Why BuzzFeed is the Most Important News Organization in the World

Like a great many such things, some of journalism’s most precious ideals were the happy result of geography and economics. That is, in any given geography, the dominant newspaper tended towards a natural monopoly for two reasons:

  • When it came to costs, the ownership of expensive printing presses and distribution channels made entrance difficult for potential competitors
  • As for revenue, broad-based advertising, at least in the pre-targeting era, naturally flowed to the channel with the greatest reach

The interaction of these two economic realities made newspapers fabulously profitable and veritable cash machines; the editorial side, meanwhile, freed from the responsibility to directly make money, could instead focus on things like far-flung bureaus, investigative journalism that in many cases took months to develop, and a clear separation between the business and editorial sides of a newspaper. The latter was important not just for the avoidance of blatant corruption, but also because it imbued the editorial side with a certain responsibility to focus on stories that deserved to be written because they mattered, not because they were sensationalistic.

This last point was best exemplified by The New York Times’ famous slogan, “All the news that’s fit to print” and by the paper’s legendary Page One meetings where editors would pitch stories for inclusion on the most valuable real estate in journalism. It’s important to appreciate that this was more than just a slogan and meeting; there are important assumptions underlying this conceit:

  • The first assumption is that there is a limited amount of space, which in the case of a physical product is quite obviously true. Sure, newspapers could and did change the length of their daily editions, but the line had to be drawn somewhere
  • The second assumption is that journalists, by choosing what to write about, are the arbiters of what is “news”
  • The third assumption is that the front page is an essential signal as to what news is important; more broadly, it’s an assumption that editors matter

With the New York Times in particular, it’s striking how deeply embedded these assumptions are. For example, as part of its response to its internal innovation report, New York Times executive editor Dean Baquet announced last month that the paper would retire the traditional Page One pitch meeting. Baquet wrote:

We’re retiring our system of pitching stories for the print Page 1. Desks will instead pitch their best enterprise pieces for digital slots on what we’re calling Dean’s List. (I didn’t come up with that name, but I like it!) Stories that the masthead selects for Dean’s List will receive the very best play on all our digital platforms – web, mobile, social and others yet to come…

It’s worth noting that the tradition of selecting Page 1 stories under the old system has long made The Times distinctive. We are seeking to preserve the rigor of this process, but update it for the digital age. Desks will compete for the best digital, rather than print, real estate.

It’s a lovely idea, and makes sense on the surface, but in fact Baquet’s proposal isn’t as groundbreaking as it seems, precisely because it preserves those old assumptions:

  • The very concept of “pitching” and “competing” reflects the assumption that there is a limited amount of space available for stories
  • “Enterprise stories” are stories generated by New York Times journalists (as opposed to breaking news stories)1; the fact only enterprise stories are considered for the “Dean’s List” reflects the assumption that journalists create the stories
  • The prize – “the best digital…real estate” reflects the assumption that this decision matters: that prime placement on “our digital platforms” makes a difference

The problem, though, is that the Internet has not only dismantled newspaper’s geographic monopoly – and thus journalism’s business model – but it has also upended the core assumptions underlying the actual journalism:

  • There is no limit on the amount of space available for stories (to put it in economic terms, the marginal cost of one more “page” is obviously zero)
  • Every single person on the Internet has the same addressable market – the entire world – as the New York Times; “news” can come from anywhere
  • Because of the hyperlink individual stories can be accessed without visiting the home page; this means link distribution channels, particularly social, are far more important when it comes to raising awareness of a story

I suspect this last point is the most difficult for Baquet specifically and traditional journalists broadly to truly grok: when it comes to driving traffic and deciding what matters, editors don’t really matter like they used to. Specifically, I find it fascinating that Baquet in his memo refers to social as “our digital platform”; in fact, social, at least superficially, belongs to Facebook in particular, but in practice it belongs to no one and everyone. Social is our collective consciousness, sometimes serious, sometimes silly, and always unpredictable, and there is no better example than last Thursday: the morning was dominated by net neutrality (serious!), the afternoon by escaped llamas (silly!), and the evening by “The Dress” (WTF!). And no single outlet owned Thursday, particularly The Dress, like BuzzFeed.

You almost certainly know the story: a seemingly nondescript photograph of a dress that appeared to some as being white-and-gold, and to others as being black-and-blue, was posted to Tumblr. It started to spread as folks argued about the color, but it truly took off when BuzzFeed staffer Cates Holderness created this BuzzFeed post that asked reader to vote on which color; I viewed the page when it was already at 300,000 views, mere minutes after it was posted. Just a few minutes later, the post had crossed one million, then three million, then five. BuzzFeed said the site at one point had 670,000 visitors on site simultaneously, half of them viewing the dress, and as of today, five days later, the post has had over 38 million views.

What’s interesting is how the existence and popularity of this post was made possible by BuzzFeed’s embrace of Internet assumptions:

  • The photo may have seemed frivolous, but hey, why not make a post? It’s not like it cost BuzzFeed anything beyond a few minutes of Holderness’s time
  • Like a huge amount of BuzzFeed’s content, the photo wasn’t produced by BuzzFeed; it was discovered on the Internet (Tumblr in this case)
  • The post blew up first on Twitter, and then Facebook: millions of people were exposed directly to the link within minutes. Few if any arrived via BuzzFeed’s homepage

In fact, while it’s theoretically possible that the post could have been created anywhere, I don’t think it was an accident that it happened at BuzzFeed.

