stratechery
stratechery

Don’t Blame Uber

At the risk of painting too broad a stroke, it seems to me that much of the opposition to changes wrought by the Internet undervalue the positive impact said changes have on normal people. For example, people despair over newspapers closing without appreciating the explosion in quality content freely available to anyone anywhere in the world, the net result of which means those who choose to be can be far more informed about far more things than just a few years ago. Others gripe about Facebook’s frivolity or it and Google’s collection of data without acknowledging that both have fundamentally changed how we relate to both those we know as well as anything we wish to know. Probably the most charged group of companies, though, are those which most closely touch the real world: the “sharing” companies. And, of those, none is more controversial than Uber.

The benefit of Uber for consumers is really quite remarkable. Everything about an Uber experience is superior to the taxis it is obsoleting: it is easier to get an Uber, it is more pleasant to ride in it, it is easier to pay. In places with heavy coverage it is possible to not use a personal car for days at a time or to completely go without, with all of the financial and environmental advantages such a decision entails. And so, my position, at least to start, is to presume that the existence of such a service is a good thing.

Critiques of Uber, particularly from the left, rather stridently disagree; consider this piece by Avi Asher-Schapiro from Jacobin:

Uber is part of a new wave of corporations that make up what’s called the “sharing economy.” The premise is seductive in its simplicity: people have skills, and costumers want services. Silicon Valley plays matchmaker, churning out apps that pair workers with work. Now, anyone can rent out an apartment with AirBnB, become a cabbie through Uber, or clean houses using Homejoy.

But under the guise of innovation and progress, companies are stripping away worker protections, pushing down wages, and flouting government regulations. At its core, the sharing economy is a scheme to shift risk from companies to workers, discourage labor organizing, and ensure that capitalists can reap huge profits with low fixed costs.

There’s nothing innovative or new about this business model. Uber is just capitalism, in its most naked form.

First off, as I noted at the beginning, I’m put off by the lack of acknowledgment of the very real benefit Uber is providing to people who use their service; while I quoted only the conclusion, actual consumers were not mentioned once in the article. The reason this matters for Uber in particular is that if Uber were to actually hire all of its drivers as I presume Asher-Schapiro would prefer (and something Kevin Roose warned the IRS might make happen) the impact on consumers would be significant:

  • Because Uber’s cost per driver would increase significantly, the geographic reach of Uber would be dramatically curtailed
  • Because Uber would not have the flexibility of drawing more drivers onto the roads through surge pricing, availability during peak demand would likely suffer
  • Were Uber to hire drivers as Uber employees, they could also restrict said employees from driving for any other car service; this would actually increase the advantages Uber gains from being reportedly 12 times bigger than its nearest competitor, Lyft, which would ultimately reduce competition and result in higher prices

Moreover, what exactly would drivers gain from being employed by Uber? Clarity on insurance and liability is a big one, and I absolutely think that Uber should be more proactive here, particularly since their scale should give them an opportunity to demand better rates. The bigger gain though – and the biggest reason for Uber not to straight-up hire their drivers – are benefits, particularly health insurance. As Roose notes in his piece:

For start-ups trying to make it in a competitive tech industry, the benefit of opting for 1099 contractors over W-2 wage-earners is obvious. Doing so lowers your costs dramatically, since you only have to pay contract workers for the time they spend providing services, and not for their lunch breaks, commutes, and vacation time. Contract workers aren’t eligible for health benefits, unemployment insurance, worker’s compensation, or retirement plans.

This is the biggest hangup for me in the Uber spin that they are, as the Uber blog put it, enabling entrepreneurship:

Drivers around the world are seizing Uber’s economic opportunity by building small businesses for community needs long forgotten by the taxi industry: high quality, safe, reliable and affordable transportation options. At its current rate, the Uber platform is generating 20,000 new driver jobs every month. UberX driver partners are small business entrepreneurs demonstrating across the country that being a driver is sustainable and profitable…Our powerful technology platform delivers turnkey entrepreneurship to drivers across the country and around the world.

Entrepreneurship is nice and all – I’m obviously a fan – but the truth is it is a risky proposition in the United States. Estimates for the cost of health care for a family of four range from $16,000 to $22,000, and medical bankruptcy accounts for the majority of personal bankruptcies. If these numbers are shocking to you, it’s likely because your employer is paying the lion’s share of your costs; the cost of such payments is a significant factor in income staganation, particularly in the lower to middle classes. The real world implication of having employers provide health care is even more pernicious though: it dramatically increases the stakes when it comes to entrepreneurship, Uber-style or more traditional.1

This is the chief reason why I am so frustrated by the left-wing attacks on Uber. Beyond the lack of regard for consumers, the truth is the venom is misplaced: it’s not that Uber is bad for not hiring workers and giving them attendant benefits, it’s that said benefits shouldn’t be Uber’s – or any employer’s – responsibility at all. It’s employer-based health care that is the problem, and in ways that go beyond the economic benefits of universal health care (the most obvious of which is the broadest possible risk pool, not to mention unmatched buying power). It’s that people are afraid to leave or lose their jobs because they lack the most basic of safety nets.

