The year's most important internet report is back, and now it's worried about the problems tech itself creates

Endlessly eating up users' time, and the privacy problem — the tech industry can no longer look away

Mary Meeker, a partner at the American venture capital firm KPCB, released the 2018 Internet Trends Report on Wednesday — the 23rd year running that KPCB has led this report.

Nearly 300 pages long, it lays out the past year's data and facts for the whole industry in exhaustive detail, covering every metric that people working in or investing in the internet most need to watch. That is why it is the most sought-after industry reference of the year. As in the past two years, this year's China chapter was produced by Hillhouse Capital.

Meeker started out as a stock analyst. She made her name in 1995 with her first report at Morgan Stanley, the report that also introduced metrics like "page views" for the first time. In that era, when the internet was still a novelty, Meeker and her report came to be treated as gospel.

That was even more true during the dot-com bubble that followed, when the Internet Trends Report helped fuel Wall Street's investment frenzy. Meeker was sued over it and issued a public apology.

Twenty-three years on, the internet is no longer short of analysts and evangelists, and Meeker's report is no longer eager to forecast future trends. It reads more like a detailed review of the year just past — and 2017 is worth revisiting, because the tech industry began to question itself as never before: are the things that once made our lives easier — data-driven user-experience design, the growth hacking that got products into more hands, the collection of private data that powers personalized experiences — making the world better or worse?

This year's report also adds a section, new for 2018, on the boundaries of privacy, and on why we spend more and more time staring at the small screens of our phones.

Both KPCB and its Chinese partner Hillhouse Capital have large internet holdings of their own: companies cited as positive examples, like Facebook and Uber, are KPCB investments, and Hillhouse has backed bike-sharing companies.

Internet growth is slowing, and 2017 didn't change that

"2017 was the first year that annual smartphone shipments didn't grow at all," Meeker said at the start of the report. Shipment growth last year was 0% against the year before, compared with 2% in 2016. After the fast growth of 2010 to 2014, the smartphone industry has struggled to find new users since about 2015.

The pool of global internet users is nearly tapped out too. Right now 3.6 billion people can get online, up 7% from a year earlier — well down from 2016's 12%.

Those 3.6 billion are 49% of the world's population. Meeker takes internet penetration passing 50% as a turning point, after which growth will keep losing steam: next year's growth in internet users will be slower still, and harder to come by.

China's situation is worse. IDC data shows China's smartphone market shrank 15% in the fourth quarter of 2017. The chapter written by Hillhouse Capital says China now has 753 million mobile internet users, more than half the population, growing at 8% — also slowing down.

For more on what the end of smartphone growth has done to the whole handset business, see QDaily's earlier coverage: After 11 Years and 8.5 Billion Units, Smartphone Growth Has Hit Its Limit and From Internet Phone Maker to Hardware Company: Xiaomi's Eight Years From Startup to IPO.

But time spent on phones keeps multiplying

Even as the world's total number of internet users stalls, people are spending longer and longer on their phones and online.

In 2017, the average adult spent 5.9 hours a day on digital media, twice as long as ten years ago. That includes audio and video, social networks, news and information.

Of that, 3.3 hours came from mobile devices — phones and tablets — and that share is plainly growing, dramatically so: in 2008 people spent just 0.3 hours a day on mobile.

China makes the point even better: mobile internet data use in 2017 grew 162% over 2016.

Where does all that time go? In China, the three biggest time sinks on mobile are social networking, video and gaming. This year, total time spent on mobile media and entertainment grew 22%.

Short video is growing far faster than long-form video. Douyin and Kuaishou have each passed 100 million daily active users, and the average user spends more than 50 minutes a day in each app.

Why can't people put their phones down?

Meeker's answer is that today's smartphones are better, faster and cheaper. Both iPhone and Samsung released expensive handsets last year, but the average retail price of a new smartphone has fallen steadily overall and now sits at about US$300.

Social, e-commerce and media apps are also evolving in ways that pull ordinary users' time away.

Take payments. KPCB's data shows digital payments now account for 60% of transactions, meaning internet users do most of their buying online: browsing e-commerce sites, using one-click ordering buttons (more common in the US), scanning QR codes to pay, shopping through smart speakers. China's mobile payment users have grown to 500 million, the largest such market in the world.

The spread of social apps, better voice technology, new content formats such as game livestreaming — all this content and technical innovation in mobile apps is responsible for the growth in time spent.

"One thing I feel deeply is that there's so much innovation and competition in the mobile internet industry, and that's what drives products to improve, increasing the usability and usage of apps," Meeker said.

Then there is personalized recommendation built on usage habits. Spotify shows different playlists based on the songs a user has already heard, which lifted the company's daily engagement rate — daily active users as a share of all users — from 37% in 2014 to 44% in 2017. It has also helped niche artists get more exposure.