There is a famous parable in the book Art and Fear that goes like this:

The ceramics teacher announced on opening day that he was dividing the class into two groups. All those on the left side of the studio, he said, would be graded solely on the quantity of work they produced, all those on the right solely on its quality.

His procedure was simple: on the final day of class he would bring in his bathroom scales and weigh the work of the “quantity” group: fifty pound of pots rated an “A”, forty pounds a “B”, and so on. Those being graded on “quality”, however, needed to produce only one pot – albeit a perfect one – to get an “A”.

Well, came grading time and a curious fact emerged: the works of highest quality were all produced by the group being graded for quantity. It seems that while the “quantity” group was busily churning out piles of work – and learning from their mistakes – the “quality” group had sat theorizing about perfection, and in the end had little more to show for their efforts than grandiose theories and a pile of dead clay.

Perhaps the single most powerful implication of an organization operating with Internet assumptions is that iteration – and its associated learning – is doable in a way that just wan’t possible with print. BuzzFeed as an organization has been figuring out what works online for over eight years now, and while “The Dress” may have been unusual in its scale, its existence was no accident.

What’s especially exciting about BuzzFeed, though, is how it uses that knowledge to make money. The company sells its ability to grok – and shape – what works on social to brands; what they don’t do is sell ads directly2 (in a narrow sense BuzzFeed almost certainly lost money spinning up servers and paying for bandwidth to deliver “The Dress”). The most obvious benefit of this strategy is that, contrary to popular opinion, and contrary to its many imitators, BuzzFeed does not do clickbait. Editor-in-chief Ben Smith wrote last year:

Clickbait actually has its origins in old media, not the web, and specifically in the don’t-touch-that-dial antics of television and radio. Because you won’t believe what happens next…after the break. It’s a pretty rough consumer experience to demand your audience sit through an ad, online or off. The banner ad, whose decline Farhad Manjoo recently celebrated, was also born during this era and created a business model in which clicks are tied directly to dollars — something many people assume is still how all online publishers make their money. But BuzzFeed has never sold a banner, and I couldn’t even tell you how many monthly page views we get. And so our business model at least moderates that incentive to drag every last click out of our audience.

If your goal — as is ours at BuzzFeed — is to deliver the reader something so new, funny, revelatory, or delightful that they feel compelled to share it, you have to do work that delivers on the headline’s promise, and more. This is a very high bar. It’s one thing to enjoy reading something, and quite another to make the active choice to share it with your friends. This is a core fact of sharing and the social web of Facebook, Twitter, Pinterest, and other platforms.

In short, by not making money from display ads, and by extension deprioritizing page views, BuzzFeed incentivizes its writers to fully embrace Internet assumptions, and just as importantly disincentivizes pure sensationalism. There is no self-editing or consideration of whether or not a particular post will make money, or if it will play well on the home page, or dishonestly writing a headline just to drive clicks. The only goal is to create – or find – something that resonates.

More importantly, with this model BuzzFeed has returned to the journalistic ideal that many – including myself – thought was lost with the demise of newspapers’ old geographic monopolies: true journalistic independence. Just as journalists of old didn’t need to worry about making money, just writing stories that they thought important, BuzzFeed’s writers simply need to write stories that people find important enough to share; the learning that results is how they make money.3 The incentives are perfectly aligned.

It’s not just journalistic independence though; all the other accoutrements of the golden age of newspaper journalism – international correspondents, long-running investigations, so on and so forth – flow from the fact that BuzzFeed is building something sustainable. A perfect example comes from an unexpected place: How The New York Times Works, a deeply-reported feature that ran last month in Popular Mechanics. The author sat in on the aforementioned Page One meeting:

[Tom] Jolly, the paper’s associate masthead editor—one of the most senior positions in the newsroom…turns over the floor to an editor from international, who has a piece about the ransom demanded by Islamic State militants for James Foley, the journalist who had recently been beheaded in Iraq. It’s an obvious candidate for the paper’s top story — front page, top-right corner — but some editors have concerns…

The Times is occasionally mocked for its staid and deliberate pace, but it is in moments like these that the seriousness with which it approaches every aspect of its operation becomes clearest. There are few organizations with the resources to spend such time and consideration on stories that aren’t primed to go viral — though search-engine optimization and other tricks of the digital age do receive plenty of consideration. When the conversation turns to a vivid story from Liberia, where Ebola has overtaken a particular neighborhood in Monrovia, one editor proudly reports that she believes the Times is the only outlet with a reporter on the ground, which makes everyone happy until another editor says, “I think BuzzFeed actually has somebody there.” There is momentary silence.

This – like the post about The Dress – is not simply a happy coincidence. The world needs great journalism, but great journalism needs a great business model. That’s exactly what BuzzFeed seems to have, and it’s for that reason the company is the most important news organization in the world.