This is quite personal for me; one of the chief reasons I took the risk of launching Stratechery is that my family lives in Taiwan, home of one of the best health care systems in the world. As someone who is self-employed I pay my fair share, but in return I could take a chance on this site knowing that while I might fail (I haven’t), I at least would not endanger or bankrupt my family in the process. I wish this opportunity on everyone.

And, as for those Uber drivers, the truth is they are Uber’s weak point (members-only); they recently forced Uber to change its policies in New York – how much more might they accomplish if they had the sort of safety net afforded to citizens of every other developed country? Imagine that: the freedom to leave a job you didn’t like because you knew that at least your family would have its most basic needs met. That’s what alleged advocates like Asher-Schapiro should be focused on.

As an addendum, I find it frankly bizarre that I write this article concerned about being characterized as both a right-wing fanatic (It’s not Uber’s problem!) as well as a left-wing socialist (Go universal health care!). And, to be honest, I’d be lying if I said I weren’t concerned about making some of my paying customers unhappy. Politics are fraught like that. But it seems like this issue in particular is one in which alleged right-wingers like Uber CEO Travis Kalanick and left-wingers like Asher-Schapiro could find common ground.

Moreover, I believe that Silicon Valley broadly should make the adoption of a social safety net one of their top political priorities. I do believe that services like Uber and technologies like automation will ultimately progress humanity, but as someone who grew up in the Midwest I know personally the wrenching cost this progress can exact. The political and regulatory challenges that Uber is facing are only the beginning for Silicon Valley, and if we as an industry are not proactive in ensuring that everyone benefits from progress then we will have only ourselves to blame for the inevitable backlash.

  1. Obamacare has, in my opinion, improved the situation, but seeing as how it still relies on employer-based health care it’s not nearly as friendly to entrepreneurship as true universal health care would be

Podcast: Exponent Episode 018 – Agree to Disagree

On the newest episode of Exponent, the podcast I co-host with James Allworth:

In this week’s episode Ben explains why he has changed his mind about Apple Watch. James is not convinced. We go on for a while.

Links

  • Ben Thompson: What I Got Wrong About Apple Watch – Stratechery
  • John Gruber: Apple Watch: Initial Thoughts and Observations – Daring Fireball

Listen to the episode here

Podcast Information: Feed | iTunes | SoundCloud | Twitter | Feedback

What I Got Wrong About Apple Watch

While I stand by last week’s opinion that the Watch presentation was poor, I’ve somehow, at least in my little corner of the Internet, become the face of people who don’t believe in Apple Watch at all. The biggest problem with that view is that I’m actually a big believer in the category, having written favorably about watches and the potential for Apple specifically here, here, and here; I even tried to buy a Pebble!1 I’m tired of how the phone pulls me away from my family, and time and notifications seemed like more than enough justification for this watch wearer. I presumed the Apple Watch would be similar, but significantly better executed with superior industrial design, plus a few additional killer features that made you just have to have one. In fact, that’s exactly how I suggested that Tim Cook should have introduced the Watch.

I must admit, though, even as I posted that article and recorded an episode of Exponent that was probably more critical of the Watch itself than I intended,2 there was a part of me that wondered if I were being Tony Fadell to Tim-Cook-and-company’s Scott Forstall. From a 2011 BusinessWeek profile of the then Senior Vice-President of iOS:

Around 2005, Jobs faced a crucial decision. Should he give the task of developing the [iPhone's] software to the team that built the iPod, which wanted to build a Linux-based system? Or should he entrust the project to the engineers who had revitalized the software foundation of the Macintosh? In other words, should he shrink the Mac, which would be an epic feat of engineering, or enlarge the iPod? Jobs preferred the former option, since he would then have a mobile operating system he could customize for the many gizmos then on Apple’s drawing board. Rather than pick an approach right away, however, Jobs pitted [Forstall and Fadell] against each other in a bake-off.

Forstall, who was head of the OS X project, obviously won, leading to the creation of a device that Blackberry executives didn’t think was possible. As a former Blackberry employee recounted:

RIM had a complete internal panic when Apple unveiled the iPhone in 2007, a former employee revealed this weekend. The BlackBerry maker is now known to have held multiple all-hands meetings on January 10 that year, a day after the iPhone was on stage, and to have made outlandish claims about its features. Apple was effectively accused of lying as it was supposedly impossible that a device could have such a large touchscreen but still get a usable lifespan away from a power outlet.