The report cites Toutiao as another case. Because it keeps pushing content matched to your browsing habits, its average daily usage time is twice that of Instagram and Snapchat.

These companies' business models rest on the time people spend on their phones. There is nothing inherently wrong with data-driven personalization: the more attention users invest, the more internet advertising is worth. The ad business is built on data — work out what users like, then put advertisers' ads, or your own products and services, in front of them as precisely as possible. KPCB concludes that mobile advertising has at least US$7 billion of room left to grow.

But the optimism about precision recommendation is now reversing.

In February, former employees of tech giants including Google, Facebook and Mozilla founded a nonprofit called the Center for Humane Technology. They launched a campaign called The Truth About Tech, meant to "reverse the digital attention crisis and re-align technology with humanity's best interests."

The Center for Humane Technology accuses tech companies of building an attention economy — a race for users' attention that is eroding the public's mental health.

Social networks, Instagram and YouTube's endlessly refreshing autoplay videos, all of them once thought harmless, have in fact changed our brains. We lean toward the opinions we already hold, and tech companies end up feeding bias rather than correcting it. That creates problems at a wider social level: fake news damages democracy, and personal relationships and children suffer too.

Google has already added a set of anti-addiction features. Android P will bring Dashboard, App Timer and Wind Down.

Dashboard shows how long you use your phone each day, how many notifications you have received, a usage schedule for each app, and when each app gets used. App Timer then lets you set a time limit per app; as you approach it, the system pops up a warning that your time is nearly gone. When the time runs out, the screen turns gray to remind you again, and the app's process is stopped. Wind Down forces the phone into do-not-disturb mode once your chosen bedtime arrives, and turns the screen gray as well.

The KPCB report quotes Google CEO Sundar Pichai:

"AI is one of the most important things humanity is working on. It is more profound than electricity or fire. We have learned to harness fire for the benefit of humanity, but we also had to overcome its downsides. AI is important, but we need to stay vigilant about it too."

Chinese internet companies talk about addiction too. Games or short video, the intent behind deliberately leading users into wasting time is the same. But when Tencent caps playing time on Honor of Kings, or Douyin runs its anti-addiction system, the reason they turn around and limit their own users is more often government regulation.

Does handing over privacy bring convenience, or disaster?

This year's report adds a section on the contradictions of privacy.

Technology's encroachment on personal privacy is not a new subject, but 2017 was an unprecedented turning point, impossible to sidestep. Early this year it emerged that Cambridge Analytica had sold Facebook users' data to marketing firms for use in an election, and the uproar has yet to die down.

Today's internet rests on a bargain: hand over your real information and you can search and share freely in the digital world. The supposed personal payoff is lower costs and a better experience through personalization.

That is also the business model Facebook has always used to defend itself — use data to drive advertising, and more internet users benefit.

The report cites a Deloitte survey of American consumers: 79% would be willing to hand over personal data for an "obvious personal benefit," and more than 66% would share their online data with friends.

Baidu CEO Robin Li said: "Chinese people's attitude toward privacy is more open, or perhaps less sensitive. If they can trade privacy for convenience or efficiency, in many cases they are willing to do so."

That holds up. A survey by the market research firm GFK shows Chinese internet users are more willing than users anywhere else to hand over data — a third more willing than the second-place United States.

This logic has worked since the internet's earliest days. Now people are asking what was wrong with it at the source.

"We made a mistake back in the '90s, when digital culture was just taking hold. We had this overly left-wing, socialist-tinged goal — we wanted everything on the internet to be free," the computer scientist Jaron Lanier said at this year's TED conference. The privacy crisis, he said, is a global disaster with no particular person or organization driving it from behind — it was produced by "an absurd and astonishing system."

As computers get smarter and algorithms more precise, and everything runs on getting you to see more ads, everything seems to have come off the rails. "I don't call them social networks anymore. I now call them 'Empires of Behavior Modification.'"

The reckoning will not stop. Europe's General Data Protection Regulation (GDPR) has taken effect, and more countries are considering similar limits. The law sets the foundation for global data protection over the next decade, regulating and restricting nearly every step by which tech companies make money from personal data.

Online shopping is now routine, and people no longer find products mainly through search engines

Search engines like Google once shortened the distance between users and products. In 2017, US e-commerce revenue kept growing at 16%, up from 14% the year before. Pure shopping apps on mobile grew faster still, up 54% year on year.

As shopping platforms like Amazon fill up with more content, and social media keeps experimenting with commerce, the ways users find products are changing too.

Amazon has become the new shopping search engine: 49% of consumers start their product searches there, and only 36% start with a traditional search engine such as Google.

The difference is that once a user searches for a product, Amazon offers a whole set of shopping features — one-click ordering, related-product recommendations, membership points. Google can only display scattered purchase options from different advertisers.