  1. In 2005 then-public editor Byron Calame wrote about The Origin of Enterprise Stories
  2. By ads I mean the sort of display ads you see on just about every other publishing site; your typical BuzzFeed page will have links to stories they have created for brands for pay
  3. Specifically, BuzzFeed makes money by creating BuzzFeed-type stories for brands; in some respects they’re an advertising agency (and how they scale long term is an open question)

Old-Fashioned Snapchat

One of the most fascinating aspects of the Evan Spiegel emails that were leaked in the Sony Pictures hack was his seemingly changing view of Facebook. Spiegel was originally not a fan, arguing that Facebook’s revenue was much too dependent on VC-funded app install ads; some time later, though, Spiegel had was urged to change his tune by Twitter CFO Anthony Noto:

If the growth in Ads is primarily all driven by higher click-through rates due to better relevant ads on mobile, than all of the private mobile companies that have a great medium for advertising will be viewed much more favorably and be more valuable…Specifically if ads on mobile are more engaging for consumer and more relevant than desktop ads than the addressable ad market for mobile will be bigger than desktop ad market and the valuations of mobile companies will be greater than desktop all else equal on audience size etc. This would be a very positive factor for Snapchat.

If Facebook knows this to be true it would result in them being willing to pay higher valuation for mobile companies than other acquirers because Google won’t know nor will yahoo msft etc because none of them have scale in mobile to understand these powerful secular trends and in essence they under value mobile vs FB and thus under invest and fall farther and farther behind.

Correction: Snapchat has clarified that this section of the email was written by Anthony Noto, Twitter CFO, not Evan Spiegel; the introduction thus originally said that Spiegel “had changed his tune.” I deeply regret the error

In fact, just a couple of months earlier Facebook had shocked the world by buying WhatsApp for $19 billion; two months before that it had tried to buy Snapchat itself for $3 billion. At the time of the failed acquisition, beyond expressing (misplaced) shock at the dollar figure, many attributed Facebook’s effort to some sort of existential struggle for relevance. I myself wrote in The Multitudes of Social:

Last week Snapchat reportedly turned down a $3 billion dollar all-cash offer from Facebook. Apparently Facebook was worried about losing the teen demographic, or perhaps they were unnerved by the 350 million photos Snapchat claims to process per day. What seems clear, though, is that Facebook is intent on “owning social”…

Facebook needs to appreciate that their dominance of social on the PC was an artifact of the PC’s lack of mobility and limited application in day-to-day life. Smartphones are with us literally everywhere, and there is so much more within us than any one social network can capture.

I already knew then that Facebook had the best (non-search) ad unit in tech; my concern was that Facebook shared the peanut gallery’s concerns that Snapchat was somehow a threat to Facebook when there was clearly room for both. Like Spiegel Noto, though, my appreciation for Facebook’s approach has only grown over time: I strongly suspect that the Snapchat CEO Twitter CFO had it exactly right: Facebook was making (or attempting) acquisitions like Instagram, WhatsApp, and Snapchat not for defensive reasons but for offensive ones. Mark Zuckerberg, earlier than just about anyone, clearly saw just how much money is going to be made on mobile.1 And, rumor has it, Snapchat’s investors completely agree: Bloomberg reports the company will soon be valued at $19 billion.

To understand why you need to look not at other social networks, but rather TV.

The Shift in TV

In May 2013 I wrote a series about TV arguing against the widely-held sentiment that cord-cutting was imminent:

Cable TV is socialism that works; subscribers pay equally for everything, and watch only what they want, to the benefit of everyone. Any “grand vision” Apple, or any other tech company, has for television is likely to sustain the current model, not disrupt it directly.

The piece was primarily focused on affiliate fees; ESPN, the most profitable cable network of them all, was then making $6.1 billion in affiliate fees a year, nearly twice the $3.3 billion it made in advertising.2 This shift made sense not just for macro reasons – in particular, the rise of “time-shifting” – but also for strategic ones: much like Apple ESPN – and several other “must-see” networks like AMC – use customer demand as leverage for better deals. ESPN, for example, has spent a tremendous amount of money to secure rights to must-see sporting events, which, by extension, makes the network a “must-have” for cable operators; this ultimately leaves ESPN’s revenue dependent on the much more predictable – and profitable – true “fans” than they are on the casual viewers that drive total ratings. That is why ESPN in 2012 could have an average of 1 million viewers as compared to USA Network’s 1.3 million, yet charge $5.04/month in affiliate fees, over 7x USA Network’s $0.68.3 And while there have been some small-scale shifts in this model – I think Sling TV is very interesting (members-only) – I continue to believe that cable is stickier than most people in tech think; there simply are too many must-see events that enable customers to justify the monthly cost.

That said, note again that the affiliate model does not depend on total viewership, which is a good thing for the cable channels; after all, there is more and more evidence that actual viewership is in decline. According to Nielsen, after remaining steady for years average monthly viewing time in 2014 decreased by six hours; January was particularly bad, with viewership down 12.7 percent year over year. The biggest culprit is streaming, up 60% year over year. The problem with streaming, though, is that it too is for-pay; there are no ads on Netflix or Amazon Prime Video. In short, TV is increasingly shifting away from advertising, to affiliate fees on the network side and subscription fees on the streaming side.

Advertising’s Inevitability

The question, then, is whither advertising? Surprisingly, advertising has had a remarkably consistent share of U.S. GDP. From Bloomberg:

The advertising business is about as static and boring as they come. The industry has never grown in scale. Looking at data since the 1920s, the U.S. advertising industry has always been about 1 percent of U.S. GDP. It’s surprisingly consistent, mostly tracking between 1 percent and 1.4 percent—and averaging 1.29 percent…This 1.29-percent number combines advertising spending on television, radio, billboard, newspaper, magazine, trade journals, and the Internet…

That means the only way to expand in this business is to steal share. “Everything is a share game,” says [db5 Chief Strategy Officer Daniel] Goldstein, as declines in older media give way to growth in newer media.