The iPhone “couldn’t do what [Apple was] demonstrating without an insanely power hungry processor, it must have terrible battery life,” Shacknews poster Kentor heard from his former colleagues of the time. “Imagine their surprise [at RIM] when they disassembled an iPhone for the first time and found that the phone was battery with a tiny logic board strapped to it.”

For my part, I’ve certainly been operating under the assumption that the wrist is not yet ready for full blown computing, which is why I thought the “iPod” version of a Watch needed to come first. From a piece I wrote in March:

Imagine a device that initially launches with limited functionality and is dependent on an iPhone (similar to the iPod, or the first iPhone). Perhaps it monitors fitness and health, and slowly, year-by-year, adds additional functionality. More importantly, assume that Moore’s Law continues, batteries make a leap forward, flexible displays improve, etc. Suddenly, instead of a phone that uses surrounding screens, like the iPhone does in the car and the living room, why might not our wrist project to a dumb screen (with a phone form-factor) in our pocket as well? Imagine all of our computing life, on our wrist, ready to project a context-appropriate UI to whichever screen is at hand. Moreover, by being with us, it’s a perfect wallet as well.

To be clear, this is certainly years off…

What, though, if it’s not? What if it is, once again, a “battery with a tiny logic board strapped to it”?

The S1 computer-on-a-chip at the heart of Apple Watch

The S1 computer-on-a-chip at the heart of Apple Watch

And what if that logic board, – which Apple calls the S1 – is even more ahead of the industry than last year’s couldn’t-possibly-have-existed 64-bit A7? What if Apple skipped the iPod-stage of wearables and went straight to the iPhone stage?

John Gruber captured this possibility in Apple Watch: Initial Thoughts and Observations:

Apple Watch’s third-party integration is clearly deeper than just showing notifications from apps on your iPhone. And though it depends upon a tethered connection with your phone for Internet access, it’s far more functional while out of range of your phone than any smartwatch I’ve seen to date. It’s a full iOS computer. If it actually doesn’t do much more, or allow much more, than what they demonstrated on stage last week, I am indeed going to be deeply disappointed, and I’ll be concerned about the entire direction of the company as a whole. But I get the impression that they’ve only shown us the tip of the functional iceberg, simply because they wanted to reveal the hardware — particularly the digital crown — on their own terms. The software they can keep secret longer, because it doesn’t enter the hands of the Asian supply chain.3

I still believe that Tim Cook missed an important opportunity to explain why the Watch existed, but, after an avalanche of tweets, emails, Gruber’s exceptionally insightful piece, and most of all, Apple’s incredible track record, I’m slowly coming around to the position that maybe, just maybe, I ought not be bullish on the Watch simply because I’m bullish on the category, but rather because it’s actually the exact product necessary to make the category succeed.

One tweet I found particularly persuasive was this one:



This makes the Pebble sound a lot like a smartphone circa 2006. The thing is, though, the iPhone was never targeted at 2006-era smartphone users: it was targeted at everyone, and that meant it had to destroy our expectations of what a smartphone was in order to build a new one that happened to look exactly like an iPhone. Similarly, to be the sort of tentpole product Cook promised the Watch would be it must target more than current watch wearers: it must be a product so good that non watch-wearers will put something on their wrists, put up with nightly charging, spend hundreds or thousands of dollars every few years, and all the other sorts of behavior that no one thought any rational phone buyer would tolerate just eight years ago. In other words, it must swing for the fences, just like Apple seems to have done.

Interestingly, I suspect this reading of the Apple Watch’s capabilities suggests that from Apple’s perspective the true new iPhone is the Plus. Numerous reviews have noted that the Plus is really more of a truly portable computer than it is a phone, the only tradeoff being its reduced portability. It is, in other words, the evolutionary iPad, but with guaranteed cellular connectivity and pocketable in a pinch. That leaves room for a device where portability is paramount, and computing only needs to be good enough given those constraints. It leaves room for an Apple Watch.

One final note: if I am (now) correct, and Apple has created something that most observers – including myself – didn’t think was possible in 2015, well, then this really is a Tim Cook breakthrough. The idea of a watch as a full-blown computer is not novel, but to create the future five years early in three different editions with all kinds of unique bands – and a buying experience to match – is something only Apple and their once-in-a-lifetime operational genius of a CEO could do, if indeed that is what they have done.