That has produced an interesting shift: Google and Amazon are turning into each other. As Amazon comes to understand users' search data, it can recommend products to advertisers' benefit more precisely. Google, meanwhile, is growing from an ad platform into a commerce platform — you can now buy things by voice through Google Assistant.

The other shift is that social media is helping users find products more efficiently.

On Facebook, Instagram and Pinterest, users increasingly come across products they like. 78% of users say they have had that experience on Facebook.

The share of e-commerce recommendations coming from social media has risen sharply too, from 2% in 2015 to 6%. Advertisers are leaning toward social platforms, and click-through rates on Facebook's e-commerce content keep rising.

Today 11% of people buy something on the spot after seeing it on social media, and 44% think it over before eventually paying. Turning ads into purchases works well.

Social media also lets advertisers think about a user's lifetime value rather than a single completed sale, which matters a great deal to retailers and brands.

It is not only American social platforms doing this. Douyin and Weibo have both been adding e-commerce content. Countless viral short videos have proved Douyin's power to move merchandise, and not long ago it launched its own storefront along with a feature that links straight through to Taobao.

In online spending, more and more purchases are shifting from one-off buys to subscriptions. Take Spotify: 45% of its monthly active users are now subscribers, against 0% when it launched its subscription product ten years ago. Meeker credits this mainly to an excellent user experience.

Netflix, which offers only subscription streaming of American shows and films, has grown just as fast: its subscriber count reached 117 million in 2017, up 25% year on year.

"There's more and more shopping inside entertainment," Meeker concluded.

Online spending has grown fast over the past decade, and it has brought overall prices down as well.

Meeker set out how far prices have fallen online and off: over the past two years and more, offline prices dropped just 1% overall, while online prices dropped 3%.

Televisions, computers and furniture took the hardest hit — the categories with the steepest overall price declines.

"We've already seen technology make online shopping more efficient, push product prices lower, and give users more choice in how they discover products," said Google chief economist Hal Varian.

"In the future, offline shopping will become the same way."

Macro data enters the report: the internet is cutting the cost of living, online and off

The internet's effect on daily life also shows up in what households spend on food, clothing, housing and getting around.

Meeker used US Department of Labor statistics to study census data on what American households spend on housing, transportation, food and the rest. Her conclusion: online services are helping bring down every category of consumer spending.

Take housing. The data shows household housing costs have kept rising. Average population density in American cities is far lower than elsewhere — South Korea's density is 17 times that of the US, Japan's 9 times, Britain's 6 times. On the same area of land, far fewer people live in the US than in those places.

As American homes have gotten bigger, the average number of residents per home has kept falling. So Americans have to spend more on upkeep, utilities and running the household.

Airbnb, which rose with this trend, has clearly redistributed housing. For guests, it avoids expensive hotel rates; for hosts, it lowers the cost of holding a property.

Right now 500,000 people in the US list a property on Airbnb, and the number keeps climbing — evidence that online services really do help consumers spend less on travel and housing.

The same is happening with transportation. The share of American households buying a car keeps falling, for many reasons, rising gas prices among them. The Wall Street Journal reported last month that international crude output and seasonal shifts have pushed US gas prices to roughly a four-year high.

Consumers are spending less on private cars. In 1995 the average car on American roads was replaced after 8 years; now it lasts 12. Well-built public transit networks have also given people more reason to take the subway and the bus.

Uber and Lyft belong to the same sharing economy as Airbnb, and work the same way: they put idle seats to use, help drivers spread the cost of fuel and maintenance across each kilometer, and give riders more ways to travel.

Uber faces plenty of problems — vehicle safety, privacy leaks, competition fueled by burning cash — but its fast-rising valuation over the past few years still shows investors like this market.

The internet and technology are improving American household life in one other important place: healthcare spending.

American health insurance costs rise every year. Health insurance as a share of consumer income has climbed from 14% in 1999 to 18% today.

Deductibles are rising too: the share of employees facing deductibles of US$2,000 or more has gone from 7% in 2009 to 22% today.

The more they spend, the more consumers care about services that give them value for money. Growing healthcare demand pushes internet companies to improve the consumer experience.

Meeker tried to prove the point with examples. The numbers behind the shift are still small, she said, but the trend of the internet lowering healthcare spending is real.

From modernized retail services to digital data analysis and interactive experiences, to more transparent pricing and easier payment — the report's data shows that both the number of users and the frequency of use of these healthcare services have risen steadily over three years.

Big tech companies including Apple, Amazon and Google also have serious ambitions to push deeper into healthcare. Apple is testing a product that would let users keep their medical records on an iPhone. Amazon, Berkshire Hathaway and JPMorgan Chase, meanwhile, have announced a partnership aimed at cutting medical costs and improving health coverage for their employees.