This particular article concludes on a pessimistic note with the assumption that Internet advertising has reached the limits of growth:

There appears to be a predictable growth rate for new media. For each “new” medium at the time—radio, television, and Internet—the growth pattern has seen similar curves. The first five years saw rapid (but declining) growth rates, and after the fifth year, growth rates steadied. The Internet is certainly disruptive, but no more disruptive than TV and radio in the past.

I think, though, this isn’t quite right. For while you can look at the “1 percent” rule as a cap, it is is also a floor, and the Internet is not just decreasing live TV’s share of advertising, it is decreasing live TV’s share of time. Here’s one more data point, this time about the most coveted 18-34 demographic: earlier this month Nielsen reported:

Traditional TV usage — which has been falling among viewers ages 18 to 34 at around 4 percent a year since 2012 — tumbled 10.6 percent between September and January…

In 2011, 21.7 million young adults tuned in to their TV sets. By the end of last month, that figure had fallen to 17.8 million, according to Nielsen figures. If the TV-as-an-anachronism trend holds, the implications for the media industry are huge, possibly causing a seismic shift in the $80 billion TV ad market.

How on earth are advertisers going to reach those young people?

What Matters for Branding

The one weird thing about TV advertising is how hard it is to measure; unlike, say, a Google search ad, which pays by the click and can be tracked all the way through conversion, your traditional TV ad is more about establishing a brand that theoretically will influence a viewer’s purchase for years to come.4 Sure, outfits like Nielsen try to track effectiveness,5 but at the end of the day TV makes its money because of the old John Wanamaker adage:

Half the money I spend on advertising is wasted; the trouble is I don’t know which half

Indeed, get a few drinks in any brand advertiser and they’ll admit that the number one reason they know that brand advertising works is that, if they stop, sales inevitably drop.

Tech companies, as you might expect, can’t stand this level of uncertainty, and a central selling proposition of digital ads have been the ability to measure effectiveness. This is easiest to do with direct marketing campaigns, which are designed to drive an immediate purchase, and no one is better at this than Google. Facebook, though, is trying to provide the same sort of feedback for brand advertising with Atlas, an attempt to connect a Facebook ad to an offline purchase some time in the future.

Still, the fact remains that for brand advertising in particular, tracking is less important than simply ensuring your target customers are actually experiencing your ad. And there is no more attractive target for brand advertisers than young people, because their choices in everything from detergent to underwear will likely persist for decades.

And so we are back to Snapchat’s rumored $19 billion valuation; it has nothing to do with “stealing teens” from Facebook, but rather the decline of TV viewership (again, a separate question from cord-cutting). Brands:

  • Want to reach young people
  • Value immersive engagement that enables emotional connections
  • View tracking as a “nice-to-have” (as opposed to a “must-have” for direct marketing)6

Here is what Snapchat offers:

  • Nearly 200 million monthly active users, including greater than 50% penetration among users 18-24 (33% among users 18-34), and those numbers continue to grow rapidly
  • Very immersive ads that can only be viewed by holding your finger on the screen; brands can have a very high confidence their message is being viewed
  • Not a single bit of tracking. No gender, no age, nothing

In fact, that sounds a lot like TV – particularly TV in the pre-time shifting age. A captive audience that you don’t know that much about, except that it’s the single best spot to build a brand. Slate’s TV critic, Willa Paskin, wrote of the service’s new Discovery service:

If this sounds nothing at all like a “channel” to you, and just another way for Snapchat and its partners to make money while giving teens a way to waste time—well, that is, in fact, exactly the way in which Snapchat channels feel like television. Channel surfing, in which you plop down on the couch, pick up the remote, and make your way through your particular stations of the cross (TBS-TNT-FX-TCM-AMC-Bravo-E!-VH1-MTV-etc.-etc., or whatever your personal catechism), letting the TV offerings wash over you, is not as popular as it once was. DVRs, streaming television services, and cord-cutting have made it much more common to turn the television or computer on with a certain kind of intentionality, a will to watch something in particular.

But Snapchat channels are a throwback to the couch potato mode of passive consumption. Every day, Cosmo and CNN and their ilk have selected five or so stories for you to flip through, read, watch, or skip. The content may also be available on the Web, but consuming it here is even easier: You don’t have to search for anything, click on anything, seek out anything. It has already been picked out for you. Everywhere you and your phone are has become the proverbial couch.

Thanks to smartphones we live in a mobile first world, and messaging is the killer app; perhaps, though, that just as advertising hasn’t really changed, neither have we humans, much to the benefit of Snapchat, the mobile messaging app with the rather old-fashioned business model ready and willing to take the place of TV.

  1. Note I specified “money”; Zuckerberg was famously late to mobile as a product, but before Facebook proved otherwise, everyone assumed that mobile would monetize worse than the desktop (as it still does for Google in particular)
  2. Last quarter Disney’s cable networks jointly made $2.9 billion in affiliate fees and $1.2 billion in advertising
  3. Numbers from the Wall Street Journal. There are more numbers in part 2 of my series, Why TV Has Resisted Disruption
  4. I wrote more about brand advertising in Peak Google
  5. All those “Nielsen says” stories are just lead generation
  6. To be clear, brands would love to track too; needless to say I remain hugely bullish on Facebook

Redmond and Reality

There’s reality, and there’s Redmond, and if one thing marked the last few years of Steve Ballmer’s tenure as the CEO of Microsoft, it was the sense that those were two distinct locales. In reality, Android (plus AOSP in China) and iOS were carving up the world phone market; in Redmond Ballmer doubled-down on the losing Window Phone bet by buying Nokia. In reality Office was losing relevance because of its absence on the mobile platforms that mattered; in Redmond Ballmer personally delayed Office on iOS until the Windows Modern née Metro version was finished.1 And in reality, all kinds of startups were taking aim at the Microsoft enterprise stack; in Redmond, Microsoft was determined to own it all, just as they had in the PC era.