  1. Unfortunately I was defeated by their refusal to accept a U.S. credit card for a non-U.S. shipment (a nice example of the tradeoff between security and user experience, I might note)
  2. I am a passionate person, and that sometimes gets me in trouble on podcasts in particular
  3. The Wall Street Journal had a piece today about how exactly those leaks happen

Microsoft’s Good (and Potentially Great) Minecraft Acquisition

It’s difficult to overstate what a big deal Minecraft is. It’s the third best-selling game of all time behind Tetris and Wii Sports, and unlike the latter especially, it is a remarkably sticky experience: the vast majority of customers (over 90 percent on PC, according to Microsoft) sign in every single month. Were Microsoft to change nothing they claim their $2.5 billion purchase of Minecraft maker Mojang would pay for itself in less than five years.1

Minecraft, though, has the potential to make a lot more money; currently, Mojang only makes money off of players once: when they buy the game. All of those additional hours of play are essentially free. Contrast this to a game like the legendary World of Warcraft, which has made somewhere between $10 and $20 billion over its lifetime through a combination of up-front purchases and subscription fees2 and you realize that Minecraft founder Notch may be gaining his sanity at the cost of a lot of potential earnings.3

Minecraft, though, isn’t just a great financial decision; it’s a good strategic one as well that fits very nicely with Microsoft’s new vision as outlined by Satya Nadella:

At our core, Microsoft is the productivity and platform company for the mobile-first and cloud-first world. We will reinvent productivity to empower every person and every organization on the planet to do more and achieve more.

At first glance, this statement seems to reference products like Office and Azure, but it also works very well for Minecraft. Minecraft is more than just a game: it’s a community, with a huge cloud component, developers, and, at its very essence, it’s about making things. What could be more productive than that?4

Moreover, like Office and Azure, Minecraft is truly cross-platform. It’s the best-selling paid-download game on both iOS and Android, and it also has a very popular PS3 version and a newly-released PS4 version, with a PS Vita port on the way. Xbox head Phil Spencer took care to note that this would remain the case:

Minecraft adds diversity to our game portfolio and helps us reach new gamers across multiple platforms. Gaming is the top activity across devices and we see great potential to continue to grow the Minecraft community and nurture the franchise. That is why we plan to continue to make Minecraft available across platforms – including iOS, Android and PlayStation, in addition to Xbox and PC.

Here’s the thing, though: how much better would this acquisition look if Microsoft didn’t own Xbox at all?

  • Microsoft would not need to reassure skittish gamers that the game would remain cross-platform (To be clear, making Minecraft an exclusive would be financially stupid. Sure, Microsoft made the first Xbox a success by buying Bungie and making Halo an exclusive, but that was for a tenth of the cost)
  • Microsoft would have a lot more latitude to capture more value from Minecraft, increasing the value of this purchase. Certainly any effort to make gamers pay more will be resisted, but when said efforts can be couched in “Microsoft is trying to help the Xbox” language it makes it that much more difficult to win the inevitable PR battle
  • Most importantly, Microsoft’s incentives would be much more aligned with the Minecraft community’s: their goal would be the success of Minecraft, full stop, without the complication of needing their own platform to succeed

As long-time readers of this blog know, I’m a big believer in the power of incentives, and in the case of Microsoft, it’s the foundational reason why I believe the company would be better off split in two. I wrote in It’s Time to Split Up Microsoft:

In 2000, Windows, Office, and Server were a virtuous cycle. Today, Windows and the entire devices business is nothing but a tax. Microsoft is a company that is meant to serve the entire market, and the way to do that is through services on every device. It’s all fine and well to say that you will treat devices equally, but given Microsoft’s history – and the power of culture – I just don’t believe it’s possible.

I would create two companies: the devices side, which includes Windows, Windows Phone, and Xbox, and let them do the best they can to grow that 14%. Heck, make Kevin Turner the CEO. Windows profits will keep the company going for quite a while, and who knows, maybe they’ll nail what is next.

The other company, the interesting company, is the services side – the productivity side, to use Nadella’s descriptor. This company would be built around Office, Azure, and Microsoft’s consumer web services including Bing, Skype and OneDrive. These products don’t need Windows; they need permission to be the best regardless of device.

