expected to be: Tablets 17%, Smartphones 15% and PC 10%. IDC is unequivocal: by 2014 the good times will come to an end to the post-PC challengers. These growth rates would be catastrophic for share prices and the value propositions of the new platforms to developers, partners and consumers.

What’s more, these growth rates are striking not only because they predict a collapse in the value of most market challengers but that they also predict a strongly resilient PC market. How can we test this forecast?

I tried to reconcile this doomsday scenario with what is known about the components making up the data. I.e. what “bottom-up” data is IDC using? In the quote above, IDC offers some insight into this market participant data. Based on the category and share data they published it’s possible to infer the following:

Bearing in mind that neither iOS nor Android existed five years ago, we can observe they are bigger together than the PC market. And yet, IDC predicts a compounded average yearly growth rate of 16.7% in Android, 19.4% in iOS and 7.5% in Windows between today and 2016.

In aggregate, IDC forecasts that in the next five years Android will not manage to double and that iOS will only increase by a factor of 2.4. Is this believable?

I try to stay away from long term forecasts, but I do maintain a short term forecast based on recent growth data. My forecasts for this year and next year are shown below.

I super-imposed my short-term forecast (outline bars) on IDC’s long term forecast (solid bars) and a several differences become apparent.

First, my 2013 forecast is nearly the same as IDC’s 2016 forecast. To see why we need to look at each platform separately.

Perhaps we might (with difficulty) agree on Microsoft’s potential. I believe Windows 8 will have a catalyzing effect and that Microsoft will begin to see its platform grow again. However, my expectations are modest. To increase Windows sales rate by 100 million units/yr between 2013 and 2016 is possible but ambitious.

The real problem is that our Android and iOS forecasts are outside any zone of possible agreement. Maybe there is a difference in what we measure. For a hint, we seem to disagree on the number of Android devices shipped in 2011. I used Google’s own reports of activations to work out the yearly shipment estimates. Perhaps IDC is including versions of Android that are not Google sanctioned.

We also disagree on the 2011 iOS figures. I obtained 156 from Apple’s own reports. Again, perhaps the difference is the inclusion of the iPod in my case.

Nevertheless, the difference in the long term cannot be accounted for only through these categorization differences. I would put the cause of the difference down to the methods used in forecasting. As can be seen from the first chart above, IDC’s growth rate reductions are extraordinarily steep. Perhaps the approach used by IDC was to forecast the overall market growth and then assignment of shares to participants. This can be called the “top-down” approach. In contrast, my approach is to forecast growth rates based on recent growth rates and moderating these rates gradually. This can be called the “bottom-up” approach.

My experience and all the data I’ve ever collected about historic disruptions tell me that the entrants tend to win these types of paradigm shifts. They win through a vast expansion of consumption and the recruitment of non-consumers. Markets tend to experience vast shifts in composition. If we believe this to be true then the bottom-up approach focused on entrants is likely to be more effective vis-a-vis the top-down approach of projecting steady state markets and the implicit assumption of incumbent share preservation.

  • Walt French

    “…entrants tend to win these types of paradigm shifts.”
    This insight might differentiate your readers, too. IDC’s research is meant to supply predictability to its customers; ergo, it is biased against your view. I tend to read the IDC report more as, “well, it’s getting harder and harder to deny the impact of post-PC.” Other readers who could chase down last years’s IDC report might be able to highlight what I only vaguely recall as stonewall denialism.

    There’s another useful approach you’ve used in these matters, Horace, that I think is terribly important to understanding Microsoft in particular. It’s “the job to be done.”

    The Enterprise remains solidly behind Microsoft software, servers and integration, with grudging recognition of individual employees’ use of iPhones, and some easy wins from iPads. But in 2012 and 2013, Win8 will grow users primarily in how much better it serves business usage. The personal ecosystem, the apps, the support network, and yes, the buzz, are all missing for individual users to flock to Win8 tablets.

    I personally don’t see Win8 as attractive for businesses EXCEPT perhaps for those who are finally ready to upgrade from XP; these are by definition not fast movers. So far, Intel-powered tablets are a hope; weight, battery life and costs are all unknown but likely to make the devices palpably inferior to iPads; Windows on ARM will lack many of the legacy support features that businesses want.

    In other words, Microsoft is bringing out a major revision that offers old usages very little enhancement, while the touch interface and mobility benefits are problematic. This spells slow adoption. 

    Your numbers for Microsoft are too optimistic.

    • N8nnc

      I’m not so sure anyone is “solidly” behind MicroSoft. I think it’s complacency.

  • http://twitter.com/gerrymcgarry Gerry McGarry

    He who pays the piper calls the tune.

  • Dick Applebaum

    From what I read, Windows 7 is a well received OS, and Windows 8, for the desktop, is Windows 7 with Metro UI/OS wedged between the user and Windows 7.Quite a few respected MS proponents describe W8 desktop as a disaster unless users are allowed to disable Metro — leaving little advantage to upgrading from W7 to W8… Metro, actually being a disincentive to upgrade.If this is true, I fail to see how W8 catylizes Windows OS growth!Sent from my iPad

    • poke

      Yes, Windows 8 looks to me like a strong signal that Microsoft just doesn’t get it. It’s adding “media tablet” features through a Media Center-esque UI layer but still thinks the real work (Office) should be on the desktop. Moreover, the tablets they’ve been demonstrating aren’t anywhere near the specs of the iPad or Android tablets (they’re running Intel i7 processors and have 4 gb RAM) and I’m skeptical that iPad-competing ARM-based Windows 8 tablets will ever make it to market.