This attitude was laid out clearly in Ballmer’s One Microsoft memo that introduced his misguided reorganization of Microsoft:

We will reshape how we interact with our customers, developers and key innovation partners, delivering a more coherent message and family of product offerings. The evangelism and business development team will drive partners across our integrated strategy and its execution. Our marketing, advertising and all our customer interaction will be designed to reflect one company with integrated approaches to our consumer and business marketplaces.

The problem with an integrated approach for Microsoft in particular is that the company’s bread-and-butter – enterprise software – was even then undergoing a dramatic transformation from on-premise software to cloud-based services. The benefits of cloud offerings are well known: flexibility, scalability, access from anywhere, automatic seamless updates, predictable operating expenses instead of lumpy capital expenditures, the list goes on and on. There is, though, in the penumbras and emanations of these well-known advantages, particularly flexibility and seamless updates, an even more significant – and disruptive – advantage to the cloud.

Consider your typical Chief Information Officer in the pre-Cloud era: for various reasons she has bought in to some aspect of the Microsoft stack (likely Exchange). So, in order to support Exchange, the CIO must obviously buy Windows Server. And Windows Server includes Active Directory, so obviously that will be the identity service. However, now that the CIO has parts of the Microsoft stack in place, she is likely to be much more inclined to go with other Microsoft products as well, whether that be SQL Server, Dynamics CRM, SharePoint, etc. True, the Microsoft product may not always be the best in a vacuum, but no CIO operates in a vacuum: maintenance and service costs are a huge concern, and there is a lot to be gained by buying from fewer vendors rather than more. In fact, much of Microsoft’s growth over the last 15 years can be traced to Ballmer’s cleverness in exploiting this advantage through both new products and also new pricing and licensing agreements that heavily incentivized Microsoft customers to buy ever more from the company.

The cloud, though, changes that. Once you remove the burden of support and maintenance – that’s handled by the service provider – it suddenly doesn’t necessarily make sense to buy from only one vendor simply because they are integrated. There is more freedom to evaluate a particular product on different characteristics, like, say, how easy it is to use, or how well it supports mobile. And it’s here that Microsoft products, particularly the hated SharePoint, were found to be lacking.

This is the context to view yesterday’s announcement from the Microsoft Office team:

We want Office to be the preferred way to work with documents no matter where they’re stored. In November we announced a special partnership with Dropbox to make it easy to access, edit and share Dropbox files from the Office apps. And today, in addition to the existing Dropbox integrations, we’re pleased to announce two new integration features for an even broader set of cloud services: First, file picker integration for the iPad and iPhone; and second, Office Online integration for viewing and editing.

The file picker is pretty straightforward: on iOS devices you can use the built-in picker to open, edit, and save documents from any storage service that is plugged in to the document picker extension, whether that be Dropbox, iCloud Drive, Box, or even Google Drive. The Office Online integration, though, is even more interesting: you could, for example, access your Box folder through any browser, click on a Word document, and edit and save it from Word online (just as you can do today through One Drive).

Continuing with the blog post:

While these may seem like small enhancements, these new features represent a big step forward for Office integration into the apps and services that are important to our customers.

This move is more than a big step forward for Office integration; it’s a big step forward in Microsoft’s fundamental positioning when it comes to the cloud. To date Microsoft’s cloud strategy, particularly around Office 365, has mostly mimicked their behind-the-firewall strategy: leverage one service to drive usage (and revenue) from another. Thus, Office 365 only worked with SharePoint, for example. In the cloud, though, absent a CIO’s desire for an integrated solution, this is a purely artificial limitation that instead of propping up SharePoint threatened to hold Office 365 back.

That is because there is in fact a need for an integrated solution on mobile. Look at Box, for example: the company obviously has a cloud component, but they also have multiple apps for every relevant – and non-relevant! – platform resulting in much better functionality than what Microsoft previously had to offer. Multiply that advantage across a whole host of services and it starts to make sense for the CIO to modularize her backend services in order to achieve integration when it comes to how those services are accessed:2


Before today, though, Office was disadvantaged in two ways: first, the productivity applications couldn’t fully partake in this new modularity because they weren’t well tied-in to other services. Secondly, though, and most importantly, this limitation meant the mobile experience just wasn’t as good as it could be. And to not be good at mobile is to not be good period.

Office 365 cannot afford to risk not being good on mobile, because there is one final piece to this puzzle: identity. The primary reason all of these modularized services work together is because access is tied to a centrally-managed identity store, and a very important feature of Office 365 is that it includes Azure Active Directory, the cloud-version of Microsoft’s identity service. This is Microsoft’s single best hold on the enterprise, and thus making Office 365 as useful as possible not only makes the service itself attractive but also positions Microsoft well to continue its hold on identity.