Every word here applies to Minecraft, a truly remarkable phenomenon that is not only about gamers but very much about the next generation of builders – including developers. I think it has the potential to continue to grow and, along the way, not only make Microsoft a whole bunch of money, but also enable an entire ecosystem. It really could be the Office of gaming. The danger is that, like Office did for too many years, it withers unnecessarily because Microsoft has Windows consoles to sell.5

  1. According to their press release, “Microsoft expects the acquisition to be break-even in FY15 on a GAAP basis”; on a GAAP basis is referring to the annual amortization cost. Microsoft won’t make back the entire $2.5 billion in FY15
  2. For reference, all developers combined have made just over $20 billion on the App Store
  3. I don’t blame Notch though; I really appreciated his resignation letter and am happy for him
  4. It’s also a community that needs Microsoft’s help: while Mojango offers Minecraft server software, another popular option is ensconced in a licensing battle that is probably best addressed by Minecraft itself building a superior option. Microsoft can do that
  5. The same thing applies to Microsoft Studios broadly; what a waste of resources to make Halo: Spartan Assault for touch devices only to limit it to Windows 8 and Windows Phone. Imagine how much revenue Microsoft has foregone by not developing for iPad and Android, and that’s before we even get to the potential of Halo proper and the other Microsoft Studios titles on Playstation. There’s a lot of latent revenue potential here, although Minecraft would be the crown jewel

How Tim Cook Might Have Introduced Apple Watch, and Exponent Episode 017: Let’s End it There

In 2010, John Gruber wrote an article for Macworld called This is How Apple Rolls:

They take something small, simple, and painstakingly well considered. They ruthlessly cut features to derive the absolute minimum core product they can start with. They polish those features to a shiny intensity. At an anticipated media event, Apple reveals this core product as its Next Big Thing, and explains—no, wait, it simply shows—how painstakingly thoughtful and well designed this core product is. The company releases the product for sale.

Then everyone goes back to Cupertino and rolls. As in, they start with a few tightly packed snowballs and then roll them in more snow to pick up mass until they’ve got a snowman. That’s how Apple builds its platforms. It’s a slow and steady process of continuous iterative improvement—so slow, in fact, that the process is easy to overlook if you’re observing it in real time. Only in hindsight is it obvious just how remarkable Apple’s platform development process is.

I really like the idea of a Wearable generally, and I think the Apple Watch looks fantastic. But when it comes to software I’m concerned that Apple got away from this powerful process. That was at the root of my concern in Apple Watch: Asking Why and Saying No. As a follow-up to that article, I wrote in my subscriber-only Daily Update how I thought Tim Cook should have introduced the Watch:

If you’ll forgive my presumptiveness, this is what I would have liked to hear:

There is one more thing.

We just showed you the best phones ever. They are bigger in every way, allowing you to do more than ever before. But sometimes you want to do less.

For example, suppose you are walking to a place you haven’t been before; you don’t want to look at a phone screen, you simply want to know where to go.

Or maybe for you the iPhone is your primary computer, so you buy the new iPhone 6 Plus, and you keep it in your bag. How, then, do you ensure you don’t miss that important call, or quickly respond to a text? Perhaps you are at the park with your children, or out to eat with your partner. You want to stay in that moment, with those you care about, yet still be reachable.

I just showed you Apple Pay with an iPhone, but even then you still need to get something out of your pocket or purse. What if there were something even more convenient and natural?

For me, fitness is really important, but an iPhone, even with our new M8 chip, is at best a blunt instrument for tracking your fitness and health. Wouldn’t it be better to have something that was always on you, even while exercising?

For our customers, the iPhone is their life: where they work, play, and everything in between. But all of us have just a few people that mean so much more, to whom we are as close as can be even if we are miles apart. What if we could connect with those most important to us in a much more personal way?

We love the iPhone; it’s the best phone on the planet, and it lets you do almost anything. But, for just a few key things, we think there is a better way. A better product, one that is the next chapter in the Apple Story.

Cue video

And then, a demo of these five use cases, and nothing else, with a clear emphasis that the Watch makes the iPhone better by doing just a couple of things really well, and looks absolutely fantastic to boot. No searching for movies, no SDK, just a simple and compelling reason to exist, with the patience to know that all of the other good ideas – and apps – will come to the platform in due course.

(To read the rest of this piece and to receive the Daily Update every morning, you can sign up here)

On the latest episode of Exponent, the podcast I co-host with James Allworth, we go deep on this same point: why is Apple trying to do so much with Watch, and obscuring the parts that are truly remarkable?

Plus, luxury in Asia and console follow-up. You can listen to the episode here.

Podcast Information: Feed | iTunes | SoundCloud | Twitter | Feedback

Apple Watch: Asking Why and Saying No

Dan Frommer wrote in Quartz about The Hidden Structure of the Apple Keynote. His analysis covered 27 events since 2007, and included things like average length, laughs per executive, and the timing of iPhone reveals.