"Will market forces eventually arrive in healthcare and push prices down for consumers?"

Technology has changed how people see and choose their work

Sharing-economy services born of internet technology, such as Uber and Airbnb, have not only cut American household spending. The report argues new technology is also changing employment.

From the steam engine's industrial revolution to today's electric-vehicle disruption of the car industry, every new technology in history has created and rearranged huge numbers of jobs.

Services have replaced agricultural work. That is obvious close to home: more and more farmers are moving to the cities to become delivery riders and couriers. The same happened in the US, where employment in agriculture has dropped from 41% in 1900 to under 2% today.

Life has become steadily more digital, and the internet's gradual absorption into everyday life is exactly what the past 70 years have been about.

The change is plain. Over that period, GDP has kept growing in country after country. In the labor market, US figures show unemployment steady, now at 3.9%, far below the 5.8% of 70 years ago. Consumer confidence has climbed all the way.

More and more jobs are being created — openings in the US market have reached 7 million, the highest in 17 years, three times more than the 2009 trough. The data shows job growth is fastest in urban areas; 86% of Americans live in cities, and that share keeps rising.

What else has technology changed? Meeker posed a question: "What do people now prefer to do with their time when they're not working?" The answer: "Rest, family activities and self-directed learning."

She argues that technological change is what keeps altering the demands of work, and that it has made what workers want most not pay or money but the continual pursuit of new skills. The number of lifelong learners has grown 30%. That is precisely the change technology has brought.

Mastering different technologies gives freelancers more career options. Demand for work freelancers can do is growing three times faster than the freelance workforce itself.

The report estimated the size of that workforce. In 2017 the US had 5.4 million freelancers; Meeker expects that to rise 23% year on year to 6.8 million in 2018.

Etsy, the marketplace known for handmade goods, has 2 million sellers. Upwork, a freelance marketplace, has 16 million freelancers looking for work.

Then there are Airbnb hosts and Uber drivers. Meeker quoted the well-known investor Bill Gurley, an Uber backer, on the Uber network: "There's no mandatory work requirement for Uber drivers, and yet this entire global network operates almost miraculously. Drivers can decide for themselves when and where to work. When they don't want to work, they have unlimited freedom of choice. You don't see that in other industries."

Because of internet technology, demand for work and people willing to work are connected more directly. And the trend keeps growing in importance in the US and everywhere else.

China turns up, inevitably: who leads the global economy?

The report also looked back at the year from a wider angle.

The world's economic growth still comes mainly from the US, China and India — all three have seen GDP grow over the past seven years. Trade protectionism is heating up globally, yet cross-border trade as a share of world GDP is rising too.

A great deal has happened to internet leadership over the past 5 to 10 years. KPCB listed the 20 internet giants with the highest current market cap or valuation, and 9 of them are Chinese: BAT, Ant Group, Xiaomi, Didi, JD.com, Meituan and Toutiao.

The change over five years is enormous. Seven of the companies now on the list could not crack the top 20 in 2013, and their value has swelled fast — Apple, ranked first, has doubled, and Tencent has grown sevenfold.

One caveat: this top-20 list includes companies that have not gone public, and of the 9 Chinese companies only BAT are listed. Their real value once public remains uncertain — Xiaomi, due to list next month, has already had its valuation cut several times.

Chinese internet companies share an obvious trait: their users are concentrated at home, and China has the world's largest single-country user base. KPCB set Google plus Facebook against Tencent and Alibaba: the latter two have close to 2 billion active users between them, but almost all of them are in China. By contrast, nearly half of Facebook's users are in Asia, and fewer than a tenth of Google Android's users are in the US itself.

Politics can't be avoided either: immigrants built America's tech industry, and staying is getting harder

The US is no longer the place where the world's immigrants go to realize the American dream. The federal agency that issues green cards and citizenship to foreigners has stopped calling America "a nation of immigrants." The Trump administration has taken a hard line on immigration: US Citizenship and Immigration Services has tightened scrutiny of visa applications for the foreign workers American companies want to hire; changed the application process for asylum seekers to keep people from seeking asylum in the US; and added steps for foreigners in the country to obtain lawful permanent residency, the green card.

By KPCB's count, more than half of the 25 highest-valued tech companies in the US were founded by first- or second-generation immigrants. In 2017, 1.7 million employees in the US tech industry had an immigrant background.

Technology is the industry taking the hardest hit. A statement issued last year by the Consumer Technology Association said: "There are currently 44 billion-dollar startups in the US founded by immigrants. On average, each one has created 760 jobs for Americans. Without these immigrant entrepreneurs, America could not be the beacon of innovation it is today."

Cover image from Pixabay; illustrations from Tencent Technology and the Chinese translation of Hillhouse Capital's report.