All that said, I must admit, as much as I think this move makes sense, I didn’t see it coming. When Microsoft announced the previous deal with Dropbox I wrote in the Daily Update (members-only):

I highly doubt that Microsoft will ever strike a similar deal with Box: the company is simply too competitive with SharePoint, one of Microsoft’s core offerings.

That sort of integration strategy is dead, though, killed by the cloud with an assist from mobile. And, fortunately for Microsoft, it seems the alternate reality that a mere year-and-a-half ago made said integration the company’s stated strategy is just as dead.3

There will be no Daily Update February 19-20 as I will be celebrating Chinese New Year

  1. Ignore the pro-Ballmer spin that he is responsible for iOS Office. Sure, he allowed it to be built; he also didn’t allow it to be released
  2. This is exact way to understand Microsoft’s acquisition of Accompli (since re-branded Outlook) and Sunrise: Exchange is only as relevant as its mobile experience, and Microsoft has far more money than they do time. I wrote about this at the time in the Daily Update; Felix Salmon posted a public version of that update here
  3. This piece originally concluded: “Welcome to reality Redmond. It’s the the first stop on the road to relevance.” I think it came across the wrong way

Podcast: Exponent 035 – Fascinating

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

I apologize for the late delivery of this podcast!

In this week’s episode we discuss why Apple is so fascinating, why the Mac lost to Windows, debate whether or not Google should have open-sourced Android, and discussed the implications of Apple’s new market – your entire life

Also, please note that there will no episode later this week due to Chinese New Year.


  • John Gruber: Dazzling Results – Daring Fireball
  • Ben Thompson: Apple’s New Market – Stratechery
  • Rita McGrath: The End of Competitive Advantage – Kindle
  • Ben Thompson: The Uncanny Valley of a Functional Organization – Stratechery

Listen to the episode here

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

David Carr’s Doubt

The strange thing about death is that most of us cope by talking about ourselves. So it was on Twitter last night as word spread of the passing of New York Times media columnist David Carr; a nearly unending stream of expressions of grief mixed with personal anecdotes of a figure so clearly beloved.

I thought, though, the most poignant words came not from Carr’s journalistic colleagues, but rather from one of those to whom he, and all journalists, ultimately answer: a reader. From the comments on his obituary:

It’s not just that I loved him. I trusted him.

Over the last decade, as journalism has been going through a wrenching change brought on by its intersection with technology, Carr has been a touchpoint for people on both sides. To journalists, he was one of them; to techies, he at least seemed willing to listen, and maybe even adjust, and hopefully bring his profession along with him. Everyone trusted him.

Carr, though, was not always so trustworthy; if you have not, you must set aside time this weekend to read Me and My Girls, an adaptation from Carr’s book, “The Night of the Gun.” The book is the product of Carr applying his considerable journalistic skills to a surprising subject: himself, and his descent into drug addiction. The story is gripping, the narrative surpassed only by the lessons to be learned:

When memory is called to answer, it often answers back with deception. How is it that almost every warm bar stool contains a hero, a star of his own epic, who is the sum of his amazing stories?

If I said I was a fat thug who beat up women and sold bad coke, would you like my story? What if instead I wrote that I was a recovered addict who obtained sole custody of my twin girls, got us off welfare and raised them by myself, even though I had a little touch of cancer? Now we’re talking. Both are equally true, but as a member of a self-interpreting species, one that fights to keep disharmony at a remove, I’m inclined to mention my tenderhearted attentions as a single parent before I get around to the fact that I hit their mother when we were together. We tell ourselves that we lie to protect others, but the self usually comes out looking damn good in the process.

That, right there, is the root of his readers’ trust: Carr had doubt, a result of his deep self-awareness and the intimate knowledge of his own failings, and was thus far closer to the truth, whatever that might be, than most of us. It’s so easy to be certain, to think you know the answers. It’s comforting, even as it blocks the pursuit of knowledge. Uncertainty and questions, though, are uncomfortable and humbling, yet freeing.

Carr long ago lost any illusion that he knew it all. He wrote of his time in treatment:

Eden House was a long-term therapeutic community, the kind of place that brimmed with slogans. This was the main one: “The answer to life is learning to live.”

This is the point where the knowing author laughs along with his readers about his time among the aphorisms, how he was once so gullible and needy that he drank deeply of such weak and fruity Kool-Aid. That’s some other story. Slogans saved my life. All of them — the dumb ones, the imperatives, the shameless, witless ones.

I lustily chanted some of those slogans and lived by others. There is nothing romantic about being a crackhead and a drunk — low-bottom addiction is its own burlesque that needs no snarky annotation. Unless a person is willing to be terminally, frantically earnest, all hope is lost.

That slogan – “The answer to life is learning to live” – struck me as many journalists passed around one of Carr’s most famous pieces of advice:

Keep typing until it turns into writing

There it is: the Eden House slogan applied to journalism. If you don’t know how to live, just get busy learning how to live. If you don’t know what to write, just get busy typing. And if you don’t know the future of journalism, or anything really, just get busy asking questions with frantic earnestness.

Rest in peace.

Apple’s New Market

There is perhaps no idea this blog has litigated against more fiercely than the idea of low-end disruption and the inevitable doom of the iPhone. It’s hard to imagine now, but when I started Stratechery in 2013, conventional wisdom held that Apple had peaked as Android devices became increasingly “good enough” and half the price to boot, all thanks to their modularity. The integrated iPhone would soon have to lower prices or start an inevitable decline – most likely both. In fact, though, this past quarter the iPhone not only grew tremendously on a unit basis, but the average selling price went up by an incredible $50.