It’s a good read, but in light of the Watch introduction, I am more interested in comparing yesterday’s keynote to only three others: the introductions of the iPod, iPhone, and iPad. Specifically, I’m interested in the exact moment when Apple revealed each device:

  • The iPod was introduced on October 23, 2001; after discussing iLife and Apple digital hub strategy, the iPod section begins at 11:30. However, the iPod itself does not actually appear on a slide until 20:48, and Jobs pulls it out of his pocket at 21:07, nearly 10 minutes after he begins his introduction. The intervening 10 minutes were spent explaining the music market, why Apple thought they could succeed in that market, and what was special about the iPod


  • The iPhone was introduced on January 9, 2007. However, the iPhone itself does not actually appear on a slide until 7:03, and only then to introduce multitouch. The rest of the device wasn’t seen until 12:20. Jobs spent all of that time explaining the smartphone market, why Apple thought they could succeed in that market, and what was special about the iPhone


  • The iPad was introduced on January 27, 2010. After a few updates, the iPad section begins at 5:15. However, the iPad itself does not actually appear on a slide until 8:55. Jobs spent the intervening time explaining that Apple saw a market between the iPhone and the Mac, but that any device that played there needed to be better than either device at a few specific use cases


  • The Apple Watch introduction was quite a bit different:


The Apple Watch section began with the iconic “One more thing…” at 55:44,1 and these were the extent of Tim Cook’s words before we got our first glimpse of the Apple Watch:

We love to make great products that really enrich people’s lives. We love to integrate hardware, software, and services seamlessly. We love to make technology more personal and allow our users to do things that they could have never imagined. We’ve been working incredibly hard for a long time on an entirely new product. And we believe this product will redefine what people expect from its category. I am so excited and I am so proud to share it with you this morning. It is the next chapter in Apple’s story. And here it is.

Then came the introductory video, and we never got an explanation of why the Apple Watch existed, or what need it is supposed to fill. What is the market? Why does Apple believe it can succeed there? What makes the Apple Watch unique?2

Now it’s very fair to note that the biggest difference between the introduction of the iPod, iPhone and iPad as compared to the Apple Watch is that Steve Jobs is no longer with us. Perhaps the long introduction was simply his personal style. But the problem is that the Smart Watch needs that explanation: what exactly is the point?

To be clear, the hardware looks amazing, and I love the Digital Crown. It’s one of those innovations that seems so blindingly obvious in retrospect, and Cook was spot on when he noted that you can’t just shrink a smartphone UI to the wrist. But that was exactly the problem with too many of the software demos: there were multiple examples of activities that simply make no sense on the wrist. For example:

  • There were sixty-four applications on the demo watch, and the tap targets are quite small3
  • I can definitely see some compelling Siri use cases for the Watch, but scrolling through movies is not one of them. If you’re looking for a movie you’re almost certainly in a state of movement and mind that makes it possible to pull out your phone and use a screen much more suited to the task
  • “We also looked at how you can carry your photos with you.” Here’s an idea: on your phone!

The Maps demo was the most frustrating: it included panning around, searching for a Whole Foods – including the phone number! – all activities that by definition mean you are stationary and can use your phone. But that’s when the demo got really good:

  • While you’re actually traveling, the watch will not only show directions, but will actually use the “Taptic Engine” to indicate turns by feel. That is awesome, and an amazing use case for the watch. Who hasn’t been dashing somewhere, running into things while looking at their phone? A watch is far more suited, particularly one that doesn’t even require you to look at the screen
  • I also like that you can use the Watch to control your iPhone or any other AirPlay device. This would be incredibly useful around the house, at a party, etc.
  • The Taptic Engine makes sure only you know about a notification that you have previously agreed to receive. There are smart options for replying, as well as Siri and emoticons, but you can always use “Handoff” to compose a more extensive reply on a more suitable device

There is a clear pattern to these examples:

  • The bad demos are all activities that are better done on your phone. They are also the activities that make the Watch seem the most like a real computer
  • The good demos are all activities that extend your phone in a way that simply wasn’t possible before. They are also activities that make the Watch seem less capable as a self-contained unit

This is why I’m worried that the lack of explanation about the Watch’s purpose wasn’t just a keynote oversight, but something that reflects a fundamental question about the product itself that Apple itself has yet to answer: is Watch an iPhone accessory, or is it valuable in its own right?4

The question is likely more fraught than it seems: the entry price for Apple Watch is $350, nearly half the price of an iPhone (and $150 more than the up-front cost for a subsidized consumer). Moreover, I suspect Edition models will go for ten times that, if not more. Surely such a price demands a device that is capable of doing more, not less.

In fact, I would argue the contrary. Swiss watches are less accurate, but the benefit they confer on the user are so much greater. Those benefits are about intangible things like status and fashion, but that doesn’t mean they are worth less than more technical capabilities like telling time accurately. Indeed, they are exponentially more valuable.