  • OpenMinde

    A slightly off-topic, IDC may be the incumbent and asymco is the entrant.  If IDC continues providing idiotic predication, who would hire it? Maybe IDC shall die with their clients, an idiotic marketing firm feeds idiotic clients, and idiotic clients make decision based on idiotic prediction.  I guess them deserve each others.

    • Walt French

      It’s been decades now that you can go to Institutional Investor and find that the best-rated analysts are not the most accurate. They’re the ones who hold their customers’ hands the best.

      Street analysts and the independents such as Horace are serving entirely different markets. Same for IDC and Asymco.

      • OpenMinde

        Ya, IDC sure hold customers’ hands the best. But question is to where IDC leads these customers while holding their hand gently and kindly? With friend like IDC, I guess that Dell, HP, RIM, etc really don’t need any enemies to be self-destruction.

      • Walt French

        I don’t think they need much help, either. Look at today’s cloud service price cuts by Amazon and Microsoft, and stare into the eyes of the grim reaper coming after HP’s and Dell’s services businesses.

        I’ve seen the claim that Horace called the death of RIM over 2 years ago. It seems consistent with his general level of insights, though I haven’t been able to sift thru the archives to find the original post; his RIM post today reinforces how important the rapidly-redefined “job to be done” is, in understanding where all these companies are headed.

        Think of IDC as providing nicotine that calms jittery nerves. Not very good for you but feels good, allows you to cope in the short term.

      • http://www.asymco.com Horace Dediu

        Analysts and consultants on retainer hold up mirrors to their clients and whisper in their ears how beautiful they are.

  • Z Kariv

    Does the argument assume that the market reach saturation in 2016 at 2B units (compare to 2015) and you belive only in different market share? And, at that point in time, there is a global slowdon in units’ replacement as well? Molti units per user?
    Does these assumption conclude that India, Russia and Brasil (1/3 of global population or so) has been included in the market (which they are minimaly so)? China?
    Or, perhaps, a much larger and more active hand-down markets?
    What about, Horace, your thoughts of whom of the companies will survive that kind of meltdown–if it happand?

  • http://twitter.com/eclosson Eric Closson

    As Apple continues to find ways to offer less expensive models through continued production of previous models and as more and more enterprises open up to the use of iOS devices in the workplace, I can’t see growth rates dropping so dramatically.

    Also, in the smartphone space, most current users are still on a new device every 2 years cycle (at least in the US) given the rapid changing technology and incentive by service providers to continue to upgrade via subsidies.  This will likely continue without a major shift in the way these businesses operate/sell devices.  Horace, do you have any data on the percentage of existing smartphone users who upgrade each year and how those total sales relate to first time purchases? I would be curious to see trending data separated into those two categories…

    And just image what smart device shipments and growth rates would look like if schools begin adopting tablets over textbooks…

    • Darwinphish

      Toni Ahonen (http://communities-dominate.blogs.com/) has estimated that practically all smartphones are currently replaced in about two years and that the average device is replaced in less than a year. He also has numbers on first time vs replacement purchases, which as I recall are about 2:1. His numbers are for all smartphones, not just iPhones or any specific market. You will have to search his blog for the details.

  • Horace the Grump

    Seems IDC is completely in love with mean reversion….  its a workable assumption most of the time, but not al of the time… and when there is disruption as a forecasting tool its about as useful as a slide rule to a 3 year old.

  • Les_S

    What do you make of the argument that there’s an upper limit to demand? CNBC’s Gary Kaminsky (who’s been bullish) was describing an analyst note to clients today that makes an argument that such a limit exists and that Apple won’t be able to get past it. Basically it’s an arguement that demand is finite and that when other analysts come out with forecasts that don’t really think about that demand they are underestimating these limits.

    Just a thought.

    http://video.cnbc.com/gallery/?video=3000081237

    • Dick Applebaum

      Sigh!  All the things worth inventing have already been invented…  The only thing that’s left is:  for companies like Apple to get this technology into the hands of every individual in the world…

      Then, commerce/capitalism, as we know it, will be finished…

    • Secular_Investor

      Les_S,

      Thanks for the link. I watched it with a mixture of amusement and contempt. It just goes to show just what nonsense analysts and so called expert talking heads and commentators spout with regard to Apple.

      This talking head (whose name I did not catch) praises some analysis by an asset manager about why he had not invested in Apple (more fool him….LOL)

      “Apple’s total sales revenue last year was $108 billion which makes up 1.5% of US GDP and this is really good analytical thinking”

      He went on to say “Each person must spend $750 a year on Apple products”  which implied there was little headroom for Apple to grow.

      He then got really excited and said  that means “$225 would have to go to Apple every day” (quite how he came up with this figure or what it means I could not understand from his ramblings.