To be perfectly honest, as much as I would like to claim I predicted this growth, my previous treatises – most notably, What Clayton Christensen Got Wrong – were more concerned with arguing that the iPhone would not collapse, an endgame that Christensen seems to still believe in. From an interview last fall with Business Insider:

In the early years of an industry’s life, almost always the dominant products are proprietary and interdependent in their architecture. In the smartphone world, the first one was Nokia — excruciatingly interdependent architecture — then RIM, which was an even more excruciatingly interdependent architecture, and then Apple. And Apple was kind of halfway. Inside of the device, it’s proprietary, but it initiated the modularity in that you could develop apps and stick them in. But then just like IBM identified modularity with the PC, Google gave us Android. And now I think the Android operating system as a platform, modularity, accounts for about 90% of the units, even while Apple makes all of the profit.

So if Apple keeps its strategy of very high prices, their share of that market will diminish. And so ultimately they’ll make a lot of profit on 100 units. And Samsung, if they win, they will be making all of the units in the industry but no profit. Either way you’re screwed, but that’s the theory behind why I said Apple won’t succeed, because in the end modularity always wins.

My objection to this line of argument has been that Christensen’s model only applies to business-to-business markets where the buyer is not the user; in consumer markets, on the other hand, markets are not monolithic, and some segment of the market cares about and is willing to pay for aspects of the user experience that can’t be measured but can only be delivered through an integrated experience.

I do still think this critique holds, but I also believe there are three additional factors to consider:

  • The iPhone – and all of modern Apple’s products1 – is far more modular than it appears. It’s critical to understand where Apple has integrated, and why
  • Apple is creating an entirely new class of services that mix integration and modularization
  • The market in which the iPhone is competing is unimaginably large – far larger, in fact, than the smartphone market

I’ll explore each of these in turn, and explain why Apple is extremely well-placed to not just preserve its position, but to in fact continue its growth.

The iPhone is a Mix of Integration and Modularity

I am always confused when discussions about integration and modularity are reduced to questions about who makes the operating system. After all, the idea of integration and modularity have traditionally been concerned with industrial production and supply chains. Henry Ford, for example, in order to meet demand for his Model T, vertically integrated to the point where the company owned rubber plantations in Brazil to provide the raw material for tires; General Motors in part upstaged Ford through a more modular approach that allowed for more customization and differing levels of quality.

From this perspective – the hardware perspective – the iPhone is quite modular. Apple has 785 different suppliers, and while not all of them contribute to the iPhone, the vast majority do, making everything from screws to memory to camera lens assemblies. In fact, while I don’t know how many suppliers are in the Samsung supply chain, I’d wager it’s fewer than the iPhone’s, simply because Samsung itself is a component manufacturer. In other words, from a pure hardware perspective, it is Samsung that is more integrated than Apple.

The glaring exception, of course, is the A-series of Systems-on-Chip first introduced with the iPad back in 2010. In retrospect, though, this is the exception that proves the rule: it is in the design of the processor that Apple can best take advantage of the fact they make the software that runs on that chip, improving performance, battery life, and enabling key technologies like Touch ID. These are factors that are directly experienced by the customer (and, in the case of Touch ID, quite literally touched); that is where Apple integrates.

On the software side, Christensen is exactly right that the iPhone is modular by virtue of the App Store. Apps are the components of the iPhone software experience (and sadly for developers, similarly commoditized); even there, though, Apple controls as many of the customer experience points as possible, both through the App Store and App Review.2 It’s a similar arrangement to the iTunes Store (albeit without the review): effectively unlimited selection in an Apple-controlled wrapper.

The result is that the iPhone stack looks something like this:

Apple products have many modular components wrapped inside an integrated experience

Apple products have many modular components wrapped inside an integrated experience

Hundreds of components, millions of apps, and tens of millions of songs and videos, all wrapped in an Apple-controlled experience.

Redefining Services

Absent in my drawing of the iPhone stack was iCloud, a surprising omission given that Tim Cook has started referring to Apple’s ability to integrate not just hardware and software, but services as well.

In fact, I think that iCloud is the least interesting – and least important – aspect of Apple’s services offering, and I think the company agrees. Notice how much of iCloud’s functionality is becoming less differentiated, not more: iCloud Core Data, which sought to integrate iCloud into Apple’s data API, has been abandoned in favor of CloudKit, a rather generic offering similar to what a developer might get from AWS or Microsoft Azure. Similarly, iCloud Drive isn’t really any different from Dropbox – the per-application integration is gone.

Moreover, you don’t really need to use iCloud to get a full iPhone experience; you can manage your email, contacts, and calendar with Google or Microsoft, and most major apps like Facebook or Twitter are simply interfaces for their company’s cloud application. True, iCloud can do things like “Find my iPhone”, but iCloud is by no means a reason to be particularly optimistic about the iPhone’s long-run prognosis.

The problem is this narrow definition of services, something I first tackled in Xiaomi’s Ambition:

There’s come to be a bit of a cliché when it comes to writing about Xiaomi…They sell smartphones at cost, or close to it, and will make money through services. The trouble with a lot of this commentary surrounding Xiaomi1 comes in determining exactly what those “services” are. The easy assumption are traditional Internet services like those offered by Google, including an app store, online portals, so on and so forth. That, though, hardly validates a $45 billion valuation…

Instead, the way to understand Xiaomi and why exactly they are so valuable is to more deeply understand what Lei Jun means by “services”, and, in the end, why Xiaomi actually is a lot like Apple after all.