Moreover, it seems clear to me that Apple wants to play in this space: Jony Ive wasn’t joking when he allegedly said that Switzerland was in trouble. I believe Apple’s long-term plan for Apple Watch is to own the wrist and to confer prestige and status with options like premium bands and 18-karat gold. To do that, though, they must compete not on technical merit but on the sort of intangible benefits that they always win with; chief among these is the user experience. A premium smart watch will win by yes, being fashionable, and yes, conferring status, but above all by doing a few things better than any other product on the market, and – this is critical – dispensing with everything else in the pursuit of simplicity.

To me the instructive Apple product is the iPod. What made the iPod so revolutionary was not just its size and industrial design; it was that Apple’s MP3 player did less than its competitors, thanks to its symbiotic relationship with iTunes. Sure, you couldn’t really make playlists5 or buy music, but that’s what your computer was for. What remained was the very essence of a music player, and it was because of that simplicity that the iPod became such a success.

It’s worth noting, of course, that the iPhone is in many ways the evolutionary iPod – Steve Jobs even introduced it as such in the above video. Similarly, I’m pretty convinced that one day our primary computing device will be something that we wear on our body. But that is many iterations and technical (and battery) advances down the road. Why is Apple in such a rush to get there by 2015?

Ultimately, I’m bullish on the Apple Watch. I think the Digital Crown is a big deal, and it’s a perfect companion for the 5.5″ iPhone especially (the device that many fear will cannibalize the iPad itself necessitates another iOS device). I also think the customization and segmentation is really smart and will enable Apple to sell at multiple price points (my piece about the Veblen goods is very much applicable to Watch). Moreover, some of the demos were quite compelling, including the fitness applications and the very personal messaging; it was telling that Apple gave that functionality a dedicated button. I plan on buying one as soon as they are available.

But I’m already a watch wearer, and a geek to boot, and heck, I can probably expense it. To ensure the Watch’s success broadly Apple needs to really articulate “Why”, not only externally in their advertising but internally to their product managers who ought to remember that Apple’s greatness is built on saying “No.”

Note: I wrote about the iPhone and Apple Pay introductions in the Daily Update (members only)

  1. I admit, I got chills
  2. In fact, somewhat bizarrely, Cook’s first words after the reveal were about Apple Watch’s accuracy:

    Apple Watch is the most personal device we’ve ever created. We set out to make the best watch in the world. One that is precise. It’s synchronized with the universal time standard and it’s accurate within plus or minus 50 milliseconds.

    What makes this so strange is that accurate timekeeping was the big selling point for Quartz watches. The Quartz crisis caused a significant decline of the Swiss watchmaking industry, but the primary reason for the success of the Asian manufacturers that adopted the technology was that they were so much cheaper. Today the watch industry is bifurcated between high end (relatively inaccurate) mechanical watches and inexpensive Asian offerings; I’m quite confused why Apple would be effectively aligning themselves with the latter, and with their first slide to boot!

  3. I suspect the demo unit was “on rails”, meaning the watch was programmed to step through the demo step-by-step; it’s telling that Kevin Lynch didn’t have a single mis-tap, and the Maps demo was obviously simulated
  4. The Watch does require an iPhone for full functionality, especially connectivity
  5. Yes, I know you could push the middle button in a pinch

Wearables, Payments, Chickens and Eggs

I feel a bit sheepish that this is the third of what will in all likelihood be four articles about Apple in a two-week span. I figured the scale of what Apple is planning to announce necessitated at least two preview posts; one about the iPhone and this one about wearables and payments. And then the iCloud theft happened, and well, here we are.

At the same time, it’s difficult to overstate the broad impact that Apple has on the entire tech ecosystem, whether it be establishing categories it competes in directly or in fundamentally changing assumptions in others impacted by their wake (think the rise of mobility as a critical component of enterprise software). Moreover, it’s not as if these articles won’t be read; any blogger with access to their Google analytics panel knows that anything Apple moves the needle in a way few other topics do.

Apple, of course, knows this as well, and what is so interesting about how they are approaching wearables and payments – together – is the way in which they are leveraging their popularity to make something that could not otherwise come into being.

The Problem With Payments

I discussed the challenge of introducing new payment methods in April in a post called The Problem with Payments:

  • You can get more adoption by building on top of credit cards, but that leaves almost no room for any sort of meaningful profit margin. This is Square’s fundamental problem
  • Building outside of credit cards gives you more room to maneuver from a profit perspective, but the delta of improvement between your new solution and credit cards is likely much too small to overcome the double-sided network effect credit cards enjoy (merchants and customers)

The rumors about Apple using the iPhone 6 for payments seemingly faces both of these challenges:

  • Any Apple payment solution will almost certainly be built on top of their current collection of 800 million credit cards, which means there won’t be much if any money to be made
  • The delta of improvement between pulling out your phone and pulling out your credit card may not be big enough to make a difference. It certainly hasn’t moved the needle for Android, even in countries like Japan that have invested significantly in NFC infrastructure. And, if customers won’t bother, neither will merchants

What is needed is something a lot better than a physical credit card and a critical mass of people willing to give it a try.