      This “really good analytical thinking” is arrant nonsense. It shows a profound lack of understanding about Apple, its markets and its growth potential both by the talking head and his analyst hero!

      Firstly the math is wrong. According to Siri US GDP in 2011 was $15.32 trillion, so Apple’s revenue of $108 billion was 0.7% of US GDP – not 1.5%.

      Again according to Siri the US population is around 309 million, so Apple’s 2011 revenue is equivalent to around $350 per person – not $750 a head.

      So this analyst and his talking head admirer cannot even do basic math.

      But what on earth are these clowns on about? What relevance does Apple’s revenue have to US GDP?

      Are they really so ignorant that they don’t know that Apple is global company selling its products across the world.

      Just for the record I asked Siri what was the world’s GDP and she gave me two answers for 2008: $59.62 trillion or PPP $69.94 trillion,  which means Apple’s 2011 revenue of $108 billion was equivalent 0.18% or PPP 0.15%. 

      However none of the above has any real significance nor does it shed any light on Apple or its growth prospects – although they do show up the naive, idiotic analysis of these clowns who pontificate on CNBC and other media.

      The real significance of Apple’s growth potential comes from Horace’s bottom up approach and Apple’s market share and growth potential in each of its product segments.

      Despite years of exceptional growth, the iPhone and Macs both still have only single figure global market share of the mobile phone and PC markets respectively, leaving huge headroom for growth.

      The iPad is still only two years old but has transformed the computer market. Most analysts (perhaps with the exception of IDC?) expect tablet unit sales to overtake PC sales within 3 or 4 years, so there is a huge growth market  for iPads.

    • http://www.asymco.com Horace Dediu

      Demand is finite. The question is how you measure it. As a percent of GDP sounds peculiar. Especially as a percent of GDP of one nation.

  • Secular_Investor

    Does anybody take IDCs forecasts seriously any more? They have an appalling record of incredible bias in favour of Microsoft, RIMM and Android (He who pays the piper etc.). 

    For example, a year ago in March 2011 they forecast that Windows Mobile global market share would increase to 5.5% in 2011 and to 20.9% in 2015, overtaking Apple to become Global No. 2.  

    They also forecast that Blackberry would achieve 14.9% market share in 2011 and still have 13.7% in 2015. 

    In fact Windows Mobile market share has collapsed since March 2011 to less than 2% in 2011 and Blackberry is facing catastrophe.

    Horace’s unbiased, bottom up approach is much more reliable.

  • Secular_Investor

    Horace, I think most of us have much more confidence in your forecasts or estimates than any of the so called “professionals” especially IDC, Gartner, iSupply etc.

    I really like your last chart. I assume iOS includes iPhones and Tablets, but does it include iTouch?   Also do you have estimates for each?

    Many thanks

    • http://www.asymco.com Horace Dediu

      I did include iPod touch in my iOS estimate. I do have estimates but I don’t publish them because of a misguided sense of modesty.

  • https://twitter.com/#!/reda_ek Reda

    Did you consider netbooks as disruptors then? How about the Wii?

    My mortgage advisor said the same about my house price but it turned out that we indeed have finite resources… ;-)

    • http://www.asymco.com Horace Dediu

      No to netbooks and yes to the Wii. I wrote about both in the past.

  • ADVILL

    In horse races  there is an axiom ” Drawing horse wins”

  • Oak

    Horace, their charted tablet sales are: 2010 (305M); 2011 (494M); 2012 (660M). How does your first chart consider 305 to 494 a 250% growth rate? Or 494 to 660 a 50% growth rate?

    • Oak

      oops, that’s phones, not tablets. Got it.

  • Petre Banu

    As usual, very interesting analysis.

    However, from the Asymco/IDC superimposed charts, if you
    ignore the Windows segments, it is interesting to see that if you draw a curve
    through the ends of the segments representing Asymco projections for 2012 and
    2013 to the corresponding ends of the curves representing IDC projection for
    2016, the resulting curves look remarkably close to a classical product life
    cycle diagram. That is – while Asymco might be right, IDC might not be very
    wrong either….

     

    Horace, how about your estimate for iOS sales in the March
    quarter? I am an iTunes vendor with a lot of free and paid products and I
    usually see a good correlation between my sales and Apple’s sales of iOS
    devices.  After the new iPad launch, my
    sales were quite good (though not as good as at the end of December/beginning
    of January), denoting a significant level of sales for devices. However, for the
    second part of January, February, and the first part of March, the level of
    sales was very low…. That’s 2 of the 3 months in the quarter.  Do you think that the boom in sales at the end
    of March made up the numbers for the whole quarter, or are we going to see
    lower than expected results this time around ?

     

    (I only sell in the North American, European and Australian
    stores, so China, which could be a huge factor, is a complete unknown for me….)

    • http://www.asymco.com Horace Dediu

      Q1 volume gains are dominated by Chinese New Year.

  • Rene Miller

    I’d also recommend taking a look at the B2B Market Sizing tool at ScienceOfMarketing.org. It’s very straightforward, takes under 3 minutes, and pulls data from the US Census Bureau. Worth checking out!