In that piece I concluded that Xiaomi was seeking to create an entire ecosystem around the home; true, the smartphone margins may be thin, but by integrating everything from air purifiers to wearables to TVs into MiUI, the Xiaomi smartphone layer, Xiaomi would both increase stickiness for their smartphones and make a lot of money selling to an entire generation entering both the middle class economically and their own homes physically.

Apple, though, is making the exact same play, but with an even broader ambition: they want the iPhone to be an essential part of not just your home but nearly every aspect of your life, and for that the company is building five foundational services:

  • HomeKit is Apple’s solution to the Internet of Things, and given both the disposable income and strong preferences of Apple customers, I expect Apple to get more traction here than just about anyone else (Xiaomi is an exception, largely because they are building – or funding companies to build – everything themselves). Everything in your house, controlled by your iPhone
  • CarPlay is self-explanatory: Americans especially spend a lot of time commuting, and Apple is attempting to make your iPhone the center of your experience in the car
  • Apple Pay is for the world at large; most of our interactions outside of the home are predicated on money changing hands, and Apple Pay is seeking to be the default mechanism. I’m bullish on its chances
  • Siri is for information and everything in the cloud: through your iPhone you can find out the answer to anything, just by asking
  • Finally, HealthKit is perhaps the most profound, because it is about interacting with and tracking your own body. A service doesn’t get much more sticky than that

These five services extend the iPhone’s importance to your daily life in nearly every dimension:

Apple's services are extending the iPhone's impact to every part of our lives

Apple’s services are extending the iPhone’s impact to every part of our lives

Note, though, that each of these services follows a similar model to the one Apple uses for the iPhone itself: Apple isn’t creating the furniture for HomeKit, the cars for CarPlay, the banks or retailers for Apple Pay, or information services for Siri. Instead they are leaving that up to the market in a modular fashion; the only integration is the actual interaction between the Apple layer and your iPhone.

To be sure, Apple’s success in each of these areas is by no means assured, particularly Siri where Apple is competing with Google. The iPhone, though, is Apple’s trump card, as Cook explained at yesterday’s Goldman Sachs Technology and Internet Conference:

We’ve taken iOS and we’ve extended it into your car, your home, into your health. All of these are really critical parts of your life and none of us want to have different platforms in different parts of our lives. We want one seamless kind of life. I think that’s huge for our future. It’s not every day you can plant that many foundational technologies.

Apple’s New Market

Christensen has previously explained that he got the iPhone wrong because it was disruptive to laptops, not cell phones. This, though, doesn’t particularly make sense given that the worldwide smartphone market vastly dwarfs laptops, and that while PCs aren’t growing, they still very much exist. Instead, as I argued in Obsoletive, the iPhone made the old idea of a cellphone obsolete: it was just another app on a computer that fit in your pocket.

The implications of this are even more profound than the fact nearly every person on planet earth will soon have a smartphone. Recall how Steve Jobs, after describing how a human on a bicycle is more efficient than even a condor, characterized computers:3

We humans are tool builders and we can fashion tools that amplify these abilities that we have to spectacular magnitudes. And so for me a computer has always been a bicycle for the mind.

That bicycle is now with us every where we go; what Apple is building are new paths.

In that respect, suppose Christensen is right: maybe in the long run everything Apple does will be modularized. However, if modularization wins in a mature market, that means – as Christensen says – that integration wins in a new one. And a new market is exactly where the iPhone is headed: Apple is on the verge of leaving the narrowly-defined smartphone market behind entirely, instead making a play to be involved in every aspect of its consumers’ lives. And, if the importance of an integrated experience matter more with your phone than your PC, because you use it more, how much more important is an integrated experience that touches every detail of your life?

In fact, if there is a flaw in this vision, it’s that even pulling an iPhone from your pocket is too cumbersome. What if you could interact with your home, your car, retail, the cloud, or even your own body with something even more personal and accessible?4


  1. By “modern” Apple I mean Apple since Steve Jobs’ return
  2. As I’ve noted several times, I’m also in the camp that believes Steve Jobs did not want an App Store, and this point explains why: software is experienced by the consumer, ergo, Apple would make all the software
  3. I’ve discussed Jobs’ bicycle of the mind analogy previously here
  4. For the record (this is not stock advice) I do think a $1 trillion market cap is in reach; I don’t believe most of this is priced in. There are, of course, significant risk factors, none more important than Apple’s spotty record in services generally; it is difficult, though, to see many competitors for the space, particularly given Apple’s integrated advantage

Podcast: Exponent 034 – The Story of Stratechery

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

This is the story of Stratechery, presented with much sheepishness on my part. How I thought about the market, my business model, and more. I apologize that this is a little long and perhaps a bit choppy. It’s hard to talk about me!


  • Andrew Sullivan: A Note to my Readers – The Dish
  • Ezra Klein: What Andrew Sullivan’s Exit Says About the Future of Blogging – Vox
  • Ben Thompson: Blogging’s Bright Future – Stratechery
  • Ben Thompson: Dear Zoë Keating: Tell YouTube to Take a Hike – Stratechery
  • Taylor Swift: For Taylor Swift, the Future of Music is a Love Story – Wall Street Journal

Listen to the episode here

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