Enter The Wearable

People often mock any new Apple product by pointing out that, “Sure, the diehards will buy whatever Apple releases” before insisting that said product will never have broad appeal. We saw it with the iPad, the iPhone, and the iPod, and we’ll almost assuredly see it with the wearable. And, when and if people complain that only Apple fans will buy the wearable, Tim Cook and company are liable to nod their heads, knowing that that’s the point.

There is the age-old question: “What came first, the chicken or the egg?”, and it’s one that is brought up again and again when it comes to building an ecosystem. For example, the biggest problem with Windows Phone is the lack of top-notch applications, but the reason that developers don’t prioritize the platform is that there aren’t enough valuable users, but there will never be enough valuable users until there are top notch applications. It’s a chicken-and-egg problem.

As I noted above, the same problem exists in payments: merchants won’t support a new payment method unless lots of valuable customers insist on it, but said customers won’t insist on a particular payment method unless lots of merchants support it.

That’s where Apple’s ability to move units simply because they are Apple becomes something that is an incredible weapon: suppose 10% of iPhone customers are willing to buy a wearable with some cool fitness functionality mainly because it’s built by Apple. Boom – suddenly there are 80 million wearables with payment functionality out in the wild.1 Moreover, the customers sporting said wearable are likely to be both vocal about their desire to use said payments, and high spenders to boot. That’s a very good way to spur merchants to install what will likely be a free payment device, available at your local Apple Store. Of course it wouldn’t hurt to move the process along by having partnerships already set up with Nordstrom and Target.2

Moreover, I’d bet the difference between using a wearable for payment and using your phone will be greater than most people expect. I have no particular evidence for this outside of my own experience with keyless ignition systems in cars; the first time we got it, I thought it was a tremendous waste of money (it was part of a package); since then, I can not imagine buying a car without it. Saving a bit of hassle and a few seconds on a daily basis really adds up; it’s the type of subtle experience improvement that is Apple’s biggest differentiation.

Not Just Payments

This idea – that Apple, simply by being popular, can get past the chicken-and-egg problem – applies to HomeKit as well. If we have keyless ignition in cars, why not keyless locks, automatic air conditions, or lighting? There is a whole host of items that could work well with a wearable, but that would only be built if there were a critical mass of wearables out there.3

More broadly, this is the answer to the question of why build a wearable at all. It’s easy to see a future where a wearable is the center of an entire ecosystem of devices and services; what’s hard is seeing how on earth we get from here to there. Unless, of course, customers give the device critical mass simply because it is made by Apple (even though they’ll tell themselves they buy it for their health).

Apple has a better chance than anyone of creating a critical mass of users for a new payment system.

Apple has a better chance than anyone of creating a critical mass of users for a new payment system.

Let me be perfectly clear: while most of those who argue that any Apple product will sell just because of the logo mean that as an insult, I’m saying that’s actually a really unique ability that only Apple has. Remember this line in the Cook Doctrine:

We participate only in markets where we can make a significant contribution.

Apple, not only because of its product capability but also because of its incredible customer loyalty, is uniquely suited to solve the payments chicken-and-egg problem and provide the killer use case for a wearable, all at the same time.

What’s In It for Apple?

Contrary to the expectations of some Apple bulls, I don’t think Apple has any interest in getting into financial services. I suspect they will be quite happy to sit on top of traditional credit cards, just as the iPhone sits on top of traditional carriers. In fact, when it comes to making money Apple’s strategy is remarkably straightforward: they sell devices for a profit; their services and infrastructure serve primarily to differentiate said devices.

That is why I expect Apple to offer payment terminals to merchants for free or close to it, and to not charge any surcharge beyond what is necessary to cover credit card fees. Their payoff will be in the creation of a killer wearable use case, something that will ultimately benefit Apple as a wearable seller more than anyone.

It will be fascinating to watch if Apple can succeed, and, if they do, what will happen to the companies in their wake. Just as the iPhone ultimately shook up all kinds of industries, including enterprise software, a true payments breakthrough will not only be the end of a whole raft of startups but could also have significant impact on all kinds of related industries. I suspect, though, all that matters to Apple is making life that much better for that many more people, something that is not only true to their mission but also results in a formidable strategic tool as well.

  1. Presuming an install base of 800 million iOS devices, which was the number reported at WWDC
  2. So says not one but two little birdies
  3. A wearable could also be the best possible answer to the password problem: a wearable alone is likely more secure than a password, and a wearable plus TouchID is likely the most consumer-friendly two-factor authorization possible